Page 1 of 4The guidance below was developed by the Financial Reporting Standards Committee (FRSC)
of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is for generalreference only. The HKICPA, FRSC and their staff do not accept any responsibility or liability,and disclaim all responsibility and liability, in respect of the guidance and any consequencesthat may arise from any person acting or refraining from action as a result of any materialsin the guidance. Members of the HKICPA and other users of this guidance should also readthefullStandard,asfoundintheHKICPAMembers’Handbook(https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Members-Handbook-and-Due-Process) for further reference, and seek professional advice wherenecessary when applying the references contained in this guidance.The HKICPA Standard Setting Department welcomes your comments and feedback, whichshould be sent to commentletters@hkicpa.org.hk.COVID-19-related financial reporting issues for SME-FRF & SME-FRSfinancial statementsBackgroundThe coronavirus pandemic and related actions (e.g. government closure orders, travelrestrictions and quarantine measures) is having a major impact on businesses, inparticular, on small and medium-sized entities. In both March and June 2020, theInstitute published guidance on the COVID-19 related financial reporting issues forHKFRS financial statements. Following on from that guidance, this educationalguidance highlights some key considerations when preparing financial statementsunder the Small and Medium-sized Entity Financial Reporting Framework andFinancial Reporting Standard (SME-FRF & SME-FRS).The financial reporting implications of COVID-19 on entities are broad and entitiesshould assess the precise effects on their financial statements considering their factsand circumstances.Key considerations when preparing the 2019 year-end financialstatementsWhat are the conditions that existed at the end of 31 December 2019?SME-FRF & SME-FRS defines “Events after the end of the reporting period” as events,both favourable and unfavourable, that occur between the end of the reporting periodand the date when the financial statements are authorised for issue. Two types ofevents can be identified:
(a) those providing evidence of conditions that existed at the end of the reporting period(adjusting events); and(b) those indicative of conditions that arose after the end of the reporting period (non-adjusting events).Paragraphs 17.1 and 17.3 of the SME-FRS state that “An entity should adjust theamounts recognised in its financial statements to reflect adjusting events after the endof the reporting period.” and “An entity should not adjust the amounts recognised in itsfinancial statements to reflect non-adjusting events after the end of the reportingperiod.”
Page 2 of 4Since 31 December 2019, the development and spread of COVID-19 has resulted inthe occurrence of a multitude of associated events. Among these are the identificationof the virus, its spread in terms of number of infected and geographical prevalence,actions taken by governments and non-governmental organisations, actions taken byprivate entities, and the resulting economic effects of these.In assessing whether events associated with the development and spread of COVID-19 are adjusting or non-adjusting events after the reporting period, entities shouldexercise judgement and carefully consider their individual facts and circumstances. Inour view, the development and spread of COVID-19 (and multitude of associatedevents) subsequent to the reporting date generally do not provide evidence ofconditions that existed at 31 December 2019. Rather, the development and spread ofCOVID-19 generally evidences conditions that arose after the reporting date. You canalso refer to our March guidance for further discussion of events associated with thedevelopment and spread of COVID-19.Accounting and disclosures for COVID-19 in 31 December 2019 year-endfinancial statementsThe outbreak of COVID-19 and its associated events subsequent to the reporting dateof 31 December 2019 should generally be accounted for as non-adjusting events underparagraph 17.3 of the SME-FRS. Per paragraph 17.3, an entity should not adjust theamounts recognised in its financial statements to reflect non-adjusting events after theend of the reporting period.However, per paragraph 17.8 of the SME-FRS, an entity should disclose non-adjustingevents if non-disclosure would affect the ability of the users of the financial statementsto make proper evaluations and decisions. This disclosure should include, the natureof the event and an estimate of its financial effect. It may be difficult to estimate thefinancial effect attributable to COVID-19. If an estimate of the financial effect cannot bemade, paragraph 17.8(b) requires a statement that such an estimate cannot be made.Impact of other events beyond the scope of COVID-19The events associated with the development and spread of COVID-19 should generallybe considered non-adjusting events. However, management should also considerwhether there are other events beyond the scope of COVID-19 that provide evidenceof conditions that existed at the end of the reporting period (adjusting events).An example of an event after the reporting period is a sale of inventories at a sellingprice below cost, which provides evidence about a decrease in net realisable value. Anentity applies judgement to determine which events contributed to the decrease, anddetermine whether those events evidence circumstances that existed at the end of thereporting period. For example, if management determines that inventories haddecreased in value due to obsolescence unrelated to COVID-19, and the condition ofobsolescence existed before the reporting date, this indicates presence of an adjustingevent. Management would then need to consider how much of the decrease in netrealisable value relates to the obsolescence event. (Paragraph 17.2(b) of the SME-FRS)
During this time, it may be challenging to determine which events have caused animpact to an entity’s financial reporting, and to measure their impact independentlyfrom the overall non-adjusting impact of COVID-19. Entities should carefully exercisejudgement and consider the specific facts and circumstances to achieve a properpresentation in accordance with the SME-FRF & SME-FRS.Page 3 of 4Is the business a going concern?COVID-19 has had a significantly unfavourable impact on some entities. Regardlessof whether an event after the reporting period is adjusting or non-adjusting,management should make an assessment of the entity’s ability to continue as a goingconcern when preparing its financial statements. For the purpose of this assessment,management should consider the impact that the outbreak of COVID-19 and itsassociated events, which have occurred since 31 December 2019, has had on theentity.When management is aware, in making its assessment, of material uncertaintiesrelated to events or conditions that may cast significant doubt on the entity’s ability tocontinue as a going concern, those uncertainties should be disclosed. Financialstatements should be prepared on a going concern basis unless management eitherintends to liquidate the entity or cease trading, or has no realistic alternative but to doso. (Paragraph 1.6 of the SME-FRS)
You can also refer to our March guidance for examples of the type of information thatmanagement should take into account when determining whether the going concernassumption is still appropriate.When the financial statements are not prepared on a going concern basis, that factshould be disclosed, together with the basis on which the financial statements areprepared and the reason why the entity is not considered to be a going concern(paragraph 1.6 of the SME-FRS). In this event, as SME-FRF & SME-FRS does notspecify the basis of accounting to change to, entities will need to carefully assess theirsituation and circumstances.Key considerations when preparing the 2020 year-end financialstatementsThe requirements highlighted above for going concern and events after the end of thereporting period will also be key consideration when preparing 2020 year-end financialstatements. The following are some other key considerations that warrant specificattention for 2020 year-ends:
•Impairment of assets: Due to the outbreak of COVID-19, a number of impairmentindications may exist, including, for example, government closure orders forfactories and shops, reduced demand from customers and debtors not repayingdebts on time due to financial difficulties.If indications of impairment exist, an entity should estimate the recoverable amountof all assets (other than inventories, construction contracts and current investments)
to determine whether an impairment loss should be recognised in profit or loss(paragraph 9.1 of the SME-FRS).•Measurement of inventories: Paragraph 7.1 of the SME-FRS states thatinventories should be measured at the lower of cost and net realisable value (NRV).NRV is the estimated selling price in the ordinary course of business less theestimated costs of completion and the estimated costs necessary to make the sale.Given the current market conditions, the NRV calculation may involve greaterjudgement.Page 4 of 4•Government grants: To alleviate the financial burden suffered by individuals andbusinesses under COVID-19, the Hong Kong SAR Government launched a seriesof support measures, including employment support schemes (e.g. wagesubsidies), sector-specific reliefs (e.g. cash subsidies to different sectors), rentconcessions and provision of concessionary interest loans with governmentguarantees.An entity should not recognise a government grant until there is reasonableassurance that the entity will comply with the conditions attaching to it and the grantwill be received. Government grants should be recognised as income over theperiods necessary to match them with the related costs they are intended tocompensate, on a systematic basis (paragraphs 12.1 – 12.2 of the SME-FRS).Government grants related to assets should be presented in the statement offinancial position either by setting up the grant as deferred income or by deductingthe grant in arriving at the carrying amount of the asset (paragraph 12.5 of the SME-FRS).Grants related to income (e.g. wage subsidies) are sometimes presented as a creditin the income statement, either separately or under a general heading such as“Other income”; alternatively, they are deducted in reporting the related expense(paragraph 12.6 of the SME-FRS).Concessionary interest loans with government guarantees is a form of governmentassistance which the entity is required to disclose its nature and duration in thefinancial statements (paragraphs 12.8 – 12.11 of the SME-FRS).•Rent concessions from lessors: Different forms of rent concessions have beenoffered, or are expected to be offered, by lessors to lessees due to the COVID-19pandemic. There is no specific accounting requirements set out in the SME-FRF &SME-FRS for rent concessions in lessees’ financial statements. Entities shouldfollow paragraphs 2.1 and 2.2 of the SME-FRS in developing its accounting policy.•Breach of loan covenants: The current conditions arising from COVID-19 mayresult in an entity breaching a loan covenant. If an entity breaches a provision of along-term loan arrangement on or before the end of the reporting period with theeffect that the liability becomes payable on demand, it classifies the liability ascurrent, even if the lender agreed, after the reporting period and before theauthorisation of the financial statements for issue, not to demand payment as aconsequence of the breach (paragraphs 1.17 and 1.18(b) of the SME-FRS).However, an entity classifies the liability as non-current if the lender agreed by theend of the reporting period to provide a period of grace ending at least twelvemonths after the reporting period, within which the entity can rectify the breach andduring which the lender cannot demand immediate repayment (e.g. borrowers maybe able to obtain "comfort letters" from their lenders) indicating that loans will notbe called within the next twelve months.21 August 2020
COVID-19-related financial reporting issues for SME-FRF & SME-FRS financial statements
下载原件Page 1 of 4The guidance below was developed by the Financial Reporting Standards Committee (FRSC)
of the Hong Kong Institute of Certified Public Accountants (HKICPA) and is for generalreference only. The HKICPA, FRSC and their staff do not accept any responsibility or liability,and disclaim all responsibility and liability, in respect of the guidance and any consequencesthat may arise from any person acting or refraining from action as a result of any materialsin the guidance. Members of the HKICPA and other users of this guidance should also readthefullStandard,asfoundintheHKICPAMembers’Handbook(https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Members-Handbook-and-Due-Process) for further reference, and seek professional advice wherenecessary when applying the references contained in this guidance.The HKICPA Standard Setting Department welcomes your comments and feedback, whichshould be sent to commentletters@hkicpa.org.hk.COVID-19-related financial reporting issues for SME-FRF & SME-FRSfinancial statementsBackgroundThe coronavirus pandemic and related actions (e.g. government closure orders, travelrestrictions and quarantine measures) is having a major impact on businesses, inparticular, on small and medium-sized entities. In both March and June 2020, theInstitute published guidance on the COVID-19 related financial reporting issues forHKFRS financial statements. Following on from that guidance, this educationalguidance highlights some key considerations when preparing financial statementsunder the Small and Medium-sized Entity Financial Reporting Framework andFinancial Reporting Standard (SME-FRF & SME-FRS).The financial reporting implications of COVID-19 on entities are broad and entitiesshould assess the precise effects on their financial statements considering their factsand circumstances.Key considerations when preparing the 2019 year-end financialstatementsWhat are the conditions that existed at the end of 31 December 2019?SME-FRF & SME-FRS defines “Events after the end of the reporting period” as events,both favourable and unfavourable, that occur between the end of the reporting periodand the date when the financial statements are authorised for issue. Two types ofevents can be identified:
(a) those providing evidence of conditions that existed at the end of the reporting period(adjusting events); and(b) those indicative of conditions that arose after the end of the reporting period (non-adjusting events).Paragraphs 17.1 and 17.3 of the SME-FRS state that “An entity should adjust theamounts recognised in its financial statements to reflect adjusting events after the endof the reporting period.” and “An entity should not adjust the amounts recognised in itsfinancial statements to reflect non-adjusting events after the end of the reportingperiod.”
Page 2 of 4Since 31 December 2019, the development and spread of COVID-19 has resulted inthe occurrence of a multitude of associated events. Among these are the identificationof the virus, its spread in terms of number of infected and geographical prevalence,actions taken by governments and non-governmental organisations, actions taken byprivate entities, and the resulting economic effects of these.In assessing whether events associated with the development and spread of COVID-19 are adjusting or non-adjusting events after the reporting period, entities shouldexercise judgement and carefully consider their individual facts and circumstances. Inour view, the development and spread of COVID-19 (and multitude of associatedevents) subsequent to the reporting date generally do not provide evidence ofconditions that existed at 31 December 2019. Rather, the development and spread ofCOVID-19 generally evidences conditions that arose after the reporting date. You canalso refer to our March guidance for further discussion of events associated with thedevelopment and spread of COVID-19.Accounting and disclosures for COVID-19 in 31 December 2019 year-endfinancial statementsThe outbreak of COVID-19 and its associated events subsequent to the reporting dateof 31 December 2019 should generally be accounted for as non-adjusting events underparagraph 17.3 of the SME-FRS. Per paragraph 17.3, an entity should not adjust theamounts recognised in its financial statements to reflect non-adjusting events after theend of the reporting period.However, per paragraph 17.8 of the SME-FRS, an entity should disclose non-adjustingevents if non-disclosure would affect the ability of the users of the financial statementsto make proper evaluations and decisions. This disclosure should include, the natureof the event and an estimate of its financial effect. It may be difficult to estimate thefinancial effect attributable to COVID-19. If an estimate of the financial effect cannot bemade, paragraph 17.8(b) requires a statement that such an estimate cannot be made.Impact of other events beyond the scope of COVID-19The events associated with the development and spread of COVID-19 should generallybe considered non-adjusting events. However, management should also considerwhether there are other events beyond the scope of COVID-19 that provide evidenceof conditions that existed at the end of the reporting period (adjusting events).An example of an event after the reporting period is a sale of inventories at a sellingprice below cost, which provides evidence about a decrease in net realisable value. Anentity applies judgement to determine which events contributed to the decrease, anddetermine whether those events evidence circumstances that existed at the end of thereporting period. For example, if management determines that inventories haddecreased in value due to obsolescence unrelated to COVID-19, and the condition ofobsolescence existed before the reporting date, this indicates presence of an adjustingevent. Management would then need to consider how much of the decrease in netrealisable value relates to the obsolescence event. (Paragraph 17.2(b) of the SME-FRS)
During this time, it may be challenging to determine which events have caused animpact to an entity’s financial reporting, and to measure their impact independentlyfrom the overall non-adjusting impact of COVID-19. Entities should carefully exercisejudgement and consider the specific facts and circumstances to achieve a properpresentation in accordance with the SME-FRF & SME-FRS.Page 3 of 4Is the business a going concern?COVID-19 has had a significantly unfavourable impact on some entities. Regardlessof whether an event after the reporting period is adjusting or non-adjusting,management should make an assessment of the entity’s ability to continue as a goingconcern when preparing its financial statements. For the purpose of this assessment,management should consider the impact that the outbreak of COVID-19 and itsassociated events, which have occurred since 31 December 2019, has had on theentity.When management is aware, in making its assessment, of material uncertaintiesrelated to events or conditions that may cast significant doubt on the entity’s ability tocontinue as a going concern, those uncertainties should be disclosed. Financialstatements should be prepared on a going concern basis unless management eitherintends to liquidate the entity or cease trading, or has no realistic alternative but to doso. (Paragraph 1.6 of the SME-FRS)
You can also refer to our March guidance for examples of the type of information thatmanagement should take into account when determining whether the going concernassumption is still appropriate.When the financial statements are not prepared on a going concern basis, that factshould be disclosed, together with the basis on which the financial statements areprepared and the reason why the entity is not considered to be a going concern(paragraph 1.6 of the SME-FRS). In this event, as SME-FRF & SME-FRS does notspecify the basis of accounting to change to, entities will need to carefully assess theirsituation and circumstances.Key considerations when preparing the 2020 year-end financialstatementsThe requirements highlighted above for going concern and events after the end of thereporting period will also be key consideration when preparing 2020 year-end financialstatements. The following are some other key considerations that warrant specificattention for 2020 year-ends:
•Impairment of assets: Due to the outbreak of COVID-19, a number of impairmentindications may exist, including, for example, government closure orders forfactories and shops, reduced demand from customers and debtors not repayingdebts on time due to financial difficulties.If indications of impairment exist, an entity should estimate the recoverable amountof all assets (other than inventories, construction contracts and current investments)
to determine whether an impairment loss should be recognised in profit or loss(paragraph 9.1 of the SME-FRS).•Measurement of inventories: Paragraph 7.1 of the SME-FRS states thatinventories should be measured at the lower of cost and net realisable value (NRV).NRV is the estimated selling price in the ordinary course of business less theestimated costs of completion and the estimated costs necessary to make the sale.Given the current market conditions, the NRV calculation may involve greaterjudgement.Page 4 of 4•Government grants: To alleviate the financial burden suffered by individuals andbusinesses under COVID-19, the Hong Kong SAR Government launched a seriesof support measures, including employment support schemes (e.g. wagesubsidies), sector-specific reliefs (e.g. cash subsidies to different sectors), rentconcessions and provision of concessionary interest loans with governmentguarantees.An entity should not recognise a government grant until there is reasonableassurance that the entity will comply with the conditions attaching to it and the grantwill be received. Government grants should be recognised as income over theperiods necessary to match them with the related costs they are intended tocompensate, on a systematic basis (paragraphs 12.1 – 12.2 of the SME-FRS).Government grants related to assets should be presented in the statement offinancial position either by setting up the grant as deferred income or by deductingthe grant in arriving at the carrying amount of the asset (paragraph 12.5 of the SME-FRS).Grants related to income (e.g. wage subsidies) are sometimes presented as a creditin the income statement, either separately or under a general heading such as“Other income”; alternatively, they are deducted in reporting the related expense(paragraph 12.6 of the SME-FRS).Concessionary interest loans with government guarantees is a form of governmentassistance which the entity is required to disclose its nature and duration in thefinancial statements (paragraphs 12.8 – 12.11 of the SME-FRS).•Rent concessions from lessors: Different forms of rent concessions have beenoffered, or are expected to be offered, by lessors to lessees due to the COVID-19pandemic. There is no specific accounting requirements set out in the SME-FRF &SME-FRS for rent concessions in lessees’ financial statements. Entities shouldfollow paragraphs 2.1 and 2.2 of the SME-FRS in developing its accounting policy.•Breach of loan covenants: The current conditions arising from COVID-19 mayresult in an entity breaching a loan covenant. If an entity breaches a provision of along-term loan arrangement on or before the end of the reporting period with theeffect that the liability becomes payable on demand, it classifies the liability ascurrent, even if the lender agreed, after the reporting period and before theauthorisation of the financial statements for issue, not to demand payment as aconsequence of the breach (paragraphs 1.17 and 1.18(b) of the SME-FRS).However, an entity classifies the liability as non-current if the lender agreed by theend of the reporting period to provide a period of grace ending at least twelvemonths after the reporting period, within which the entity can rectify the breach andduring which the lender cannot demand immediate repayment (e.g. borrowers maybe able to obtain "comfort letters" from their lenders) indicating that loans will notbe called within the next twelve months.21 August 2020