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PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs

PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs. - a second consultation. Simon Riley Hong Kong Society of Accountants 11 May 2004. The First Consultation – Where we left off last time. General support for a differentiation to main GAAP for SMEs

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PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs

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  1. PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs - a second consultation Simon RileyHong Kong Society of Accountants11 May 2004

  2. The First Consultation – Where we left off last time • General support for a differentiation to main GAAP for SMEs • Concerns that cost: benefit not sufficiently redressed • Response: Separate Framework based primarily on historical cost convention 11 May 2004

  3. Six Consultation Issues • The need for a separate financial reporting framework for SMEs? • Justification / principles for SME financial reporting framework? • True & Fair necessary? • Which entities should qualify? • How does the Companies Ordinance requirement fit in? • What reporting requirements should apply? 11 May 2004

  4. Issue 1 – Separate financial reporting framework for SMEs • General consensus from first consultation that a differentiated / separate SME reporting framework • Recap on international experience from first consultation - SME reporting frameworks in place in UK, Australia, Canada, NZ 11 May 2004

  5. Issue 1 – Separate financial reporting framework for SMEs • Developments at IASB - Discussion Paper imminent - Accommodating the IASB’s approach in Hong Kong 11 May 2004

  6. Issue 2 – Justification / principles • Cost:benefit - Limited user group for non-listed SMEs in non-regulated industries - Financial reporting needs of users • Resources available to SMEs also limited • Financial reporting requirements should always meet the cost:benefit criterion (for main GAAP & SME GAAP) 11 May 2004

  7. Issue 3 – True & Fair necessary? • In CP-I, proposition was that “True & Fair” necessary - integrated approach • differential reporting • Problem: - disclosure relief not consistent with true & fair - did not sufficiently redress cost:benefit issue • Decision to propose SME financial reporting framework outside True & Fair 11 May 2004

  8. Issue 4 – Which entities qualify? • No public accountability - Listed securities - Banks, insurance companies, dealers, investment advisers • Unanimous agreement of owners • Hong Kong Company – per s.141D, currently: - Private company - No subsidiaries / holding company 11 May 2004

  9. Issue 4 – Which entities qualify? • Other entities on the basis of size - Not to exceed any two of the following: - Total revenue of HK$50m p.a. - Total assets of HK$50m - 50 employees 11 May 2004

  10. Issue 5 – Companies Ordinance • Current s.141D “True & Correct” requirement to remain for qualifying companies •  S.141D companies to prepare financial statements in accordance with Companies Ordinance requirements & with relevant HKSA requirements – (currently PN 600.2 but proposed new SME-Financial Reporting Standard) 11 May 2004

  11. Issue 5 – Companies Ordinance • Proposed retention of s.141D separate reporting framework but lobby for changes - Repeal Eleventh Schedule - Repeal group company restriction - Introduce size criteria 11 May 2004

  12. Issue 6 – Financial Reporting Framework • 1st consultation: discussion on integrated v separate framework • Differential reporting proposal was integrated operating within true and fair • Comments received – re-think of approach • 2nd consultation: separate approach • Financial Reporting Framework (SME-FRF) & Financial Reporting Standard (SME-FRS) 11 May 2004

  13. Issue 6 – Financial Reporting Framework • Cutting ties with “true and fair” (main GAAP)  • Measurement & Disclosure requirements greatly simplified – proposed historical cost basis • Will not necessarily move in tandem with main GAAP (contrasts with UK FRSSE which is linked to ‘true and fair’) 11 May 2004

  14. Issue 6 – Financial Reporting Framework • Designed to redress the balance between cost & benefit - But a quantification not possible 11 May 2004

  15. Financial Reporting Framework (SME-FRF) • Summary of main points • Different user base for SME financial statements – absence of investing public • Accrual accounting still applicable • substantially same definitions of “asset”, “liability”, “revenue” & “expense” as per main GAAP • But historical cost convention considered appropriate for users’ needs and for cost:benefit in financial reporting for qualifying entities • Stewardship rather than business valuation 11 May 2004

  16. Financial Reporting Framework (SME-FRF) • For a qualifying entity: - free choice to apply either SME-FRS or main GAAP but not a hybrid of the two - SME-FRS applies only to a single entity’s financial statements – main GAAP required for consolidated financial statements 11 May 2004

  17. Financial Reporting Framework (SME-FRF) • On first time adoption of the SME-FRS: - financial statements and comparatives in full compliance with the SME-FRS except when impracticable to do so s.141D exemption on comparatives - equity reconciliation to that reported under previous GAAP 11 May 2004

  18. Financial Reporting Standard (SME-FRS) • Stand-alone set of financial reporting requirements • Applicable only to entity’s separate financial statements - Consolidation requires application of full GAAP 11 May 2004

  19. Financial Reporting Standard (SME-FRS) • Significant simplifications to main GAAP - Asset accounting: Property, Plant & Equipment, Leases, Investments, Investment Properties, Intangibles: All at Cost less depreciation / amortisation / impairment (as applicable) - Income Taxes: No deferred tax recognition - Disclosure relief in many cases (e.g. impairment; no Cash Flow Statement) • Introduction of Related Party Disclosure requirements • Illustrative financial statements 11 May 2004

  20. The Consultation Process • Consultation documents issued for public comment - Comments welcomed by 31 August 2004 • Available on HKSA websitehttp://www.hksa.org.hk/professionaltechnical/accounting/exposuredraft/ 11 May 2004

  21. The Consultation Process • We have also specifically written to those who provided comments on the first consultation • First consultation paper & comment letters posted on the HKSA website http://www.hksa.org.hk/professionaltechnical/accounting/rm/consultation_paper.pdf http://www.hksa.org.hk/professionaltechnical/accounting/rm/ias_consultation_paper.php 11 May 2004

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