STANDARDSETTINGFEBRUARY 2025Financial reportingconsiderations for closing outCONTENTSIntroductionI.Amended HKFRS Accounting Standards mandatorily effective on1 January 2024II.Topical issues
1.Macroeconomic uncertainties and their financial reporting implications
2.Accounting implications of recent updates on laws and regulations
3.Climate-related matters on financial reporting and connectivityIII. HKFRS Accounting Standards issued but not yet effectiveAppendix – New and amended HKFRS Accounting Standards as well asAgenda Decisions issued by the IFRS Interpretations CommitteeIntroductionThis publication highlights key financial reporting reminders and topical areas that are relevantand beneficial for preparers in the preparation of their annual financial statements withDecember 2024 year-end, in accordance with HKFRS Accounting Standards. The insightsprovided may be also applicable to future reporting periods.The first section summarizes the amended HKFRS Accounting Standards that are mandatoryeffective for annual periods beginning on or after 1 January 2024. The second section coverstopical areas that are relevant for the preparation of 2024 and subsequent financial statements.Finally, the third section provides a high-level discussion of the key areas and financialimplications of the major new and amended HKFRS Accounting Standards that will beeffective after 1 January 2025.It is important to note that this publication is not intended to be comprehensive, nor does itpurport to address all the potential issues relevant to an entity’s financial statements. Entitiesare advised to exercise judgement and refer to HKFRS Accounting Standards in the HKICPA’sMembers’ Handbook for further guidance relevant to their own facts and circumstances.I.Amended HKFRS Accounting Standards mandatorilyeffective on 1 January 2024There are no new HKFRS Accounting Standards effective for annual periods beginning on orafter 1 January 2024. Instead, all changes relate to amendments to existing HKFRSAccounting Standards, as summarized in the table below. In addition to the summary below,entities are recommended to refer to the publication Closing Out 20231, as well as relevanttechnical training activities, to gain a thorough understanding of the amendments and theirimplications.Paragraph 28 of HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errorsrequires specific disclosures on initial application of a HKFRS Accounting Standard if there isan effect on the current or prior periods. Entities should provide clear and sufficiently granulardisclosures tailored to their specific circumstances.HKFRSAccountingStandardKey aspectsProspective or retrospective applicationand key remindersAmendments to HKAS 12: Classification of Liabilities as Current or Non-current, Non-currentLiabilities with Covenants- Clarify the requirements for classifying liabilities as current or non-current.- Require new disclosures for non-current liabilities that are subject to covenants within 12months after the reporting period.HKAS 1Presentation ofFinancialStatementsClassification of a liability Clarify that the right to defersettlement3 must exist at thereporting date and have substance. Remove the word ‘unconditional’ inHKAS 1.69(d). Clarify that classification isunaffected by management’sintention or expectations andevents after the reporting date. Specify that only loan covenantswith which an entity must comply onor before the reporting date affectthe classification.Classification of a liability Retrospective application in accordancewith HKAS 8. Certain requirements are carriedforward unchanged to HKFRS 18Presentation and Disclosure in FinancialStatements, which will replace HKAS 1on 1 January 2027. Entities need to carefully consider theimpact of the amendments on existingand planned loan agreements andconvertible instruments.Disclosure In case where entity has difficulties inrepaying the debt after the year end,1 Closing Out 2023, Section III (P.14-20).2 Amendments to HKAS 1 encompass two amendments, namely the 2020 Amendments regarding ‘Classification of Liabilities asCurrent or Non-current’ and the 2022 Amendments regarding ‘Non-current Liabilities with Covenants’. These two amendmentsare required to be applied together on 1 January 2024. Hong Kong Interpretation 5 (Revised) Presentation of Financial Statements– Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause has been updated to incorporatethe references to the 2020 and 2022 Amendments.3 Refers to the right to defer settlement of a liability for at least 12 months after the end of the reporting period. See HKAS 1.69(d).HKFRSAccountingStandardKey aspectsProspective or retrospective applicationand key reminders Clarify the meaning of ‘settlement’4in the context of classification. Classification of a liability as currentor non-current is not affected by thesettlement terms of a conversionoption which is classified as equityinstrument under HKAS 32Financial Instruments: Presentation.Disclosure Introduce new disclosures to enablefinancial statement users tounderstand the risk that non-currentliabilities with covenants maybecome repayable within 12months after the reporting date5.disclosures regarding the going concernassessment under HKAS 1 and liquidityrisk under HKFRS 7 FinancialInstruments: Disclosures may berelevant.Amendments to HKFRS 166: Lease Liability in a Sale and Leaseback- Explain how a seller-lessee subsequently measures the lease liability arising from a sale andleaseback where the transfer of asset satisfies the requirements in HKFRS 15 Revenue fromContracts with Customers to be accounted for as a sale.HKFRS 16Leases Require an entity to recognize alease liability at the date of sale andleaseback transaction, even if all ofthe lease payments are variable,and regardless of whether theydepend on an index or rate. Require that lease liability arisingfrom a leaseback is subsequentlymeasured in a way that no gain orloss is recognized that relates to theright of use (ROU) retained. Add a new Illustrative Example 25to demonstrate the application ofthe amendments. Retrospective application to sale andleaseback transactions (that includevariable lease payments) entered intoon or after the initial application date ofHKFRS 16 (i.e. 1 January 2019 forDecember year-end financialstatements). Disclose quantitative and qualitativeinformation specific to sale andleaseback transactions required byHKFRS 167.4 For the purpose of classifying a liability as current or non-current, settlement refers to a transfer to the counterparty of cash, orother economic resources (e.g. goods or services) or the entity’s own equity instruments, that results in the extinguishment of theliability. See HKAS 1.76A-76B for details.5 HKAS 1.76ZA.6 HKFRS 16.102A, C2 and C20E.7 HKFRS 16.51, 59(d), B48 and B52.HKFRSAccountingStandardKey aspectsProspective or retrospective applicationand key remindersAmendments to HKAS 7 and HKFRS 78: Supplier Finance Arrangements- Add disclosure requirements to enhance the transparency of supplier finance arrangement(SFA) and their effects on an entity’s liabilities, cash flows and exposure to liquidity risk.HKAS 7Statement ofCash Flows andHKFRS 7FinancialInstruments:
DisclosuresHKAS 7 Clarify the characteristics of SFAs. Disclose the terms and conditionsof SFAs in place. Disclose at the beginning and endof the reporting period:
- Carrying amounts and associatedline items of financial liabilitiesthat are part of SFAs.- Carrying amounts and associatedline items of financial liabilities forwhich suppliers have receivedpayments from finance providers.- Range of payment due dates forboth financial liabilities associatedwith SFAs and comparable tradepayables that are not part of aSFA. Disclose the type and effect of non-cash changes in the carryingamounts of financial liabilities.HKFRS 7 Add SFA as an example of when anentity may need to discloseinformation of concentration ofliquidity risk with finance providers. Transition reliefs provided. Entities arenot required to disclose certaincomparative information in the first yearof adoption of the amendments9. Entities should exercise judgement indetermining whether the nature orfunction of the liabilities related to theSFAs is sufficiently different from thoseof ‘trade and other payables’, andtherefore it warrants a separatepresentation in the statement of financialposition. Other reminders:
- disclose separately terms andconditions of multiple SFAs that havedissimilar terms and conditions10.- disclose explanatory informationabout the range of payment duedates or additional ranges if theranges are wide11.8 HKAS 7.44F-H, 62-63 and HKFRS 7.44JJ, B11F(j), IG18 and IG18A.9 See HKAS 7.63 for details of transition reliefs when the entity first applies the Amendments to HKAS 7 and HKFRS 7.10 HKAS 7.44H(a).11 HKAS 7.44H(b)(iii).The following table summarizes the relevant educational guidance and support activities forthe above Amendments.Educational guidance and supportAll of the aboveAmendmentsClosing Out 2023E-learning CPD courses:
- Annual Accounting Update 2023- 2024 SMP Symposium – Module one- Annual Accounting and Sustainability Update 2024- Year-end Financial Reporting Reminders for 2024Amendments to HKAS 1 Educational publication issued in June 2023 provides four illustrativeexamples to explain the application of the Amendments:
- Term loan with financial covenants- Term loan with non-financial covenants/conditions- Revolving loan facility- Convertible bonds A-Plus technical article issued in April 2023 E-learning CPD course:
- Classification of Liabilities as Current or Non-currentII. Topical issuesIn this section, we set out topical issues relevant to the preparation of financial statements withDecember 2024 year end. While certain issues persist from the previous years, new emergingissues have surfaced that warrant careful consideration. This year, we discuss recent updateson local laws and regulations, covering several topics of particular relevance to entitiesreporting in Hong Kong. We highlight the financial implications of these issues to raiseawareness and understanding.
1.Macroeconomic uncertainties and their financial reporting implicationsAs an international financial centre, companies in Hong Kong engage in global businessactivities, playing a vital role in facilitating global capital flows, driving regional economicdevelopment and connecting businesses across borders. Consequently, Hong Kong’seconomy is influenced by the macroeconomic environment both regionally and globally. Theuncertainties inherent in the macroeconomic environment impact companies in diverse ways,depending on their industries and specific circumstances. This section explores the financialreporting implications of macroeconomic uncertainties.One significant uncertainty relates to interest rates in Hong Kong. Due to the Hong Kongdollar’s peg to the US dollar, local interest rates closely track those of the US Federal Reserve,consequently impacting Hong Kong’s economy. Interest rates in Hong Kong have remainedrelatively high in 2024, albeit with some softening12,13. The persistent high interest rates andongoing inflationary pressures continue to have implications for entities’ financial reporting.We recommend that entities refer to Closing Out 2022 and Closing Out 2023, whichextensively discuss these impacts on the following areas of financial reporting:
Impairment of non-financial assets applying HKAS 36 Impairment of AssetsThe expected credit loss (ECL) assessment under HKFRS 9 Financial InstrumentsLeases applying HKFRS 16 LeasesRevenue recognition applying HKFRS 15 Revenue from Contracts with CustomersEvents after the reporting date applying HKAS 10 Events after the Reporting PeriodRecognition of deferred tax assets applying HKAS 12 Income TaxesGoing concern assessment and estimation uncertainty and judgement application underHKAS 1 Presentation of Financial StatementsCurrent and non-current classification of financial liabilities, especially non-currentliabilities with loan covenants under HKAS 1.While entities should ensure that proper recognition and measurements are reflected in theirprimary financial statements, it is equally crucial to provide sufficient and clear disclosures forhigh-quality financial reporting. We highlight some common risk disclosure areas in thefollowing table which may be relevant during times of uncertainties. Please note that it is notan exhaustive checklist. Entities should refer to HKFRS Accounting Standards to ensuresufficient disclosures according to their specific circumstances.Risk exposures(not exhaustive)
Examples of disclosures (not exhaustive)
Interest rate riskEntities exposed to interest rate risks from floating-rate financialinstruments should provide a sensitivity analysis showing how profit orloss and equity would have been affected by reasonably possiblechanges in interest rates, and a description of the methods andassumptions used. [HKFRS 7.40(a)-(b)] To enhance transparency, theyshould consider presenting the analysis for different classes of financialinstruments.Entities that account for fixed-rate financial instruments at fair valuethrough profit or loss are also exposed to interest rate risk, as changes inmarket interest rates can lead to changes in the fair value of suchfinancial instruments. Therefore, the sensitivity analysis for market riskunder HKFRS 7.4014 may still be relevant.If an entity changes the methods and/or assumptions used in preparingthe sensitivity analysis, they are required to disclose the changes andreasons for them. [HKFRS 7.40(c)]12 Hong Kong Economy – The Government of Hong Kong Special Administrative Region webpage:
https://www.hkeconomy.gov.hk/en/pdf/assets.pdf13 Documents for Legislative Council LC Paper No. CB(1)1570/2024(03) dated 25 November 2024 (P.7, para 13).14 Appendix A of HKFRS 7: Market risk is defined as ‘The risk that the fair value or future cash flows of a financial instrument willfluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and otherprice risk’.Risk exposures(not exhaustive)
Examples of disclosures (not exhaustive)
Liquidity riskThe macroeconomic environment may impact entities’ strategies formanaging liquidity risk and financing arrangements. For example, entitiesmay make use of SFA (also known as ‘reverse factoring arrangements’),triggering the need for new disclosures on SFA as detailed in Section Iabove.Entities might also engage in ‘factoring arrangements’. When financialassets, like trade receivables with recourse, do not meet thederecognition criteria under HKFRS 915, both the financial assets andrelated financial liabilities would be presented in the entity’s financialstatements. It is crucial to include relevant maturity analysis in the liquidityrisk disclosures for such financial liabilities based on the agreed termsand conditions with the factors. This analysis is based on undiscountedcontractual cash flows that include both principal and interest payments.[HKFRS 7.39, B11-B11F]In response to macroeconomic challenges, entities might undergorestructuring exercises as part of their liquidity risk management strategy.Disclosures of the entity’s objectives, policies and processes formanaging the risk and the method used to measure the risk tailored toentities’ own circumstances16 should be provided.Higher inflation and interest rates might hamper the financial performanceand position of an entity, which in turn affects its compliance with loancovenants. The new disclosure requirement under HKAS 1.76ZA requiresdisclosure of information enabling financial statement users to understandthe risk that liabilities classified as non-current could become repayablewithin 12 months after the reporting period.Fair value volatilityChanges in macroeconomic conditions may prompt an entity to adjust itsvaluation measurements by using different inputs, assumptions andvaluation techniques. For example, the fair value of investment properties,previously determined using the market approach during an activeproperty market, may shift to the income approach when the propertymarket becomes sluggish and lacks comparable transactions.Consequently, the fair value measurement, previously categorized asLevel 2, may shift to Level 3, requiring additional Level 3 disclosures17,that include quantitative information about the significant unobservableinputs used in the fair value measurement. Significant changes invaluation measurements, such as changes in valuation techniques andthe reasons thereof, should also be disclosed.Entities that previously asserted in the financial statements that thecarrying amounts of certain assets and liabilities not measured at fair15 See HKFRS 9.3.2.3 to 3.2.22 for the requirements regarding derecogntion and transfer of financial assets.16 For detailed requirements, please refer to HKFRS 7.33(a)-(c) (for each type of risk arising from financial instruments) andHKFRS 7.39(c) (for liquidity risk).17 See HKFRS 13.93(d)-(h) for disclosures specific to Level 3.Risk exposures(not exhaustive)
Examples of disclosures (not exhaustive)
value approximate their fair value18 should revisit the appropriateness ofthis assertion in environments with high interest rates.Credit riskCredit risk tends to increase in economic downturns when debtors,whether individual or corporates, experience lower income or revenuelevel, making it challenging for them to repay the debts. Higher interestrates also increase the cost of borrowings, further challenging the debtors.These factors increase the likelihood of defaults, leading to a rise in creditrisk and potential deterioration of credit ratings. The impacts are notlimited to the measurement of ECL under HKFRS 9, but also extend tocredit risk disclosures in HKFRS 719.The following are some examples of the effects:
- Updating disclosures related to credit risk management practices toexplain how entities manage and address the increased credit risk ofdebtors.- Recognizing a higher level of ECL due to increased risk of default,necessitating disclosures that explain changes in loss allowances.- Collateral negotiations with debtors affecting ECL measurement,requiring relevant disclosure to explain the effect of collateral on ECLmeasurement.- Industry-specific sensitivities to macroeconomic changes may lead tocredit risk concentration within particular sectors, warrantingdisclosures regarding significant credit risk concentration.- Changes in debtors’ credit ratings impacting disclosure of credit riskexposure by credit risk rating.
2.Accounting implications of recent updates on laws and regulationsIn an evolving world, entities must stay updated on the developments of laws and regulations,remaining vigilant about compliance to fulfil their obligations. Some laws and regulations mayimpact financial reporting. Being aware of these implications can help prevent last-minutechallenges and facilitate proactive planning. This year, we highlight the latest legal updatesand their financial reporting implications relevant for entities in Hong Kong.A.Granting tax deductions for lease reinstatement costs in Hong KongOn 18 December 2024, the Legislative Council passed the Inland Revenue (Amendment) (TaxDeductions for Leased Premises Reinstatement and Allowances for Buildings and Structures)
Bill 2024, which was gazetted by the HKSAR Government as the Inland Revenue (Amendment)
(Tax Deductions for Leased Premises Reinstatement and Allowances for Buildings and18 See HKFRS 13.97 and HKFRS 7.25-26 and 29 for relevant requirements.19 HKFRS 7.35A-38 require disclosure of an entity’s credit risk management practices, quantitative and qualitative informationabout amounts arising from ECL and the entity’s credit risk exposure. HKFRS 7.34(c) and B8 set out requirements on significantconcentration of credit risk.Structures) Ordinance 2024 (the Amendment Ordinance) on 27 December 2024. Since theBill was passed after its Third Reading on 18 December 2024, it is considered to besubstantively enacted on that date in the context of HKAS 12. Consequently, entities shouldconsider deferred tax implications of the Bill20, as further discussed in the examples below.The Amendment Ordinance gives effect to two enhancement measures for deduction ofexpenses under profits tax in the 2024-25 Budget21, effective from the year of assessment2024/25. One of these enhancements introduces a tax deduction for expenses incurred forreinstating leased premises to their original condition (reinstatement cost).The Amendment Ordinance sets out five conditions that must be satisfied to qualify for taxdeduction for reinstatement costs:
1) The reinstatement costs have been actually incurred by the taxpayer;
2) the taxpayer is a lessee of the lease;
3) the taxpayer has a reinstatement obligation for the premises;
4) the reinstatement costs do not relate to any provisions made under HKFRS 16 Leases orany other similar accounting standards (e.g. the depreciation and interest expenses of thecapitalized reinstatement costs recognized in the financial statements); and5) the amount of the reinstatement cost is reasonable in the circumstances.As noted from conditions 1) and 4), tax deduction can only be claimed for lease reinstatementcosts actually incurred or paid. These deductions do not relate to any provisions made underHKFRS 16 or any other similar accounting standards. In other words, any accountingprovisions that recognize reinstatement costs as part of the ROU assets or their depreciationare not eligible for deductions. The resulting accounting implications will be that taxpayersmay need to make tax adjustments in their profit tax computations and provide for deferredtax during the lease period. This is illustrated in the following two examples:
20 HKAS 12.47 requires that ‘Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply tothe period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted by the end of the reporting period’ (underline added). Please see Part D, ‘Implementation of Pillar TwoGlobal Minimum Tax in Hong Kong’, below for a discussion of the FAQ published by the HKICPA regarding the consideration ofwhen a tax law is considered ‘substantively enacted’ in the context of Hong Kong.21 On 28 February 2024, the Financial Secretary of the HKSAR Government announced in the 2024-25 Budget that the HKSARGovernment would introduce a profit tax deduction for expenses incurred for reinstating the condition of the leased premises totheir original condition (reinstatement costs), and remove the time limit for claiming industrial and commercial building allowancescommencing from the year of assessment 2024/25.Example 1 – Lease entered into before the Amendment Ordinance is substantively enactedFact pattern IEntity A entered into a lease in Hong Kong, effective from 1 July 2024 for a term of fiveyears and was required to reinstate the premise to the original condition at the end ofthe lease term.At the commencement date of the lease, a ROU asset corresponding to the sameamount recognized for provision for reinstatement cost of HK$100K22 was recognized.The reporting date of Entity A is 31 December 2024.The income tax rate is 16.5%.Carrying amountHK$’000(A)
Tax base [Note 3]HK$’000(B)
TemporaryDifferenceHK$’000(A) – (B)
Deferred taximplicationHK$’0001 July 2024 (Before the Amendment Ordinance substantively enacted)
Reinstatementprovision[Note 1]--ROU asset[Note 6]-No deferred taximpact in view ofinitial recognitionexception[Note 4]18 December 2024 (Amendment Ordinance substantively enacted)
Reinstatementprovision-Deferred tax asset= 100 X 16.5%= 16.5 [Note 5]ROU asset[Note 6][Note 2]-No deferred taximpact in view ofinitial recognitionexception[Note 4]Note 1: The amount is recognized and measured applying HKAS 37 Provisions, Contingent Liabilities and ContingentAsset. See HKFRS 16.25. For simplicity, the discounting impact and future changes in reinstatement provision are ignored.We also assume that the ROU asset has no impairment issue.Note 2: The depreciation of the ROU asset related to the reinstatement provision every year = HK$100K / 5 = $20K peryear. As the Amendment Ordinance was substantively enacted on 18 December 2024, close to Entity A’s reporting dateof 31 December 2024, the depreciation for the period from 1 July 2024 to 18 December 2024 approximates = HK$20K/2= HK$10K. Therefore, the ROU asset at 18 December 2024 = HK$100K – HK$10K = HK$90K.Note 3: Tax base of asset = carrying amount – future taxable amounts + future deductible amounts [HKAS 12.7]Tax base of liability = carrying amount – future deductible amounts + future taxable amounts [HKAS 12.8]Note 4: See HKAS 12.15(b) and 24 for the exception to initial recognition of an asset and liability.Note 5: The recognition of a deferred tax asset is subject to the assessment of the availability of sufficient future taxableprofits, as required by HKAS 12.24.Note 6: The corresponding lease liability is not presented in this table.22 HKFRS 16.24 sets out the composition of the ROU asset, which includes ‘an estimate of costs to be incurred by the lessee indismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to thecondition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories’.Example 2 – Lease entered into after the Amendment Ordinance is substantively enactedFact pattern IIWith the same information as in fact pattern I, except that the lease was commenced on31 December 2024, which is after the Amendment Ordinance is substantively enacted.Carrying amountHK$’000(A)
Tax baseHK$’000(B)
TemporaryDifferenceHK$’000(A) – (B)
Deferred taximplicationHK$’00031 December 2024 (after the Amendment Ordinance substantively enacted)
Reinstatementprovision-Deferred tax asset= 100 X 16.5%= 16.5[Notes 8, 9]ROU asset[Note 10][Note 7]-Deferred tax liability= 100 X 16.5%= 16.5[Note 8]Note 7: Assume the depreciation of ROU asset is negligible as the lease was entered on 31 December 2024.Note 8: The exception to initial recognition of an asset and liability under HKAS 12.15(b) and 24 does not apply in thiscase, as the transaction results in equal taxable and deductible temporary differences, which is HK$100K in this example.Refer to Closing Out 2023 (Section II, P.11-12) which summarized key aspects of Amendments to HKAS 12 IncomeTaxes – Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which became effective from 1January 2023. According to these Amendments, the initial recognition exception no longer applies to transactions thatgive rise to equal taxable and deductible temporary differences on initial recognition. Please refer to HKAS 12.22A for therequirement.Note 9: Refer to Note 5 in Example 1 regarding the requirement for the recognition of a deferred tax asset under HKAS
12.24.Note 10: The corresponding lease liability is not presented in this table.The key differences between Example 1 and Example 2 are that in Example 1, there is nodeferred tax impact on the initial recognition of reinstatement provision and ROU asset butthere will be an immediate profit or loss impact when deferred tax asset is recognized on thedate the Amendment Ordinance is substantively enacted. In Example 2, deferred tax assetand deferred tax liability are recognized respectively upon the initial recognition ofreinstatement provision and ROU asset.In both examples, a deferred tax asset is recognized to the extent that it is probable that futuretaxable profits will be available against which it can be utilized23. After initial recognition,entities should assess any implications for deferred tax that might arise from other changes,such as depreciation of ROU assets and changes in estimate of reinstatement provision.23 HKAS 12.24.B.Update on Hong Kong Land Leases – Extensions by the HKSAR GovernmentIn July 1997, the HKSAR Government promulgated the land policy stating that leases notcontaining a right of renewal (excluding short term tenancies and special purposeleases)(hereafter referred to ‘Non-renewable Leases’) may be extended at the sole discretionof the HKSAR Government for a term of 50 years upon expiry without an additional premium,but an annual government rent of 3% rateable value is required.To streamline the procedures for extending Non-renewable Leases, the Extension ofGovernment Leases Ordinance (Cap.648)24(Ordinance) came into effect on 5 July 2024. Thefirst ‘Extension Notice’ was published in the Gazatte, covering the lease expiry period from 5July 2024 to 31 December 2030 (both days inclusive). The Ordinance establishes a newstatutory mechanism for lease extension. The Lands Department will publish ExtensionNotices in the Government Gazette regularly 6 years before the expiry of applicable leases(Regular Renewal Schedule), as illustrated in Diagram 1 below. Under the Ordinance, theHKSAR Government will normally extend applicable leases unless in a remote scenario wherethere are public interest considerations against the extension of any particular lease (meaningthat the lease specified in a ‘Non-extension List’)25.Diagram 1 – Schedule of publication date of Extension Notice and the land lease coveredPublication date of Extension Notice in the GazetteSpecified lease expiry period being covered5 July 20245 July 2024 to 31 December 2030End-December 2024261 January to 31 December 2031End-December 20251 January to 31 December 2032(and so on)
Under the Ordinance, land leases are extended for a term of 50 years without additionalpremium, but an annual government rent of 3% rateable value is required. Interests and rightsunder the original lease will be carried forward to the extended lease term. Owners are notobligated to conduct any procedures, or execute lease extension documents with the HKSARGovernment or rearrange mortgages.For accounting purposes, the implications of extension of Hong Kong land leases are analyzedseparately for leases renewed via the Extension Notice and those yet to be renewed.24 Please refer to a leaflet published by the Lands Department which provides a summary of the Ordinance.25 The Ordinance is applicable to general purpose leases expiring on or after 5 July 2024 without a right of renewal. These areleases for general commercial, residential or industrial uses. The Lands Department will publish a set of ‘Extension Notice’ and‘Non-extension List’ in the Gazette at the end of each year. Applicable leases extended in accordance with the Ordinance will notbe individually listed on the ‘Extension Notice’. The ‘Extension Notice’ will specify that all applicable leases that are due to expirein the specified lease expiry period will be extended in accordance with the Ordinance. Only leases which are not extended willbe specified individually on the ‘Non-extension list’ published on the same day.26 The HKSAR Government issued its Second Extension Notice on 27 December 2024.(i)
Leases renewed via the Extension NoticeAccording to Appendix A of HKFRS 16, a ‘lease modification’ is defined as a change inthe scope of a lease, or the consideration for a lease, that was not part of the originalterms and conditions of the lease – e.g. adding or terminating the right to use one ormore underlying assets, or extending or shortening the contractual lease term.For those leases that do not contain a right of renewal, the extension of land leasesunder the Ordinance, which increases the scope of the lease and is not a part of theoriginal terms and conditions of respective leases, constitutes a lease modification.Consequently, lessees account for such extensions applying the relevant requirementsin HKFRS 1627 from the effective date of the modification – the date when both partiesagree to a lease modification28 – the publication date of the Extension Notice.It is important to note that from the effective date of modification, entities shoulddepreciate the net carrying amount of ROU asset (i.e. cost minus accumulateddepreciation) over the revised lease term. For example, if the Extension Notice issuedon 5 July 2024 extends the lease term from 31 December 2030 to 31 December 2080for 50 years, lessee should depreciate the ROU asset over the revised lease term, from5 July 2024 to 31 December 2080.(ii)
Leases not yet renewedAs the HKSAR Government’s intention to renew leases and management’s expectationof renewal are not sufficient grounds for a lessee to include such extensions in thedetermination of the lease term, leases not yet renewed will continue to be accountedfor based on their existing terms and no significant impact is expected.However, entities should anticipate the timing of lease renewals based on the RegularRenewal Schedule and be prepared to account for them in the appropriate financial year.For example, the Extension Notice will be published near the end of December eachyear as per the Regular Renewal Schedule. Therefore, entities with December year-endfinancial statements, should account for their leases covered by the Extension Notice inthe financial statements for the same year as the publication of the Extension Notice.However, in cases where the financial year does not end in December (e.g. Septemberyear-end), land leases might be renewed after the reporting period but before thefinancial statements are authorized for issue. Information as required by paragraph 21of HKAS 10 Events after the Reporting Period should be disclosed if material.27 HKFRS 16.44-46 set out the accounting requirements of lease modification. Different accounting treatments will be applieddepending on the nature of the modifications, e.g. whether the modification is considered as a separate lease, and whether themodification increases or decreases the scope of the lease.28 HKFRS 16.Appendix A.C.Accounting for Long Service Payment subsidiesIn June 2022, the HKSAR Government gazetted the Employment and Retirement SchemesLegislation (Offsetting Arrangement) (Amendment) Ordinance 2022 to abolish the MandatoryProvident Fund (MPF)-Long Service Payment (LSP) and Severance Payment (SP) offsettingmechanism. The Abolition will be effective from 1 May 2025 (the Transition Date). TheHKICPA issued a financial reporting alert in February 2023, followed by detailed educationalguidance in July 2023 to explain the accounting implications of the Abolition.On 22 November 2024, the Finance Committee of the Legislative Council approved thecreation of a commitment for implementing the subsidy scheme for the Abolition (LSP Subsidy).Under the scheme, the HKSAR Government will subsidize a portion of the post-transition LSPpayable by employers for 25 years. The subsidy covers up to a specified amount per employeeper year, with the employers’ sharing ratio and capped amounts progressively increasing overtime. The following diagram illustrates the employer’s share of post-transition LSP:
Diagram 2 – An employer’s share of the post-transition LSPNote 1: The $500,000 threshold refers to whether the accumulated amount of post-transition portion of LSP payable by anemployer during the same year exceeds $500,000.Note 2: The specified employer’s sharing ratio and the capped amount, as referred to in (a) and (b) in this box apply to eachemployee.Note 3: The specified employer’s sharing ratio and the capped amount increase progressively over the 25-year subsidyperiod. Please refer to the table enclosed in Legislative Council Finance Committee paper FCR(2024-25)37 discussed on 22November 2024.In view of these developments, as an extension of the July 2023 educational publication, theHKICPA published another educational publication in January 2025 to provide guidance onthe accounting implications of the LSP subsidy. The publication highlights that, as a generallyacceptable method, the LSP subsidy is considered as a government grant under HKAS 20Accounting for Government Grants and Disclosure of Government Assistance, and isrecognized when there is reasonable assurance that the employer will comply with theOf the accumulated amount of post-transition portion of LSP payable byan employer during the same year [Note 1]For the first $500,000the lower of:
(a) the amount of post-transition LSP forthat employee multiplied by a specifiedsharing ratio (e.g. 50% in the first yearafter the Abolition takes effect); and(b) a specified capped amount (e.g.$3,000 in the first year after theAbolition takes effect)
[Note 2]Beyond the first $500,000the amount of post-transition LSP for thatemployee multiplied by a specified ratio[Note 3]conditions attaching to the government grant and the grant will be received29. Typically, thisassurance is met when the employer has paid or is about to pay the LSP to the employee andis eligible to claim the LSP subsidies from the HKSAR Government. The subsidy as acompensation for LSP expenses incurred by the employer is recognized in profit or loss in theperiod it becomes receivable30. There may be exceptions where the reasonable assurancethreshold might be met earlier. Each case should be assessed individually based on its factsand circumstances. The Financial Reporting Standards Committee (FRSC) of the HKICPAacknowledges that there may be other acceptable accounting alternatives to account for theLSP subsidy. Entities should ensure that the method adopted is justifiable and complies withHKFRS Accounting Standards, and they should disclose the accounting policy information ifmaterial.D.Implementation of Pillar Two Global Minimum Tax in Hong KongOn 27 December 2024 31, the HKSAR Government published in the Gazette the InlandRevenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024 (Bill) forimplementing the Global Minimum Tax (GMT) and Hong Kong Minimum Top-up Tax (HKMTT)
rules in Hong Kong. Upon enactment, the GMT and HKMTT will be implemented for fiscalyears beginning on or after 1 January 2025. The Bill went through its First Reading, and theSecond Reading debate in the Legislative Council commenced on 8 January 2025.Amendments to HKAS 12 Income Taxes – International Tax Reform – Pillar Two Model Rulesintroduce new disclosure requirements on Pillar Two income taxes. When applying theAmendments, entities should consider whether (1) the legislation is enacted or substantivelyenacted but not yet in effect at the reporting date; or (2) the legislation is in effect32.In the context of Hong Kong, the need for disclosure under (1) depends on when the legislationis considered as ‘substantively enacted’. A FAQ published by the HKICPA states that for thepurpose of accounting for income taxes, the FRSC considers that a bill to be substantivelyenacted after passing the Third Reading33. This is because the legislative procedures after theThird Reading appear to be a formality, and there is usually reasonable certainty that a bill willbe passed in law after the Third Reading. Accordingly, since the Bill underwent its FirstReading in January 2025, the disclosures for (1) required by the Amendments to HKAS 12are not relevant for entities with December 2024 year end. The disclosures for (2) required bythe Amendments to HKAS 12 are also not relevant as the legislation is not in effect during thereporting period. However, to assist financial statements users in better understanding the29 HKAS 20.7.30 HKAS 20.20.31 As mentioned in Closing Out 2023 (Section II, P.13), the HKSAR Government released a consultation paper on 21 December2023, regarding the implementation of the global minimum tax and the domestic minimum top-up tax in Hong Kong, withconsultation period of 3 months, ending on 20 March 2024. This Bill incorporated feedback received during the consultation.32 See Closing Out 2023 (Section II, P.12-13) for a summary.33 Extracted from FAQ: According to the Basic Law of HKSAR, after a bill has been gazetted, it has to pass through three readingsin the Legislative Council (LegCo) before it is enacted. A bill is subject to debate and vote in the Second and Third Readings. Ifa bill is rejected during either of those Readings, no further proceedings shall be taken on it. A bill passed by LegCo after theThird Reading shall take effect only after it is signed and promulgated by the Chief Executive.development and related impact of the Pillar Two legislation in Hong Kong on entities, entitiesare encouraged to provide relevant disclosures in accordance with HKAS 1.17(c).Furthermore, depending on the progress of the legislative process in Hong Kong, if thelegislation is enacted or substantively enacted after the reporting period but before thefinancial statements are authorized for issue, the disclosure requirements under HKAS 10.21will apply. An estimation of the relevant financial effect should be disclosed.In respect of (2), a Hong-Kong based multinational company or a group with subsidiaries oftenoperates in different jurisdictions, which may have varying statuses regarding theimplementation of their Pillar Two legislation at the reporting date. Some jurisdictions mighthave Pillar Two legislation in effect during the reporting period, leading the affected entities torecognize related income taxes in the statement of profit or loss. In such cases, current taxexpenses related to Pillar Two income taxes should be separately disclosed in the financialstatements.The following diagram highlights the accounting implications of Pillar Two legislations.Diagram 3 – Accounting implications of Pillar Two legislations in different scenariosReporting for financial statements applyingAmendments to HKAS 12 – International Tax Reform – Pillar Two Model RulesScenarioI [Note 1]IIIIIPillar Two legislationenacted or substantivelyenacted after the end of thereporting period but beforefinancial statements areauthorized for issuePillar Two legislation enactedor substantively enacted butnot yet in effect at the end ofthe reporting periodPillar Two legislationenacted or substantivelyenacted and in effect atthe end of the reportingperiodAccountingimplicationsNo top-up tax payable→ only mandatorydisclosures applyNo top up tax payable→ only mandatory disclosuresapplyTop-up tax payable+ mandatory disclosuresRelevantHKAS 12 orotherrequirementsNot covered by HKAS12, but required underHKAS 10 to disclose thenature of the event andan estimate of itsfinancial effect, or astatement that such anestimate cannot bemade [Note 3]Disclose the fact that the exception to recognizing anddisclosing information of deferred tax assets and liabilitiesrelated to Pillar Two income taxes has been applied. [Note 2]Disclose known orreasonably estimableexposure to Pillar Twoincome taxes arising fromrelevant jurisdiction at thereporting date, bothqualitative andquantitative information[Note 4]Disclose separately itscurrent tax expense(income) related toPillar Two income taxes[Note 5]Note 1: This may be in the case for Hong Kong, if the Bill is enacted or substantively enacted after the end of the reporting periodbut before the financial statements are authorized for issue.Note 2: HKAS 12.88A.Note 3: The extent of information required by HKAS 10 should be similar to HKAS 12.88C-88D to enable financial statementusers to understand the entity’s exposure to Pillar Two income taxes arising from that jurisdiction.Note 4: HKAS 12.88C-88D.Note 5: HKAS 12.88BThe scenarios described above can arise within an entity’s consolidated financial statements,where the entity and its group companies operate in various jurisdictions with different statusof development of Pillar Two Model Rules. It is crucial to provide appropriate disclosures inlight of the circumstances. As the Amendments to HKAS 12 became effective in 2023, entitiesshould ensure the disclosures are updated for their 2024 financial statements.
3.Climate-related matters on financial reporting and connectivityWe started discussing the implication of climate-related reporting in Closing Out 2021, withupdates provided in Closing Out 2022 and Closing Out 2023. This year, we highlight thefollowing recent major developments.A.Hong Kong Sustainability Disclosure Standards and ConnectivityThere have been significant developments in the sustainability reporting landscape in HongKong in 2024. The publication of the Roadmap on Sustainability Disclosure in HongKong (Roadmap)34 by the Financial Services and the Treasury Bureau on 10 December 2024,sets out Hong Kong’s approach to require publicly accountable entities35 (PAEs) to adopt theInternational Sustainability Standards Board (ISSB) Standards. The Roadmap lays down aclear pathway for large PAEs to fully adopt the ISSB Standards no later than 2028 with thefollowing key milestones:
Details of respective milestones and their statusMilestone 1– Development ofHong KongSustainabilityDisclosureStandards Being a significant step in Hong Kong’s sustainability reporting journey, on12 December 2024, the HKICPA published HKFRS S1 GeneralRequirements for Disclosure of Sustainability-related Financial Informationand HKFRS S2 Climate-related Disclosures (collectively referred to asHKFRS Sustainability Disclosure Standards or HKFRS SDS). HKFRS SDSare fully aligned with the ISSB Standards.Milestone 2– Compliancewith the HongKong Exchangesand ClearingLimited (HKEX)’sNew ClimateRequirements All Main Board issuers are required to disclose against the New ClimateRequirements modelling on IFRS S2 Climate-related Disclosures on a“comply or explain” basis from 1 January 2025 (except for the mandatorydisclosure requirement on Scope 1 and 2 greenhouse emissions applying toall issuers from 1 January 2025). Issuers that are Hang Seng Composite LargeCap Index constituents arefurther required to disclose against the New Climate Requirements from 1January 2026.34 Roadmap P.5.35 As set out in the Inaugural Jurisdictional Guide published by the IFRS Foundation in May 2024, PAEs are (a) entities whosesecurities are traded in a public market or entities in the process of issuing securities for trading in a public market; and (b) entitiesthat hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses (for example, banks,credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks) and have a significant weightin the jurisdiction, regardless of their ownership structure or listed status.Details of respective milestones and their status HKEX will consult the market in 2027 on mandating sustainability reportingagainst HKFRS SDS for listed PAEs under a proportionate approach, withan expected effective date of 1 January 2028.Milestone 3– Compliance bynon-listed PAEsSubject to stakeholders’ comments and feedback, relevant financial regulatorswill require financial institutions carrying a significant weight (being non-listedPAEs) to apply HKFRS SDS no later than 2028.The Roadmap indicates that Main Board issuers will be first impacted by the New ClimateRequirements specified in the Listing Rules, with the mandate eventually extending to includeboth listed and non-listed PAEs applying HKFRS SDS by 2028. While the publication ofHKFRS SDS has no immediate impact on PAEs and its adoption remains voluntary currently,PAEs should actively familiarize themselves with HKFRS SDS to ensure smoothimplementation by 2028.To support the implementation of HKFRS SDS, the HKICPA offers resources including:
E-learning: Charting Sustainability Reporting in Hong Kong – Public briefing on HKFRSS1 and S2Resource Centre for Sustainability Standards36Sustainability Information Centre37Frequently-asked questionsIn light of the above recent developments, achieving connectivity between sustainabilityreporting and financial reporting has become increasingly crucial for entities reporting in HongKong, especially listed entities. Ensuring consistency and complementarity between financialstatements disclosures and sustainability reporting disclosures is key to achieving thisconnectivity. An effective and robust connectivity can empower stakeholders to obtain aholistic and comprehensive view of an entity’s financial performance, financial position andcash flows. In terms of climate-related risks, stakeholders can gain a deeper insight into anentity’s exposure to these risks, management’s strategies to manage and address them intheir operations and the resulting financial implications.The International Accounting Standards Board (IASB) and ISSB recognize the importance ofconnectivity between their respective requirements in enabling the provision of high-qualityfinancial information to capital markets. A new dedicated webpage ‘Connecting IFRSAccounting and IFRS Sustainability’ has been launched, containing all related resources andupdates. Entities are recommended to refer to the resources in the webpage, particularly thewebcast series ‘Connectivity between the financial statements and sustainability-relatedfinancial disclosures’, which include illustrative scenarios, to gain insights on achievingconnectivity.36 It is a centralized hub for technical publications and reference materials relevant to sustainability reporting, assurance andethics. It also provides guidance materials covering topics such as the applicability of HKFRS SDS (i.e. which entities must applythe standards and by when) and their interaction with the New Climate requirements under the amended Listing Rules.37 It is a collection of thought leadership articles and learning resources to help stakeholders keep abreast of local and internationaldevelopments.B.Other developments of IFRS Accounting Standards related to climateIn 2024, the IASB engaged in several financial reporting projects, notably covering climate riskand connectivity, as highlighted below. Entities should vigilantly and robustly assess thepotential impacts of these projects on their financial statements. For example, entities shouldassess whether they have any climate-related commitments that should be recognized as aprovision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets byconsidering the project in (i) below. Regarding (iv), although the current impact on entitiesoperating in Hong Kong is limited, there could be potential implications for their investmentsin entities operating in other jurisdictions engaging in the sale and purchase of nature-dependent electricity.(i)
In April 2024, the IFRS Interpretation Committee (IFRS IC) published an agendadecision – Climate-related Commitments (IAS 37) on whether a company’s commitmentto reduce or offset its greenhouse gas emissions creates a constructive obligation and,if so, whether that constructive obligation meets the criteria in IAS 37 for recognizing aprovision.(ii)
In July 2024, the IASB published the Exposure Draft Climate-related and OtherUncertainties in the Financial Statements. The Exposure Draft proposes eight examplesillustrating how an entity applies the requirements in IFRS Accounting Standards toreport the effects of climate-related and other uncertainties in its financial statements.These examples aim to improve the reporting of the effects of climate-related and otheruncertainties in the financial statements and to strengthen connections between financialstatement disclosures and sustainability disclosures. The consultation closed on 28November 2024. The IASB will start deliberating the feedback in February 2025, whichwill be a joint meeting with ISSB38.(iii)
On 12 November 2024, the IASB published the Exposure Draft Provision – TargetedImprovements. The proposed amendments clarify how entities assess when to recordprovisions and how to measure them, which in turn assist entities in applying therequirements of IAS 37 to climate-related obligations, such as decommissioning orenvironmental rehabilitation obligations as well as emission credits. The Exposure Draftalso amends the Guidance on implementing IAS 37 by adding examples to illustrate factpatterns that have been the subjects of IFRS IC agenda decision, namely July 2022Agenda Decision – Negative Low Emission Vehicle Credits (IAS 37) 39 and theabovementioned IFRS IC April 2024 Agenda Decision on Climate-related Commitments(IAS 37).(iv) Given the rising use of power purchase agreements to acquire nature-dependentelectricity and the need for better representation of these contracts in financial38 Please refer to IASB’s project page for the development of this project.39 See relevant discussion in Closing Out 2023 –Section I, P.7.statements, the IASB published its targeted amendments to IFRS 9 FinancialInstruments and IFRS 7 Financial Instruments: Disclosures on 18 December 2024, afterconsidering the stakeholders’ feedback on the Exposure Draft Contracts for RenewableElectricity. These amendments are required to be applied for reporting periods on orafter 1 January 2026, with early adoption permitted.III. HKFRS Accounting Standards issued but not yeteffectiveThe final part of this publication provides an overview of HKFRS Accounting Standards thathave been issued but are not yet effective. In accordance with HKAS 840, entities need todisclose in their December 2024 financial statements the possible impact of initial applicationof the new or amended HKFRS Accounting Standards. Accordingly, entities should familiarizethemselves with the requirements of the new or amended HKFRS Accounting Standards, andassess their impacts based on their own circumstances. We highlight below threeamendments or Standards that we consider particularly relevant to entities reporting in HongKong.
1.Amendments to HKFRS 9 Financial Instruments and HKFRS 7 FinancialInstruments: Disclosures – Amendments to the Classification and Measurementof Financial InstrumentsIn May 2024, the IASB issued Amendments to the Classification and Measurement ofFinancial Instruments, which amended IFRS 9 and IFRS 7, to address the matters identifiedduring the post-implementation review of the classification and measurement of IFRS 9 andclarify stakeholders’ concerns and emerging issues. The HKICPA issued the equivalentAmendments to HKFRS 9 and HKFRS 7 in August 2024. A summary of the key amendmentsand their implications is set out below.Effective date: Annual reporting periods beginning or after 1 January 2026. Earlier application of eitherall the amendments at the same time or only the amendments related to classification of financial assetsplus related disclosures permitted.Initial application: Amendments to be applied retrospectively. Restatement of prior periods not required,and only permitted without the use of hindsight. Disclosure of information of financial assets that changethe measurement category due to the Amendments required.A.Initial recognition or derecognition of financial assets and liabilitiesHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
A1. Date of initial recognition or derecognition of financial assets and liabilities – general principles41Clarify the existing requirements ofHKFRS 9 that financial assets or financialUnless using an electronic payment system thatmeets the specified criteria in HKFRS 9.B3.3.840 HKAS 8.30-31.41 HKFRS 9.B3.1.2AHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
liabilities are recognized when the entitybecomes a party to the contractualprovisions of the instrument.Clarify that financial assets arederecognized when the entity’s rights tothe contractual cash flows (CCFs) expireor are transferred.Clarify that a financial liability isderecognized on the ‘settlement date’, i.e.the date on which the financial liability isextinguished because the relatedobligation specified in the contract isdischarged, cancelled, expires or theliability otherwise qualifies forderecognition (see A2 below).(refer to A2 below), entities cannot derecognize afinancial asset or financial liability until the amounthas cleared in the receiving entity’s bankaccount42. These requirements apply to paymentsmade via cheque, debit card or credit card andother electronic transfers that do not satisfy theconditions in HKFRS 9.B3.3.8.Consequently, entities whose financial reportingprocesses do not align with the clarificationsprovided in the Amendments might be affected. Assuch, entities should revisit their processes andassess whether the accounting policy forderecognition of financial assets and financialliabilities conform to the Amendments.See an example below to understand the impact ofthe Amendments.A2. Derecognition of a financial liability through electronic transfer43Introduce an accounting policy option thatan entity is permitted to deem a financialliability (or part of it) to be settled in cashusing an electronic payment system asdischarged before the settlement date ifcertain conditions are met andderecognize the financial liability beforethe settlement date.Require that the above accounting policyoption is applied to all settlements madethrough the same electronic paymentsystem if elected.The accounting policy option can beapplied for electronic payments on asystem-by-system basis.No significant impact is expected on entitiesoperating in Hong Kong and Mainland China wherethe electronic payment systems generally areoperated on a real-time basis.The Amendments apply to specific scenarios ofpayments made using an electronic paymentsystem for financial liabilities. To assess whetherthe specified conditions will be met, additional workis needed to analyze the contractual and legalrequirements for each electronic payment systemin each jurisdiction. This work could be complex,particularly in case of cross-border payments.Entities’ financial reporting processes might beaffected, e.g. some entities that, prior to theAmendments, derecognized financial liabilities onlyupon cash receipts.Example – derecognition of a financial liability through a cheque paymentIn Hong Kong, it is common for companies to derecognize their financial liabilities upon theissuance of cheques to their creditors. At each month-end, they perform bank reconciliationprocedures to reconcile any differences in the closing balance between the bank ledger andbank statements (e.g. cheques not yet cleared by the bank). The Amendments could changethis current practice by clarifying that entities can derecognize their financial liabilities only42 HKFRS 9.BC 3.55 and BC3.60..43 HKFRS 9.B3.1.2A, B3.3.8 – B3.3.10.when cheques are cleared by the bank, instead of when they are issued, as illustrated indiagram below.Diagram 4 – Derecognition of trade payable settled by chequeUnder the Amendments, the debtor should derecognize trade payable on Day Y when thecreditor receives the cash, as opposed to Day 0 when the debtor issues the cheque. Similarly,a creditor derecognizes a trade receivable upon receiving cash from the debtor after thecheque has been cleared by the bank. In preparation for adopting the Amendments, weconsider it crucial that entities review their derecognition practices for financial assets andfinancial liabilities to ensure compliance with the Amendments.B.Classification of financial assetsHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
B1. Classification of financial assets – contractual terms that are consistent with a basic lendingarrangement44Provides guidance on how an entity assesseswhether CCFs of a financial asset, withcontingent features, are consistent with a basiclending arrangement, specifically:
- whether the CCFs that could arise before andafter the change in CCFs would meet theSPPI45 test.- whether the nature of contingent event relatesdirectly to, and the CCFs change in the samedirection as, changes in basic lending risks andcosts.- whether SPPI test may still be met when thenature of contingent event does not relateThe Amendments provide additionalapplication guidance for all financial assetswhose CCFs could change as a result ofcontingent events46. Therefore, entitiesshould reassess whether their financialassets with contingent features areimpacted by the Amendments.Judgement may be needed in assessingwhether financial assets containingcontingent features satisfy the SPPI underthe Amendments, e.g. what is consideredas ‘significantly different’ in applying thenew requirements of HKFRS 9.B.4.1.10A.44 HKFRS 9.B4.1.8A, B4.1.10, B4.1.10A and B4.1.13-1445 SPPI refers to ‘solely payments of principal and interest on the principal amount outstanding’.46 Given the principle-based approach of IFRS 9 (HKFRS 9 equivalent), the Amendments are not specific to environmental, socialand governance (ESG)-linked instruments. See HKFRS 9.BC4.254-4.256 for the IASB’s relevant consideration.Highlights of the AmendmentsImplications and relevant considerations (notexhaustive)
directly to changes in basic lending risks andcosts.Add examples of financial assets that have, or donot have, CCFs that are SPPI.There could be a change in themeasurement category of existing financialassets as a result of applying theAmendments. If so, entities should providethe relevant disclosures according to thetransition provisions47.B2. Classification of financial assets – financial assets with non-recourse features48Enhance the description of the term ‘non-recourse’, specifying that a financial asset hasnon-recourse features if an entity’s ultimate rightto receive cash flows is contractually limited tothe cash flows generated by specified assets.That means, the entity is primarily exposed to thespecified assets’ performance risk, not thedebtor’s credit risk.Clarify the difference between a non-recourseloan and a collateralized loan49.Clarify how to perform the ‘look-through’assessment to the underlying assets for financialasset with non-recourse feature to assess if sucha financial asset still meets SPPI.Entities should reassess the impact of theAmendments on the classification of theirfinancial assets, such as:
- financial assets initially considered in-substance non-recourse withoutcontractual terms, given that theAmendments50 clarify that non-recoursefeature must be contractual;
- financial assets which are collateralizedloans but accounted for as non-recourse,and vice versa.Be mindful of the disclosure requirementsand transitional provision if there is achange in measurement category asmentioned above.B3. Classification of financial assets – contractually linked instruments (CLI)51Clarify the characteristics of CLI, which have awaterfall payment structure that createsconcentration of credit risk and results in adisproportionate allocation of cash shortfalls fromthe underlying pool between tranches.Clarify that CLI with non-recourse features are tobe assessed only in accordance with CLIrequirements under HKFRS 9.Clarify that CLI are not created when multipledebt instruments of differing seniority are issuedto facilitate lending with enhanced creditprotection to a creditor (or a group of creditors).Clarify that the reference to instruments in theunderlying pool can include financial instrumentsnot within the scope of HKFRS 9 but with CCFsequivalent to SPPI, such as lease receivables.Entities should reassess the impact of theAmendments on the classification of theirfinancial assets currently treated as CLI. Forexample, those multiple debt instruments ofdifferent seniority issued for credit protectionof creditor cannot be accounted for as CLIunder the Amendments.Be mindful of the disclosure requirementsand transitional provision if there is achange in measurement category asmentioned above.47 HKFRS 9.7.2.48 HKFRS 9.B4.1.16, B4.1.16A and B4.1.17.49 HKFRS 9.BC4.280.50 HKFRS 9.B4.1.16A and BC4.286.51 HKFRS 9.B4.1.20, B4.1.20A, B4.1.21 and B4.1.23.C.DisclosuresHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
C1. Disclosures – investments in equity instruments designated at fair value through othercomprehensive income (FVTOCI)52Require additional disclosures for FVTOCIinvestments:
- the change in fair value in OCI during theperiod, showing separately, the amountsrelating to investments derecognized inthe period, and those held at the end ofthe reporting period for each class ofinvestment.- the aggregate fair value of investmentsfor each class of investment (as opposedto fair value of each such investmentbefore the Amendments) at the end of thereporting period, and- any transfer of cumulative gains andlosses within equity for investmentsderecognized in the period.The grouping of investments into classes shouldbe performed based on the requirements ofHKFRS 7.6.The applicability of the new disclosure regardingthe transfer of cumulative gains or losses withinequity depends on the entities’ existingaccounting policy on whether to transfer thesecumulative gains or losses.C2. Disclosures – contractual terms that could change the timing or amount of contractual cash flows onthe occurrence (or non-occurrence) of a contingent event53Add new disclosures for financial assetsand liabilities that contain contingentfeatures (including those that are ESG-linked) to:
- each class of financial asset measured atamortized cost or FVTOCI and- each class of financial liability atamortized cost.The new disclosures include:
- a qualitative description of the nature ofthe contingent event;
- quantitative information about thepossible changes to CCFs that couldresult from those contractual terms; and- the gross carrying amount of financialassets and the amortized cost of financialliabilities subject to those contractualterms.Add the same disclosure requirements toHKFRS 19 Subsidiaries without PublicAccountability: DisclosuresNew disclosures are applicable to both financialassets and financial liabilities whose cash flowswould change due to a contingent event, and notonly financial assets whose classificationrequirements have been amended.The new disclosures are not required for financialinstruments measured at fair value through profitor loss, as the changes in fair value areconsidered to provide sufficient information toenable users to assess the future cash flows ofthose instruments.The grouping of investments into classes shouldbe performed based on the requirements ofHKFRS 7.6.Judgement may be needed in the following:
- determination of the nature and extent ofqualitative and quantitative disclosures requiredby the Amendments, considering the complexityof the instruments and materiality.- appropriate level of aggregation ordisaggregation of information for disclosures.52 HKFRS 7.11A and 11B.53 HKFRS 7.20B, 20C and 20D.
2.HKFRS 18 Presentation and Disclosure in Financial StatementsIn July 2024, the HKICPA issued HKFRS 18 together with the consequential amendments toother HKFRS Accounting Standards54, following the issuance of IFRS 18 Presentation andDisclosure in Financial Statements and consequential amendments to other IFRS AccountingStandards in April 2024. HKFRS 18, which replaces HKAS 1 Presentation of FinancialStatements, is effective for annual periods beginning on or after 1 January 2027, with earlyapplication permitted. Requirements in HKAS 1 that are unchanged have been ‘broughtforward’ into HKFRS 18 and other HKFRS Accounting Standards.Although HKFRS 18 will not affect how companies measure financial performance, it will affecthow companies present and disclose financial performance. As shown in the table below,HKFRS 18 introduces three sets of new requirements to improve entities’ reporting of financialperformance and give investors a better basis for analyzing and comparing entities. Theserequirements affect all entities in all industries as to how they present and disclose financialperformance in financial statements.AreasHighlights of key requirements
1.Statement of profit orloss55More structured statement of profit or loss by requiring:
i)
Classification of all income and expenses into one of the fivecategories – operating, investing, financing, income taxes anddiscontinued operation. The first three are new categories.ii)
Presentation of two new defined subtotals and totals– ‘operating profit’ and ‘profit or loss before financing andincome taxes’.For the purpose of (i), an entity assesses whether it has a ‘mainbusiness activity’ of investing in assets or providing financing tocustomers, which would require specific classification.Require entities to classify foreign exchange differences in the samecategory of the statement of profit or loss as the income andexpenses from the items that gave rise to the foreign exchangedifferences. However, if classifying such a way would involve unduecost or efforts, entities are permitted to classify foreign exchangedifferences in the operating category.Include specific requirements for classifying fair value gains andlosses on derivatives and hedging instruments, and for classifyingincome and expenses from hybrid contracts.
2.Management-definedperformance measures(MPMs)56Define MPM as a subtotal of income and expenses that an entityuses in public communications outside financial statements, tocommunicate management’s view of an aspect of the financialperformance of the entity as a whole to users. However, subtotals of54 This includes narrow-scope amendments to HKAS 7, HKAS 33 Earnings per Share and HKAS 8. HKAS 8 is re-titled ‘Basis ofPreparation of Financial Statements’ to better reflect its amended content.55 HKFRS 18.46-85, B29-B85.56 HKFRS 18.117-125, B113-B142.AreasHighlights of key requirementsincome and expenses listed by HKFRS 18 or specifically required byHKFRS Accounting Standards are not MPMs.Require disclosure of all of an entity’s MPMs in a single note,including a reconciliation between the measure and the most directlycomparable subtotal specified by HKFRS 18 or total or subtotalspecially required by other HKFRS Accounting Standards, and adescription of how the measure communicates management’s viewand the calculation of the measure.Provide a statement that the measure reflects management’s viewof an aspect of financial performance of the company as a wholeand is not necessarily comparable to measures sharing similarlabels or descriptions provided by other companies.
3.Aggregation anddisaggregation57Provide guidance for entities on grouping transactions and otherevents into the line items in the primary financial statements andinformation disclosed in the notes. Entities are required to:
i)
Aggregate items that have similar characteristics anddisaggregate items that have different characteristics;
ii)
Group items in a way that does not obscure material informationor reduce the understandability of the information presented;
iii) Use meaningful labels or descriptions for aggregated items, anduse the label ‘other’ only when entities are unable to find a moreinformative label; andiv) Place items in the primary financial statements and the notes tofulfil their complementary roles.Require entities to present the operating category expenses basedon their nature or their function. Entities that present expensesclassified by function are required to disclose in the notes the fivespecified operating expenses by nature, namely the amount ofdepreciation, amortization, employee benefits, impairment lossesand write-downs of inventories included in each line item in theoperating category of statement of profit or loss58.The implementation of HKFRS 18 will have a broad impact on various entities and industries.The HKICPA released two A-Plus technical articles in January and July 2024. Entities areencouraged to read them to gain insights into the implications of HKFRS 18. Moreover, theHKICPA has developed a dedicated webpage focusing on HKFRS 18, which includes theproject summaries and effects analysis, providing another helpful resources to assist in theimplementation of this new major Standard.Restatement of comparative period and compliance with the disclosure requirements underHKFRS 18.C3 on transition are required. Entities with interim reporting obligations should be57 HKFRS 18.41-43, B16-B26.58 HKFRS 18.78-85 and B80-B85.aware of the amendments to HKAS 34 Interim Financial Reporting and related transitionprovisions in HKFRS 18.C4-C5.To ensure smooth transition, we advise entities to start preparing for the implementation ofHKFRS 18 as soon as possible. The following are some key reminders for the transition:
(i)
Entities should carefully assess whether they are engaged in specified main businessactivities, as the classification of income and expenses in their statements of profit orloss depends on their main business activities. The main business of a subsidiary is notnecessarily the main business of a consolidated group.(ii)
Entities’ current reporting practices, internal processes, accounting systems and internalcontrols may be impacted by the following:
-changes in the structure of their statements of profit or loss,-assessment of specified main business at each reporting entity level, and-requirements for aggregation and disaggregation, including the need for (1) moredescriptive labels for items currently aggregated and labelled as ‘other’ in thefinancial statements, and (2) capturing relevant information to fulfil the disclosureson the five specified operating expenses by nature.(iii)
Management and those charged with governance should proactively communicate theexpected implications of HKFRS 18 to stakeholders. Non-GAAP measures that meet thedefinition of MPMs shall be included in financial statements and subject to audit. Thedisclosure requirements for MPMs might heighten communication endeavors andengagements with investors, prompting entities to reassess their externalcommunication strategies to ensure effective public communication on non-GAAPmeasures while complying with HKFRS 18 requirements.
3.HKFRS 19 Subsidiaries without Public Accountability: DisclosuresIn July 2024, the HKICPA issued HKFRS 19, the equivalent of IFRS 19 Subsidiaries withoutPublic Accountability: Disclosures issued by the IASB in May 2024. HKFRS 19 is a disclosure-only and optional standard which allows eligible subsidiaries to apply HKFRS AccountingStandards with reduced disclosures. The objective of HKFRS 19 is to reduce the costs ofpreparing financial statements for eligible subsidiaries, while maintaining the usefulness ofthose financial statements for their users.An eligible subsidiary may elect to apply HKFRS 19 in its consolidated, separate or individualfinancial statements for annual periods beginning on or after 1 January 2027. Early applicationis permitted. A subsidiary59 is eligible for applying HKFRS 19 if meeting these two conditions60:
(i)
It does not have public accountability (See Diagram 5); and(ii)
Its ultimate or intermediate parent produces consolidated financial statements availablefor public use that comply with HKFRS Accounting Standards.Diagram 5 – What is public accountability61?The following are some key points for application of HKFRS 19:
(i)
As HKFRS 19 is part of HKFRS Accounting Standards, an eligible subsidiary that appliesHKFRS 19 and complies with HKFRS Accounting Standards is required to state as partof its explicit and unreserved statement of compliance with HKFRS AccountingStandards that HKFRS 19 has been adopted62.(ii)
An entity that has elected to apply HKFRS 19 may later revoke that election63. An entityis permitted to elect to apply HKFRS 19 more than once. For example, an entity thatapplied HKFRS 19 in a prior period but not in the immediately preceding period mayelect to apply HKFRS 19 in the current period.(iii)
Entities, which prepare their financial statements for the immediately preceding periodunder Small and Medium-sized Entity Financial Reporting Framework and FinancialReporting Standard or HKFRS for Private Entities Accounting Standard and elect toapply HKFRS 19 and other HKFRS Accounting Standards in the current period, areconsidered a first-time adopter of HKFRS Accounting Standards and thus the disclosurerequirements in HKFRS 19 relating to HKFRS 1 First-time Adoption of Hong KongFinancial Reporting Standards will apply. This is because those reporting frameworksare not HKFRS Accounting Standards64.59 Appendix A of HKFRS 10 Consolidated Financial Statements defines ‘subsidiary’ as ‘an entity that is controlled by anotherentity’.60 HKFRS 19.7.61 HKFRS 19.11-12.62 HKFRS 19.20.63 HKFRS 19.13 and BC 96-98.64 HKFRS 19.BC 107.(iv) Unless otherwise specified, an eligible subsidiary applying HKFRS 19 applies therequirements of recognition, measurement and presentation in other HKFRS AccountingStandards to a transaction, event or condition and applies the disclosure requirementsunder the subheading of that HKFRS Accounting Standard in HKFRS 19. For example,an entity applies the recognition, measurement and presentation requirements underHKAS 2 Inventories to account for its inventories and applies HKFRS 19.164 under thesubheading HKAS 2 Inventories in HKFRS 19 for disclosure.(v)
Eligible subsidiaries voluntarily applying HKFRS 8 Operating Segments and HKAS 33Earnings per Share should continue to refer to these HKFRS Accounting Standards forall relevant disclosure requirements.(vi) If an entity applying HKFRS 19 also applies HKFRS 17 Insurance Contracts, it is requiredto apply all the disclosure requirements in HKFRS 17, as there are no reductions in thedisclosure requirements for HKFRS 17 at this stage.(vii) Entities previously applying HKFRS Accounting Standards and have decided to applyHKFRS 19 should identify the disclosure requirements that no longer apply andinformation that no longer needs to be gathered. Financial reporting systems andprocesses may need to be adjusted to accommodate the reduced disclosurerequirements.We recommend that entities utilize the following resources to understand and implementHKFRS 19:
(i) Our A-Plus technical article published in October 2024: This article not only explains theapplication of HKFRS 19, but also discusses the expected benefits and costs of adoptingHKFRS 19. It serves as a starting point for entities to assess whether they should applyHKFRS 19, taking into account their own circumstances.(ii) The IFRS 19 disclosure tracker: This tracker lists the disclosure requirements in IFRS 19and maps them to their equivalents in other IFRS Accounting Standards. It is intended tobe a ‘living document’ that will be updated with changes to disclosure requirements in otherIFRS Accounting Standards and the corresponding changes to IFRS 19 itself.Appendix – New and amended HKFRS AccountingStandards as well as Agenda Decisions issued by the IFRSICThe following amended standards and interpretation became effective as of 1 January 2024:
Standards and InterpretationDescriptionAmendments to HKAS 1 Presentation ofFinancial Statements – Classification ofLiabilities as Current or Non-currentThe amendments to HKAS 1 clarify how to classify debtand other liabilities as current or non-current and dealwith the classification of non-current liabilities withcovenants.Amendments to HKAS 1 Presentation ofFinancial Statements – Non-currentLiabilities with CovenantsAmendments to HKFRS 16 Leases –Lease Liability in a Sale and LeasebackThe amendments to HKFRS 16 add subsequentmeasurement requirements for the lease liability arisingfrom a sale and leaseback transaction, where thetransfer of the asset satisfies the requirements inHKFRS 15 Revenue from Contracts with Customers tobe accounted for as a sale.Amendments to Hong KongInterpretation 5 (Revised) Presentationof Financial Statements – Classificationby the Borrower of a Term Loan thatContains a Repayment on DemandClauseHK Interpretation 5 has been updated to incorporatethe references to the above amendments to HKAS 1.Amendments to HKAS 7 Statement ofCash Flows and HKFRS 7 FinancialInstruments: Disclosures – SupplierFinance ArrangementsThe amendments introduce new disclosurerequirements to enhance the transparency of supplierfinance arrangements and their effects on an entity’sliabilities, cash flows and exposure to liquidity risk.The following new and amended standards and interpretation have been issued but are notyet effective as of 1 January 2024. They are available for early adoption.Effective from annualperiods beginning on orafter (in chronologicalorder):
New and amended HKFRS Accounting Standards andInterpretation1 January 2025Amendments to HKAS 21 The Effects of Changes in ForeignExchange Rates – Lack of ExchangeabilityEffective from annualperiods beginning on orafter (in chronologicalorder):
New and amended HKFRS Accounting Standards andInterpretation1 January 2026Amendments to HKFRS 9 Financial Instruments and HKFRS 7Financial Instruments: Disclosures – Amendments to the Classificationand Measurement of Financial Instruments1 January 2026Annual Improvements to HKFRS Accounting Standards — Volume 11:
Amendments to HKFRS 1 First-time Adoption of Hong KongFinancial Reporting StandardsAmendments to HKFRS 7 Financial Instruments: Disclosures andGuidance on Implementing HKFRS 7Amendments to HKFRS 9 Financial InstrumentsAmendments to HKFRS 10 Consolidated Financial StatementsAmendments to HKAS 7 Statement of Cash Flows1 January 2027HKFRS 18 Presentation and Disclosure in Financial Statements1 January 2027Amendments to Hong Kong Interpretation 5 Presentation of FinancialStatements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause1 January 2027HKFRS 19 Subsidiaries without Public Accountability: DisclosuresA date to be determinedby the IASBAmendments to HKFRS 10 Consolidated Financial Statements andHKAS 28 Investments in Associates and Joint Ventures – Sale orContribution of Assets between an Investor and its Associate or JointVentureThe following agenda decisions were published by the IFRS IC in 2024:
Publication monthAgenda DecisionsJanuary 2024Merger between a Parent and Its Subsidiary in Separate FinancialStatements – IAS 27 Separate Financial StatementsApril 2024Payments Contingent on Continued Employment during HandoverPeriods – IFRS 3 Business CombinationsClimate-related Commitments – IAS 37 Provisions, ContingentLiabilities and Contingent AssetsJuly 2024Disclosure of Revenues and Expenses for Reportable Segments –IFRS 8 Operating SegmentsAbout the Standard Setting DepartmentThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorizedby law to set and promulgate standards relating to financial reporting, auditing, ethics andsustainability disclosures for professional accountants in Hong Kong. The due processdocuments of the Standard Setting Department (SSD) explain the processes and proceduresfor developing local standards and adopting international standards.To find out more about how SSD contributes to international standard-setting, please visit:
https://www.hkicpa.org.hk/en/Standards-setting/Standards/How-we-set-standards-and-contribute-to-international-standardsTo access SSD’s latest publications and webcasts, please visit:
https://www.hkicpa.org.hk/en/Standards-setting/Standards/Whats-News/2025Connect with us on social media:
HKICPA SSD@hkicpa.officialThis publication is developed by the SSD of the HKICPA and is for general reference only.The HKICPA, its staff, Council and its committees do not accept any responsibility or liabilityin respect of the publication or any consequence that may arise from any person acting orrefraining from acting as a result of any materials in the publication. Members of the HKICPAand other users of this publication should also read the full HKFRS Accounting Standards, asfound in the HKICPA Members’ Handbook for further reference and seek professional advicewhere necessary when applying the references contained in this publication. The SSDwelcomesyourcommentsonthispublication.Theycanbesenttocommentletters@hkicpa.org.hk.2425_20250320AuthorCarrie LauAssociate Director,Standard Setting,HKICPAHong Kong Institute of Certified Public Accountants37th Floor, Wu Chung House213 Queen’s Road East, Wanchai, Hong KongTel: (852) 2287 7228Fax: (852) 2865 6603Email: hkicpa@hkicpa.org.hkWebsite: www.hkicpa.org.hkThe author thanks members of the Financial Reporting Standards Committee of the HKICPA for theirinput in reviewing this publication.
Educational guidance: Financial reporting considerations for closing out 2024
下载原件STANDARDSETTINGFEBRUARY 2025Financial reportingconsiderations for closing outCONTENTSIntroductionI.Amended HKFRS Accounting Standards mandatorily effective on1 January 2024II.Topical issues
1.Macroeconomic uncertainties and their financial reporting implications
2.Accounting implications of recent updates on laws and regulations
3.Climate-related matters on financial reporting and connectivityIII. HKFRS Accounting Standards issued but not yet effectiveAppendix – New and amended HKFRS Accounting Standards as well asAgenda Decisions issued by the IFRS Interpretations CommitteeIntroductionThis publication highlights key financial reporting reminders and topical areas that are relevantand beneficial for preparers in the preparation of their annual financial statements withDecember 2024 year-end, in accordance with HKFRS Accounting Standards. The insightsprovided may be also applicable to future reporting periods.The first section summarizes the amended HKFRS Accounting Standards that are mandatoryeffective for annual periods beginning on or after 1 January 2024. The second section coverstopical areas that are relevant for the preparation of 2024 and subsequent financial statements.Finally, the third section provides a high-level discussion of the key areas and financialimplications of the major new and amended HKFRS Accounting Standards that will beeffective after 1 January 2025.It is important to note that this publication is not intended to be comprehensive, nor does itpurport to address all the potential issues relevant to an entity’s financial statements. Entitiesare advised to exercise judgement and refer to HKFRS Accounting Standards in the HKICPA’sMembers’ Handbook for further guidance relevant to their own facts and circumstances.I.Amended HKFRS Accounting Standards mandatorilyeffective on 1 January 2024There are no new HKFRS Accounting Standards effective for annual periods beginning on orafter 1 January 2024. Instead, all changes relate to amendments to existing HKFRSAccounting Standards, as summarized in the table below. In addition to the summary below,entities are recommended to refer to the publication Closing Out 20231, as well as relevanttechnical training activities, to gain a thorough understanding of the amendments and theirimplications.Paragraph 28 of HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errorsrequires specific disclosures on initial application of a HKFRS Accounting Standard if there isan effect on the current or prior periods. Entities should provide clear and sufficiently granulardisclosures tailored to their specific circumstances.HKFRSAccountingStandardKey aspectsProspective or retrospective applicationand key remindersAmendments to HKAS 12: Classification of Liabilities as Current or Non-current, Non-currentLiabilities with Covenants- Clarify the requirements for classifying liabilities as current or non-current.- Require new disclosures for non-current liabilities that are subject to covenants within 12months after the reporting period.HKAS 1Presentation ofFinancialStatementsClassification of a liability Clarify that the right to defersettlement3 must exist at thereporting date and have substance. Remove the word ‘unconditional’ inHKAS 1.69(d). Clarify that classification isunaffected by management’sintention or expectations andevents after the reporting date. Specify that only loan covenantswith which an entity must comply onor before the reporting date affectthe classification.Classification of a liability Retrospective application in accordancewith HKAS 8. Certain requirements are carriedforward unchanged to HKFRS 18Presentation and Disclosure in FinancialStatements, which will replace HKAS 1on 1 January 2027. Entities need to carefully consider theimpact of the amendments on existingand planned loan agreements andconvertible instruments.Disclosure In case where entity has difficulties inrepaying the debt after the year end,1 Closing Out 2023, Section III (P.14-20).2 Amendments to HKAS 1 encompass two amendments, namely the 2020 Amendments regarding ‘Classification of Liabilities asCurrent or Non-current’ and the 2022 Amendments regarding ‘Non-current Liabilities with Covenants’. These two amendmentsare required to be applied together on 1 January 2024. Hong Kong Interpretation 5 (Revised) Presentation of Financial Statements– Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause has been updated to incorporatethe references to the 2020 and 2022 Amendments.3 Refers to the right to defer settlement of a liability for at least 12 months after the end of the reporting period. See HKAS 1.69(d).HKFRSAccountingStandardKey aspectsProspective or retrospective applicationand key reminders Clarify the meaning of ‘settlement’4in the context of classification. Classification of a liability as currentor non-current is not affected by thesettlement terms of a conversionoption which is classified as equityinstrument under HKAS 32Financial Instruments: Presentation.Disclosure Introduce new disclosures to enablefinancial statement users tounderstand the risk that non-currentliabilities with covenants maybecome repayable within 12months after the reporting date5.disclosures regarding the going concernassessment under HKAS 1 and liquidityrisk under HKFRS 7 FinancialInstruments: Disclosures may berelevant.Amendments to HKFRS 166: Lease Liability in a Sale and Leaseback- Explain how a seller-lessee subsequently measures the lease liability arising from a sale andleaseback where the transfer of asset satisfies the requirements in HKFRS 15 Revenue fromContracts with Customers to be accounted for as a sale.HKFRS 16Leases Require an entity to recognize alease liability at the date of sale andleaseback transaction, even if all ofthe lease payments are variable,and regardless of whether theydepend on an index or rate. Require that lease liability arisingfrom a leaseback is subsequentlymeasured in a way that no gain orloss is recognized that relates to theright of use (ROU) retained. Add a new Illustrative Example 25to demonstrate the application ofthe amendments. Retrospective application to sale andleaseback transactions (that includevariable lease payments) entered intoon or after the initial application date ofHKFRS 16 (i.e. 1 January 2019 forDecember year-end financialstatements). Disclose quantitative and qualitativeinformation specific to sale andleaseback transactions required byHKFRS 167.4 For the purpose of classifying a liability as current or non-current, settlement refers to a transfer to the counterparty of cash, orother economic resources (e.g. goods or services) or the entity’s own equity instruments, that results in the extinguishment of theliability. See HKAS 1.76A-76B for details.5 HKAS 1.76ZA.6 HKFRS 16.102A, C2 and C20E.7 HKFRS 16.51, 59(d), B48 and B52.HKFRSAccountingStandardKey aspectsProspective or retrospective applicationand key remindersAmendments to HKAS 7 and HKFRS 78: Supplier Finance Arrangements- Add disclosure requirements to enhance the transparency of supplier finance arrangement(SFA) and their effects on an entity’s liabilities, cash flows and exposure to liquidity risk.HKAS 7Statement ofCash Flows andHKFRS 7FinancialInstruments:
DisclosuresHKAS 7 Clarify the characteristics of SFAs. Disclose the terms and conditionsof SFAs in place. Disclose at the beginning and endof the reporting period:
- Carrying amounts and associatedline items of financial liabilitiesthat are part of SFAs.- Carrying amounts and associatedline items of financial liabilities forwhich suppliers have receivedpayments from finance providers.- Range of payment due dates forboth financial liabilities associatedwith SFAs and comparable tradepayables that are not part of aSFA. Disclose the type and effect of non-cash changes in the carryingamounts of financial liabilities.HKFRS 7 Add SFA as an example of when anentity may need to discloseinformation of concentration ofliquidity risk with finance providers. Transition reliefs provided. Entities arenot required to disclose certaincomparative information in the first yearof adoption of the amendments9. Entities should exercise judgement indetermining whether the nature orfunction of the liabilities related to theSFAs is sufficiently different from thoseof ‘trade and other payables’, andtherefore it warrants a separatepresentation in the statement of financialposition. Other reminders:
- disclose separately terms andconditions of multiple SFAs that havedissimilar terms and conditions10.- disclose explanatory informationabout the range of payment duedates or additional ranges if theranges are wide11.8 HKAS 7.44F-H, 62-63 and HKFRS 7.44JJ, B11F(j), IG18 and IG18A.9 See HKAS 7.63 for details of transition reliefs when the entity first applies the Amendments to HKAS 7 and HKFRS 7.10 HKAS 7.44H(a).11 HKAS 7.44H(b)(iii).The following table summarizes the relevant educational guidance and support activities forthe above Amendments.Educational guidance and supportAll of the aboveAmendmentsClosing Out 2023E-learning CPD courses:
- Annual Accounting Update 2023- 2024 SMP Symposium – Module one- Annual Accounting and Sustainability Update 2024- Year-end Financial Reporting Reminders for 2024Amendments to HKAS 1 Educational publication issued in June 2023 provides four illustrativeexamples to explain the application of the Amendments:
- Term loan with financial covenants- Term loan with non-financial covenants/conditions- Revolving loan facility- Convertible bonds A-Plus technical article issued in April 2023 E-learning CPD course:
- Classification of Liabilities as Current or Non-currentII. Topical issuesIn this section, we set out topical issues relevant to the preparation of financial statements withDecember 2024 year end. While certain issues persist from the previous years, new emergingissues have surfaced that warrant careful consideration. This year, we discuss recent updateson local laws and regulations, covering several topics of particular relevance to entitiesreporting in Hong Kong. We highlight the financial implications of these issues to raiseawareness and understanding.
1.Macroeconomic uncertainties and their financial reporting implicationsAs an international financial centre, companies in Hong Kong engage in global businessactivities, playing a vital role in facilitating global capital flows, driving regional economicdevelopment and connecting businesses across borders. Consequently, Hong Kong’seconomy is influenced by the macroeconomic environment both regionally and globally. Theuncertainties inherent in the macroeconomic environment impact companies in diverse ways,depending on their industries and specific circumstances. This section explores the financialreporting implications of macroeconomic uncertainties.One significant uncertainty relates to interest rates in Hong Kong. Due to the Hong Kongdollar’s peg to the US dollar, local interest rates closely track those of the US Federal Reserve,consequently impacting Hong Kong’s economy. Interest rates in Hong Kong have remainedrelatively high in 2024, albeit with some softening12,13. The persistent high interest rates andongoing inflationary pressures continue to have implications for entities’ financial reporting.We recommend that entities refer to Closing Out 2022 and Closing Out 2023, whichextensively discuss these impacts on the following areas of financial reporting:
Impairment of non-financial assets applying HKAS 36 Impairment of AssetsThe expected credit loss (ECL) assessment under HKFRS 9 Financial InstrumentsLeases applying HKFRS 16 LeasesRevenue recognition applying HKFRS 15 Revenue from Contracts with CustomersEvents after the reporting date applying HKAS 10 Events after the Reporting PeriodRecognition of deferred tax assets applying HKAS 12 Income TaxesGoing concern assessment and estimation uncertainty and judgement application underHKAS 1 Presentation of Financial StatementsCurrent and non-current classification of financial liabilities, especially non-currentliabilities with loan covenants under HKAS 1.While entities should ensure that proper recognition and measurements are reflected in theirprimary financial statements, it is equally crucial to provide sufficient and clear disclosures forhigh-quality financial reporting. We highlight some common risk disclosure areas in thefollowing table which may be relevant during times of uncertainties. Please note that it is notan exhaustive checklist. Entities should refer to HKFRS Accounting Standards to ensuresufficient disclosures according to their specific circumstances.Risk exposures(not exhaustive)
Examples of disclosures (not exhaustive)
Interest rate riskEntities exposed to interest rate risks from floating-rate financialinstruments should provide a sensitivity analysis showing how profit orloss and equity would have been affected by reasonably possiblechanges in interest rates, and a description of the methods andassumptions used. [HKFRS 7.40(a)-(b)] To enhance transparency, theyshould consider presenting the analysis for different classes of financialinstruments.Entities that account for fixed-rate financial instruments at fair valuethrough profit or loss are also exposed to interest rate risk, as changes inmarket interest rates can lead to changes in the fair value of suchfinancial instruments. Therefore, the sensitivity analysis for market riskunder HKFRS 7.4014 may still be relevant.If an entity changes the methods and/or assumptions used in preparingthe sensitivity analysis, they are required to disclose the changes andreasons for them. [HKFRS 7.40(c)]12 Hong Kong Economy – The Government of Hong Kong Special Administrative Region webpage:
https://www.hkeconomy.gov.hk/en/pdf/assets.pdf13 Documents for Legislative Council LC Paper No. CB(1)1570/2024(03) dated 25 November 2024 (P.7, para 13).14 Appendix A of HKFRS 7: Market risk is defined as ‘The risk that the fair value or future cash flows of a financial instrument willfluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and otherprice risk’.Risk exposures(not exhaustive)
Examples of disclosures (not exhaustive)
Liquidity riskThe macroeconomic environment may impact entities’ strategies formanaging liquidity risk and financing arrangements. For example, entitiesmay make use of SFA (also known as ‘reverse factoring arrangements’),triggering the need for new disclosures on SFA as detailed in Section Iabove.Entities might also engage in ‘factoring arrangements’. When financialassets, like trade receivables with recourse, do not meet thederecognition criteria under HKFRS 915, both the financial assets andrelated financial liabilities would be presented in the entity’s financialstatements. It is crucial to include relevant maturity analysis in the liquidityrisk disclosures for such financial liabilities based on the agreed termsand conditions with the factors. This analysis is based on undiscountedcontractual cash flows that include both principal and interest payments.[HKFRS 7.39, B11-B11F]In response to macroeconomic challenges, entities might undergorestructuring exercises as part of their liquidity risk management strategy.Disclosures of the entity’s objectives, policies and processes formanaging the risk and the method used to measure the risk tailored toentities’ own circumstances16 should be provided.Higher inflation and interest rates might hamper the financial performanceand position of an entity, which in turn affects its compliance with loancovenants. The new disclosure requirement under HKAS 1.76ZA requiresdisclosure of information enabling financial statement users to understandthe risk that liabilities classified as non-current could become repayablewithin 12 months after the reporting period.Fair value volatilityChanges in macroeconomic conditions may prompt an entity to adjust itsvaluation measurements by using different inputs, assumptions andvaluation techniques. For example, the fair value of investment properties,previously determined using the market approach during an activeproperty market, may shift to the income approach when the propertymarket becomes sluggish and lacks comparable transactions.Consequently, the fair value measurement, previously categorized asLevel 2, may shift to Level 3, requiring additional Level 3 disclosures17,that include quantitative information about the significant unobservableinputs used in the fair value measurement. Significant changes invaluation measurements, such as changes in valuation techniques andthe reasons thereof, should also be disclosed.Entities that previously asserted in the financial statements that thecarrying amounts of certain assets and liabilities not measured at fair15 See HKFRS 9.3.2.3 to 3.2.22 for the requirements regarding derecogntion and transfer of financial assets.16 For detailed requirements, please refer to HKFRS 7.33(a)-(c) (for each type of risk arising from financial instruments) andHKFRS 7.39(c) (for liquidity risk).17 See HKFRS 13.93(d)-(h) for disclosures specific to Level 3.Risk exposures(not exhaustive)
Examples of disclosures (not exhaustive)
value approximate their fair value18 should revisit the appropriateness ofthis assertion in environments with high interest rates.Credit riskCredit risk tends to increase in economic downturns when debtors,whether individual or corporates, experience lower income or revenuelevel, making it challenging for them to repay the debts. Higher interestrates also increase the cost of borrowings, further challenging the debtors.These factors increase the likelihood of defaults, leading to a rise in creditrisk and potential deterioration of credit ratings. The impacts are notlimited to the measurement of ECL under HKFRS 9, but also extend tocredit risk disclosures in HKFRS 719.The following are some examples of the effects:
- Updating disclosures related to credit risk management practices toexplain how entities manage and address the increased credit risk ofdebtors.- Recognizing a higher level of ECL due to increased risk of default,necessitating disclosures that explain changes in loss allowances.- Collateral negotiations with debtors affecting ECL measurement,requiring relevant disclosure to explain the effect of collateral on ECLmeasurement.- Industry-specific sensitivities to macroeconomic changes may lead tocredit risk concentration within particular sectors, warrantingdisclosures regarding significant credit risk concentration.- Changes in debtors’ credit ratings impacting disclosure of credit riskexposure by credit risk rating.
2.Accounting implications of recent updates on laws and regulationsIn an evolving world, entities must stay updated on the developments of laws and regulations,remaining vigilant about compliance to fulfil their obligations. Some laws and regulations mayimpact financial reporting. Being aware of these implications can help prevent last-minutechallenges and facilitate proactive planning. This year, we highlight the latest legal updatesand their financial reporting implications relevant for entities in Hong Kong.A.Granting tax deductions for lease reinstatement costs in Hong KongOn 18 December 2024, the Legislative Council passed the Inland Revenue (Amendment) (TaxDeductions for Leased Premises Reinstatement and Allowances for Buildings and Structures)
Bill 2024, which was gazetted by the HKSAR Government as the Inland Revenue (Amendment)
(Tax Deductions for Leased Premises Reinstatement and Allowances for Buildings and18 See HKFRS 13.97 and HKFRS 7.25-26 and 29 for relevant requirements.19 HKFRS 7.35A-38 require disclosure of an entity’s credit risk management practices, quantitative and qualitative informationabout amounts arising from ECL and the entity’s credit risk exposure. HKFRS 7.34(c) and B8 set out requirements on significantconcentration of credit risk.Structures) Ordinance 2024 (the Amendment Ordinance) on 27 December 2024. Since theBill was passed after its Third Reading on 18 December 2024, it is considered to besubstantively enacted on that date in the context of HKAS 12. Consequently, entities shouldconsider deferred tax implications of the Bill20, as further discussed in the examples below.The Amendment Ordinance gives effect to two enhancement measures for deduction ofexpenses under profits tax in the 2024-25 Budget21, effective from the year of assessment2024/25. One of these enhancements introduces a tax deduction for expenses incurred forreinstating leased premises to their original condition (reinstatement cost).The Amendment Ordinance sets out five conditions that must be satisfied to qualify for taxdeduction for reinstatement costs:
1) The reinstatement costs have been actually incurred by the taxpayer;
2) the taxpayer is a lessee of the lease;
3) the taxpayer has a reinstatement obligation for the premises;
4) the reinstatement costs do not relate to any provisions made under HKFRS 16 Leases orany other similar accounting standards (e.g. the depreciation and interest expenses of thecapitalized reinstatement costs recognized in the financial statements); and5) the amount of the reinstatement cost is reasonable in the circumstances.As noted from conditions 1) and 4), tax deduction can only be claimed for lease reinstatementcosts actually incurred or paid. These deductions do not relate to any provisions made underHKFRS 16 or any other similar accounting standards. In other words, any accountingprovisions that recognize reinstatement costs as part of the ROU assets or their depreciationare not eligible for deductions. The resulting accounting implications will be that taxpayersmay need to make tax adjustments in their profit tax computations and provide for deferredtax during the lease period. This is illustrated in the following two examples:
20 HKAS 12.47 requires that ‘Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply tothe period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted by the end of the reporting period’ (underline added). Please see Part D, ‘Implementation of Pillar TwoGlobal Minimum Tax in Hong Kong’, below for a discussion of the FAQ published by the HKICPA regarding the consideration ofwhen a tax law is considered ‘substantively enacted’ in the context of Hong Kong.21 On 28 February 2024, the Financial Secretary of the HKSAR Government announced in the 2024-25 Budget that the HKSARGovernment would introduce a profit tax deduction for expenses incurred for reinstating the condition of the leased premises totheir original condition (reinstatement costs), and remove the time limit for claiming industrial and commercial building allowancescommencing from the year of assessment 2024/25.Example 1 – Lease entered into before the Amendment Ordinance is substantively enactedFact pattern IEntity A entered into a lease in Hong Kong, effective from 1 July 2024 for a term of fiveyears and was required to reinstate the premise to the original condition at the end ofthe lease term.At the commencement date of the lease, a ROU asset corresponding to the sameamount recognized for provision for reinstatement cost of HK$100K22 was recognized.The reporting date of Entity A is 31 December 2024.The income tax rate is 16.5%.Carrying amountHK$’000(A)
Tax base [Note 3]HK$’000(B)
TemporaryDifferenceHK$’000(A) – (B)
Deferred taximplicationHK$’0001 July 2024 (Before the Amendment Ordinance substantively enacted)
Reinstatementprovision[Note 1]--ROU asset[Note 6]-No deferred taximpact in view ofinitial recognitionexception[Note 4]18 December 2024 (Amendment Ordinance substantively enacted)
Reinstatementprovision-Deferred tax asset= 100 X 16.5%= 16.5 [Note 5]ROU asset[Note 6][Note 2]-No deferred taximpact in view ofinitial recognitionexception[Note 4]Note 1: The amount is recognized and measured applying HKAS 37 Provisions, Contingent Liabilities and ContingentAsset. See HKFRS 16.25. For simplicity, the discounting impact and future changes in reinstatement provision are ignored.We also assume that the ROU asset has no impairment issue.Note 2: The depreciation of the ROU asset related to the reinstatement provision every year = HK$100K / 5 = $20K peryear. As the Amendment Ordinance was substantively enacted on 18 December 2024, close to Entity A’s reporting dateof 31 December 2024, the depreciation for the period from 1 July 2024 to 18 December 2024 approximates = HK$20K/2= HK$10K. Therefore, the ROU asset at 18 December 2024 = HK$100K – HK$10K = HK$90K.Note 3: Tax base of asset = carrying amount – future taxable amounts + future deductible amounts [HKAS 12.7]Tax base of liability = carrying amount – future deductible amounts + future taxable amounts [HKAS 12.8]Note 4: See HKAS 12.15(b) and 24 for the exception to initial recognition of an asset and liability.Note 5: The recognition of a deferred tax asset is subject to the assessment of the availability of sufficient future taxableprofits, as required by HKAS 12.24.Note 6: The corresponding lease liability is not presented in this table.22 HKFRS 16.24 sets out the composition of the ROU asset, which includes ‘an estimate of costs to be incurred by the lessee indismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to thecondition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories’.Example 2 – Lease entered into after the Amendment Ordinance is substantively enactedFact pattern IIWith the same information as in fact pattern I, except that the lease was commenced on31 December 2024, which is after the Amendment Ordinance is substantively enacted.Carrying amountHK$’000(A)
Tax baseHK$’000(B)
TemporaryDifferenceHK$’000(A) – (B)
Deferred taximplicationHK$’00031 December 2024 (after the Amendment Ordinance substantively enacted)
Reinstatementprovision-Deferred tax asset= 100 X 16.5%= 16.5[Notes 8, 9]ROU asset[Note 10][Note 7]-Deferred tax liability= 100 X 16.5%= 16.5[Note 8]Note 7: Assume the depreciation of ROU asset is negligible as the lease was entered on 31 December 2024.Note 8: The exception to initial recognition of an asset and liability under HKAS 12.15(b) and 24 does not apply in thiscase, as the transaction results in equal taxable and deductible temporary differences, which is HK$100K in this example.Refer to Closing Out 2023 (Section II, P.11-12) which summarized key aspects of Amendments to HKAS 12 IncomeTaxes – Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which became effective from 1January 2023. According to these Amendments, the initial recognition exception no longer applies to transactions thatgive rise to equal taxable and deductible temporary differences on initial recognition. Please refer to HKAS 12.22A for therequirement.Note 9: Refer to Note 5 in Example 1 regarding the requirement for the recognition of a deferred tax asset under HKAS
12.24.Note 10: The corresponding lease liability is not presented in this table.The key differences between Example 1 and Example 2 are that in Example 1, there is nodeferred tax impact on the initial recognition of reinstatement provision and ROU asset butthere will be an immediate profit or loss impact when deferred tax asset is recognized on thedate the Amendment Ordinance is substantively enacted. In Example 2, deferred tax assetand deferred tax liability are recognized respectively upon the initial recognition ofreinstatement provision and ROU asset.In both examples, a deferred tax asset is recognized to the extent that it is probable that futuretaxable profits will be available against which it can be utilized23. After initial recognition,entities should assess any implications for deferred tax that might arise from other changes,such as depreciation of ROU assets and changes in estimate of reinstatement provision.23 HKAS 12.24.B.Update on Hong Kong Land Leases – Extensions by the HKSAR GovernmentIn July 1997, the HKSAR Government promulgated the land policy stating that leases notcontaining a right of renewal (excluding short term tenancies and special purposeleases)(hereafter referred to ‘Non-renewable Leases’) may be extended at the sole discretionof the HKSAR Government for a term of 50 years upon expiry without an additional premium,but an annual government rent of 3% rateable value is required.To streamline the procedures for extending Non-renewable Leases, the Extension ofGovernment Leases Ordinance (Cap.648)24(Ordinance) came into effect on 5 July 2024. Thefirst ‘Extension Notice’ was published in the Gazatte, covering the lease expiry period from 5July 2024 to 31 December 2030 (both days inclusive). The Ordinance establishes a newstatutory mechanism for lease extension. The Lands Department will publish ExtensionNotices in the Government Gazette regularly 6 years before the expiry of applicable leases(Regular Renewal Schedule), as illustrated in Diagram 1 below. Under the Ordinance, theHKSAR Government will normally extend applicable leases unless in a remote scenario wherethere are public interest considerations against the extension of any particular lease (meaningthat the lease specified in a ‘Non-extension List’)25.Diagram 1 – Schedule of publication date of Extension Notice and the land lease coveredPublication date of Extension Notice in the GazetteSpecified lease expiry period being covered5 July 20245 July 2024 to 31 December 2030End-December 2024261 January to 31 December 2031End-December 20251 January to 31 December 2032(and so on)
Under the Ordinance, land leases are extended for a term of 50 years without additionalpremium, but an annual government rent of 3% rateable value is required. Interests and rightsunder the original lease will be carried forward to the extended lease term. Owners are notobligated to conduct any procedures, or execute lease extension documents with the HKSARGovernment or rearrange mortgages.For accounting purposes, the implications of extension of Hong Kong land leases are analyzedseparately for leases renewed via the Extension Notice and those yet to be renewed.24 Please refer to a leaflet published by the Lands Department which provides a summary of the Ordinance.25 The Ordinance is applicable to general purpose leases expiring on or after 5 July 2024 without a right of renewal. These areleases for general commercial, residential or industrial uses. The Lands Department will publish a set of ‘Extension Notice’ and‘Non-extension List’ in the Gazette at the end of each year. Applicable leases extended in accordance with the Ordinance will notbe individually listed on the ‘Extension Notice’. The ‘Extension Notice’ will specify that all applicable leases that are due to expirein the specified lease expiry period will be extended in accordance with the Ordinance. Only leases which are not extended willbe specified individually on the ‘Non-extension list’ published on the same day.26 The HKSAR Government issued its Second Extension Notice on 27 December 2024.(i)
Leases renewed via the Extension NoticeAccording to Appendix A of HKFRS 16, a ‘lease modification’ is defined as a change inthe scope of a lease, or the consideration for a lease, that was not part of the originalterms and conditions of the lease – e.g. adding or terminating the right to use one ormore underlying assets, or extending or shortening the contractual lease term.For those leases that do not contain a right of renewal, the extension of land leasesunder the Ordinance, which increases the scope of the lease and is not a part of theoriginal terms and conditions of respective leases, constitutes a lease modification.Consequently, lessees account for such extensions applying the relevant requirementsin HKFRS 1627 from the effective date of the modification – the date when both partiesagree to a lease modification28 – the publication date of the Extension Notice.It is important to note that from the effective date of modification, entities shoulddepreciate the net carrying amount of ROU asset (i.e. cost minus accumulateddepreciation) over the revised lease term. For example, if the Extension Notice issuedon 5 July 2024 extends the lease term from 31 December 2030 to 31 December 2080for 50 years, lessee should depreciate the ROU asset over the revised lease term, from5 July 2024 to 31 December 2080.(ii)
Leases not yet renewedAs the HKSAR Government’s intention to renew leases and management’s expectationof renewal are not sufficient grounds for a lessee to include such extensions in thedetermination of the lease term, leases not yet renewed will continue to be accountedfor based on their existing terms and no significant impact is expected.However, entities should anticipate the timing of lease renewals based on the RegularRenewal Schedule and be prepared to account for them in the appropriate financial year.For example, the Extension Notice will be published near the end of December eachyear as per the Regular Renewal Schedule. Therefore, entities with December year-endfinancial statements, should account for their leases covered by the Extension Notice inthe financial statements for the same year as the publication of the Extension Notice.However, in cases where the financial year does not end in December (e.g. Septemberyear-end), land leases might be renewed after the reporting period but before thefinancial statements are authorized for issue. Information as required by paragraph 21of HKAS 10 Events after the Reporting Period should be disclosed if material.27 HKFRS 16.44-46 set out the accounting requirements of lease modification. Different accounting treatments will be applieddepending on the nature of the modifications, e.g. whether the modification is considered as a separate lease, and whether themodification increases or decreases the scope of the lease.28 HKFRS 16.Appendix A.C.Accounting for Long Service Payment subsidiesIn June 2022, the HKSAR Government gazetted the Employment and Retirement SchemesLegislation (Offsetting Arrangement) (Amendment) Ordinance 2022 to abolish the MandatoryProvident Fund (MPF)-Long Service Payment (LSP) and Severance Payment (SP) offsettingmechanism. The Abolition will be effective from 1 May 2025 (the Transition Date). TheHKICPA issued a financial reporting alert in February 2023, followed by detailed educationalguidance in July 2023 to explain the accounting implications of the Abolition.On 22 November 2024, the Finance Committee of the Legislative Council approved thecreation of a commitment for implementing the subsidy scheme for the Abolition (LSP Subsidy).Under the scheme, the HKSAR Government will subsidize a portion of the post-transition LSPpayable by employers for 25 years. The subsidy covers up to a specified amount per employeeper year, with the employers’ sharing ratio and capped amounts progressively increasing overtime. The following diagram illustrates the employer’s share of post-transition LSP:
Diagram 2 – An employer’s share of the post-transition LSPNote 1: The $500,000 threshold refers to whether the accumulated amount of post-transition portion of LSP payable by anemployer during the same year exceeds $500,000.Note 2: The specified employer’s sharing ratio and the capped amount, as referred to in (a) and (b) in this box apply to eachemployee.Note 3: The specified employer’s sharing ratio and the capped amount increase progressively over the 25-year subsidyperiod. Please refer to the table enclosed in Legislative Council Finance Committee paper FCR(2024-25)37 discussed on 22November 2024.In view of these developments, as an extension of the July 2023 educational publication, theHKICPA published another educational publication in January 2025 to provide guidance onthe accounting implications of the LSP subsidy. The publication highlights that, as a generallyacceptable method, the LSP subsidy is considered as a government grant under HKAS 20Accounting for Government Grants and Disclosure of Government Assistance, and isrecognized when there is reasonable assurance that the employer will comply with theOf the accumulated amount of post-transition portion of LSP payable byan employer during the same year [Note 1]For the first $500,000the lower of:
(a) the amount of post-transition LSP forthat employee multiplied by a specifiedsharing ratio (e.g. 50% in the first yearafter the Abolition takes effect); and(b) a specified capped amount (e.g.$3,000 in the first year after theAbolition takes effect)
[Note 2]Beyond the first $500,000the amount of post-transition LSP for thatemployee multiplied by a specified ratio[Note 3]conditions attaching to the government grant and the grant will be received29. Typically, thisassurance is met when the employer has paid or is about to pay the LSP to the employee andis eligible to claim the LSP subsidies from the HKSAR Government. The subsidy as acompensation for LSP expenses incurred by the employer is recognized in profit or loss in theperiod it becomes receivable30. There may be exceptions where the reasonable assurancethreshold might be met earlier. Each case should be assessed individually based on its factsand circumstances. The Financial Reporting Standards Committee (FRSC) of the HKICPAacknowledges that there may be other acceptable accounting alternatives to account for theLSP subsidy. Entities should ensure that the method adopted is justifiable and complies withHKFRS Accounting Standards, and they should disclose the accounting policy information ifmaterial.D.Implementation of Pillar Two Global Minimum Tax in Hong KongOn 27 December 2024 31, the HKSAR Government published in the Gazette the InlandRevenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024 (Bill) forimplementing the Global Minimum Tax (GMT) and Hong Kong Minimum Top-up Tax (HKMTT)
rules in Hong Kong. Upon enactment, the GMT and HKMTT will be implemented for fiscalyears beginning on or after 1 January 2025. The Bill went through its First Reading, and theSecond Reading debate in the Legislative Council commenced on 8 January 2025.Amendments to HKAS 12 Income Taxes – International Tax Reform – Pillar Two Model Rulesintroduce new disclosure requirements on Pillar Two income taxes. When applying theAmendments, entities should consider whether (1) the legislation is enacted or substantivelyenacted but not yet in effect at the reporting date; or (2) the legislation is in effect32.In the context of Hong Kong, the need for disclosure under (1) depends on when the legislationis considered as ‘substantively enacted’. A FAQ published by the HKICPA states that for thepurpose of accounting for income taxes, the FRSC considers that a bill to be substantivelyenacted after passing the Third Reading33. This is because the legislative procedures after theThird Reading appear to be a formality, and there is usually reasonable certainty that a bill willbe passed in law after the Third Reading. Accordingly, since the Bill underwent its FirstReading in January 2025, the disclosures for (1) required by the Amendments to HKAS 12are not relevant for entities with December 2024 year end. The disclosures for (2) required bythe Amendments to HKAS 12 are also not relevant as the legislation is not in effect during thereporting period. However, to assist financial statements users in better understanding the29 HKAS 20.7.30 HKAS 20.20.31 As mentioned in Closing Out 2023 (Section II, P.13), the HKSAR Government released a consultation paper on 21 December2023, regarding the implementation of the global minimum tax and the domestic minimum top-up tax in Hong Kong, withconsultation period of 3 months, ending on 20 March 2024. This Bill incorporated feedback received during the consultation.32 See Closing Out 2023 (Section II, P.12-13) for a summary.33 Extracted from FAQ: According to the Basic Law of HKSAR, after a bill has been gazetted, it has to pass through three readingsin the Legislative Council (LegCo) before it is enacted. A bill is subject to debate and vote in the Second and Third Readings. Ifa bill is rejected during either of those Readings, no further proceedings shall be taken on it. A bill passed by LegCo after theThird Reading shall take effect only after it is signed and promulgated by the Chief Executive.development and related impact of the Pillar Two legislation in Hong Kong on entities, entitiesare encouraged to provide relevant disclosures in accordance with HKAS 1.17(c).Furthermore, depending on the progress of the legislative process in Hong Kong, if thelegislation is enacted or substantively enacted after the reporting period but before thefinancial statements are authorized for issue, the disclosure requirements under HKAS 10.21will apply. An estimation of the relevant financial effect should be disclosed.In respect of (2), a Hong-Kong based multinational company or a group with subsidiaries oftenoperates in different jurisdictions, which may have varying statuses regarding theimplementation of their Pillar Two legislation at the reporting date. Some jurisdictions mighthave Pillar Two legislation in effect during the reporting period, leading the affected entities torecognize related income taxes in the statement of profit or loss. In such cases, current taxexpenses related to Pillar Two income taxes should be separately disclosed in the financialstatements.The following diagram highlights the accounting implications of Pillar Two legislations.Diagram 3 – Accounting implications of Pillar Two legislations in different scenariosReporting for financial statements applyingAmendments to HKAS 12 – International Tax Reform – Pillar Two Model RulesScenarioI [Note 1]IIIIIPillar Two legislationenacted or substantivelyenacted after the end of thereporting period but beforefinancial statements areauthorized for issuePillar Two legislation enactedor substantively enacted butnot yet in effect at the end ofthe reporting periodPillar Two legislationenacted or substantivelyenacted and in effect atthe end of the reportingperiodAccountingimplicationsNo top-up tax payable→ only mandatorydisclosures applyNo top up tax payable→ only mandatory disclosuresapplyTop-up tax payable+ mandatory disclosuresRelevantHKAS 12 orotherrequirementsNot covered by HKAS12, but required underHKAS 10 to disclose thenature of the event andan estimate of itsfinancial effect, or astatement that such anestimate cannot bemade [Note 3]Disclose the fact that the exception to recognizing anddisclosing information of deferred tax assets and liabilitiesrelated to Pillar Two income taxes has been applied. [Note 2]Disclose known orreasonably estimableexposure to Pillar Twoincome taxes arising fromrelevant jurisdiction at thereporting date, bothqualitative andquantitative information[Note 4]Disclose separately itscurrent tax expense(income) related toPillar Two income taxes[Note 5]Note 1: This may be in the case for Hong Kong, if the Bill is enacted or substantively enacted after the end of the reporting periodbut before the financial statements are authorized for issue.Note 2: HKAS 12.88A.Note 3: The extent of information required by HKAS 10 should be similar to HKAS 12.88C-88D to enable financial statementusers to understand the entity’s exposure to Pillar Two income taxes arising from that jurisdiction.Note 4: HKAS 12.88C-88D.Note 5: HKAS 12.88BThe scenarios described above can arise within an entity’s consolidated financial statements,where the entity and its group companies operate in various jurisdictions with different statusof development of Pillar Two Model Rules. It is crucial to provide appropriate disclosures inlight of the circumstances. As the Amendments to HKAS 12 became effective in 2023, entitiesshould ensure the disclosures are updated for their 2024 financial statements.
3.Climate-related matters on financial reporting and connectivityWe started discussing the implication of climate-related reporting in Closing Out 2021, withupdates provided in Closing Out 2022 and Closing Out 2023. This year, we highlight thefollowing recent major developments.A.Hong Kong Sustainability Disclosure Standards and ConnectivityThere have been significant developments in the sustainability reporting landscape in HongKong in 2024. The publication of the Roadmap on Sustainability Disclosure in HongKong (Roadmap)34 by the Financial Services and the Treasury Bureau on 10 December 2024,sets out Hong Kong’s approach to require publicly accountable entities35 (PAEs) to adopt theInternational Sustainability Standards Board (ISSB) Standards. The Roadmap lays down aclear pathway for large PAEs to fully adopt the ISSB Standards no later than 2028 with thefollowing key milestones:
Details of respective milestones and their statusMilestone 1– Development ofHong KongSustainabilityDisclosureStandards Being a significant step in Hong Kong’s sustainability reporting journey, on12 December 2024, the HKICPA published HKFRS S1 GeneralRequirements for Disclosure of Sustainability-related Financial Informationand HKFRS S2 Climate-related Disclosures (collectively referred to asHKFRS Sustainability Disclosure Standards or HKFRS SDS). HKFRS SDSare fully aligned with the ISSB Standards.Milestone 2– Compliancewith the HongKong Exchangesand ClearingLimited (HKEX)’sNew ClimateRequirements All Main Board issuers are required to disclose against the New ClimateRequirements modelling on IFRS S2 Climate-related Disclosures on a“comply or explain” basis from 1 January 2025 (except for the mandatorydisclosure requirement on Scope 1 and 2 greenhouse emissions applying toall issuers from 1 January 2025). Issuers that are Hang Seng Composite LargeCap Index constituents arefurther required to disclose against the New Climate Requirements from 1January 2026.34 Roadmap P.5.35 As set out in the Inaugural Jurisdictional Guide published by the IFRS Foundation in May 2024, PAEs are (a) entities whosesecurities are traded in a public market or entities in the process of issuing securities for trading in a public market; and (b) entitiesthat hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses (for example, banks,credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks) and have a significant weightin the jurisdiction, regardless of their ownership structure or listed status.Details of respective milestones and their status HKEX will consult the market in 2027 on mandating sustainability reportingagainst HKFRS SDS for listed PAEs under a proportionate approach, withan expected effective date of 1 January 2028.Milestone 3– Compliance bynon-listed PAEsSubject to stakeholders’ comments and feedback, relevant financial regulatorswill require financial institutions carrying a significant weight (being non-listedPAEs) to apply HKFRS SDS no later than 2028.The Roadmap indicates that Main Board issuers will be first impacted by the New ClimateRequirements specified in the Listing Rules, with the mandate eventually extending to includeboth listed and non-listed PAEs applying HKFRS SDS by 2028. While the publication ofHKFRS SDS has no immediate impact on PAEs and its adoption remains voluntary currently,PAEs should actively familiarize themselves with HKFRS SDS to ensure smoothimplementation by 2028.To support the implementation of HKFRS SDS, the HKICPA offers resources including:
E-learning: Charting Sustainability Reporting in Hong Kong – Public briefing on HKFRSS1 and S2Resource Centre for Sustainability Standards36Sustainability Information Centre37Frequently-asked questionsIn light of the above recent developments, achieving connectivity between sustainabilityreporting and financial reporting has become increasingly crucial for entities reporting in HongKong, especially listed entities. Ensuring consistency and complementarity between financialstatements disclosures and sustainability reporting disclosures is key to achieving thisconnectivity. An effective and robust connectivity can empower stakeholders to obtain aholistic and comprehensive view of an entity’s financial performance, financial position andcash flows. In terms of climate-related risks, stakeholders can gain a deeper insight into anentity’s exposure to these risks, management’s strategies to manage and address them intheir operations and the resulting financial implications.The International Accounting Standards Board (IASB) and ISSB recognize the importance ofconnectivity between their respective requirements in enabling the provision of high-qualityfinancial information to capital markets. A new dedicated webpage ‘Connecting IFRSAccounting and IFRS Sustainability’ has been launched, containing all related resources andupdates. Entities are recommended to refer to the resources in the webpage, particularly thewebcast series ‘Connectivity between the financial statements and sustainability-relatedfinancial disclosures’, which include illustrative scenarios, to gain insights on achievingconnectivity.36 It is a centralized hub for technical publications and reference materials relevant to sustainability reporting, assurance andethics. It also provides guidance materials covering topics such as the applicability of HKFRS SDS (i.e. which entities must applythe standards and by when) and their interaction with the New Climate requirements under the amended Listing Rules.37 It is a collection of thought leadership articles and learning resources to help stakeholders keep abreast of local and internationaldevelopments.B.Other developments of IFRS Accounting Standards related to climateIn 2024, the IASB engaged in several financial reporting projects, notably covering climate riskand connectivity, as highlighted below. Entities should vigilantly and robustly assess thepotential impacts of these projects on their financial statements. For example, entities shouldassess whether they have any climate-related commitments that should be recognized as aprovision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets byconsidering the project in (i) below. Regarding (iv), although the current impact on entitiesoperating in Hong Kong is limited, there could be potential implications for their investmentsin entities operating in other jurisdictions engaging in the sale and purchase of nature-dependent electricity.(i)
In April 2024, the IFRS Interpretation Committee (IFRS IC) published an agendadecision – Climate-related Commitments (IAS 37) on whether a company’s commitmentto reduce or offset its greenhouse gas emissions creates a constructive obligation and,if so, whether that constructive obligation meets the criteria in IAS 37 for recognizing aprovision.(ii)
In July 2024, the IASB published the Exposure Draft Climate-related and OtherUncertainties in the Financial Statements. The Exposure Draft proposes eight examplesillustrating how an entity applies the requirements in IFRS Accounting Standards toreport the effects of climate-related and other uncertainties in its financial statements.These examples aim to improve the reporting of the effects of climate-related and otheruncertainties in the financial statements and to strengthen connections between financialstatement disclosures and sustainability disclosures. The consultation closed on 28November 2024. The IASB will start deliberating the feedback in February 2025, whichwill be a joint meeting with ISSB38.(iii)
On 12 November 2024, the IASB published the Exposure Draft Provision – TargetedImprovements. The proposed amendments clarify how entities assess when to recordprovisions and how to measure them, which in turn assist entities in applying therequirements of IAS 37 to climate-related obligations, such as decommissioning orenvironmental rehabilitation obligations as well as emission credits. The Exposure Draftalso amends the Guidance on implementing IAS 37 by adding examples to illustrate factpatterns that have been the subjects of IFRS IC agenda decision, namely July 2022Agenda Decision – Negative Low Emission Vehicle Credits (IAS 37) 39 and theabovementioned IFRS IC April 2024 Agenda Decision on Climate-related Commitments(IAS 37).(iv) Given the rising use of power purchase agreements to acquire nature-dependentelectricity and the need for better representation of these contracts in financial38 Please refer to IASB’s project page for the development of this project.39 See relevant discussion in Closing Out 2023 –Section I, P.7.statements, the IASB published its targeted amendments to IFRS 9 FinancialInstruments and IFRS 7 Financial Instruments: Disclosures on 18 December 2024, afterconsidering the stakeholders’ feedback on the Exposure Draft Contracts for RenewableElectricity. These amendments are required to be applied for reporting periods on orafter 1 January 2026, with early adoption permitted.III. HKFRS Accounting Standards issued but not yeteffectiveThe final part of this publication provides an overview of HKFRS Accounting Standards thathave been issued but are not yet effective. In accordance with HKAS 840, entities need todisclose in their December 2024 financial statements the possible impact of initial applicationof the new or amended HKFRS Accounting Standards. Accordingly, entities should familiarizethemselves with the requirements of the new or amended HKFRS Accounting Standards, andassess their impacts based on their own circumstances. We highlight below threeamendments or Standards that we consider particularly relevant to entities reporting in HongKong.
1.Amendments to HKFRS 9 Financial Instruments and HKFRS 7 FinancialInstruments: Disclosures – Amendments to the Classification and Measurementof Financial InstrumentsIn May 2024, the IASB issued Amendments to the Classification and Measurement ofFinancial Instruments, which amended IFRS 9 and IFRS 7, to address the matters identifiedduring the post-implementation review of the classification and measurement of IFRS 9 andclarify stakeholders’ concerns and emerging issues. The HKICPA issued the equivalentAmendments to HKFRS 9 and HKFRS 7 in August 2024. A summary of the key amendmentsand their implications is set out below.Effective date: Annual reporting periods beginning or after 1 January 2026. Earlier application of eitherall the amendments at the same time or only the amendments related to classification of financial assetsplus related disclosures permitted.Initial application: Amendments to be applied retrospectively. Restatement of prior periods not required,and only permitted without the use of hindsight. Disclosure of information of financial assets that changethe measurement category due to the Amendments required.A.Initial recognition or derecognition of financial assets and liabilitiesHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
A1. Date of initial recognition or derecognition of financial assets and liabilities – general principles41Clarify the existing requirements ofHKFRS 9 that financial assets or financialUnless using an electronic payment system thatmeets the specified criteria in HKFRS 9.B3.3.840 HKAS 8.30-31.41 HKFRS 9.B3.1.2AHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
liabilities are recognized when the entitybecomes a party to the contractualprovisions of the instrument.Clarify that financial assets arederecognized when the entity’s rights tothe contractual cash flows (CCFs) expireor are transferred.Clarify that a financial liability isderecognized on the ‘settlement date’, i.e.the date on which the financial liability isextinguished because the relatedobligation specified in the contract isdischarged, cancelled, expires or theliability otherwise qualifies forderecognition (see A2 below).(refer to A2 below), entities cannot derecognize afinancial asset or financial liability until the amounthas cleared in the receiving entity’s bankaccount42. These requirements apply to paymentsmade via cheque, debit card or credit card andother electronic transfers that do not satisfy theconditions in HKFRS 9.B3.3.8.Consequently, entities whose financial reportingprocesses do not align with the clarificationsprovided in the Amendments might be affected. Assuch, entities should revisit their processes andassess whether the accounting policy forderecognition of financial assets and financialliabilities conform to the Amendments.See an example below to understand the impact ofthe Amendments.A2. Derecognition of a financial liability through electronic transfer43Introduce an accounting policy option thatan entity is permitted to deem a financialliability (or part of it) to be settled in cashusing an electronic payment system asdischarged before the settlement date ifcertain conditions are met andderecognize the financial liability beforethe settlement date.Require that the above accounting policyoption is applied to all settlements madethrough the same electronic paymentsystem if elected.The accounting policy option can beapplied for electronic payments on asystem-by-system basis.No significant impact is expected on entitiesoperating in Hong Kong and Mainland China wherethe electronic payment systems generally areoperated on a real-time basis.The Amendments apply to specific scenarios ofpayments made using an electronic paymentsystem for financial liabilities. To assess whetherthe specified conditions will be met, additional workis needed to analyze the contractual and legalrequirements for each electronic payment systemin each jurisdiction. This work could be complex,particularly in case of cross-border payments.Entities’ financial reporting processes might beaffected, e.g. some entities that, prior to theAmendments, derecognized financial liabilities onlyupon cash receipts.Example – derecognition of a financial liability through a cheque paymentIn Hong Kong, it is common for companies to derecognize their financial liabilities upon theissuance of cheques to their creditors. At each month-end, they perform bank reconciliationprocedures to reconcile any differences in the closing balance between the bank ledger andbank statements (e.g. cheques not yet cleared by the bank). The Amendments could changethis current practice by clarifying that entities can derecognize their financial liabilities only42 HKFRS 9.BC 3.55 and BC3.60..43 HKFRS 9.B3.1.2A, B3.3.8 – B3.3.10.when cheques are cleared by the bank, instead of when they are issued, as illustrated indiagram below.Diagram 4 – Derecognition of trade payable settled by chequeUnder the Amendments, the debtor should derecognize trade payable on Day Y when thecreditor receives the cash, as opposed to Day 0 when the debtor issues the cheque. Similarly,a creditor derecognizes a trade receivable upon receiving cash from the debtor after thecheque has been cleared by the bank. In preparation for adopting the Amendments, weconsider it crucial that entities review their derecognition practices for financial assets andfinancial liabilities to ensure compliance with the Amendments.B.Classification of financial assetsHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
B1. Classification of financial assets – contractual terms that are consistent with a basic lendingarrangement44Provides guidance on how an entity assesseswhether CCFs of a financial asset, withcontingent features, are consistent with a basiclending arrangement, specifically:
- whether the CCFs that could arise before andafter the change in CCFs would meet theSPPI45 test.- whether the nature of contingent event relatesdirectly to, and the CCFs change in the samedirection as, changes in basic lending risks andcosts.- whether SPPI test may still be met when thenature of contingent event does not relateThe Amendments provide additionalapplication guidance for all financial assetswhose CCFs could change as a result ofcontingent events46. Therefore, entitiesshould reassess whether their financialassets with contingent features areimpacted by the Amendments.Judgement may be needed in assessingwhether financial assets containingcontingent features satisfy the SPPI underthe Amendments, e.g. what is consideredas ‘significantly different’ in applying thenew requirements of HKFRS 9.B.4.1.10A.44 HKFRS 9.B4.1.8A, B4.1.10, B4.1.10A and B4.1.13-1445 SPPI refers to ‘solely payments of principal and interest on the principal amount outstanding’.46 Given the principle-based approach of IFRS 9 (HKFRS 9 equivalent), the Amendments are not specific to environmental, socialand governance (ESG)-linked instruments. See HKFRS 9.BC4.254-4.256 for the IASB’s relevant consideration.Highlights of the AmendmentsImplications and relevant considerations (notexhaustive)
directly to changes in basic lending risks andcosts.Add examples of financial assets that have, or donot have, CCFs that are SPPI.There could be a change in themeasurement category of existing financialassets as a result of applying theAmendments. If so, entities should providethe relevant disclosures according to thetransition provisions47.B2. Classification of financial assets – financial assets with non-recourse features48Enhance the description of the term ‘non-recourse’, specifying that a financial asset hasnon-recourse features if an entity’s ultimate rightto receive cash flows is contractually limited tothe cash flows generated by specified assets.That means, the entity is primarily exposed to thespecified assets’ performance risk, not thedebtor’s credit risk.Clarify the difference between a non-recourseloan and a collateralized loan49.Clarify how to perform the ‘look-through’assessment to the underlying assets for financialasset with non-recourse feature to assess if sucha financial asset still meets SPPI.Entities should reassess the impact of theAmendments on the classification of theirfinancial assets, such as:
- financial assets initially considered in-substance non-recourse withoutcontractual terms, given that theAmendments50 clarify that non-recoursefeature must be contractual;
- financial assets which are collateralizedloans but accounted for as non-recourse,and vice versa.Be mindful of the disclosure requirementsand transitional provision if there is achange in measurement category asmentioned above.B3. Classification of financial assets – contractually linked instruments (CLI)51Clarify the characteristics of CLI, which have awaterfall payment structure that createsconcentration of credit risk and results in adisproportionate allocation of cash shortfalls fromthe underlying pool between tranches.Clarify that CLI with non-recourse features are tobe assessed only in accordance with CLIrequirements under HKFRS 9.Clarify that CLI are not created when multipledebt instruments of differing seniority are issuedto facilitate lending with enhanced creditprotection to a creditor (or a group of creditors).Clarify that the reference to instruments in theunderlying pool can include financial instrumentsnot within the scope of HKFRS 9 but with CCFsequivalent to SPPI, such as lease receivables.Entities should reassess the impact of theAmendments on the classification of theirfinancial assets currently treated as CLI. Forexample, those multiple debt instruments ofdifferent seniority issued for credit protectionof creditor cannot be accounted for as CLIunder the Amendments.Be mindful of the disclosure requirementsand transitional provision if there is achange in measurement category asmentioned above.47 HKFRS 9.7.2.48 HKFRS 9.B4.1.16, B4.1.16A and B4.1.17.49 HKFRS 9.BC4.280.50 HKFRS 9.B4.1.16A and BC4.286.51 HKFRS 9.B4.1.20, B4.1.20A, B4.1.21 and B4.1.23.C.DisclosuresHighlights of the AmendmentsImplications and relevant considerations (notexhaustive)
C1. Disclosures – investments in equity instruments designated at fair value through othercomprehensive income (FVTOCI)52Require additional disclosures for FVTOCIinvestments:
- the change in fair value in OCI during theperiod, showing separately, the amountsrelating to investments derecognized inthe period, and those held at the end ofthe reporting period for each class ofinvestment.- the aggregate fair value of investmentsfor each class of investment (as opposedto fair value of each such investmentbefore the Amendments) at the end of thereporting period, and- any transfer of cumulative gains andlosses within equity for investmentsderecognized in the period.The grouping of investments into classes shouldbe performed based on the requirements ofHKFRS 7.6.The applicability of the new disclosure regardingthe transfer of cumulative gains or losses withinequity depends on the entities’ existingaccounting policy on whether to transfer thesecumulative gains or losses.C2. Disclosures – contractual terms that could change the timing or amount of contractual cash flows onthe occurrence (or non-occurrence) of a contingent event53Add new disclosures for financial assetsand liabilities that contain contingentfeatures (including those that are ESG-linked) to:
- each class of financial asset measured atamortized cost or FVTOCI and- each class of financial liability atamortized cost.The new disclosures include:
- a qualitative description of the nature ofthe contingent event;
- quantitative information about thepossible changes to CCFs that couldresult from those contractual terms; and- the gross carrying amount of financialassets and the amortized cost of financialliabilities subject to those contractualterms.Add the same disclosure requirements toHKFRS 19 Subsidiaries without PublicAccountability: DisclosuresNew disclosures are applicable to both financialassets and financial liabilities whose cash flowswould change due to a contingent event, and notonly financial assets whose classificationrequirements have been amended.The new disclosures are not required for financialinstruments measured at fair value through profitor loss, as the changes in fair value areconsidered to provide sufficient information toenable users to assess the future cash flows ofthose instruments.The grouping of investments into classes shouldbe performed based on the requirements ofHKFRS 7.6.Judgement may be needed in the following:
- determination of the nature and extent ofqualitative and quantitative disclosures requiredby the Amendments, considering the complexityof the instruments and materiality.- appropriate level of aggregation ordisaggregation of information for disclosures.52 HKFRS 7.11A and 11B.53 HKFRS 7.20B, 20C and 20D.
2.HKFRS 18 Presentation and Disclosure in Financial StatementsIn July 2024, the HKICPA issued HKFRS 18 together with the consequential amendments toother HKFRS Accounting Standards54, following the issuance of IFRS 18 Presentation andDisclosure in Financial Statements and consequential amendments to other IFRS AccountingStandards in April 2024. HKFRS 18, which replaces HKAS 1 Presentation of FinancialStatements, is effective for annual periods beginning on or after 1 January 2027, with earlyapplication permitted. Requirements in HKAS 1 that are unchanged have been ‘broughtforward’ into HKFRS 18 and other HKFRS Accounting Standards.Although HKFRS 18 will not affect how companies measure financial performance, it will affecthow companies present and disclose financial performance. As shown in the table below,HKFRS 18 introduces three sets of new requirements to improve entities’ reporting of financialperformance and give investors a better basis for analyzing and comparing entities. Theserequirements affect all entities in all industries as to how they present and disclose financialperformance in financial statements.AreasHighlights of key requirements
1.Statement of profit orloss55More structured statement of profit or loss by requiring:
i)
Classification of all income and expenses into one of the fivecategories – operating, investing, financing, income taxes anddiscontinued operation. The first three are new categories.ii)
Presentation of two new defined subtotals and totals– ‘operating profit’ and ‘profit or loss before financing andincome taxes’.For the purpose of (i), an entity assesses whether it has a ‘mainbusiness activity’ of investing in assets or providing financing tocustomers, which would require specific classification.Require entities to classify foreign exchange differences in the samecategory of the statement of profit or loss as the income andexpenses from the items that gave rise to the foreign exchangedifferences. However, if classifying such a way would involve unduecost or efforts, entities are permitted to classify foreign exchangedifferences in the operating category.Include specific requirements for classifying fair value gains andlosses on derivatives and hedging instruments, and for classifyingincome and expenses from hybrid contracts.
2.Management-definedperformance measures(MPMs)56Define MPM as a subtotal of income and expenses that an entityuses in public communications outside financial statements, tocommunicate management’s view of an aspect of the financialperformance of the entity as a whole to users. However, subtotals of54 This includes narrow-scope amendments to HKAS 7, HKAS 33 Earnings per Share and HKAS 8. HKAS 8 is re-titled ‘Basis ofPreparation of Financial Statements’ to better reflect its amended content.55 HKFRS 18.46-85, B29-B85.56 HKFRS 18.117-125, B113-B142.AreasHighlights of key requirementsincome and expenses listed by HKFRS 18 or specifically required byHKFRS Accounting Standards are not MPMs.Require disclosure of all of an entity’s MPMs in a single note,including a reconciliation between the measure and the most directlycomparable subtotal specified by HKFRS 18 or total or subtotalspecially required by other HKFRS Accounting Standards, and adescription of how the measure communicates management’s viewand the calculation of the measure.Provide a statement that the measure reflects management’s viewof an aspect of financial performance of the company as a wholeand is not necessarily comparable to measures sharing similarlabels or descriptions provided by other companies.
3.Aggregation anddisaggregation57Provide guidance for entities on grouping transactions and otherevents into the line items in the primary financial statements andinformation disclosed in the notes. Entities are required to:
i)
Aggregate items that have similar characteristics anddisaggregate items that have different characteristics;
ii)
Group items in a way that does not obscure material informationor reduce the understandability of the information presented;
iii) Use meaningful labels or descriptions for aggregated items, anduse the label ‘other’ only when entities are unable to find a moreinformative label; andiv) Place items in the primary financial statements and the notes tofulfil their complementary roles.Require entities to present the operating category expenses basedon their nature or their function. Entities that present expensesclassified by function are required to disclose in the notes the fivespecified operating expenses by nature, namely the amount ofdepreciation, amortization, employee benefits, impairment lossesand write-downs of inventories included in each line item in theoperating category of statement of profit or loss58.The implementation of HKFRS 18 will have a broad impact on various entities and industries.The HKICPA released two A-Plus technical articles in January and July 2024. Entities areencouraged to read them to gain insights into the implications of HKFRS 18. Moreover, theHKICPA has developed a dedicated webpage focusing on HKFRS 18, which includes theproject summaries and effects analysis, providing another helpful resources to assist in theimplementation of this new major Standard.Restatement of comparative period and compliance with the disclosure requirements underHKFRS 18.C3 on transition are required. Entities with interim reporting obligations should be57 HKFRS 18.41-43, B16-B26.58 HKFRS 18.78-85 and B80-B85.aware of the amendments to HKAS 34 Interim Financial Reporting and related transitionprovisions in HKFRS 18.C4-C5.To ensure smooth transition, we advise entities to start preparing for the implementation ofHKFRS 18 as soon as possible. The following are some key reminders for the transition:
(i)
Entities should carefully assess whether they are engaged in specified main businessactivities, as the classification of income and expenses in their statements of profit orloss depends on their main business activities. The main business of a subsidiary is notnecessarily the main business of a consolidated group.(ii)
Entities’ current reporting practices, internal processes, accounting systems and internalcontrols may be impacted by the following:
-changes in the structure of their statements of profit or loss,-assessment of specified main business at each reporting entity level, and-requirements for aggregation and disaggregation, including the need for (1) moredescriptive labels for items currently aggregated and labelled as ‘other’ in thefinancial statements, and (2) capturing relevant information to fulfil the disclosureson the five specified operating expenses by nature.(iii)
Management and those charged with governance should proactively communicate theexpected implications of HKFRS 18 to stakeholders. Non-GAAP measures that meet thedefinition of MPMs shall be included in financial statements and subject to audit. Thedisclosure requirements for MPMs might heighten communication endeavors andengagements with investors, prompting entities to reassess their externalcommunication strategies to ensure effective public communication on non-GAAPmeasures while complying with HKFRS 18 requirements.
3.HKFRS 19 Subsidiaries without Public Accountability: DisclosuresIn July 2024, the HKICPA issued HKFRS 19, the equivalent of IFRS 19 Subsidiaries withoutPublic Accountability: Disclosures issued by the IASB in May 2024. HKFRS 19 is a disclosure-only and optional standard which allows eligible subsidiaries to apply HKFRS AccountingStandards with reduced disclosures. The objective of HKFRS 19 is to reduce the costs ofpreparing financial statements for eligible subsidiaries, while maintaining the usefulness ofthose financial statements for their users.An eligible subsidiary may elect to apply HKFRS 19 in its consolidated, separate or individualfinancial statements for annual periods beginning on or after 1 January 2027. Early applicationis permitted. A subsidiary59 is eligible for applying HKFRS 19 if meeting these two conditions60:
(i)
It does not have public accountability (See Diagram 5); and(ii)
Its ultimate or intermediate parent produces consolidated financial statements availablefor public use that comply with HKFRS Accounting Standards.Diagram 5 – What is public accountability61?The following are some key points for application of HKFRS 19:
(i)
As HKFRS 19 is part of HKFRS Accounting Standards, an eligible subsidiary that appliesHKFRS 19 and complies with HKFRS Accounting Standards is required to state as partof its explicit and unreserved statement of compliance with HKFRS AccountingStandards that HKFRS 19 has been adopted62.(ii)
An entity that has elected to apply HKFRS 19 may later revoke that election63. An entityis permitted to elect to apply HKFRS 19 more than once. For example, an entity thatapplied HKFRS 19 in a prior period but not in the immediately preceding period mayelect to apply HKFRS 19 in the current period.(iii)
Entities, which prepare their financial statements for the immediately preceding periodunder Small and Medium-sized Entity Financial Reporting Framework and FinancialReporting Standard or HKFRS for Private Entities Accounting Standard and elect toapply HKFRS 19 and other HKFRS Accounting Standards in the current period, areconsidered a first-time adopter of HKFRS Accounting Standards and thus the disclosurerequirements in HKFRS 19 relating to HKFRS 1 First-time Adoption of Hong KongFinancial Reporting Standards will apply. This is because those reporting frameworksare not HKFRS Accounting Standards64.59 Appendix A of HKFRS 10 Consolidated Financial Statements defines ‘subsidiary’ as ‘an entity that is controlled by anotherentity’.60 HKFRS 19.7.61 HKFRS 19.11-12.62 HKFRS 19.20.63 HKFRS 19.13 and BC 96-98.64 HKFRS 19.BC 107.(iv) Unless otherwise specified, an eligible subsidiary applying HKFRS 19 applies therequirements of recognition, measurement and presentation in other HKFRS AccountingStandards to a transaction, event or condition and applies the disclosure requirementsunder the subheading of that HKFRS Accounting Standard in HKFRS 19. For example,an entity applies the recognition, measurement and presentation requirements underHKAS 2 Inventories to account for its inventories and applies HKFRS 19.164 under thesubheading HKAS 2 Inventories in HKFRS 19 for disclosure.(v)
Eligible subsidiaries voluntarily applying HKFRS 8 Operating Segments and HKAS 33Earnings per Share should continue to refer to these HKFRS Accounting Standards forall relevant disclosure requirements.(vi) If an entity applying HKFRS 19 also applies HKFRS 17 Insurance Contracts, it is requiredto apply all the disclosure requirements in HKFRS 17, as there are no reductions in thedisclosure requirements for HKFRS 17 at this stage.(vii) Entities previously applying HKFRS Accounting Standards and have decided to applyHKFRS 19 should identify the disclosure requirements that no longer apply andinformation that no longer needs to be gathered. Financial reporting systems andprocesses may need to be adjusted to accommodate the reduced disclosurerequirements.We recommend that entities utilize the following resources to understand and implementHKFRS 19:
(i) Our A-Plus technical article published in October 2024: This article not only explains theapplication of HKFRS 19, but also discusses the expected benefits and costs of adoptingHKFRS 19. It serves as a starting point for entities to assess whether they should applyHKFRS 19, taking into account their own circumstances.(ii) The IFRS 19 disclosure tracker: This tracker lists the disclosure requirements in IFRS 19and maps them to their equivalents in other IFRS Accounting Standards. It is intended tobe a ‘living document’ that will be updated with changes to disclosure requirements in otherIFRS Accounting Standards and the corresponding changes to IFRS 19 itself.Appendix – New and amended HKFRS AccountingStandards as well as Agenda Decisions issued by the IFRSICThe following amended standards and interpretation became effective as of 1 January 2024:
Standards and InterpretationDescriptionAmendments to HKAS 1 Presentation ofFinancial Statements – Classification ofLiabilities as Current or Non-currentThe amendments to HKAS 1 clarify how to classify debtand other liabilities as current or non-current and dealwith the classification of non-current liabilities withcovenants.Amendments to HKAS 1 Presentation ofFinancial Statements – Non-currentLiabilities with CovenantsAmendments to HKFRS 16 Leases –Lease Liability in a Sale and LeasebackThe amendments to HKFRS 16 add subsequentmeasurement requirements for the lease liability arisingfrom a sale and leaseback transaction, where thetransfer of the asset satisfies the requirements inHKFRS 15 Revenue from Contracts with Customers tobe accounted for as a sale.Amendments to Hong KongInterpretation 5 (Revised) Presentationof Financial Statements – Classificationby the Borrower of a Term Loan thatContains a Repayment on DemandClauseHK Interpretation 5 has been updated to incorporatethe references to the above amendments to HKAS 1.Amendments to HKAS 7 Statement ofCash Flows and HKFRS 7 FinancialInstruments: Disclosures – SupplierFinance ArrangementsThe amendments introduce new disclosurerequirements to enhance the transparency of supplierfinance arrangements and their effects on an entity’sliabilities, cash flows and exposure to liquidity risk.The following new and amended standards and interpretation have been issued but are notyet effective as of 1 January 2024. They are available for early adoption.Effective from annualperiods beginning on orafter (in chronologicalorder):
New and amended HKFRS Accounting Standards andInterpretation1 January 2025Amendments to HKAS 21 The Effects of Changes in ForeignExchange Rates – Lack of ExchangeabilityEffective from annualperiods beginning on orafter (in chronologicalorder):
New and amended HKFRS Accounting Standards andInterpretation1 January 2026Amendments to HKFRS 9 Financial Instruments and HKFRS 7Financial Instruments: Disclosures – Amendments to the Classificationand Measurement of Financial Instruments1 January 2026Annual Improvements to HKFRS Accounting Standards — Volume 11:
Amendments to HKFRS 1 First-time Adoption of Hong KongFinancial Reporting StandardsAmendments to HKFRS 7 Financial Instruments: Disclosures andGuidance on Implementing HKFRS 7Amendments to HKFRS 9 Financial InstrumentsAmendments to HKFRS 10 Consolidated Financial StatementsAmendments to HKAS 7 Statement of Cash Flows1 January 2027HKFRS 18 Presentation and Disclosure in Financial Statements1 January 2027Amendments to Hong Kong Interpretation 5 Presentation of FinancialStatements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause1 January 2027HKFRS 19 Subsidiaries without Public Accountability: DisclosuresA date to be determinedby the IASBAmendments to HKFRS 10 Consolidated Financial Statements andHKAS 28 Investments in Associates and Joint Ventures – Sale orContribution of Assets between an Investor and its Associate or JointVentureThe following agenda decisions were published by the IFRS IC in 2024:
Publication monthAgenda DecisionsJanuary 2024Merger between a Parent and Its Subsidiary in Separate FinancialStatements – IAS 27 Separate Financial StatementsApril 2024Payments Contingent on Continued Employment during HandoverPeriods – IFRS 3 Business CombinationsClimate-related Commitments – IAS 37 Provisions, ContingentLiabilities and Contingent AssetsJuly 2024Disclosure of Revenues and Expenses for Reportable Segments –IFRS 8 Operating SegmentsAbout the Standard Setting DepartmentThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorizedby law to set and promulgate standards relating to financial reporting, auditing, ethics andsustainability disclosures for professional accountants in Hong Kong. The due processdocuments of the Standard Setting Department (SSD) explain the processes and proceduresfor developing local standards and adopting international standards.To find out more about how SSD contributes to international standard-setting, please visit:
https://www.hkicpa.org.hk/en/Standards-setting/Standards/How-we-set-standards-and-contribute-to-international-standardsTo access SSD’s latest publications and webcasts, please visit:
https://www.hkicpa.org.hk/en/Standards-setting/Standards/Whats-News/2025Connect with us on social media:
HKICPA SSD@hkicpa.officialThis publication is developed by the SSD of the HKICPA and is for general reference only.The HKICPA, its staff, Council and its committees do not accept any responsibility or liabilityin respect of the publication or any consequence that may arise from any person acting orrefraining from acting as a result of any materials in the publication. Members of the HKICPAand other users of this publication should also read the full HKFRS Accounting Standards, asfound in the HKICPA Members’ Handbook for further reference and seek professional advicewhere necessary when applying the references contained in this publication. The SSDwelcomesyourcommentsonthispublication.Theycanbesenttocommentletters@hkicpa.org.hk.2425_20250320AuthorCarrie LauAssociate Director,Standard Setting,HKICPAHong Kong Institute of Certified Public Accountants37th Floor, Wu Chung House213 Queen’s Road East, Wanchai, Hong KongTel: (852) 2287 7228Fax: (852) 2865 6603Email: hkicpa@hkicpa.org.hkWebsite: www.hkicpa.org.hkThe author thanks members of the Financial Reporting Standards Committee of the HKICPA for theirinput in reviewing this publication.