Page 1 of 9The guidance below was developed by the Financial Reporting Standards Committee (FRSC) of the HongKong Institute of Certified Public Accountants (HKICPA) and is for general reference only. The HKICPA,FRSC and their staff do not accept any responsibility or liability, and disclaim all responsibility andliability, in respect of the guidance and any consequences that may arise from any person acting orrefraining from action as a result of any materials in the guidance. Members of the HKICPA and otherusers of this guidance should also read the full Standard, as found in the HKICPA Members’ Handbook(https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Members-Handbook-and-Due-Process) for further reference, and seek professional advice where necessary when applying thereferences contained in this guidance.The HKICPA Standard Setting Department welcomes your comments and feedback, which should be sentto commentletters@hkicpa.org.hk.COVID-19-related financial reporting issues for 2020 reporting periodsBackgroundDue to the outbreak of the COVID-19 pandemic, related actions (e.g. government closure orders,travel restrictions and quarantine measures) and resultant economic effect, businesses havebeen seriously impacted locally and globally. These circumstances have resulted in increasingchallenges for entities when preparing their financial statements. In early March, the Institutepublished educational guidance1 that focused on some key financial reporting implications ofCOVID-19, including highlighting some key requirements for events after the reporting period,going concern and disclosures about key judgements and estimates in preparing financialstatements. That guidance was aimed primarily at reporting periods ended on 31 December 2019,but the principles highlighted were also relevant to interim and future reporting periods.This educational guidance highlights some other financial reporting considerations in the light ofCOVID-19 that warrant specific attention for 2020 interim and annual financial statements. Inparticular, this publication highlights some key considerations in the following areas:
1.Expected credit losses
2.Impairment of non-financial assets
3.Fair value measurements
4.Revenue recognition
5.Government grants
6.Rent concessions
7.Property, plant and equipment
8.Measurement of inventories
9.Breach of loan covenants
10.Interim financial reportingThe financial reporting implications of COVID-19 on entities are broad and entities should assessthe precise effects on their financial statements considering their facts and circumstances.
1.Expected credit lossesHKFRS 9 Financial Instruments requires entities to estimate and account for expected creditlosses (ECL) on financial assets, including leases receivables, contract assets, loan commitments1 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/03_Our-views/Financial-Reporting-Auditing-and-Ethics-Alert/alert33a.pdfPage 2 of 9and financial guarantee contracts, subject to its impairment requirements. The current uncertainenvironment creates challenges in estimating ECL applying HKFRS 9.Implications of support measures: Certain governments and local banks have introducedvarious relief measures to support borrowers affected by COVID-19. These could be in the formof payment holidays on existing loans. Entities giving such support need to consider the impacton their financial statements, in particular, whether payment holidays indicate the affected loanshave suffered a significant increase in credit risk or default, and therefore moved to stage 2 or 3of the ECL model. Entities should carefully assess the terms and conditions of the extension ofpayment terms. For example, the extension of payment holidays to all borrowers in particularclasses of financial instruments should not automatically result in all those instruments beingconsidered to have suffered a significant increase in credit risk for the purpose of determiningECL2. However, entities still need to consider whether there are other indicators of significantincrease in credit risk. If the relief measures are available only to those who meet certain criteria,entities should assess whether those criteria might indicate a significant increase in credit risk.Credit enhancements, such as guarantees, are also provided by some governments and banksto ensure partial or full recovery of the loan amounts affected by COVID-19. Entities need toassess whether such credit enhancements are integral to the loans/receivables or should berecognised as a separate reimbursement asset or a government grant under HKAS 20 Accountingfor Government Grants and Disclosures of Government Assistance. Paragraph B5.5.55 ofHKFRS 9 requires that only credit enhancements that are part of the contractual terms and arenot recognised separately by the entity shall be reflected in the measurement of ECL.Re-visiting the models and assumptions: In light of the current uncertainty arising from COVID-19, entities will need to revisit their models and assumptions used in measuring ECL. In particular,entities need to exercise judgement in considering multiple macroeconomic scenarios that reflectthe changes in economic conditions and the probability weighting assigned to the scenarios, forexample, to reflect the downside scenarios and/or to increase their weighting due to COVID-19.If the effects of COVID-19 cannot be reflected in the models, top-down management overlays oradjustments will need to be considered.Re-segmentation of loan portfolios or receivables: The occurrence of COVID-19 may changethe risk characteristics of certain loans or receivables because borrowers or customers mightengage in businesses, or be located in areas that are affected by COVID-19 in different ways.Therefore, entities should consider re-segmenting their portfolios so that they are grouped on thebasis of shared credit risk characteristics (paragraph B5.5.5 of HKFRS 9). For trade receivables,entities need to consider whether to apply the provision matrix at a more granular level or toassess a greater number of receivables on an individual basis.Credit risk disclosures: Given the uncertainty arising from COVID-19 and the significantjudgement involved in estimating ECL, disclosure of the key assumptions and the estimationtechniques used is particularly important for users of financial statements to understand theimpact of COVID-19 on ECL estimation. Such disclosures include the values of the keymacroeconomic inputs used in the multiple economic scenarios and the probability weightsassigned to these scenarios, the effect of management overlays and judgements made on howand the extent to which related support measures have been factored into the assessment of ECL.2 Refer to the IASB’s educational statement Accounting for expected credit losses applying IFRS 9 FinancialInstruments in the light of current uncertainty resulting from the covid-19 pandemic (https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en).Page 3 of 9Entities are reminded to refer to HKFRS 7 Financial Instruments: Disclosures for the relevantdisclosure requirements, and provide disclosures that are specific to the entity’s circumstances.
2.Impairment of non-financial assetsParagraph 9 of HKAS 36 Impairment of Assets requires an entity to assess at the end of eachreporting period whether there is any indication that an asset may be impaired. If any suchindication exists, the entity shall estimate the recoverable amount of the asset (the higher of itsfair value less costs of disposal and its value in use). For goodwill and intangible assets with anindefinite useful life or not yet available for use, paragraph 10 of HKAS 36 requires an entity totest for impairment annually (irrespective of whether there is any indication of impairment) andalso when there is any indication that the asset may be impaired.Indication of impairment: Due to the outbreak of COVID-19, a number of impairment indicationsmay exist for many assets and cash-generating units (CGUs), including, for example, governmentclosure orders for factories and shops, reduced demand from customers and evidence frominternal reporting that actual performance is significantly lower than management forecasts. If anysuch indication exists, entities are required to estimate the recoverable amounts of those assetsand/or CGUs to assess whether to recognise impairment losses.Identification of CGU: Due to the existence of potential new impairment indicators following theoutbreak of COVID-19, many assets may need to be tested for impairment for the first time.Different jurisdictions may be affected by COVID-19 differently and if assets need to be allocatedto CGUs for impairment testing, this allocation will often need to be made at a lower CGU levelthan the country level. Judgement is required to determine the appropriate CGU level forimpairment testing.Present value techniques: When using present value techniques to estimate the recoverableamount of an asset or a CGU, the assumptions and cash flow projections used must be updatedto reflect the potential effects due to COVID-19. Instead of using the traditional approach in HKAS36, which uses a single set of expected cash flows, the expected cash flow approach in HKAS36, which uses all expectations about possible cash flows, may in some situations better reflectthe range of possible outcomes and related risks in light of the current uncertainty due to COVID-
19.Assumptions and cash flow projections used in impairment tests of different assets should beconsistent with each other and align with market evidence.Disclosures: Disclosure requirements under HKAS 36 and HKFRS 13 Fair Value Measurement,about the key assumptions and judgements applied in estimating the recoverable amount are ofvital importance to investors given the current uncertainty, including a description ofmanagement’s approach to determining the values assigned to the key assumptions and theinformation about the sensitivity of recoverable amount to changes in those key assumptions.
3.Fair value measurementsParagraph 2 of HKFRS 13 states that the objective of fair value measurement is to estimate theprice at which an orderly transaction to sell the asset or to transfer the liability would take placebetween market participants at the measurement date under current market conditions.Fair value hierarchy and approach: The effects of COVID-19 may create challenges inobtaining the fair value of an asset due to highly volatile markets and/or a significant decrease inthe volume of transactions (and in some cases, the market may no longer be active). The level inthe fair value hierarchy for inputs into fair value measurements may shift, e.g. from level 2 to levelPage 4 of 93 due to a lack of observable inputs. Entities need to ensure that the unobservable inputs reflecthow market participants would incorporate the effect of COVID-19.When a present value technique is used for fair value measurements, appropriate cash flows anddiscount rates must be estimated based on the current market conditions at the measurementdate. As described for item 2, assumptions used must reflect the potential effects due to COVID-19, and in order to better reflect the range of possible outcomes and related risks, entities mayapply an expected cash flow approach.Disclosures: HKFRS 13 specifies disclosure requirements to address the measurementuncertainty in relation to level 3 fair value measurements, including about the sensitivity of the fairvalue measurement to changes in the unobservable inputs and the significant judgements appliedin fair value measurement.Use of valuation experts: The significant uncertainty related to COVID-19 also createschallenges for the valuation profession. The International Valuation Standards Council has issueda letter and guidance on the implications of COVID-19 on valuation3. In addition to challengescaused by the market uncertainty/volatility, valuers may not be able to perform the valuationproperly due to government restrictions, e.g. lockdown measures in some jurisdictions, which maylimit the scope of work. The impact of COVID-19 on valuations may affect the reliability of thevaluation report for accounting and auditing purposes and valuation reports may need to includeappropriate caveats, eg restrictions on information or on physical inspection.
4.Revenue recognitionHKFRS 15 Revenue from Contracts with Customers establishes the core principle that an entityshall recognise revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange forthose goods or services.As a result of the COVID-19 pandemic and the related government measures and actions in manyjurisdictions, there may be significant changes in circumstances for both an entity and itscustomers.Enforceability: A contract is an agreement between two or more parties that creates enforceablerights and obligations. Enforceability of the rights and obligations in a contract is a matter of law.Business disruptions from the COVID-19 pandemic may cast doubt on the enforceability ofcontract terms (e.g. how COVID-19 will be considered in the legal interpretation of clauses, suchas “force majeure” or similar clauses).Collectability: Contracts with customers are only accounted for under HKFRS 15 when theymeet all of the criteria under paragraph 9 of the standard, which includes collectability ofconsideration in exchange for goods and services transferred to the customer is probable. Ifa contract with a customer meets the criteria in paragraph 9 of HKFRS 15 at contract inception,an entity shall not reassess those criteria unless there is an indication of a significant change infacts and circumstances. As a result of the COVID-19 pandemic, customers may be experiencingfinancial difficulties that significantly affect their ability to pay and an entity should reassesswhether collectability of the consideration remains probable.3 https://www.ivsc.org/files/file/view/id/1719https://www.ivsc.org/news/article/statement-in-relation-to-the-covid-19-pandemicPage 5 of 9If an entity reassesses that collectability is no longer probable for existing contracts with acustomer, this may also indicate there may be collectability issue for new contracts entered withthis customer.When a contract with a customer does not meet the criteria in paragraph 9 of HKFRS 15, theentity recognises any consideration received from the customer as revenue only when either ofthe following events has occurred:
(a)
the entity has no remaining obligations to transfer goods or services to the customer andsubstantially all of the consideration promised by the customer has been received by theentity and is non-refundable; or(b)
the contract has been terminated and the consideration received from the customer isnon-refundable.The entity needs to assess any related contract assets or accounts receivable for impairment (seeitem 1 above for some considerations on estimating expected credit losses on financial assets).In addition, the entity shall continue to assess the contract to determine whether the criteria inparagraph 9 of HKFRS 15 are subsequently met.As a result of COVID-19, entities may decide to offer extended payment terms to some customers.This may indicate a collectability issue (i.e. whether it remains probable that the entity will collectthe consideration). If collectability is probable, entities need to evaluate whether there is asignificant financing component in accordance with paragraphs 60-65 of HKFRS 15.Customer incentives: In response to the current market situation, many entities have provided,or expect to provide, various schemes to incentivise or compensate customers. Challenges mayarise in a number of areas, including whether a change in the consideration (i.e. cash rebate,refunds, discounts, etc.) is a result of a contract modification, or a resolution or change in theestimation for variable consideration. On one hand, contract modifications are accounted for byapplying paragraphs 20-21 of HKFRS 15. On the other hand, the requirements for estimatingvariable consideration, including constraining those estimates, are in paragraphs 50-59 of HKFRS15; in particular, entities shall update the estimated transaction price (including updating theassessment of whether an estimate of variable consideration is constrained) to represent faithfullythe circumstances at the end of the reporting period and the changes in circumstances during thereporting period.To mitigate the decline in sales, entities may offer discounts on future goods or services tocustomers. Judgement may be required to determine whether the incentive represents a materialright associated with the existing contract to be accounted for in accordance with paragraph B40of HKFRS 15, or a payment to a customer that shall be recognised as a reduction in revenueapplying paragraph 72 of HKFRS 15. The discounted price on future goods or services may alsoimpact estimates of the standalone selling price for future contracts.Entities may provide free or discounted goods to existing customers that are not included in anexisting contract. Entities need to evaluate whether the additional promised goods is amodification of an existing contract (because it results in a change to the scope of that contract)
or a new contract, which might need to be combined with an existing contract (based on thecriteria in paragraph 17 of HKFRS 15). In addition, entities need to evaluate whether the additionalincentives offered create implied promises or performance obligations for future contracts, i.e.implied by the entity’s customary business practices.Page 6 of 9Measuring progress: Because of the significant disruption to entities’ operations as a result ofthe COVID-19 pandemic, entities may need to reconsider the timing of revenue recognition if theyare unable to satisfy their performance obligations in a timely manner. When entities use a cost-based input method to measure progress for over-time revenue recognition, they must excludecosts that do not depict the entities’ performance in transferring control of goods or services tothe customers, for example, any abnormal costs incurred due to the effects of COVID-19.Paragraph B19 of HKFRS 15 provides circumstances when an adjustment to the measure ofprogress may be required.Disclosures: The objective of the disclosure requirements in HKFRS 15 is to disclose sufficientinformation to enable users of financial statements to understand the nature, amount, timing anduncertainty of revenue and cash flows arising from contracts with customers. Entities will need toconsider how to reflect the implications arising from COVID-19 highlighted above in theirdisclosures, including any significant changes in contract balances during the reporting period e.g.due to impairment, changes in the timeframe for a performance obligation to be satisfied, andsignificant judgements made in the application of the standard and changes in those judgements.
5.Government grantsTo alleviate the financial burden suffered by individuals and businesses under COVID-19, theHong Kong SAR Government launched a series of support measures in response to COVID-19,including employment support schemes (e.g. wage subsidies), sector-specific reliefs (e.g. cashsubsidies to different sectors), rent concessions and provision of concessionary interest loanswith government guarantees.Scope: Entities need to evaluate all of the government assistance they receive, and their factsand circumstances, to determine the appropriate accounting treatment. Government supportmeasures may fall within the scope of different standards, including HKAS 12 Income Taxes,HKAS 20, HKFRS 9 and HKFRS 16 Leases.Recognition: HKAS 20 defines government grants as assistance by government in the form oftransfers of resources to an entity in return for past or future compliance with certain conditionsrelating to the operating activities of the entity. An entity shall not recognise a government grantuntil there is reasonable assurance that the entity will comply with the conditions attaching to thegrant and the grant will be received. Government grants shall be recognised in profit or loss on asystematic basis over the periods in which the entity recognises as expenses the related costsfor which the grants are intended to compensate.Presentation: A government grant related to assets shall be presented in the statement offinancial position either by setting up the grant as deferred income or by deducting the grant inarriving at the carrying amount of the asset. A government grant related to income (e.g. wagesubsidies) shall be presented as part of profit or loss, either separately or under a general headingsuch as “Other income”; alternatively, they are deducted in reporting the related expense.Government supported loans: Government support may be in the form of concessionary low-interest loans with government guarantees. Paragraph 10A of HKAS 20 states the benefit of agovernment loan at a below-market rate of interest is treated as government grant. The loan isrecognised and measured in accordance with HKFRS 9. The benefit of the below-market rate ofinterest is measured as the difference between the initial carrying amount of the loan determinedin accordance with HKFRS 9 and the proceeds received. This benefit is accounted for inPage 7 of 9accordance with the general principles of HKAS 20. A similar treatment would be applied to aconcessionary low-interest loan with a government guarantee. The entity is required to considerthe conditions and obligations that have been, or must be, met when identifying the costs forwhich the benefit of the loan is intended to compensate.
6.Rent concessionsDifferent forms of rent concessions have been offered, or are expected to be offered, by lessorsto lessees due to the COVID-19 pandemic. Covid-19-Related Rent Concessions (Amendment toHKFRS 16) issued in June 2020 provides a practical expedient that a lessee may elect not toassess whether a COVID-19-related rent concession is a lease modification. A lessee that makesthis election would account for such a rent concession in the same way as if the change were nota lease modification. No change has been made to lessor accounting (See separate educationalmaterial on COVID-19-related rent concessions4 for guidance).If a lessee does not elect to use the practical expedient for particular rent concessions, or thoserent concessions do not qualify for the application of the practical expedient (i.e. the conditionsunder paragraph 46B of HKFRS 16 are not met), the lessee assesses whether the rentconcessions meet the definition of lease modifications (applying paragraphs 44-46 of HKFRS 16)
(See separate educational material on rent concessions5 for guidance).If a rent concession is accounted for as a lease modification, a revised discount rate is used fordiscounting the revised lease payments. Determining an appropriate discount rate, particularlythe incremental borrowing rate of the lessee when the interest rate implicit in the lease is notavailable, is challenging and involves significant judgement.
7.Property, plant and equipmentAn entity’s development and construction projects may be interrupted due to restrictions onactivities imposed by government due to COVID-19, cash flow difficulties or a desire to pausedevelopment in uncertain market conditions.Capitalisation of borrowing costs: Paragraph 8 of HKAS 23 Borrowing Costs requires an entityto capitalise borrowing costs that are directly attributable to the acquisition, construction orproduction of a qualifying asset as part of the cost of that asset. Paragraph 20 of HKAS 23 requiresthe suspension of capitalisation of borrowing costs during extended periods in which an entitysuspends active development of a qualifying asset.If an entity’s development and construction projects are interrupted for an extended period due torestrictions on activities imposed by government due to COVID-19, borrowing costs incurredduring the period of suspension will generally be required to be recognised as an expense.However, an entity does not normally suspend capitalising borrowing costs during a period whenit carries out substantial technical and administrative work or when a temporary delay is anecessary part of the process of getting an asset ready for its intended use or sale.Depreciation of idle assets: Paragraph 55 of HKAS 16 Property, Plant and Equipment statesthat depreciation does not cease when the asset becomes idle or is retired from active use unless4 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/06_New-and-major-stds/ag_rent.pdf5 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/06_New-and-major-stds/ie161.pdfPage 8 of 9the asset is fully depreciated. Therefore, entities shall continue to recognise depreciation whilethat asset is temporarily idle. However, under usage methods of depreciation the depreciationcharge can be zero while there is no production.
8.Measurement of inventoriesAs part of the government measures to reduce the spread of COVID-19, factories in manycountries, including the PRC, have been forced to close for a period of time. During thesuspension of the operations of the factories, fixed overhead costs e.g. rent, fixed labour costs,depreciation of idle plant, are still incurred.Inventories are measured at the lower of cost and net realisable value (NRV). NRV is theestimated selling price in the ordinary course of business less the estimated costs of completionand the estimated costs necessary to make the sale.Paragraph 30 of HKAS 2 Inventories requires entities to estimate NRV based on the most reliableevidence at the time the estimate is made. Given the current market conditions, the NRVcalculation may be more challenging and require more detailed methods or assumptions.Paragraph 13 of HKAS 2 requires that the amount of fixed overhead allocated to each unit ofproduction is not increased as a consequence of low production or idle plant. Unallocatedoverheads are recognised as an expense in the period in which they are incurred.If an entity is forced to temporarily close its factory or significantly reduce production for a periodof time, a significant portion of fixed overhead may need to be expensed as incurred rather thancapitalised as part of the cost of the inventory.
9.Breach of loan covenantsThe current conditions arising from COVID-19 may result in an entity breaching a loan covenant.In particular, entities should consider any repayment on demand clauses and classification of theloan at the reporting date.Paragraph 74 of HKAS 1 Presentation of Financial Statements requires that when an entitybreaches a provision of a long-term loan arrangement on or before the end of the reporting periodwith the effect that the liability becomes payable on demand, it classifies the liability as current,even if the lender agreed, after the reporting period and before the authorisation of the financialstatements for issue, not to demand payment as a consequence of the breach.However, an entity classifies the liability as non-current if the lender agreed by the end of thereporting period to provide a period of grace ending at least twelve months after the reportingperiod, within which the entity can rectify the breach and during which the lender cannot demandimmediate repayment (paragraph 75 of HKAS 1).
10.Interim financial reportingThe development and spread of COVID-19, including actions taken in relation to COVID-19, havelargely occurred since the start of 2020 and have been difficult to predict. Consequently, entitiesmay have only provided limited information about the effect of COVID-19 in their 2019 annualfinancial statements.Paragraph 15 of HKAS 34 Interim Financial Reporting requires an entity to include in its interimfinancial report an explanation of events and transactions that are significant to an understandingPage 9 of 9of the changes in financial position and performance of the entity since the end of the last annualreporting period. Information disclosed in relation to those events and transactions shall updatethe relevant information presented in the most recent annual financial report.Accordingly, entities that prepare their first interim financial statements since the annual periodpreceding the outbreak of COVID-19 (e.g. entities with 31 December year-ends) may need toprovide more comprehensive disclosures to enable users of the financial statements tounderstand the effect of the outbreak of COVID-19 and related events on its financial statements.9 June 2020
COVID-19-related financial reporting issues for 2020 reporting periods
下载原件Page 1 of 9The guidance below was developed by the Financial Reporting Standards Committee (FRSC) of the HongKong Institute of Certified Public Accountants (HKICPA) and is for general reference only. The HKICPA,FRSC and their staff do not accept any responsibility or liability, and disclaim all responsibility andliability, in respect of the guidance and any consequences that may arise from any person acting orrefraining from action as a result of any materials in the guidance. Members of the HKICPA and otherusers of this guidance should also read the full Standard, as found in the HKICPA Members’ Handbook(https://www.hkicpa.org.hk/en/Standards-and-regulation/Standards/Members-Handbook-and-Due-Process) for further reference, and seek professional advice where necessary when applying thereferences contained in this guidance.The HKICPA Standard Setting Department welcomes your comments and feedback, which should be sentto commentletters@hkicpa.org.hk.COVID-19-related financial reporting issues for 2020 reporting periodsBackgroundDue to the outbreak of the COVID-19 pandemic, related actions (e.g. government closure orders,travel restrictions and quarantine measures) and resultant economic effect, businesses havebeen seriously impacted locally and globally. These circumstances have resulted in increasingchallenges for entities when preparing their financial statements. In early March, the Institutepublished educational guidance1 that focused on some key financial reporting implications ofCOVID-19, including highlighting some key requirements for events after the reporting period,going concern and disclosures about key judgements and estimates in preparing financialstatements. That guidance was aimed primarily at reporting periods ended on 31 December 2019,but the principles highlighted were also relevant to interim and future reporting periods.This educational guidance highlights some other financial reporting considerations in the light ofCOVID-19 that warrant specific attention for 2020 interim and annual financial statements. Inparticular, this publication highlights some key considerations in the following areas:
1.Expected credit losses
2.Impairment of non-financial assets
3.Fair value measurements
4.Revenue recognition
5.Government grants
6.Rent concessions
7.Property, plant and equipment
8.Measurement of inventories
9.Breach of loan covenants
10.Interim financial reportingThe financial reporting implications of COVID-19 on entities are broad and entities should assessthe precise effects on their financial statements considering their facts and circumstances.
1.Expected credit lossesHKFRS 9 Financial Instruments requires entities to estimate and account for expected creditlosses (ECL) on financial assets, including leases receivables, contract assets, loan commitments1 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/03_Our-views/Financial-Reporting-Auditing-and-Ethics-Alert/alert33a.pdfPage 2 of 9and financial guarantee contracts, subject to its impairment requirements. The current uncertainenvironment creates challenges in estimating ECL applying HKFRS 9.Implications of support measures: Certain governments and local banks have introducedvarious relief measures to support borrowers affected by COVID-19. These could be in the formof payment holidays on existing loans. Entities giving such support need to consider the impacton their financial statements, in particular, whether payment holidays indicate the affected loanshave suffered a significant increase in credit risk or default, and therefore moved to stage 2 or 3of the ECL model. Entities should carefully assess the terms and conditions of the extension ofpayment terms. For example, the extension of payment holidays to all borrowers in particularclasses of financial instruments should not automatically result in all those instruments beingconsidered to have suffered a significant increase in credit risk for the purpose of determiningECL2. However, entities still need to consider whether there are other indicators of significantincrease in credit risk. If the relief measures are available only to those who meet certain criteria,entities should assess whether those criteria might indicate a significant increase in credit risk.Credit enhancements, such as guarantees, are also provided by some governments and banksto ensure partial or full recovery of the loan amounts affected by COVID-19. Entities need toassess whether such credit enhancements are integral to the loans/receivables or should berecognised as a separate reimbursement asset or a government grant under HKAS 20 Accountingfor Government Grants and Disclosures of Government Assistance. Paragraph B5.5.55 ofHKFRS 9 requires that only credit enhancements that are part of the contractual terms and arenot recognised separately by the entity shall be reflected in the measurement of ECL.Re-visiting the models and assumptions: In light of the current uncertainty arising from COVID-19, entities will need to revisit their models and assumptions used in measuring ECL. In particular,entities need to exercise judgement in considering multiple macroeconomic scenarios that reflectthe changes in economic conditions and the probability weighting assigned to the scenarios, forexample, to reflect the downside scenarios and/or to increase their weighting due to COVID-19.If the effects of COVID-19 cannot be reflected in the models, top-down management overlays oradjustments will need to be considered.Re-segmentation of loan portfolios or receivables: The occurrence of COVID-19 may changethe risk characteristics of certain loans or receivables because borrowers or customers mightengage in businesses, or be located in areas that are affected by COVID-19 in different ways.Therefore, entities should consider re-segmenting their portfolios so that they are grouped on thebasis of shared credit risk characteristics (paragraph B5.5.5 of HKFRS 9). For trade receivables,entities need to consider whether to apply the provision matrix at a more granular level or toassess a greater number of receivables on an individual basis.Credit risk disclosures: Given the uncertainty arising from COVID-19 and the significantjudgement involved in estimating ECL, disclosure of the key assumptions and the estimationtechniques used is particularly important for users of financial statements to understand theimpact of COVID-19 on ECL estimation. Such disclosures include the values of the keymacroeconomic inputs used in the multiple economic scenarios and the probability weightsassigned to these scenarios, the effect of management overlays and judgements made on howand the extent to which related support measures have been factored into the assessment of ECL.2 Refer to the IASB’s educational statement Accounting for expected credit losses applying IFRS 9 FinancialInstruments in the light of current uncertainty resulting from the covid-19 pandemic (https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en).Page 3 of 9Entities are reminded to refer to HKFRS 7 Financial Instruments: Disclosures for the relevantdisclosure requirements, and provide disclosures that are specific to the entity’s circumstances.
2.Impairment of non-financial assetsParagraph 9 of HKAS 36 Impairment of Assets requires an entity to assess at the end of eachreporting period whether there is any indication that an asset may be impaired. If any suchindication exists, the entity shall estimate the recoverable amount of the asset (the higher of itsfair value less costs of disposal and its value in use). For goodwill and intangible assets with anindefinite useful life or not yet available for use, paragraph 10 of HKAS 36 requires an entity totest for impairment annually (irrespective of whether there is any indication of impairment) andalso when there is any indication that the asset may be impaired.Indication of impairment: Due to the outbreak of COVID-19, a number of impairment indicationsmay exist for many assets and cash-generating units (CGUs), including, for example, governmentclosure orders for factories and shops, reduced demand from customers and evidence frominternal reporting that actual performance is significantly lower than management forecasts. If anysuch indication exists, entities are required to estimate the recoverable amounts of those assetsand/or CGUs to assess whether to recognise impairment losses.Identification of CGU: Due to the existence of potential new impairment indicators following theoutbreak of COVID-19, many assets may need to be tested for impairment for the first time.Different jurisdictions may be affected by COVID-19 differently and if assets need to be allocatedto CGUs for impairment testing, this allocation will often need to be made at a lower CGU levelthan the country level. Judgement is required to determine the appropriate CGU level forimpairment testing.Present value techniques: When using present value techniques to estimate the recoverableamount of an asset or a CGU, the assumptions and cash flow projections used must be updatedto reflect the potential effects due to COVID-19. Instead of using the traditional approach in HKAS36, which uses a single set of expected cash flows, the expected cash flow approach in HKAS36, which uses all expectations about possible cash flows, may in some situations better reflectthe range of possible outcomes and related risks in light of the current uncertainty due to COVID-
19.Assumptions and cash flow projections used in impairment tests of different assets should beconsistent with each other and align with market evidence.Disclosures: Disclosure requirements under HKAS 36 and HKFRS 13 Fair Value Measurement,about the key assumptions and judgements applied in estimating the recoverable amount are ofvital importance to investors given the current uncertainty, including a description ofmanagement’s approach to determining the values assigned to the key assumptions and theinformation about the sensitivity of recoverable amount to changes in those key assumptions.
3.Fair value measurementsParagraph 2 of HKFRS 13 states that the objective of fair value measurement is to estimate theprice at which an orderly transaction to sell the asset or to transfer the liability would take placebetween market participants at the measurement date under current market conditions.Fair value hierarchy and approach: The effects of COVID-19 may create challenges inobtaining the fair value of an asset due to highly volatile markets and/or a significant decrease inthe volume of transactions (and in some cases, the market may no longer be active). The level inthe fair value hierarchy for inputs into fair value measurements may shift, e.g. from level 2 to levelPage 4 of 93 due to a lack of observable inputs. Entities need to ensure that the unobservable inputs reflecthow market participants would incorporate the effect of COVID-19.When a present value technique is used for fair value measurements, appropriate cash flows anddiscount rates must be estimated based on the current market conditions at the measurementdate. As described for item 2, assumptions used must reflect the potential effects due to COVID-19, and in order to better reflect the range of possible outcomes and related risks, entities mayapply an expected cash flow approach.Disclosures: HKFRS 13 specifies disclosure requirements to address the measurementuncertainty in relation to level 3 fair value measurements, including about the sensitivity of the fairvalue measurement to changes in the unobservable inputs and the significant judgements appliedin fair value measurement.Use of valuation experts: The significant uncertainty related to COVID-19 also createschallenges for the valuation profession. The International Valuation Standards Council has issueda letter and guidance on the implications of COVID-19 on valuation3. In addition to challengescaused by the market uncertainty/volatility, valuers may not be able to perform the valuationproperly due to government restrictions, e.g. lockdown measures in some jurisdictions, which maylimit the scope of work. The impact of COVID-19 on valuations may affect the reliability of thevaluation report for accounting and auditing purposes and valuation reports may need to includeappropriate caveats, eg restrictions on information or on physical inspection.
4.Revenue recognitionHKFRS 15 Revenue from Contracts with Customers establishes the core principle that an entityshall recognise revenue to depict the transfer of promised goods or services to customers in anamount that reflects the consideration to which the entity expects to be entitled in exchange forthose goods or services.As a result of the COVID-19 pandemic and the related government measures and actions in manyjurisdictions, there may be significant changes in circumstances for both an entity and itscustomers.Enforceability: A contract is an agreement between two or more parties that creates enforceablerights and obligations. Enforceability of the rights and obligations in a contract is a matter of law.Business disruptions from the COVID-19 pandemic may cast doubt on the enforceability ofcontract terms (e.g. how COVID-19 will be considered in the legal interpretation of clauses, suchas “force majeure” or similar clauses).Collectability: Contracts with customers are only accounted for under HKFRS 15 when theymeet all of the criteria under paragraph 9 of the standard, which includes collectability ofconsideration in exchange for goods and services transferred to the customer is probable. Ifa contract with a customer meets the criteria in paragraph 9 of HKFRS 15 at contract inception,an entity shall not reassess those criteria unless there is an indication of a significant change infacts and circumstances. As a result of the COVID-19 pandemic, customers may be experiencingfinancial difficulties that significantly affect their ability to pay and an entity should reassesswhether collectability of the consideration remains probable.3 https://www.ivsc.org/files/file/view/id/1719https://www.ivsc.org/news/article/statement-in-relation-to-the-covid-19-pandemicPage 5 of 9If an entity reassesses that collectability is no longer probable for existing contracts with acustomer, this may also indicate there may be collectability issue for new contracts entered withthis customer.When a contract with a customer does not meet the criteria in paragraph 9 of HKFRS 15, theentity recognises any consideration received from the customer as revenue only when either ofthe following events has occurred:
(a)
the entity has no remaining obligations to transfer goods or services to the customer andsubstantially all of the consideration promised by the customer has been received by theentity and is non-refundable; or(b)
the contract has been terminated and the consideration received from the customer isnon-refundable.The entity needs to assess any related contract assets or accounts receivable for impairment (seeitem 1 above for some considerations on estimating expected credit losses on financial assets).In addition, the entity shall continue to assess the contract to determine whether the criteria inparagraph 9 of HKFRS 15 are subsequently met.As a result of COVID-19, entities may decide to offer extended payment terms to some customers.This may indicate a collectability issue (i.e. whether it remains probable that the entity will collectthe consideration). If collectability is probable, entities need to evaluate whether there is asignificant financing component in accordance with paragraphs 60-65 of HKFRS 15.Customer incentives: In response to the current market situation, many entities have provided,or expect to provide, various schemes to incentivise or compensate customers. Challenges mayarise in a number of areas, including whether a change in the consideration (i.e. cash rebate,refunds, discounts, etc.) is a result of a contract modification, or a resolution or change in theestimation for variable consideration. On one hand, contract modifications are accounted for byapplying paragraphs 20-21 of HKFRS 15. On the other hand, the requirements for estimatingvariable consideration, including constraining those estimates, are in paragraphs 50-59 of HKFRS15; in particular, entities shall update the estimated transaction price (including updating theassessment of whether an estimate of variable consideration is constrained) to represent faithfullythe circumstances at the end of the reporting period and the changes in circumstances during thereporting period.To mitigate the decline in sales, entities may offer discounts on future goods or services tocustomers. Judgement may be required to determine whether the incentive represents a materialright associated with the existing contract to be accounted for in accordance with paragraph B40of HKFRS 15, or a payment to a customer that shall be recognised as a reduction in revenueapplying paragraph 72 of HKFRS 15. The discounted price on future goods or services may alsoimpact estimates of the standalone selling price for future contracts.Entities may provide free or discounted goods to existing customers that are not included in anexisting contract. Entities need to evaluate whether the additional promised goods is amodification of an existing contract (because it results in a change to the scope of that contract)
or a new contract, which might need to be combined with an existing contract (based on thecriteria in paragraph 17 of HKFRS 15). In addition, entities need to evaluate whether the additionalincentives offered create implied promises or performance obligations for future contracts, i.e.implied by the entity’s customary business practices.Page 6 of 9Measuring progress: Because of the significant disruption to entities’ operations as a result ofthe COVID-19 pandemic, entities may need to reconsider the timing of revenue recognition if theyare unable to satisfy their performance obligations in a timely manner. When entities use a cost-based input method to measure progress for over-time revenue recognition, they must excludecosts that do not depict the entities’ performance in transferring control of goods or services tothe customers, for example, any abnormal costs incurred due to the effects of COVID-19.Paragraph B19 of HKFRS 15 provides circumstances when an adjustment to the measure ofprogress may be required.Disclosures: The objective of the disclosure requirements in HKFRS 15 is to disclose sufficientinformation to enable users of financial statements to understand the nature, amount, timing anduncertainty of revenue and cash flows arising from contracts with customers. Entities will need toconsider how to reflect the implications arising from COVID-19 highlighted above in theirdisclosures, including any significant changes in contract balances during the reporting period e.g.due to impairment, changes in the timeframe for a performance obligation to be satisfied, andsignificant judgements made in the application of the standard and changes in those judgements.
5.Government grantsTo alleviate the financial burden suffered by individuals and businesses under COVID-19, theHong Kong SAR Government launched a series of support measures in response to COVID-19,including employment support schemes (e.g. wage subsidies), sector-specific reliefs (e.g. cashsubsidies to different sectors), rent concessions and provision of concessionary interest loanswith government guarantees.Scope: Entities need to evaluate all of the government assistance they receive, and their factsand circumstances, to determine the appropriate accounting treatment. Government supportmeasures may fall within the scope of different standards, including HKAS 12 Income Taxes,HKAS 20, HKFRS 9 and HKFRS 16 Leases.Recognition: HKAS 20 defines government grants as assistance by government in the form oftransfers of resources to an entity in return for past or future compliance with certain conditionsrelating to the operating activities of the entity. An entity shall not recognise a government grantuntil there is reasonable assurance that the entity will comply with the conditions attaching to thegrant and the grant will be received. Government grants shall be recognised in profit or loss on asystematic basis over the periods in which the entity recognises as expenses the related costsfor which the grants are intended to compensate.Presentation: A government grant related to assets shall be presented in the statement offinancial position either by setting up the grant as deferred income or by deducting the grant inarriving at the carrying amount of the asset. A government grant related to income (e.g. wagesubsidies) shall be presented as part of profit or loss, either separately or under a general headingsuch as “Other income”; alternatively, they are deducted in reporting the related expense.Government supported loans: Government support may be in the form of concessionary low-interest loans with government guarantees. Paragraph 10A of HKAS 20 states the benefit of agovernment loan at a below-market rate of interest is treated as government grant. The loan isrecognised and measured in accordance with HKFRS 9. The benefit of the below-market rate ofinterest is measured as the difference between the initial carrying amount of the loan determinedin accordance with HKFRS 9 and the proceeds received. This benefit is accounted for inPage 7 of 9accordance with the general principles of HKAS 20. A similar treatment would be applied to aconcessionary low-interest loan with a government guarantee. The entity is required to considerthe conditions and obligations that have been, or must be, met when identifying the costs forwhich the benefit of the loan is intended to compensate.
6.Rent concessionsDifferent forms of rent concessions have been offered, or are expected to be offered, by lessorsto lessees due to the COVID-19 pandemic. Covid-19-Related Rent Concessions (Amendment toHKFRS 16) issued in June 2020 provides a practical expedient that a lessee may elect not toassess whether a COVID-19-related rent concession is a lease modification. A lessee that makesthis election would account for such a rent concession in the same way as if the change were nota lease modification. No change has been made to lessor accounting (See separate educationalmaterial on COVID-19-related rent concessions4 for guidance).If a lessee does not elect to use the practical expedient for particular rent concessions, or thoserent concessions do not qualify for the application of the practical expedient (i.e. the conditionsunder paragraph 46B of HKFRS 16 are not met), the lessee assesses whether the rentconcessions meet the definition of lease modifications (applying paragraphs 44-46 of HKFRS 16)
(See separate educational material on rent concessions5 for guidance).If a rent concession is accounted for as a lease modification, a revised discount rate is used fordiscounting the revised lease payments. Determining an appropriate discount rate, particularlythe incremental borrowing rate of the lessee when the interest rate implicit in the lease is notavailable, is challenging and involves significant judgement.
7.Property, plant and equipmentAn entity’s development and construction projects may be interrupted due to restrictions onactivities imposed by government due to COVID-19, cash flow difficulties or a desire to pausedevelopment in uncertain market conditions.Capitalisation of borrowing costs: Paragraph 8 of HKAS 23 Borrowing Costs requires an entityto capitalise borrowing costs that are directly attributable to the acquisition, construction orproduction of a qualifying asset as part of the cost of that asset. Paragraph 20 of HKAS 23 requiresthe suspension of capitalisation of borrowing costs during extended periods in which an entitysuspends active development of a qualifying asset.If an entity’s development and construction projects are interrupted for an extended period due torestrictions on activities imposed by government due to COVID-19, borrowing costs incurredduring the period of suspension will generally be required to be recognised as an expense.However, an entity does not normally suspend capitalising borrowing costs during a period whenit carries out substantial technical and administrative work or when a temporary delay is anecessary part of the process of getting an asset ready for its intended use or sale.Depreciation of idle assets: Paragraph 55 of HKAS 16 Property, Plant and Equipment statesthat depreciation does not cease when the asset becomes idle or is retired from active use unless4 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/06_New-and-major-stds/ag_rent.pdf5 https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/06_New-and-major-stds/ie161.pdfPage 8 of 9the asset is fully depreciated. Therefore, entities shall continue to recognise depreciation whilethat asset is temporarily idle. However, under usage methods of depreciation the depreciationcharge can be zero while there is no production.
8.Measurement of inventoriesAs part of the government measures to reduce the spread of COVID-19, factories in manycountries, including the PRC, have been forced to close for a period of time. During thesuspension of the operations of the factories, fixed overhead costs e.g. rent, fixed labour costs,depreciation of idle plant, are still incurred.Inventories are measured at the lower of cost and net realisable value (NRV). NRV is theestimated selling price in the ordinary course of business less the estimated costs of completionand the estimated costs necessary to make the sale.Paragraph 30 of HKAS 2 Inventories requires entities to estimate NRV based on the most reliableevidence at the time the estimate is made. Given the current market conditions, the NRVcalculation may be more challenging and require more detailed methods or assumptions.Paragraph 13 of HKAS 2 requires that the amount of fixed overhead allocated to each unit ofproduction is not increased as a consequence of low production or idle plant. Unallocatedoverheads are recognised as an expense in the period in which they are incurred.If an entity is forced to temporarily close its factory or significantly reduce production for a periodof time, a significant portion of fixed overhead may need to be expensed as incurred rather thancapitalised as part of the cost of the inventory.
9.Breach of loan covenantsThe current conditions arising from COVID-19 may result in an entity breaching a loan covenant.In particular, entities should consider any repayment on demand clauses and classification of theloan at the reporting date.Paragraph 74 of HKAS 1 Presentation of Financial Statements requires that when an entitybreaches a provision of a long-term loan arrangement on or before the end of the reporting periodwith the effect that the liability becomes payable on demand, it classifies the liability as current,even if the lender agreed, after the reporting period and before the authorisation of the financialstatements for issue, not to demand payment as a consequence of the breach.However, an entity classifies the liability as non-current if the lender agreed by the end of thereporting period to provide a period of grace ending at least twelve months after the reportingperiod, within which the entity can rectify the breach and during which the lender cannot demandimmediate repayment (paragraph 75 of HKAS 1).
10.Interim financial reportingThe development and spread of COVID-19, including actions taken in relation to COVID-19, havelargely occurred since the start of 2020 and have been difficult to predict. Consequently, entitiesmay have only provided limited information about the effect of COVID-19 in their 2019 annualfinancial statements.Paragraph 15 of HKAS 34 Interim Financial Reporting requires an entity to include in its interimfinancial report an explanation of events and transactions that are significant to an understandingPage 9 of 9of the changes in financial position and performance of the entity since the end of the last annualreporting period. Information disclosed in relation to those events and transactions shall updatethe relevant information presented in the most recent annual financial report.Accordingly, entities that prepare their first interim financial statements since the annual periodpreceding the outbreak of COVID-19 (e.g. entities with 31 December year-ends) may need toprovide more comprehensive disclosures to enable users of the financial statements tounderstand the effect of the outbreak of COVID-19 and related events on its financial statements.9 June 2020