Educational Publication: Financial Reporting Consideration for Closing Out 2022

MARCH 2023STANDARDSETTINGFinancial reportingconsiderations for closing outCONTENTSIntroductionI.Amendments to HKFRSs mandatorily effective from 1 January 2022II.Topical issues

1.The lingering impact of COVID-19 on financial reporting

2.Impact of higher inflation, rising interest rates and othermacroeconomic uncertainties on financial reporting

3.Climate-related reportingIII. Agenda decisions issued by the IFRS Interpretations Committeein 2022 that are relevant to Hong Kong entitiesIV. Other remindersAppendix – New and revised Hong Kong Financial Reporting Standardsas well as Agenda Decisions issued by the IFRS Interpretations CommitteeIntroductionThis publication highlights the key topics and reminders that preparers should consider inpreparing their December 2022 financial statements but may also be relevant to upcominginterim period-ends and financial year-ends.The first section discusses the amendments to HKFRSs which are mandatorily effective forannual periods beginning on or after 1 January 2022. The second section discusses topicalissues including the challenges faced by Hong Kong entities in their financial reporting underthe current macroeconomic environment. In the third section, we discuss the agenda decisionsissued by the IFRS Interpretations Committee (IFRS IC) in 2022 that are considered to bemore relevant to Hong Kong entities.For readers’ ease of reference, the Appendix provides the full lists of standards andamendments which are effective on 1 January 2022 and those new and issued standardswhich are not yet effective but available for early adoption as well as a full list of agendadecisions issued by the IFRS IC.This publication is not intended to be comprehensive nor does it necessarily cover all thepotential issues relevant to an entity’s financial statements. Readers should refer to theHKFRSs in the HKICPA Members’ Handbook for further reference.I.Amendments to HKFRSs mandatorily effective from 1January 2022There are no major new standards or amendments that are applicable to financial yearsending December 2022. However, there are several narrow-scope amendments the financialimpact of which should be carefully assessed. Relevant disclosures are required by HKAS 8Accounting Policies, Changes in Accounting Estimates and Errors when the changes broughtby the amendments have a material impact on the financial statements. This section discussesthose amendments which may be more widely relevant to Hong Kong entities and the keyconsiderations in applying the amendments.

1.Amendments to HKAS 16 Property, Plant and Equipment – Proceeds beforeIntended UseAn entity may produce items (Items) while bringing an item of property, plant and equipment(PPE) to the location and condition necessary for it to be capable of operating in the mannerintended by management. The amendments require the proceeds from selling any such Itemsand the related costs be recognized in profit or loss in accordance with applicable HKFRSs(HKAS 16.20A).The amendments are expected to have more impact on entities engaging in those industrieswhich produce and sell items when constructing or testing items of property, plant andequipment before they are available for use, such as mining, petrochemicals andmanufacturing companies (HKAS 16.BC36B). Applying the amendments, these entities areprohibited from deducting the proceeds from selling the Items from the cost of the PPE.Instead, such proceeds should be recognized in profit or loss. In addition, all the costs of thoseItems are required to be initially accounted for using HKAS 2 Inventories and recognize theproceeds and related costs in profit or loss in accordance with the applicable HKFRSs whenthey are sold, e.g. applying HKFRS 15 Revenue from Contracts with Customers if the itemssold are output of the entity’s ordinary activities (HKAS 16.BC16M). The amendments inessence require an entity to distinguish between the costs of producing the Items and othercosts incurred in making the PPE available for use which are capitalized under HKAS 16.The amendments require limited retrospective application. In particular, they should only beapplied to those PPE that are brought to the location and condition necessary for them to becapable of operating in the manner intended by management on or after the beginning of theearliest period presented in the financial statements in which the entity first applies theamendments1 (i.e. applicable to those PPE that were not yet available for use as at 1 January2021 for entities with a December year-end). The cumulative effect of initially applying the1 The International Accounting Standards Board (IASB) recognized that an affected entity might find it difficult and costly to applythe amendments retrospectively to assets made available for use many years ago and therefore decided to limit the number ofassets an entity is required to reassess on first applying the requirements. The transition requirements in IAS 16.80D promoteconsistency in application of the amendments for all periods presented (HKAS 16.BC36C).amendments is recognized as an opening adjustment to retained earnings or other componentof equity, as appropriate, at the beginning of the earliest period presented.HKAS 16.74A requires additional disclosures including (1) the amount of proceeds and costsrecognized, and (2) the relevant line items in the statement of comprehensive income thatinclude such proceeds and costs as a result of selling the Items.

2.Amendments to HKAS 37 – Onerous Contracts: Cost of Fulfilling a ContractHKAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that, if an entityhas an onerous contract, it shall measure and recognize the present obligation under thecontract as a provision. HKAS 37 defines an onerous contract as a contract in which theunavoidable costs of meeting the obligations under the contract exceed the economic benefitsexpected to be received under it. The unavoidable costs under a contract reflect the least netcost of exiting from the contract, which is the lower of the cost of fulfilling it and anycompensation or penalties arising from failure to fulfil it (HKAS 37.68).To address the diversity in practice regarding which costs should be included as the cost offulfilling a contract, HKAS 37.68A was added to clarify that, for the purpose of assessingwhether a contract is onerous under HKAS 37, the cost of fulfilling the contract comprises thecosts that relate directly to the contract which include:

the incremental costs of fulfilling that contract (e.g. direct labour and materials); andan allocation of other costs that relate directly to fulfilling contracts (e.g. depreciationcharge of machinery used in fulfilling that contract).It is expected that entities, which applied the ‘incremental cost’ approach in the past to identifyonerous contracts, will be more impacted by the amendments. These entities should carefullyreassess their contracts to identify whether there are any material contracts that have becomeonerous as a result of applying the amendments and provide the necessary provisions.On transition, an entity shall apply the amendments only to contracts for which it has notfulfilled all its obligations at the date of initial application (i.e. contracts with outstandingobligations as at 1 January 2022 for an entity with a December year-end) without restatingcomparative information. The entity shall instead recognize the cumulative effect of initiallyapplying the amendments as an adjustment to the opening balance of retained earnings orother component of equity, as appropriate, at the date of initial application (i.e. 1 January2022)2.Before a separate provision is recognized for an onerous contract, entities should rememberto recognize any impairment loss that has occurred on the assets used in fulfilling the contract(HKAS 37.69).2 The IASB considered that (1) it may be difficult and costly for an entity to obtain the information needed to restate comparativeamounts, and the information provided by doing so was unlikely to be sufficiently useful to justify the costs that the entity mightincur and (2) the benefits of providing the option to restate comparative amounts would be limited. Accordingly, the IASB decidedto require entities to apply the amendments to those contracts for which the entity has not fulfilled all its obligations (HKAS

37.BC20-21).

3.Other amendments that are effective on 1 January 2022(a)

Annual Improvements to HKFRS Standards 2018-2020The following table lists out the HKFRSs and the topics that are amended as part of the AnnualImprovements to HKFRS Standards 2018-2020.HKFRSsSubjectHKFRS 1 First-timeAdoption of Hong KongFinancial ReportingStandardsSubsidiary as a First-time AdopterA subsidiary that uses the exemption in HKFRS 1.D16(a) mayelect, in its financial statements, to measure cumulativetranslation differences for all foreign operations at the carryingamount that would be included in the parent’s consolidatedfinancial statements, based on the parent’s date of transition toHKFRSs, if no adjustments were made for consolidationprocedures and for the effects of the business combination inwhich the parent acquired the subsidiary.A similar election is available to an associate or joint venture thatuses the exemption in HKFRS 1.D16(a).HKFRS 9Financial InstrumentsFees in the ‘10 per cent’ Test for Derecognition of FinancialLiabilitiesThe amendments clarify which fees an entity includes when itapplies the ‘10 per cent’ test3 in assessing whether toderecognize a financial liability. An entity includes only fees paidor received between the entity (the borrower) and the lender,including fees paid or received by either the entity or the lenderon the other’s behalf.Illustrative Examplesaccompanying HKFRS 16LeasesLease IncentivesThe amendment simplifies Illustrative Example 13 –Measurement by a lessee and accounting for a change in thelease term by taking out the illustration of the reimbursement ofleasehold improvements from the example. This removes thepotential confusion regarding the treatment of lease incentives inthe example.HKAS 41 AgricultureTaxation in Fair Value MeasurementsThe amendment removes the requirement for entities to excludecash flows for taxation when measuring the fair value of abiological asset using a present value technique. Under theamendment, an entity is permitted to use post-tax cash flows anda post-tax discount rate in the present value calculation whendetermining the fair value of its biological assets.3 The ‘10 per cent’ test refers to a test in HKFRS 9 that is used to quantitatively assess whether the new contractual termsbetween the borrower and the lender are substantially different from the original contractual terms, in determining whether theoriginal financial liability should be derecognized. Under HKFRS 9.B3.3.6, the terms are substantially different if the discountedpresent value of the cash flows under the new terms is at least 10 per cent different from the discounted present value of theremaining cash flows of the original financial liability.(b)

Amendments to HKFRS 3 Business Combinations – Reference to the ConceptualFrameworkThe Amendments to HKFRS 3 update certain references to the Conceptual Framework forFinancial Reporting issued in 2018 (Conceptual Framework), and add an exception to therequirement for an entity to refer to the Conceptual Framework in relation to liabilities andcontingent liabilities that would have been in the scope of HKAS 37 or HK(IFRIC) Interpretation21 Levies if they were incurred separately rather than assumed in a business combination.(c)

Amendment to HKFRS 16 Leases – Covid-19-Related Rent Concessions beyond 30June 2021Rent concessions were prevalent during the COVID-19 pandemic in certain jurisdictions. InMarch 2021, the IASB issued Covid-19-Related Rent Concessions beyond 30 June 2021,which amended the date in IFRS 16.46B(b) from 30 June 2021 to 30 June 2022 to extend theperiod in which lessees could apply the practical relief in accounting for qualifying COVID-19-related rent concessions. The HKICPA approved the equivalent amendment in April 2021.Readers may refer to Financial considerations for closing out 2021 for our discussions of theamendment.Section III.2 below discusses an IFRS IC agenda decision which addresses the questionsrelating to a lessor’s accounting for a particular type of rent concession.II. Topical issuesThis section discusses the topical issues relevant to Hong Kong entities, focusing on (1) thelingering impact of COVID-19 on financial reporting, (2) other impact on financial reportingbrought by the changes in the macroeconomic environment, and (3) the current climate-related reporting landscape. To attain high quality financial reporting, regulators continuallyemphasize the need for transparent, complete and entity-specific disclosures that faithfullyrepresent the underlying transactions to provide useful information to users. It is thereforeimportant for entities to consider the issues below carefully and to provide useful disclosuresin the financial statements.

1.The lingering impact of COVID-19 on financial reportingWhile the impact of COVID-19 pandemic may have diminished towards the end of 2022 inHong Kong and economic activities have gradually resumed normalcy, some industries haveyet to recover fully from the adverse effects of the pandemic that have accumulated over thepast few years. Accordingly, some, if not all, of the COVID-19-related accountingconsiderations discussed in our prior publications (2022: Financial considerations for closingout 2021; 2021: Alert Issue 37, 2020: Alert Issue 33) would remain relevant for those entities,in particular for the following aspects:

AreasApplicable HKFRSsKey matters for attention (notexhaustive)

Judgements and keysources of estimationuncertaintiesHKAS 1 Presentation ofFinancial Statements and otherapplicable HKFRS for specificdisclosures to which theaccounting items relate Overarching principles set outin HKAS 1.122 & 125 Areas which involve judgementand estimation include goingconcern, asset impairments,useful lives of assets, expectedcredit loss (ECL) of a financialasset, write down ofinventories and provisions andfair value measurementsinvolving significantunobservable inputsImpairment considerationsand disclosures Financial assets- HKFRS 9 FinancialInstruments- HKFRS 7 FinancialInstruments: DisclosuresNon-financial assets- HKAS 36 Impairment ofAssetsInventories-HKAS 2 Inventories Financial assets (e.g. tradereceivables, lease receivables,loan receivables, and bondinvestments at amortized costor fair value through othercomprehensive income):

- assess the staging of ECLmodel (Stage 1, 2 or 3),whether there has been asignificant increase in creditrisk since initial recognitionwhen applying the generalmodelAreasApplicable HKFRSsKey matters for attention (notexhaustive)

- If applicable, assess thechanges in the estimationtechniques or significantassumptions, and therelated disclosures Non-financial assets (e.g. PPE,intangibles and goodwill):

- other than goodwill, identifyimpairment indicator(s) ateach reporting date andperform impairmentassessment as necessary- perform impairmentassessment for goodwill atleast annually4- properly calculate therecoverable amount whichis the higher of fair valueless costs of disposal andvalue in use of an asset orcash-generating unit (CGU)

- assess if impairment lossrecognized in the past onassets other than goodwillshould be reversed Inventories:

- estimate the net realizablevalue of inventories basedon the most reliableevidence available at thetime the estimates aremade- the amount of fixedoverhead allocated to eachunit of production is notincreased as aconsequence of lowproduction or idle plant.Unallocated overhead arerecognized as an expensewhen incurred4 There have been discussions for years as to whether the amortization of goodwill should be reintroduced in view of the users’fears of the problem that goodwill was impaired ‘too little, too late’. In its November 2022 meeting, the IASB decided once andfor all to not reintroduce amortization of goodwill but to stick with the impairment-only approach for goodwill. It was believed thatthere would be significant costs and disruption for entities, with no real evidence that the amortization model gives any betterinformation for the users.AreasApplicable HKFRSsKey matters for attention (notexhaustive)

Fair value measurementsHKFRS 13 Fair ValueMeasurement Market-based, instead ofentity-specific measurement Apply fair value techniques thatmaximize the use ofobservable inputs andminimize the use ofunobservable inputs The extent of disclosuresdepends on the fair valuehierarchy (i.e. Level 1, 2 & 3)

Going concernHKAS 1 Assess if going concernassumption is appropriate forat least 12 months after thereporting date based on allfacts and circumstances Provide the requireddisclosures of HKAS 1 Other helpful reminder: IASB’seducational materialDebt restructuringsHKFRS 9, HKAS 32 FinancialInstruments: Presentation, HK(IFRIC) Interpretation 19Extinguishing Financial Liabilitieswith Equity Instruments Assess if restructuring resultsin a substantial modification toa financial liability (‘10 per cent’test5) and apply the relevantHKFRS 9 requirements Assess if the financial assetsinvolved in the debtrestructuring should bederecognized Where appropriate, refer to HK(IFRIC) Interpretation 19 fordebt-to-equity swaps Consider the substance of theintragroup debt restructuringarrangement in determining theaccounting treatmentProvisions and contingentliabilitiesHKAS 37 Consider if there are applicableHKFRSs before considering toapply HKAS 37 to account forthe provision Recognize a provision onlywhen all three criteria in HKAS

37.14 are met Consider the need for onerouscontract provision65 See Amendments to HKFRS 9 discussed in Section I.3(a) – Annual Improvements to HKFRS Standards 2018-2020.6 See our discussions on the Amendments to HKAS 37 effective from 1 January 2022 in Section I.2.We recommend that readers refer to the relevant sections in our previous publications formore details when considering the above aspects.

2.Impacts of higher inflation, rising interest rates and other macroeconomicuncertainties on financial reportingAlthough the impact of COVID-19 may be lessening, many entities have been facing newchallenges arising from the changes in the macroeconomic environment, for example, higherinflation and rising interest rates arising from geopolitical conflicts and uncertainties.This part of the publication discusses how these changes generally impact the accounting forDecember 2022 year-end financial statements. The discussions below are not exhaustive andentities should perform their own assessment based on an evaluation of all relevant facts andcircumstances.(a)

Impairment of non-financial assets applying HKAS 36Higher inflation and rising interest rates could lead to broader consequences such as changesin customers’ demand (as the purchasing power of money has lessened) and a higher cost ofgoods and services. Entities should consider these and other indicators of impairment carefullyand test an asset for impairment as appropriate. The key points to consider for an impairmenttesting include, but are not limited to:

i.Impairment indicators – HKAS 36 requires an entity to assess whether there is anyindication that an asset may be impaired at the end of the reporting period. If any suchindication exists, an entity shall estimate the recoverable amount of the asset. Intangibleassets with an indefinite useful life and intangible assets which are not yet available foruse must be tested for impairment annually regardless of whether there is anyimpairment indication (HKAS 36.10)

Entities should watch out for any changes in the macroeconomic environment thatprovide indications that their assets may be impaired. HKAS 36.12 provides a list ofindications from external and internal sources of information that an entity needs toconsider as a minimum. HKAS 36.12 explicitly states that increases in market interestrates or other rates of returns on investments during the period are potential indicatorsof impairment as such increases are likely to affect the discount rate used in calculatingan asset’s value in use and which would in turn decrease an asset’s recoverable amount.Other unfavorable or uncertain economic environment such as unfavorable exchangerates, changing customer behaviour and declining growth forecasts may also trigger animpairment test.ii.Conditions existing at the reporting date – Entities should keep in mind that the estimatedfuture cash flows must be based on conditions existing at the reporting date. Asconditions under an evolving macroeconomic environment may be rapidly changing,entities should carefully distinguish whether information obtained for impairmentassessment reflect the conditions at, or after, the reporting date.iii.Discount rate – It is common that entities use the weighted average cost of capital(WACC) formula as a starting point to determine the discount rate. WACC is a weightedaverage of the cost of debt and cost of equity, which are affected by rising interest rates.Inflation represents rising prices and reduces the purchasing power of money andtherefore also has an impact on the time value of money. Accordingly, entities shouldgive proper consideration to the impact of rising interest rates and inflation in determiningan appropriate discount rate. See (v) and (vi) for further discussions on the discount rate.iv.Growth rate – In measuring value in use, HKAS 36 requires entities to extrapolate theprojections beyond the period covered by the most recent budgets/forecasts using asteady or declining long-term growth rate for subsequent years, unless an increasingrate can be justified7. More judgement may be required in determining the long-termgrowth rate when forecasts of the rate of inflation are changing. Entities should considerall relevant market information on inflation forecasts, including the short, medium andlong-term market expectations, when making this judgement.v.Weighted average of all possible outcomes – In determining value in use, the elementsidentified in HKAS 36.30(b), (d) and (e) can be reflected either as adjustments to thefuture cash flows or as adjustments to the discount rate8. In times of uncertainty, for thepurpose of impairment testing, it may be more pragmatic for entities to reflect differenteconomic environments by constructing multiple scenarios of future cash flows andapply probability weightings to each scenario to arrive at an expected present value ofcash flows (‘expected cash flow approach’), rather than using a single cash flow forecastand adjusting the discount rate (‘traditional approach’). Entities can refer to Appendix Ato HKAS 36 which provides guidance on these two approaches and properly considerwhich approach would be more appropriate based on their facts and circumstances.vi.Use of consistent assumptions about price increases attributable to general inflation –Estimates of future cash flows and the discount rate should reflect consistentassumptions about price increases attributable to general inflation. If the discount rateincludes the effect of price increases attributable to general inflation, future cash flowsshould also be estimated in nominal terms (i.e. incorporating the effect of inflation). If thediscount rate excludes the effect of price increases attributable to general inflation, futurecash flows are estimated in real terms (i.e. excluding the effect of inflation).vii.Investments in subsidiaries in separate financial statements – Entities should rememberto assess whether the investments in subsidiaries in their separate financial statements7 See HKAS 36.33(c). The rate as referred to in this paragraph shall not exceed the long-term average growth rate for the products,industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher ratecan be justified.8 HKAS 36.30(b): expectations about possible variations in the amount or timing of future cash flows; 30(d): the price for bearingthe uncertainty inherent in the asset; and 30(e): other factors, such as illiquidity, that market participants would reflect in pricingthe future cash flows the entity expects to derive from the asset.are impaired, in particular when a goodwill impairment is recognized in the consolidatedfinancial statements.viii. Disclosures – Entities should make adequate disclosures as required by HKAS 36.126-

136.Additional sensitivity disclosures (e.g. an increase / a decrease in certain % of thediscount rates) would also be warranted if a reasonably possible change in a keyassumption on which management has based its determination of recoverable amountwould cause the CGU’s (group of CGUs’) carrying amount to exceed its recoverableamount9. In a volatile and uncertain market environment, more entities may need toprovide sensitivity disclosures due to the widened range of reasonably possible changes.(b)

ECL assessment under HKFRS 9HKFRS 9 requires ECL to be measured in a way that takes into account the time value ofmoney, using reasonable and supportable information that is available without undue cost oreffort at the reporting date about past events, current conditions and forecasts of futureeconomic conditions10. In light of this requirement, entities should pay attention to the followingareas when undertaking an ECL assessment:

i.Credit risk assessment – Higher inflation and rising interest rates may cause the creditrisk of a financial asset to increase. For example, the repayment ability of a debtor of afloating-rate instrument may deteriorate if the inflation and interest rate keep rising.Similarly, if a debtor intends to repay its loans through refinancing, the high interest rateenvironment might make it difficult for the debtor to obtain refinancing due to its failureto meet the requirements for refinancing (e.g. interest cover ratio), hence increasing theprobability of default on the loan. This issue is more pronounced for shorter term loansas there may not be sufficient time for the debtor’s earnings to adjust to the higherinflation environment (e.g. through charging sufficiently higher prices) to meet thenecessary requirements for refinancing. If there is a significant increase in credit risksince initial recognition, financial assets that are accounted for under the generalapproach may need to move from Stage 1 ECL to Stage 2 or even Stage 3. The resultingfinancial impact could be significant as the amount of ECL recognized in Stage 1 is 12-month ECL but increases to life-time ECL in Stage 2 and Stage 311. Determining whethercredit risk has increased significantly since initial recognition requires judgment. Entitiesare advised to refer to HKFRS 9.5.5.9-5.5.11 and HKFRS 9.B5.5.15-B5.5.24 for therelevant guidance.ii.Determination of ECL rates – This formula is commonly used for estimating the ECL:

ECL = Probability of default (PD) * Loss given default (LGD) * Exposure at default (EAD).The impact of rising interest rate and inflation on these three elements should be9 See HKAS 36.134(f) & 135(e) for details.10 See HKFRS 9.5.5.17.11 Stage 2 financial assets are those financial assets which have significant increase in credit risk but do not have objectiveevidence of impairment. Stage 3 financial assets are credit-impaired financial assets which have objective evidence of impairment(see HKFRS 9.Appendix A for the definition of credit-impaired financial asset).separately assessed. For example, PD is an estimate of the likelihood of a default overa specified time period. As discussed in (i), PD may increase as rising interest rate andinflation may negatively affect a debtor’s ability to pay. LGD, which is the estimated lossin the event of default, may also increase when there is a decrease in the value of thecollaterals pledged for the financial asset. EAD is the expected outstanding balance ofthe receivable at the point of default. In difficult times, a debtor’s payment patterns maychange resulting in a higher outstanding balance (EAD).iii.Provision matrix – Entities should reassess whether the groupings of financial assets(e.g. groupings of trade receivables from different customers) in the provision matrixused for determining the ECL of trade receivables12 are still appropriate to ensure thatthe financial assets in the same group share similar credit risk characteristics. Entitiesmay consider further stratifying the provision matrix as customers from differentindustries may be affected by rising inflation and interest rates to varying extents. Entitiesshould also critically reassess whether historical loss rates remain appropriate in light ofthe changes in the current and forecast economic conditions from those of the past.iv.Forward-looking information – Entities may find it more challenging in obtainingreasonable and supportable forward-looking information for incorporating into themeasurement of ECL for financial assets during the times of macroeconomic uncertainty.In assessing the forward-looking information, entities should ensure the correlation ofthe information obtained with the financial assets being assessed. Entities shouldcritically analyze all relevant market information at the reporting date, including the short,medium and long-term market expectations of the future macroeconomic conditions.v.Disclosures – Entities may need to enhance their disclosures, particularly those relatingto liquidity risk, market risk, credit risk and sensitivity as required by HKFRS 7 to explainhow the effects of inflation, rising interest rates and other macroeconomic issues aremanaged by management and reflected in the financial statements.The assessment of ECL has long been a subject of regulatory scrutiny in Hong Kong13 andelsewhere due to its prevalence and the repeated deficiencies found in audit work in this area.It is expected that it will continue to be one of the key areas of focus in the foreseeable future.Preparers and auditors should refer to the standard to obtain a sufficient understanding of howto apply the ECL requirements. Entities are also recommended to calibrate their ECL modelsby comparing the ECL amounts with actual outcomes.(c)

Leases applying HKFRS 16HKFRS 16.27 sets out the lease payments that are required to be included in themeasurement of lease liability at the commencement date. Apart from fixed lease payments,12 HKFRS 9.B5.5.35 provides a practical expedient by which entities could use a provision matrix as the basis for measurementof ECL for trade receivables.13 As set out in AFRC 2022 Interim Inspection Report, the auditor’s evaluation of the entity’s application of accounting standardsfor revenue recognition and ECL will continue to be key areas of inspection focus given the prevalence of deficiencies identifiedin their inspection.they also include variable lease payments which depend on an index or a rate. HKFRS 16.28further explains that variable lease payments that depend on an index or rate includepayments linked to a consumer price index (CPI), payments linked to a benchmark interestrate or payments that vary to reflect changes in market rental rates.Accordingly, leases for which the rentals include variable lease payments that are contingenton an index or a rate (such as CPI and market interest rates) would be particularly affectedunder the current economic environment. To reflect the change in rate or index used, lesseeshall remeasure the lease liability with an equivalent adjustment made to the right-of-use asset.HKFRS 16.39-43 provide further guidance on reassessment of lease liability.(d)

Revenue recognitionSome of the impacts of the volatile economic environment on revenue recognition are:

i.Identifying the contract – Customers’ financial position and their purchasing power maydeteriorate in light of inflation and rising interest rates. An entity should assess at contractinception whether it is probable that it will collect consideration from the customer afterproviding the goods or services. This is important as it is one of the criteria in HKFRS

15.9 for assessing whether a contract with a customer as defined in HKFRS 15 exists inthe first place.HKFRS 15.13 states that an entity shall not reassess the criteria in HKFRS 15.9 if acontract with a customer meets those criteria at contract inception, unless there is anindication of a change in facts and circumstances. However, if a customer’s ability to paythe consideration deteriorates significantly, an entity will need to reassess whether it isstill probable that the entity will collect the consideration for future goods and services.If, on reassessment, an entity determines that the criteria are no longer met, then itceases to apply the revenue model to the contract from that date. Accordingly, entitiesare advised to reassess the collectability of the amount of consideration from their majorcustomers for future provision of goods and services.ii.Significant financing component – Under HKFRS 15, the transaction price is adjusted forthe effects of the time value of money if the contract includes a significant financingcomponent14. As inflation and rising interest rate have an impact on the time value ofmoney, they should be considered when identifying significant financing component15.In addition, when adjusting the promised amount of consideration for a significantfinancing component, an entity shall use the discount rate that would be reflected in aseparate financing transaction between the entity and its customer at contract inception.HKFRS 15 requires such rate to reflect the credit characteristics of the party receivingfinancing in the contract, as well as any collateral or security provided by the customer14 See HKFRS 15.60.15 An entity shall consider all relevant facts and circumstances in assessing whether a contract contains a financing componentand whether that financing component is significant to the contract. See HKFRS 15.61 for the detailed requirements.or the entity16. It is worth pointing out that the discount rate is determined at contractinception and generally is not updated for subsequent changes in interest rate or othercircumstances after contract inception17.iii.Onerous contracts – Sales and cost of sales of an entity may change because ofrising/higher inflation and other macroeconomic factors. The combined effect of changesin revenue and cost of sales (e.g. rising cost but declining sales) may lead to onerouscontracts if the unavoidable costs of fulfilling the performance obligations in a contractwith a customer exceed the economic benefits expected to be received.(e)

Events after the reporting date applying HKAS 10 Events after the Reporting PeriodWe emphasized in (a)(ii) above the fundamental principle that the financial statements needto reflect conditions that exist at the reporting date. In an evolving economic environment,events which occur after the year end may provide evidence about the conditions at year endwhich would require an entity to adjust the amounts recognized in its financial statements, orto recognize items that were not previously recognized (i.e. adjusting events after the reportingperiod) (HKAS 10.8-9).Information and events reflecting circumstances that arise subsequent to the year-end shouldbe disclosed if material (i.e. non-adjusting events after the reporting period) (HKAS 10.10-11,21).(f)

Other considerationsi.Recognition of deferred tax assets – Rising interest rates and higher inflation mightinfluence the future profitability of an entity and therefore the recoverability of deferredtax assets recognized. Entities are reminded to disclose (1) the nature of evidence tosupport the recognition of deferred tax assets if there is a recent history of loss making(paragraph 82 of HKAS 12 Income Taxes) and (2) the judgement and estimates appliedon deferred tax assets recognition such as sensitivity information for the possibleoutcomes in the next financial year (HKAS 1.129).ii.Going concern – Contrary to asset impairment for which the assessment shall be basedon conditions which existed at the reporting date, going concern assessment takesaccount of events and conditions that exist after the reporting date. Entities should reviewand update the assumptions for financial forecasts up until the financial statements areauthorized for issue in assessing their ability to continue as a going concern. Inassessing whether the going concern assumption is appropriate, management assessesall available information about the future for at least, but not limited to, twelve monthsfrom the reporting date. An entity should not prepare its financial statements on a going16 See HKFRS 15.64.17 See HKFRS 15.64.concern basis if the events after the reporting date indicate that it is no longer a goingconcern18.iii.Estimation uncertainty and judgment applied – As discussed throughout this section onall affected areas, rising market interest rates and inflation increase estimationuncertainty and bring in more challenges when making accounting estimates in themeasurement. Financial and non-financial assets as well as liabilities with a longer termwould be more significantly affected than those with a shorter term. Entities shouldreview all material areas in their financial statements that are subject to significantjudgement and estimation uncertainty and consider expanding the disclosures on thoseareas based on the relevant requirements in HKAS 1. See Section II.1.

3.Climate-related reportingIn recent years, climate change has attracted increasing attention from investors and otherstakeholders worldwide including Hong Kong. We discussed climate-related reporting in ourlast year’s publication – Financial considerations for closing out 2021. In our view, Hong Kongentities’ exposure to climate-related risks might not have changed significantly since last yearand so those discussions should continue to be relevant for 2022 financial reporting.For entities to whom the financial impact of climate-related risks is material, they shouldcontinue to perform a robust assessment of such impact in preparing their financial statementsand provide updated disclosures. Although HKFRSs do not set out any specific disclosurerequirements on climate-related reporting, there is an overarching principle in HKAS 119 thatrequires an entity to disclose information which enables investors to understand the effects ofparticular transactions, other events and conditions on its financial position and financialperformance. As mentioned in our publication last year, we recommend that entities refer tothe two IASB educational materials published in November 2020 and November 2019 indetermining how to report climate-related matters in their financial statements under IFRSAccounting Standards. Entities are reminded to ensure consistency between financial andnon-financial information on the climate-related matters being reported.In March 2022, the International Sustainability Standards Board (ISSB) issued its first twoexposure drafts (EDs) on IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. These two potentialstandards are intended to provide a global baseline for climate and other environmental, socialand governance (ESG) reporting. The HKICPA20 responded to the EDs in July 2022. It isexpected that the final standards will be issued by the ISSB towards the end of June 2023.Entities which are required to prepare sustainability reports should monitor the latestdevelopments of the sustainability disclosures standards and ESG reporting in Hong Kongand globally.18 See HKAS 10.1 and 14.19 See HKAS 1.15, 17(c) and 31.20 The HKICPA is the only body authorized by law to set and promulgate standards for professional standards accountants inHong Kong, including financial reporting, auditing, ethics and sustainability disclosures standards.III. Agenda decisions issued by the IFRS IC in 2022 thatare relevant to Hong Kong entities21This section highlights the IFRS IC agenda decisions issued in 2022 that are relevant tocompanies reporting in Hong Kong. As HKFRSs are fully converged with IFRS AccountingStandards, entities are advised to assess the impact of the agenda decisions22 issued by IFRSIC and implement the explanatory materials therein on a timely basis where material.

1.Demand Deposits with Restrictions on Use arising from a Contract with a ThirdPartyIn order to ensure the collectability of the amounts receivable from the customers or borrowers,it is not uncommon that a seller or lender requests its customers or borrowers to place aspecified amount of cash as demand deposits in a bank which is contractually agreed to beused only for settling the transactions. Questions arise as to whether such demand depositsmeet the definition of ‘cash and cash equivalent’ in IAS 7 Statement of Cash Flows.The IFRS IC issued an agenda decision in April 2022 which clarifies the classification ofdemand deposits in the statements of cash flows and financial position when such deposit issubject to contractual restrictions on use as agreed with a third party but the entity can stillaccess those amounts on demand.Considering that both IAS 1 and IAS 7 indicate that amounts included in cash and cashequivalents may be subject to restrictions, the IFRS IC reached the following conclusionregarding the submitted fact pattern:

Cash and cash equivalents inthe statement of cash flowsPresentation in the statementof financial positionDisclosuresRestriction on use of ademand deposit does notresult in the demand depositno longer being cash, unlessthose restrictions change thenature of the deposit suchthat it would no longer meetthe definition of cash in IAS

7.In the submitted fact pattern,the contractual restrictions onthe use of the amounts heldPursuant to IAS 1.54(i), theentity presents the demanddeposit in a line item ‘cashand cash equivalents’ in itsstatement of financialposition.The entity may disaggregatethe ‘cash and cashequivalent’ line item andpresent the demand depositseparately in an additionalline item applying IAS 1.55.Applying IAS 7.45, theentity discloses thedemand deposit as acomponent of cashand cash equivalent.The entity considersdisclosing additionalinformation:

- IFRS 7: liquidity riskfrom the financialinstruments and21 Agenda decisions (including any explanatory material contained therein) cannot add or change requirements in IFRSs. Instead,explanatory material explains how the applicable principles and requirements of IFRSs apply to the fact pattern described in theagenda decision. Explanatory material derives its authority from IFRSs themselves and accordingly, an entity is required to applythe applicable IFRSs reflecting the explanatory material in an agenda decision, subject to it having sufficient time to implementthat accounting. (Paragraphs 8.4 and 8.5 to the IASB Due Process Handbook).22 See Appendix to this publication for the list of all agenda decisions issued by the IFRS IC in 2022.in the demand deposit do notchange the nature of thedeposit because the entitycan still access thoseamounts on demand.The entity includes thedemand deposit as acomponent of ‘cash and cashequivalents’ in its statementof cash flows.The demand deposit shall beclassified as current assetapplying IAS 1.66(d) unlessthe deposit is ‘restricted frombeing exchanged or used tosettle a liability for at least 12months after the reportingperiod’.how it manages thatrisk;

- IAS 1.31: ifinformationprovided in applyingIAS 7 and IFRS 7 isinsufficient toenable users tounderstand theimpact ofrestrictions on theentity’s financialposition.Entities that have entered into the arrangements as described in the submitted fact patternshould assess if their current accounting policy for demand deposits needs to be changed tobe in line with the IFRS IC agenda decision.

2.Lessor Forgiveness of Lease PaymentsThe IFRS IC published an agenda decision in October 2022 to clarify the accounting for aparticular type of rent concession from the perspective of a lessor. In the submitted fact pattern,the lessor forgives certain lease payments due from the lessee, some of which arecontractually due but not paid (i.e. the lessor has already recognized these amounts asoperating lease receivable) and some of which are not yet contractually due. No other changesare made to the lease contract, nor are there any other negotiations between the lessor andthe lessee that might affect the accounting for the rent concession.The agenda decision addresses the following two questions:

(a)

How the lessor applies the ECL model in IFRS 9 to the operating lease receivable beforethe rent concession is granted if it expects to forgive payments due from the lessee underthe lease contract; and(b)

Whether the lessor applies the derecognition requirements in IFRS 9 or the leasemodification requirements in IFRS 16 when accounting for the rent concession.The IFRS IC concluded that the lessor accounts for the rent concession described in the factpattern under both IFRS 9 and IFRS 16 – it applies the ECL model and derecognitionrequirements in IFRS 9 to the operating lease receivable forgiven, and the lease modificationrequirements in IFRS 16 to future forgiven lease payments (which had not been recognizedas an operating lease receivable). This is further explained below:

Total lease payments forgivenOperating lease receivable (applying IFRS 9)

Future lease payments (applying IFRS 16)

Before forgiveness of lease payments (rent concession) is grantedThe ECL on the operating lease receivableis measured on a probability-weightedbasis, by evaluating a range of possibleoutcomes, including its expectation offorgiving lease payments recognized aspart of that operating lease receivable. Theexpectation of forgiving the lease paymentsreflects a potential cash shortfall whichshould be considered in the ECL model.The lessor estimates the ECL to include allcash shortfalls, being the differencebetween:

- all contractual cash flows due under thelease contract with the lessee that areincluded in the gross carrying amount ofthe operating lease receivable, and- all cash flows the lessor expects toreceive, using ‘reasonable andsupportable information’ about ‘pastevents, current conditions, and forecastsof future economic conditions’.N/AOn the date the rent concession is grantedImmediately prior to the date the leasepayments are forgiven, the lessorremeasures the ECL on the operating leasereceivable and recognizes any changes tothe ECL in profit or loss.The rent concession legally releases thelessee from its obligation to make specifiedidentified lease payments. The lessorapplies the derecognition requirements inIFRS 9 to derecognize the operating leasereceivables relating to the forgiven leasepayments including any associated ECLallowance.As the rent concession in the fact patternwas not included in the original lease, it isa lease modification under IFRS 16 andthe modified lease is accounted for as anew lease.The lessor applies the lease modificationrequirements in IFRS 16.87 to future leasepayments, considering any prepaid oraccrued lease payments relating to theoriginal lease as part of the leasepayments for the new lease23. Operatinglease receivables are not accrued leasepayments.As noted from the agenda decision, the accounting for the rent concession in the submittedfact pattern (i.e. the application of IFRS 9 versus IFRS 16) depends on whether there is anoperating lease receivable on the date the rent concession is granted. Lessors which have23 All future lease payments are determined and subsequently recognized by the lessor as income on a straight-line basis oranother systematic basis over the remaining lease term.previously granted rent concessions and/or intend to grant rent concessions in future shouldpay particular attention to the accounting implication of this agenda decision. They shouldrevisit their accounting policy and consider reasonable and supportable information aboutexpectations of forgiveness of lease payments as at the reporting date for the purpose of ECLassessment of operating lease receivable.

3.Principal versus Agent: Software ResellerHKFRS 15.B34-B38 set out a framework to determine whether an entity is a principal or anagent in a transaction with a customer. When another party is involved in providing goods orservices to a customer, an entity determines whether the nature of its promise is aperformance obligation to provide the specified goods or services itself (the entity is a principal)

or to arrange for those goods or services to be provided by the other party (the entity is anagent).In the submitted fact pattern, the IFRS IC was asked about whether a reseller of standardsoftware licenses is acting as a principal or an agent for the purposes of recognizing revenueunder IFRS 15.Fact patternReseller has the right to sell software licenses to customers.Reseller must provide pre-sale advice, e.g. the type and number of licenses required. There is nocharge to customer for the pre-sale advice.Reseller has a discretion in setting the sales prices and negotiates with customers.Reseller places orders with the software manufacturer on behalf of customers (and pays themanufacturer) if the customer decides to buy a specified type and number of software licenses.Reseller invoices the customers for the agreed price.Software manufacturer provides the customer with the software licenses ordered via a softwareportal and key activation.If Reseller advises the customer to buy an incorrect type or number of licenses, the customer maynot accept the licenses. The Reseller cannot return these licenses to the software manufacturernor sell them to another customer.With regard to the fact pattern, the following key points are set out in the agenda decision:

Step 1: Reseller should first identify the specified goods or services to be provided to thecustomer. It is considered that the pre-sale advice is not a separate performanceobligation because the Reseller has already provided such service before the inceptionof the contract with the customer. Consequently, at the time of entering the contract withthe customer, there is no valid expectation of the customer that the Reseller will transfera good or service to the customer other than the standard software licenses. Accordingly,the IFRS IC concluded that the promised goods in the Reseller’s contract with thecustomer are the standard software licenses.Step 2: Reseller should assess whether it controls the standard software licenses beforethey are transferred to the customer. The conclusion of whether the Reseller is aprincipal or an agent in the transaction depends on the specific facts and circumstances,including the terms and conditions of the relevant contracts. Reseller would applyjudgement in making its overall assessment within the context of the framework andrequirements set out in IFRS 15.B34-B38.Reseller would disclose (a) material accounting policy information (IAS 1.117), (b)

information required by IFRS 15 including information about its performance obligations(IFRS 15.119) and the significant judgements regarding the principal versus agentassessment (IFRS 15.123).No conclusion was given in the agenda decision on whether the Reseller is a principal or anagent in the submitted fact pattern. However, the agenda decision explains the thoughtprocess of how to apply the requirements of IFRS 15. We recommend preparers refer to theagenda decision if they encounter similar circumstances as described in the fact pattern.IV. Other remindersThe following sets out a few other reminders that may be relevant for financial periods endingon or after 31 December 2022:

A new major standard, HKFRS 17 Insurance Contracts (including the October 2020 andFebruary 2022 Amendments to HKFRS 17), became effective from 1 January 2023.HKFRS 17 introduces new and comprehensive accounting requirements on insurancecontracts that affect not only insurers but also entities that issue insurance contracts.Entities in particular insurers are reminded to disclose information including thoserelevant to assessing the possible impact of applying HKFRS 17 for the first time asrequired by HKAS 8 in its 2022 financial statements. They should also be prepared todisclose robust and entity-specific information about the application of this new standardin their 2023 financial statements based on the relevant requirements in HKAS 8 andHKFRS 17.The Russo-Ukrainian conflict and the ensuing sanctions imposed on/by Russia and othercountries have disrupted multinational entities that have businesses in Russia, Ukraineand other parts of the world that have been affected by the spill over effect of the conflict.Entities should carefully consider the accounting implications arising from the conflictwhich may include, but are not limited to, changes in foreign exchange exposure underHKAS 21 The Effects of Changes in Foreign Exchange Rates, classification of cash andcash equivalents (in relation to restricted cash) under HKAS 7, going concernconsideration under HKAS 1, onerous contract provisions under HKAS 37, fair valuemeasurement under HKFRS 13 and impairment of assets under HKAS 36.At the end of 2022, over 135 countries and jurisdictions have joined the two-pillar planof the Organisation for Economic Co-operation and Development (OECD) to reforminternational taxation rules to ensure multinational enterprises pay a fair share of taxwherever they operate, with a global minimum tax rate of 15%. The exact timing ofimplementation of the Pillar Two model rules varies between jurisdictions24, with someexpected to enact the rules as early as 2023. In response to the imminentimplementation of the rules, the IASB undertook a standard-setting project and publishedan ED International Tax Reform – Pillar Two Model Rules in January 2023 whichproposes amendments to IAS 12 to introduce a mandatory temporary exception fromaccounting for deferred taxes arising from application of the Pillar Two model rules. TheIASB will start deliberating the feedback received on the ED in April 2023 and aims toissue the amendments as soon as practicable. Hong Kong entities engaging inmultinational operations should monitor the latest developments of the international taxreform and the proposed amendments to IAS 12 for future financial reporting purposes.24 The Hong Kong Government has announced in its 2023-2024 Budget Speech that Hong Kong plans to apply the globalminimum effective tax rate on the relevant large multinational enterprise groups and implement the domestic minimum top-up taxstarting from 2025 onwards. See paragraph 200 of the 2023-2024 Budget Speech by the Financial Secretary, the Hon Paul MPChan.Appendix – New and revised Hong Kong FinancialReporting Standards as well as Agenda Decisions issuedby the IFRS ICThe following amendments to HKFRSs and Accounting Guideline became effective as of 1January 2022:

StandardsDescriptionAnnual Improvements to HKFRS Standards2018-2020:

Amendment to HKFRS 1 First-time Adoptionof Hong Kong Financial ReportingStandardsAmendment to HKFRS 9 FinancialInstrumentsAmendment to Illustrative Examplesaccompanying HKFRS 16 LeasesAmendment to HKAS 41 AgricultureAnnual Improvements to HKFRS Standards2018-2020 (amendments) address the followingtopics:

Subsidiary as a First-time AdopterFees in the ‘10 per cent’ Test forDerecognition of Financial LiabilitiesLease IncentivesTaxation in Fair Value MeasurementsAmendments to HKFRS 3 BusinessCombinations – Reference to the ConceptualFrameworkThe amendments update a reference in HKFRS3 to the Conceptual Framework for FinancialReporting issued in 2018 (ConceptualFramework). The amendments also add toHKFRS 3 an exception to its requirement for anentity to refer to the Conceptual Framework todetermine what constitutes an asset or aliability.Amendments to HKAS 16 Property, Plant andEquipment – Proceeds before Intended UseThe amendments clarify the accountingrequirements for proceeds received by an entityfrom selling items produced while testing anitem of property, plant or equipment before it isused for its intended purpose.Amendments to HKAS 37 Provisions,Contingent Liabilities and Contingent Assets –Onerous Contracts – Cost of Fulfilling aContractThe amendments clarify that for the purpose ofassessing whether a contract is onerous underHKAS 37, the cost of fulfilling the contractcomprises the costs that relate directly to thecontract. Costs that relate directly to a contractinclude both the incremental costs of fulfillingthat contract and an allocation of other coststhat relate directly to fulfilling contracts.Amendments to HKFRS 16 Leases – Covid-19-Related Rent Concessions beyond 30 JuneThe amendments extend the availability of thepractical expedient in HKFRS 16.46A so that itapplies to rent concessions for which anyreduction in lease payments affects onlypayments originally due on or before 30 JuneStandardsDescription2022, provided the other conditions for applyingthe practical expedient are met.Accounting Guideline 5 (Revised) MergerAccounting for Common Control CombinationsAG 5 was amended in several aspects torespond to the feedback received from the post-implementation review of AG5.The following new and amended standards, interpretation and practice statement have been issued butare not yet effective as of 1 January 2022. They are available for early adoption.Effective from annualperiods beginning on orafter:

New and Amended Standards, Interpretation and PracticeStatementNew Standard1 January 2023HKFRS 17 Insurance Contracts1 January 2023Amendments to HKFRS 17 Insurance Contracts1 January 2023Initial Application of HKFRS 17 and HKFRS 9 – ComparativeInformationAmended Standards, Interpretation, Practice Statement and Accounting Guideline1 January 2023Amendments to HKAS 1 Presentation of Financial Statementsand HKFRS Practice Statement 2 Making Materiality Judgements– Disclosure of Accounting Policies1 January 2023Amendments to HKAS 8 Accounting Policies, Changes inAccounting Estimates and Errors – Definition of AccountingEstimates1 January 2023Amendments to HKAS 12 Income Taxes – Deferred Tax relatedto Assets and Liabilities arising from a Single Transaction1 January 202426Amendments to HKAS 1 Presentation of Financial Statements –Classification of Liabilities as Current or Non-current1 January 202426Amendments to HKAS 1 Presentation of Financial Statements –Non-current Liabilities with CovenantsShould only be applied whenan entity applies theAmendments to HKAS 1 asreferred to in the aboveHong Kong Interpretation 5 (Revised) Presentation of FinancialStatements – Classification by the Borrower of a Term Loan thatContains a Repayment on Demand Clause25 This Accounting Guideline is effective for common control combinations that occur on or after the beginning of the first annualreporting period beginning on or after 1 January 2022.26 Both amendments are to be applied as a package.Effective from annualperiods beginning on orafter:

New and Amended Standards, Interpretation and PracticeStatement1 January 2024Amendments to HKFRS 16 Leases – Lease Liability in a Sale andLeasebackEffective date to bedetermined by the IASB butearly adoption is permittedAmendments to HKFRS 10 Consolidated Financial Statementsand HKAS 28 Investments in Associates and Joint Ventures –Sale or Contribution of Assets between an Investor and itsAssociate or Joint VentureThe following agenda decisions were published by the IFRS IC in 2022:

IFRS IC UpdateAgenda DecisionsMarch 2022TLTRO III Transactions – IFRS 9 Financial Instruments andIAS 20 Accounting for Government Grants and Disclosure ofGovernment AssistanceApril 2022Demand Deposits with Restrictions on Use arising from aContract with a Third Party – IAS 7 Statement of Cash FlowsMay 2022Principal versus Agent: Software Reseller – IFRS 15 Revenuefrom Contracts with CustomersJuly 2022Negative Low Emissions Vehicle Credits – IAS 37 Provisions,Contingent Liabilities and Contingent AssetsSpecial Purpose Acquisition Companies (SPAC):

Classification of Public Shares as Financial Liabilities or Equity– IAS 32 Financial Instruments: PresentationTransfer of Insurance Coverage under a Group of AnnuityContracts – IFRS 17 Insurance ContractsOctober 2022Lessor Forgiveness of Lease Payments – IFRS 9 FinancialInstruments and IFRS 16 LeasesMulti-currency Groups of Insurance Contracts – IFRS 17Insurance Contracts and IAS 21 The Effects of Changes inForeign Exchange RatesSpecial Purpose Acquisition Companies (SPAC): Accountingfor Warrants At AcquisitionAbout 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/2023Connect 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 liability in respect of the publication or anyconsequence that may arise from any person acting or refraining from acting as a result of any materials in thepublication. Members of the HKICPA and other users of this publication should also read the full HKFRS Standardas found in the HKICPA Members’ Handbook for further reference and seek professional advice where necessarywhen applying the references contained in this publication. The SSD welcomes your comments on this publication.They can be sent to commentletters@hkicpa.org.hk2049_20230321AuthorCarrie 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 would like to thank members of the Financial Reporting Standards Committee of theHKICPA for their input in reviewing this publication.