PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs - PowerPoint PPT Presentation

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PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs

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General support for a differentiation to main GAAP for SMEs. Concerns that cost: benefit not sufficiently redressed ... Income Taxes: No deferred tax recognition ... – PowerPoint PPT presentation

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Title: PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs


1
PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING
FRAMEWORK FOR SMEs
  • - a second consultation

Simon RileyHong Kong Society of Accountants11
May 2004
2
The First Consultation Where we left off last
time
  • General support for a differentiation to main
    GAAP for SMEs
  • Concerns that cost benefit not sufficiently
    redressed
  • Response Separate Framework based primarily on
    historical cost convention

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

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

5
Issue 1 Separate financial reporting framework
for SMEs
  • Developments at IASB
  • - Discussion Paper imminent
  • - Accommodating the IASBs approach in Hong Kong

6
Issue 2 Justification / principles
  • Costbenefit
  • - Limited user group for non-listed SMEs in
    non-regulated industries
  • - Financial reporting needs of users
  • Resources available to SMEs also limited
  • Financial reporting requirements should always
    meet the costbenefit criterion (for main GAAP
    SME GAAP)

7
Issue 3 True Fair necessary?
  • In CP-I, proposition was that True Fair
    necessary
  • - integrated approach
  • differential reporting
  • Problem
  • - disclosure relief not consistent with true
    fair
  • - did not sufficiently redress costbenefit issue
  • Decision to propose SME financial reporting
    framework outside True Fair

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

9
Issue 4 Which entities qualify?
  • Other entities on the basis of size
  • - Not to exceed any two of the following
  • - Total revenue of HK50m p.a.
  • - Total assets of HK50m
  • - 50 employees

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

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

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

13
Issue 6 Financial Reporting Framework
  • Cutting ties with true and fair (main GAAP) 
  • Measurement Disclosure requirements greatly
    simplified proposed historical cost basis
  • Will not necessarily move in tandem with main
    GAAP (contrasts with UK FRSSE which is linked to
    true and fair)

14
Issue 6 Financial Reporting Framework
  • Designed to redress the balance between cost
    benefit
  • - But a quantification not possible

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

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

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

18
Financial Reporting Standard (SME-FRS)
  • Stand-alone set of financial reporting
    requirements
  • Applicable only to entitys separate financial
    statements
  • - Consolidation requires application of full GAAP
  •  

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

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

21
The Consultation Process
  • We have also specifically written to those who
    provided comments on the first consultation
  • First consultation paper comment letters posted
    on the HKSA website http//www.hksa.org.hk/profess
    ionaltechnical/accounting/rm/consultation_paper.p
    df
  • http//www.hksa.org.hk/professionaltechnical/acc
    ounting/rm/ias_consultation_paper.php
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