1 PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs - a second consultation Simon Riley Hong Kong Society of Accountants 11 May 2004

HKSA 11 May 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

HKSA 11 May Six Consultation Issues 1.The need for a separate financial reporting framework for SMEs? 2.Justification / principles for SME financial reporting framework? 3.True & Fair necessary? 4.Which entities should qualify? 5.How does the Companies Ordinance requirement fit in? 6.What reporting requirements should apply?

HKSA 11 May 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

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

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

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

HKSA 11 May 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

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

HKSA 11 May 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 but proposed new SME-Financial Reporting Standard)

HKSA 11 May 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

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

HKSA 11 May 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’)

HKSA 11 May Issue 6 – Financial Reporting Framework  Designed to redress the balance between cost & benefit - But a quantification not possible

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

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

HKSA 11 May 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

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

HKSA 11 May 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

HKSA 11 May The Consultation Process  Consultation documents issued for public comment - Comments welcomed by 31 August Available on HKSA website accounting/exposuredraft/

HKSA 11 May 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 accounting/rm/consultation_paper.pdf accounting/rm/ias_consultation_paper.php