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Background
This webpage contains pronouncements, guides and articles that are relevant to the presentation and disclosure in financial statements for the following projects:
- Primary Financial Statements;
- HKFRS Practice Statement 2 Making Materiality Judgements;
- Disclosure of Accounting Policies;
- Classification of Liabilities as Current or Non-current; and
- Non-current Liabilities with Covenants.
Primary Financial Statements
About the project
The International Accounting Standards Board (IASB)’s Primary Financial Statements project is part of its work on Better Communication in Financial Reporting. The IASB has developed the proposals in response to the strong demand from stakeholders, in particular users of financial statements, to undertake a project to address concerns about the comparability and transparency of companies’ performance reporting. The proposals would result in a new IFRS Accounting Standard that sets out general presentation and disclosure requirements relevant for all companies, replacing IAS 1 Presentation of Financial Statements.
The IASB published its Exposure Draft ED/2019/7 General Presentation and Disclosures (ED) in December 2019 to seek public comments. The Hong Kong Institute of Certified Public Accountants (Institute) conducted various forms of outreach activities to solicit views from local stakeholders and submitted its comment letter to the IASB on 28 September 2020. The submission, together with comment letters received and meeting summaries for our outreach activities, is available at the Institute’s website.
Recent and upcoming activities
The IASB has completed redeliberations of the proposals in the ED and is in the process of drafting the new IFRS Accounting Standard − IFRS 18 Presentation and Disclosure in Financial Statements. The IASB expects to publish IFRS 18 in April 2024. IFRS 18 will be effective for annual reporting periods beginning on or after 1 January 2027.
IFRS 18 will set out requirements on presentation and disclosures in financial statements and will replace IAS 1. IFRS 18 will:
- add new requirements to present new defined subtotals in the statement of profit or loss;
- strengthen requirements for aggregation and disaggregation of information, including specific requirements for disaggregation of ‘other’ balances and presentation of operating expenses;
- add new requirements relating to the disclosures of management-defined performance measures in the notes to the financial statements, including the requirement to provide a reconciliation between these measures and totals or subtotals specified by IFRS Accounting Standards; and
- include targeted improvements to the statement of cash flows.
HKFRS Practice Statement 2 Making Materiality Judgements
The Institute issued HKFRS Practice Statement 2 Making Materiality Judgements in March 2021.
A Practice Statement is non-mandatory guidance and it is not a Standard. It does not change or introduce any requirements in HKFRS, and companies are not required to comply with it to state compliance with HKFRS.
HKFRS Practice Statement 2 is equivalent to IFRS Practice Statement 2 Making Materiality Judgements, and provides the following:
- An overview of the general characteristics of materiality.
- A four-step process an entity may follow in making materiality judgements when preparing its financial statements (materiality process). The description of the materiality process provides an overview of the role materiality plays in the preparation of financial statements, with a focus on the factors the entity should consider when making materiality judgements.
- Guidance on how to make materiality judgements in specific circumstances, namely, how to make materiality judgements about prior-period information, errors and covenants, and in the context of interim reporting.
An entity that chooses to apply the guidance in HKFRS Practice Statement 2 is permitted to apply it to financial statements prepared from 22 March 2021.
Recent amendments to the presentation and disclosures of financial statements
Disclosure of Accounting Policies
In April 2021, the Institute issued Disclosure of Accounting Policies, which amended HKAS 1 Presentation of Financial Statements and HKFRS Practice Statement 2, to provide more guidance for companies to decide what accounting policy information should be disclosed. The amendments to HKAS 1 on the Disclosure of Accounting Policies project require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendments to HKFRS Practice Statement 2 provide guidance on how to apply the concept of materiality to accounting policy disclosures.
The amendments to HKAS 1 on the Disclosure of Accounting Policies project are effective for annual reporting periods beginning on or after 1 January 2023, with early application permitted. The amendments to HKFRS Practice Statement 2 should only be applied when an entity applies the amendments to HKAS 1 on the Disclosure of Accounting Policies project.
Classification of Liabilities as Current or Non-current & Non-current Liabilities with Covenants
In August 2020, the Institute issued Classification of Liabilities as Current or Non-currentwhich amended HKAS 1 (2020 Amendments). The amendments provide further guidance on how to classify debt and other liabilities as current or non-current. In particular, the 2020 Amendments specify that an entity’s right to defer settlement as described in paragraph 69(d) of HKAS 1 must exist at the end of the reporting period, and delete the word ‘unconditional’ from the classification principle in that paragraph. The 2020 Amendments also include clarification on the classification requirements for debt a company might be settled by converting into its equity instruments.
In December 2022, the Institute issued Non-current Liabilities with Covenants (2022 Amendments) to deal with the classification of long-term loan arrangements with covenants as current or non-current, and defer the effective date of the 2020 Amendments to align with the effective date of the 2022 Amendments. Both the 2020 and 2022 Amendments are to be applied as a package and are effective for annual reporting periods beginning on or after 1 January 2024, with early adoption permitted.
As a consequence of the publications of the 2020 Amendments and the 2022 Amendments, Hong Kong Interpretation 5 Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause (HK-Int 5 (Revised) has been updated to incorporate the references to these amendments, but its conclusions are not impacted by these amendments.
HK Int-5 (Revised) should only be applied together with both the 2020 and 2022 Amendments which are effective for annual reporting periods beginning on or after 1 January 2024, and earlier application is permitted.
Separately, the IC will withdraw a related IFRS Interpretations Committee agenda decision(Current/non-current classification of a callable term loan) issued in November 2010 once the 2020 Amendments become effective.
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The Institute Standard Setting Department
