Amendments to HKFRS 1 and HKAS 27 

In May 2008, the IASB issued amendments to IFRS 1 "First-time Adoption of International Financial Reporting Standards" and IAS 27 "Consolidated and Separate Financial Statements", entitled "Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate". Corresponding amendments to the HKFRS are expected to be announced in due course.

These changes affect only the separate financial statements of a parent entity or investor. In some jurisdictions, parent entities apply IFRS in their consolidated financial statements but continue to use local GAAP in their separate (or "Company-only") financial statements. The changes aim to remove one of the problems which have discouraged the use of IFRS in separate financial statements. The main changes are:

the introduction of a "deemed cost" exemption into IFRS 1 for first-time adopters of IFRS when measuring the cost of an investment in a subsidiary, jointly controlled entity or associate. The deemed cost can be determined using either fair value in accordance with IAS 39 "Financial Instruments: Recognition and Measurement" at the entity's date of transit to IFRS or a previous GAAP carrying amount at that date, and ¡@

the removal of IAS 27's requirement to deduct dividends paid from pre-acquisition profits from the cost of such an investment in the investor's separate financial statements.

Previously parent entities recognised income from investments in subsidiaries only to the extent that dividends were paid out of post-acquisition accumulated profits; distributions received out of pre-acquisition profits were regarded as a recovery of the investment and were deducted from its cost. In future, dividends receivable will be recorded as income. However, IAS 36 "Impairment of Assets" has also been amended to include a dividend in excess of the investee's "comprehensive income" for the period as an indicator of possible impairment of the investment. "Comprehensive income" is a concept adopted in IAS 1 "Presentation of Financial Statements" (revised 2007) but is not defined in the standard. In essence, it includes all items of income and expense recognised in income statement or directly in equity but is reduced by transfers from equity to profit or loss as required or permitted by other IFRSs.

The article in this newsletter entitled "HKAS 1 Revised: Implementation draws nearer" provides more details on the amendments to HKAS 1 which is a textual copy of IAS 1.

The changes to IAS 27 also include new requirements on accounting by a parent that reorganises its group by forming a new parent entity without affecting the interests of shareholders. The new parent shall measure cost of investment at the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation.

The amendments are effective for annual periods beginning on or after 1 January 2009. Change in accounting policy arising from the amendments to IAS 27 regarding the recognition of dividends from subsidiaries, associates and jointly controlled entities is accounted for prospectively. Regarding group reorganisations, the amendments are applied prospectively but entities may elect to apply the amendments retrospectively to past reorganisations that are within the scope of the amendments. Other later reorganisations also within the scope of the amendments should also be restated. For example, if an entity elects to apply the amendments retrospectively and designates the reorganisation in May 2005 as the first reorganisation applying the amended standard, all subsequent qualifying reorganisations should be restated.

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