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The document discusses the adoption of HKAS 40, which requires investment properties to be measured at fair value, in Hong Kong. Prior to 2005, SSAP 13 was applied which prohibited fair value changes from being recognized in profit or loss. Many companies adopted HKAS 40 early due to advantages of fair value information being more relevant to investors. For real estate companies in Hong Kong, adopting HKAS 40 increased reported profits and asset values, and the market reacted positively to fair value changes presented in income statements. Overall, HKAS 40 provides more useful information to investors compared to SSAP 13.
Originalbeschreibung:
Financial Accounting Seminar
Originaltitel
Team 4 - [Case Study 5-1 and 5-3] Investment Property
The document discusses the adoption of HKAS 40, which requires investment properties to be measured at fair value, in Hong Kong. Prior to 2005, SSAP 13 was applied which prohibited fair value changes from being recognized in profit or loss. Many companies adopted HKAS 40 early due to advantages of fair value information being more relevant to investors. For real estate companies in Hong Kong, adopting HKAS 40 increased reported profits and asset values, and the market reacted positively to fair value changes presented in income statements. Overall, HKAS 40 provides more useful information to investors compared to SSAP 13.
The document discusses the adoption of HKAS 40, which requires investment properties to be measured at fair value, in Hong Kong. Prior to 2005, SSAP 13 was applied which prohibited fair value changes from being recognized in profit or loss. Many companies adopted HKAS 40 early due to advantages of fair value information being more relevant to investors. For real estate companies in Hong Kong, adopting HKAS 40 increased reported profits and asset values, and the market reacted positively to fair value changes presented in income statements. Overall, HKAS 40 provides more useful information to investors compared to SSAP 13.
annisadew67@gmail.com Annisa Dewi Syafrina danilalamsyah01@gmail.com Danil
Department of Accounting, Faculty of Economics, Andalas University
BUAPAKMU DARI Popular slang back then (generation 90s kids will get it) Negative comments on IAS 40 Robert Gazzi and Ming Tse of PwC: The Hong Kong and Shanghai Hotels, Ltd: ...taking all fair value changes through the profit and loss account would result in ..in the view of the directors either not substantial volatility of reported profit year reflecting the commercial substance of the on year... business or being subject to significant potential short-term volatility. ...using reported profit to measure company’s performance would be possibly misleading. ..the investment properties were not revalued The Hong Kong Accountant, January 2002. at 30 June 2005 since the director consider that such change of practice could introduce a significant element of short term volatility into the income statement.. Interim report of June 2005 Hong Kong Investment Property Hong Kong is a world-recognised centre for property construction, development and investment (KPMG China and Hong Kong, 2004) and the total market capitalisation of its property industry (conglomerates/consolidated enterprises excluded) in 2006 was HK$13,249bn, representing 11% of the total market capitalisation of all Hong Kong Stock Exchange Main Board equities (HKSE, 2005, 2006). Investment property is a significant component of many company balance sheets in Hong Kong and the way it is accounted for has become an issue of prominent interest in Hong Kong in 2005–2006 (McBride, 2006) The date 1 January 2005 marked the beginning of a new era when accounting standards in Hong Kong became fully converged with International Financial Reporting Standards (IFRS). SSAP 13, Standard Prior IFRS that Regulates Investment Property in Hong Kong Statement of Standard Accounting Practice 13 (2000) adopted the definition of open market value from the Hong Kong Institute of Surveyors which defined it as the best price at which an interest in a property might reasonably be expected to be sold at the date of valuation assuming a willing seller, a reasonable period in which to negotiate the sale taking into account the nature of the property and the state of market, that values will remain static during that period, that the property will be freely exposed to the open market, and that no account will be taken of any additional bid by a purchaser with a special interest (HKSA, 2000). Main Issue “How many companies adopt HKAS 40 prior and after year 2005?”
“Why many companies adopt HKAS 40 early ?”
“What is the impact by adopting HKAS 40 for real estate businesses in
Hong Kong?” “How many companies adopt HKAS 40 prior and after year 2005?” Related research: “Why many companies adopt HKAS 40 early ?” HKAS 40 Investment Properties SSAP 13 Investment Properties (effective 2005) (2000)
17. ...changes in the value of 35. A gain or loss arising from a
investment properties should not change in the fair value of be taken to the profit and loss investment property shall be account but should be treated as recognised in profit or loss for the movements in an investment period in which it arises. property revaluation reserve,... Fair Value Advantages
• Historical cost unable to reflect price change
due to inflation (Deegan & Unerman, 2006) • Fair value for certain assets reflects the market assessment caused by current economic conditions (Riahi-Belkaoui, 2004; Alkhadash & Abdullatif, 2009) • Fulfills the financial statement information by reflecting asset liability management activities (Gebhardt et al., 2004; Siam and Abdullatif, 2011) • Representing up-to-date value and true economic substance (Penman, 2007) • Improve international accounting harmonization (Barlev & Haddad, 2007) Fair Value Disadvantages
• Cause distortion for net income, less reliable than
traditional methods, possibility to manipulate fair values by managers, and might break historical cost model which more understandable (Evans, 2003) • Increase volatility of earnings and unavailable market information can misuse the fair value estimations (Penman, 2007) • Irrelevant when measuring particular assets, ex: WIP or Inventorie (Benston, 2008) • Undependable in estimating future cash flows, possibility to apply subjective estimations and practice of moral hazard by managers (Ronen, 2008) “What is the impact by adopting HKAS 40 for real estate businesses in Hong Kong?” Profit from Operations 2005 2004 HK$’M HK$’M
Annual Report of IDT International Ltd, 2005
Supporting Research: House Price Change in Hong Kong, Source: Rating and Valuation Department Summarization both references:
• Increase in the profit for current period and the
total asset of the company. • Significant market price reaction to investment properties’ fair value change information • Significant association between the market- adjusted annual share returns and the presentation of the investment properties’ fair value change in the income statement • Result above strongly suggest that investors appear to place more value on HKAS 40 rather than SSAP 13 Companies Investors Goverment Our group final judgement for HKAS 40 adoption in Hong Kong Decision Usefulness, according to IASB The objective of financial reporting is defined as: “To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.” ( CF OB2). Decisions about selling or holding such instruments are assumed to depend on the return these primary users expect from investing in them (CF OB3 & OB5). Consequently, users need information to help them assess the prospects for future net cash inflows to an entity (CF OB3).
Thus, financial statements provide information that should be useful
in estimating the value of the reporting entity (CF OB7). Relevance and Faithful Representation
“If financial information is to be useful, it must be relevant and
faithfully represents what it purports to represent” (CF QC4).
Relevant financial information is defined as Information
that is: “capable of making a difference in the decisions made by users.” (CF QC6), which it is regarded as having if it has predictive and/or confirmatory value (CF QC7). A predicative value is attributed to financial information that can be employed by users as an input for predicting future outcomes (CF QC 8) and a confirmatory value if it provides feedback about previous evaluations (CF QC9). In CF QC 12, IASB admits that is unlikely to achieve a perfectly faithful representation of a phenomenon. Nevertheless, the goal is to maximize the quality of the characteristics that IASB believes such a depiction should have; complete, neutral and free from error (CF QC12). In short, Faithfull representation is not intended to mean accurate in all respects. Free from error is understood as no errors in the description of a phenomenon and the processes used to produce the reported information (CF QC15). Neutral is described as without bias (CF QC14) and complete as including all information necessary to understand the depicted phenomenon (CF QC13).
Finally, QC 17 of the conceptual framework provides
that: “Information must be both relevant and faithfully represented if it is to be useful. Neither a faithful representation of an irrelevant phenomenon nor an unfaithful representation of a relevant phenomenon helps users make good decisions.” In Financial Accounting Theory, Scott (2003) writes the following on the fundamental problem of accounting: “Investors’ interests are best served by information that provides a useful tradeoff between relevance and reliability, where relevant information is that which enables investors to assess the firm’s future economic prospects, and reliable information is that which is precise and free of bias or other management manipulation.” Weijun (2007) Findings: 1. Fair Value of investment property is relevant to investor when they are m a k i n g e co n o m i c d e c i s i o n o n respective company. 2. Since the relevance of information is the main concern for investors, so the reliability should not be an obstacle of applying fair value accounting on investment property. Case Study 5.3 Additional Information In Hong Kong, since 1997, all land has become the property of the People’s Republic of China while the government of the Hong Kong Special Administrative Region is responsible for its management, use and development. In other words, every piece of land in Hong Kong (with the sole exception of St. John’s Cathedral, the only freehold property in Hong Kong) is leasehold property (www.dlapiperrealworld.com). IAS 40 Investment Property (p.5)
• Investment property is property (land or
a building—or part of a building—or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. • Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes. IAS 40 Investment Property (p.7) 7. Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. The production or supply of goods or services (or the use of property for administrative purposes) generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process. IAS 16 Property, Plant and Equipment applies to owner-occupied property. IAS 40 Investment Property (p.12) 12. In other cases, the services provided are significant. For example, if an entity owns and manages a hotel, services provided to guests are significant to the arrangement as a whole.
Therefore, an owner-managed hotel
is owner-occupied property, rather than investment property. Recognition, Measurement, and Disclosure for Investment Property Recognition Investment property shall be recognised as an asset when, and only when:
(a)it is probable that the future
economic benefits that are associated with the investment property will flow to the entity; and (b) the cost of the investment property can be measured reliably.
(IAS 40, p. 16)
Measurement Measurement at Recognition: An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.
Measurement after recognition:
Subsequent to the initial recognition, IAS 40 requires an entity to choose as its accounting policy either the fair value model or the cost model and to apply that policy to all of its investment property.
(IAS 40, p. 20 & p.32A)
Transfer Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by: (a) commencement of owner-occupation, for a transfer from investment property to owner- occupied property;
(IAS 40, P.57)
For a transfer from investment property carried
at fair value to owner-occupied property or inventories, the property’s deemed cost for subsequent accounting in accordance with IAS 16 or IAS 2 shall be its fair value at the date of change in use. (IAS 40, p.60) Disclosure (IAS 40, P.75) An Entity shall disclose: • whether it applies the fair value model or the cost model. • The criteria used in classified invesment property • the methods and significant assumptions applied in determining the fair value of investment property • the amounts recognised in profit or loss • the existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal. • contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements. People is Money Money is People