2022 HKFRS updates

Accounting Development Foundation Limited

Eunice Chu .
EC Training & Advisory .
eunicechuchu@gmail.com .
Skype: chu.Eunice .
Whatsapp / Wechat: +852 9279-6283 .
E-learning website with FREE and
paid CPD webinars.
• Full notes
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Course Agenda
1. Amendments to HKAS 12 -Deferred Tax related to Assets and Liabilities arising
from a Single Transaction
2. HKFRS 16 Covid-19 related updates
3. Amendment to HKAS16 Property, Plant and Equipment
4. Amendments to HKAS37 Provision, Contingent Liabilities and Contingent Assets
5. Amendment to HKFRS3 (revised) Business Combination
6. HKAS 1 – changes to classification of current vs non-current liabilities
HKAS 12 – Deferred Tax related to Assets and
Liabilities from a Single Transaction.
General

On 7 May 2021, the IASB issued amendments to IAS 12 - Deferred Tax related to
Assets and Liabilities Arising from a Single Transaction
Hong Kong adopted the change on 8 June 2021

Major changes
clarify whether the Initial Recognition Exemption (IRE) applies to transactions that
result in both an asset and a liability being recognised simultaneously. E.g.
a. Lessees accounting on leases contracts
b. Asset retirement obligations
Now (AROs)/decommissioning liabilities

Now
Effective date
• 1 January 2023
• Show comparative figure of 1 January 2022
Initial recognition exemptions (IRE) – Before May 2021

The initial recognition exemption (IRE) is an exception to the requirement to recognised

deferred tax assets and liabilities relating to all deductible and taxable temporary
differences arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
i. is not a business combination; and
ii. at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss).

• Land \Building \PPE \Intangible assets – when it was first Dr. Machine \ Building \ PPE \ IA $100
acquired.
• When these assets subsequently depreciate or revaluate or Cr. Bank ($100)
devaluate, it creates temporary timing difference and give rise
to DT.
Initial Recognition Exemption
• Company A purchase a machine at $100,000
• But it causes pollution and government discourages the use of this machine.
• So the maximum tax deduction was limited to $80,000

Accounting Tax base Deductible / (taxable) Deferred tax

base temporary difference 10%
Asset 100,000 80,000 (20,000) (2,000) DTL

Polling Question #1
Should DTL $2,000 be recognized?
a. Yes
b. No
Initial Recognition Exemption
Accounting Tax base Deductible / (taxable) Deferred tax
base temporary difference 10%
Asset 100,000 80,000 (20,000) (2,000) DTL

Answer: No based on the IRE point (b). Because

Does the difference arise from the initial recognition of an asset or liability Correct
Is it not business combination Correct
At the time of the transaction, does it affect neither accounting or taxable profit? Correct
Initial recognition exemptions (IRE) – Update in May 2021

The initial recognition exemption (IRE) is an exception to the requirement to recognised

deferred tax assets and liabilities relating to all deductible and taxable temporary
differences arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
i. is not a business combination; and
ii. at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss).
iii. at the time of the transaction, does not give rise to equal taxable and
deductible temporary differences.
Added point
Tax deduction for lessees
• Company A leased a machine for a 5-year. • present value of lease payments at 5% p.a. =
$454,595.
• Annual lease payment $100,000 payable in
advance. • Deductible for tax purpose when payments are
made.
• Interest rate implicit in the lease was 5%.
• Tax rate 10%

Accounting Tax base Deductible / (taxable) Deferred tax

base temporary difference 10%
Dr. ROU assets 454,595 0 (454,595) (45,460) DTL

Cr. Lease liabilities (454,595) 0 454,595 45,460 DTA

Polling Question #2
Should deferred tax be recognized?
a. Yes DTL/DTA will be provided based on IRE point (b) (iii)
b. No
Initial Recognition Exemption Amendments

Answer: YES based on the IRE point (b) (iii). Because

Does the difference arise from the initial recognition of an asset or liability Correct
Is it not business combination Correct
At the time of the transaction, does it affect neither accounting or taxable profit? Correct
At the time of the transaction, does not give rise to equal taxable and deductible Incorrect
temporary differences.”

Dr. DTA $45,460 At the time of the transaction, it give rise to equal taxable
Cr. DTL ($45,460) and deductible temporary difference of $454,595. Hence
the IRE does not applied
Deferred tax for leases contracts
• Landlord required payment of first year rental of $100,000 in advance
• Lessee paid agent fee of $20,000

Accounting Tax Deductible / (taxable) Deferred tax

base base temporary difference 10%
Dr. ROU assets (454,595 + 20,000) 474,595 0 (474,595) (47,460) DTL
Cr. Lease liabilities (454,595 – 100,000) (354,595) 0 354,595 35,460 DTA
Cr. Bank (120,000) _________
Deferred tax recognized 12,000

Polling Question #3
Should DTL $47,460 and DTA $35,460 be recognized? Dr. DTA $35,460
a. Yes Dr. P/L- tax $12,000
b. No Cr. DTL ($47,460)
Initial Recognition Exemption Amendments

Answer: YES based on the IRE point (b) (iii). Because

Does the difference arise from the initial recognition of an asset or liability Correct
Is it not business combination Correct
At the time of the transaction, does it affect neither accounting or taxable profit? Correct
At the time of the transaction, does not give rise to equal taxable and deductible Incorrect
temporary differences.”

At the time of the transaction, it give rise to equal taxable

and deductible temporary difference of $354,595. Hence
the IRE does not applied
L ease liabilities
Original 5%
Period Opening Payment Interest Closing
a b 5% x (a - b)
Year 1 354,595 - 17,730 372,325
Year 2 372,325 (100,000) 13,616 285,941
Year 3 285,941 (100,000) 9,297 195,238
Year 4 195,238 (100,000) 4,762 100,000
Year 5 100,000 (100,000) - 0 - 0
( 400, 000) 45, 405

ROU Assets
Accumulated
Cost Depreciation Depreciation Closing
Year 1 474,595 (94,919) (94,919) 379,676
Year 2 379,676 (94,919) (189,838) 284,757
Year 3 284,757 (94,919) (284,757) 189,838
Year 4 189,838 (94,919) (379,676) 94,919
Year 5 94,919 (94,919) (474,595) 0
Deferred tax for leases contracts
• After one year
Accounting Tax Deductible / Deferred tax Deferred tax Change
base base (taxable) 10% 10%
temporary At Year end At beginning
difference of Year
ROU assets 379,676 0 (379,676) (37,968) DTL (47,460) DTL 9,492
Lease liabilities (372,325) 0 372,325 37,233 DTA 35,460 DTA 1,773
Deferred tax liability recognized at year end (735) DTL (12,000) DTL 11,265

Dr. DTL $9,492

Dr. DTA $1,773
Cr. P/L- tax ($11,265)
Decommissioning
Decommissioning, restoration and similar liabilities and the corresponding amounts recognised
as part of the cost of the related asset.

• A company lease an office for 4 years

• According the lease term, the lessee needs to reinstate the premise upon handover the premise
to the landlord upon termination of lease
• Estimated reinstatement cost is $500,000 to be paid in 4 year’s time
• Interest rate is 5%. PV of $500,000 / 1.05 4 = $411,351
• The amount is tax deductible when payment is made.

Polling Question #4
Should initial recognition exemption be
Dr. Leasehold improvement $411,351
applied?
Cr. Decommissioning liability ($411,351) a. Yes
b. No
Decommissioning

When IRE does not apply, deferred tax has to be recognized

Accounting Tax base Deductible / (taxable) Deferred tax 10%

base temporary difference At beginning of
Year
Dr. Leasehold improvement $411,351 0 (411,351) ($41,135)
Cr. Decommissioning liability ($411,351) 0 $411,351 $41,135

Dr. DTA $41,135

Cr. DTL ($41,135) After netting off, there may not be
impact on the financial statements
Decommissioning liabilities
5%
Period Opening Interest Closing
a 5% x (a - b)
Year 1 411,351 20,568 431,919
Year 2 431,919 21,596 453,514
Year 3 453,514 22,676 476,190
Year 4 476,190 23,810 500,000
88,649

Leasehold improvemnet
Accumulated
Cost Depreciation Depreciation Closing
Year 1 411,351 (102,838) (102,838) 308,513
Year 2 308,513 (102,838) (205,676) 205,676
Year 3 205,676 (102,838) (308,513) 102,838
Year 4 102,838 (102,838) (411,351) 0
Decommissioning
When IRE does not apply, deferred tax has to be recognized

Accounting Tax Deductible / Deferred tax Deferred tax Change

base base (taxable) 10% 10%
temporary At Year end At beginning
difference of Year
Leasehold 308,513 0 (308,513) (30,851) DTL (41,135) DTL 10,284
improvement
Decommissioning (431,919) 0 431,919 43,192 DTA 41,135 DTA 2,057
liabilities
Net amount recognized at year end 12,341 DTA (0) 12,341

Dr. DTL $10,284

Dr. DTA $2,057 After netting off, there would be
impact on the financial statements
Cr. P/L - tax ($12,341)
Recap of Amendment to HKAS 12 – Income Tax
At the beginning of the earliest comparative period presented
(1.1.2022), entities are required to recognise deferred tax assets and
deferred tax liabilities associated with:

(i) Right-of-use assets and lease liabilities; and

(ii) Decommissioning, restoration and similar liabilities and the
corresponding amounts recognised as part of the cost of the
related asset
Transitional Requirement

• Effective for annual • Not require

reporting periods retrospective application
beginning on or after 1 of the amendment as it
Jan 2023. is onerous.
• Required to apply the
amendments on or after
the beginning of the
earliest comparative
period presented (1 Jan
2022)
Covid-19 related updates to
HKFRS 16 Leases
Amendments to HKFRS 16 – practical expedient (PE)

• Effective date : mandatory for annual reporting periods beginning on or after 1 June 2020
• Earlier application is permitted including in FS not yet authorized for issue at 28 May 2020
• E.g. year end 31.3.2020 but FS is not yet approved by 28 May 2020, it can still apply PE →
retrospective basis

Accounting impact
Significant operational relief for lessees in accounting for modifications to lease contract as a
consequence of Coronavirus
Amendment

HKFRS 16 has been amended to:

(a) Provide lessees (NOT lessors) with an exemption from determining whether a COVID-19-
related rent concession is a lease modification;
(b) Require lessees that apply the exemption to account for COVID-19-related rent concessions
as if they were not lease modifications.
(c) HKFRS16.38 will apply – treat as negative variable lease payment and included in P/L in the
period in which the event that triggers those payments occurs.

Must satisfy four criteria for a rent concession to qualify for the practical expedient.
Practical Expedient (reduce rent before 6.2021) 6.2022

• Lease office 4-year at $30,000 p.a. from 2019 to 2022

• PV of lease payment at 5% is $111,697
• Due to Coronavirus, lessor reduce the rental to $25,000 p.a. in 2020.
• No rental reduction in 2021 and 2022

Finance Lease liability movement

Actual cash out flow is
Effective Carried $25,000
Opening Cashflow
Interest 5% forward
a b (a - b) x 5%
2019 111,697 (30,000) 4,085 85,782
2020 85,782 (30,000) 2,789 58,571
2021 58,571 (30,000) 1,429 29,999
2022 29,999 (30,000) 0 0

Dr. Lease liabilities $30,000 • No change in depreciation of ROU assets

Cr. Bank ($25,000) • No re-measurement of lease liabilities

Cr. P/L- negative variable rent (not ROU asset) ($5,000)

Practical Expedient (Waive rent before 6.2021 6.2022)

Landlord waive tenant 1 month rent, i.e. $100 that would otherwise be due on 1 July 2021
It unconditionally waived. This rent concession was not part of the original terms.
It is granted because tenant had to close its retail location due to government mandated lockdown order.

The rent concession satisfies the criteria to apply the practical expedient because:
(1) It is a direct consequence of the pandemic;
(2) It results in revised consideration that is less than the original consideration.
(3) It reduces lease payments originally due on or before 30 June 2021 June 2022; and
(4) There is no substantive change to other terms and conditions of the lease.
Dr. Lease liabilities $100
Cr. Bank ($0)
Cr. P/L- negative variable rent ($100)
 1. Rental concession a direct
consequence of Covid-19? No

yes

2. Lease payment is
substantially the same or less No
than preceding change?
Practical expedient may not be
yes applied

3. Affect ONLY payments due No Apply lease modification

on or before 30 Jun 2022
yes
re-measure lease liability using most
4. No substantive change in No updated discount rate, with
other terms / conditions corresponding adjustment recorded
yes against the ROU assets

Lessee elect to apply PE? No

yes

Apply PE
# Polling Question 5
Can the practical expedient apply?
Reduces lease payments by $100 per month during 30 June 2021 to 31 August
2022.
a) Yes
b) No

• Reduction does NOT only affect payment due before 30 June 2022
• The entire rent concession fail Criteria #3
• Rental concessions are not permitted to be sub-divided into two portions
• Criteria #3 access for the rental concession in its entirety
# Polling Question 6
Can the practical expedient apply?

Lessor halved the monthly rental from Jun 2021 to Dec 2021.
But office space reduce from 5,000 to 3,000 square feet
Lease period extended for another 12 months
a) Yes
b) No

• Constitute substantive change to other terms and conditions of the lease

• Criteria #4 is NOT satisfied
• Account for as lease modification. Remeasure lease liabilities and ROU assets
# Polling Question 7
Can the practical expedient apply?

Three month rental holiday in Apr to Jun 2021 (before Jun 2022) followed by
double monthly rental for three month at the end of the lease term from Oct to
Dec 2021.
a) Yes
b) No

• Not constitute substantive change to other terms and conditions of the lease
• Criteria #4 is satisfied
 5%/12
0.4167%
• Rent an office at $10,000/ month
Period Opening Payment Interest Closing Propose
• 5% rate (10,000) (10,000)
Jan-21 117,299 447 107,746
• Rental holiday from Apr to Jun 21. Feb-21 107,746 (10,000) 407 98,154 (10,000)
• But double rent in Oct to Dec 21 Mar-21 98,154 (10,000) 367 88,521 (10,000)
Apr-21 88,521 (10,000) 327 78,848 -
May-21 78,848 (10,000) 287 69,135 -
Jun-21 69,135 (10,000) 246 59,381 -
Jul-21 59,381 (10,000) 206 49,587 (10,000)
Is this a lease modification? Aug-21 49,587 (10,000) 165 39,752 (10,000)
Sep-21 39,752 (10,000) 124 29,876 (10,000)
• NO, only delay payments
Oct-21 29,876 (10,000) 83 19,959 (20,000)
Can we apply PE? Nov-21 19,959 (10,000) 41 10,000 (20,000)
• YES Dec-21 10,000 (10,000) 0 0 (20,000)
(120,000) 2,701 (120,000)
Negative variable rent recognize at the time the concession is granted

Period Payment 5%/12 PV of payments

$ 0.417% 0.42 $
Apply Practical Expedient Apr-21 - -
Dr. Lease liabilities ($88,521 - $87,785) $736 May-21 - -
Jun-21 - -
Cr. P/L- negative variable rent (not ROU assets) ($736) Jul-21 10,000 /1.04166
3
9,876
4
Aug-21 10,000 /1.04166 9,835
5
Sep-21 10,000 /1.04166 9,794
6
• Adjustment is reflected in P/L as negative variable lease Oct-21 20,000 /1.04166 19,507
7
• Not adjustment to ROU assets / depreciation Nov-21 20,000 /1.04166 19,426
8
Dec-21 20,000 /1.04166 19,346
87,785
Negative variable rent recognize at the time the concession is granted
5%/12
0.4167% Adj
Period Opening Payment Interest Closing to P/L
Mar-21 98,154 (10,000) 367 88,521 (736) 87,785
Apr-21 87,785 - 366 88,151
May-21 88,151 - 367 88,518
Jun-21 88,518 - 369 88,887 Still accrue interest during rent free months
Jul-21 88,887 (10,000) 329 79,216 Dr. P/L – interest $366
Cr. Lease liability ($366)
Aug-21 79,216 (10,000) 288 69,504
Sep-21 69,504 (10,000) 248 59,752 But no cash outflow and no adjustment to lease
Oct-21 59,752 (20,000) 166 39,918 liability during rental holiday period.
Nov-21 39,918 (20,000) 83 20,000
Dec-21 20,000 (20,000) - 0 - 0
(120,000) 3,437
Negative variable rent recognize at the time the concession is granted

Apply Practical Apr May Jun Jul Aug Sep Oct Nov Dec
Expedient 21 21 21 21 21 21 21 21 21

Dr. Lease liabilities 0 0 0 10k 10k 10k 20k 20k 20k

Cr. Bank 0 0 0 (10k) (10k) (10k) (20k) (20k) (20k)

Apply Practical Apr May Jun Jul Aug Sep Oct Nov Dec
Expedient 21 21 21 21 21 21 21 21 21
Dr. P/L – interest cost 366 367 369 329 288 248 166 83 0
Cr. Lease liabilities (366) (367) (369) (329) (288) (248) (166) 83 0

▪ No change in the depreciation of ROU asset

▪ No impact to the P/L
Practical Expedient for lessees (Recap)
PE not applied – lease modification PE is applied – variable lease
accounting payment
Lease liability Remeasure to reflect revised consideration Reduced to reflect the revised
consideration
Discount rate using an updated discount rate as at the No change
effective date of lease modification

Right-of-use asset The offsetting adjustment is recorded in No change

ROU assets
Profit or loss account No impact at the time of modification; but The offsetting adjustment is
lower depreciation and finance expenses in recorded in the P/L
subsequent periods
Amendment to HKAS16, HKAS37
and HKFRS3 (revised)
– effective on 1 Jan 2022

© ACCAPUBLIC
PwC
HKAS 16 Property, Plant and Equipment (Amendment – Proceeds before
Intended Use)

In May 2020, the IASB issued amendments to IAS 16, which prohibit a
company from deducting amounts received from selling items produced
while the company is preparing the asset for its intended use from the cost
of property, plant and equipment.

Instead, a company will recognise such sales proceeds and any related costs
in profit or loss.

HKAS 16
Proceeds received from selling items produced while testing an item of
property, plant or equipment before it is used for its intended purpose,
should be recognised in profit or loss and measures the cost of those items
applying the measurement requirements of HKAS 2.
HKAS 16 Property, Plant and Equipment (Amendment – Proceeds before Intended
Use)

• A mineral extraction machine cost $100m has to be installed in mineral mine.

• Installation cost $10m
• When installing the machine and test run its installation, certain minerals were
extracted and tested.
• The minerals were then sold at $3m

# Polling question 8
How much should be capitalized as machine costs?
a. $100m + $10m = $110m
b. $100m + $10m - $3m = $107m
HKAS 37 Provisions, Contingent Liabilities and Contingent Assets
(Amendment – Onerous Contracts – Cost of Fulfilling a Contract)

The amendments clarify that for the purpose of assessing whether a contract is
onerous under HKAS 37, the cost of fulfilling the contract comprises the costs
that relate directly to the contract.

Costs that relate directly to a contract include both the incremental costs of
fulfilling that contract (for example, direct labour and materials) and an
allocation of other costs that relate directly to fulfilling contracts (for example, an
allocation of the depreciation charge for an item of property, plant and
equipment used in fulfilling the contract).

Impact: more contracts being accounted for as onerous contracts because they
increase the scope of costs that are included in the onerous contract assessment.
# Polling Question 9
Which of the following costs are considered costs of fulfilling a
contract? (Select all that apply)

a) General and administrative costs of head office

b) Training costs
c) Direct materials related to a contract
d) Direct labour costs related to a contract
e) Allocation of a depreciation charged for PPE used in fulfilling
a contract
 HKFRS 3 Business Combination (revised)

1. In May 2020, the IASB issued amendments to IFRS 3, which update a

reference to the Conceptual Framework for Financial Reporting issued
in 2018.

2. The amendments also add to HKFRS 3:

• an exception to its requirement for an entity to refer to the Conceptual
Framework to determine what constitutes an asset or a liability.
• an entity applying HKFRS 3 should instead refer to HKAS 37 in determine
Avoid the so-call Day 2
liabilities and contingent liabilities assumed in a business combination.
Gain or Loss
• A new paragraph was added in HKFRS 3.23A to make it clear that an
acquirer does not recognize contingent assets acquired in a business
combination.

3. Effective for annual reporting periods beginning on or after 1 Jan 2022.

4. Earlier application is permitted.
 Example
HKFRS 3.23 - before amendment
The requirements in HKAS 37 do not apply in • On the acquisition date, Parent noted that the subsidiary was
determining which contingent liabilities to claimed by a dissatisfied customer for a compensation of $5m
recognise as of the acquisition date. for delayed delivery
• Legal opinion: the claim was not valid
Instead, the acquirer shall recognise as of the • It is not probable that an outflow of resources
acquisition date a contingent liability
assumed in a business combination if it is a Should liability of $5m be recognized in business combination ?
present obligation that arises from past ➢ Yes, based on paragraph 3.23.
events and its fair value can be measured ➢ No, based on the amendment
reliably.

Therefore, contrary to HKAS 37, the acquirer

recognises a contingent liability assumed in a One week after the acquisition, the customer withdrew the
business combination at the acquisition date claim due to insufficient evidence.
even if it is not probable that an outflow of •The $5m provision was written back in the post acquisition
resources embodying economic benefits will income statement → Day 2 gain
be required to settle the obligation
HKAS1 Changes to classification of current
vs non-current liabilities

44
Date Objectives Impact

▪ Effective date of 1 ▪ Clarify how an entity ▪ Significant impact on

January 2022. assesses whether it has many entities, with more
▪ But deferred until 1 a right to defer liabilities being classified
January 2023 as a settlement of a liability as current, particularly
result of the COVID-19 for at least 12 months those with covenants
pandemic. after the reporting relating to borrowings.
▪ Early adoption period. ▪ It affects key metrics such
permitted as current ratios, debt
▪ Clarify how a conversion covenants and other
▪ Retrospective option affects the
application measures of liquidity.
current/non-current
classification of a liability
Current HKAS 1 Paragraph 69
An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;
or
(b) it holds the liability primarily for the purpose of trading; or
(c) the liability is due to be settled within twelve months after Amended Para. 69
the reporting period; or (d) It does not have the "right" to defer
(d) it does not have an unconditional right to defer settlement settlement by at least twelve months
of the liability for at least twelve months after the reporting
period.
Classification of liabilities as current or non-current
• based on rights that are in existence at the end of the reporting period (Para
72A) and align the wording to refer to the "right" to defer settlement by at
least twelve months and

• unaffected by expectations about whether an entity will exercise its right to

defer settlement of a liability; and

• make clear that settlement refers to the transfer to the counterparty of cash,
equity instruments, other assets or services (Para 76A, 76B).
• Current or non-current liability?
• Settle shortly after year end

• Year end 31 Dec 20x1

• Loan was due on 31 Dec 20x6 (five years later)
• The company settled the loan on 1 March 20x2 to save interest
• Finance statements were approved on 1 Jun 20x2

Polling Question #10

As at year end 31 Dec 20x1, the liability is
a. Current
b. Non-current Early settlement on 1 Mar 20x2 was disclosed as
event after reporting period
• Polling 3: Current or non-current liability?
• Repayable on demand
• Year end 31 Dec 20x1
• Loan was due on 31 Dec 20x6 (five years later)
• Term: repayable on demand by the lender
• Company plans to settle upon maturity – 31 Dec 20x6

Polling Question #11

As at year end 31 Dec 20x1, the liability is
a. Current
Repayable on demand= the company does NOT
b. Non-current have the "right" to defer settlement by at least
twelve months
• Current or non-current liability?
• Breach debt covenant
• Year end 31 Dec 20x1. Loan was due on 31 Dec 20x6 (five years later)
• Term: maintain debt to equity ratio below 1. Otherwise repayable on
demand.
• Debt to equity ratio at 31 Dec 20x1: 1.2
• Company obtain waiver not to demand repay for 12 months on 5 Jan
20x2.

Polling Question #12

As at year end 31 Dec 20x1, the liability is
a. Current Different from US GAAP which
is non-current
b. Non-current
• A right to defer settlement…
An entity’s right to defer settlement of a liability for at least twelve
months after the reporting period must
• have substance and
• exist at the end of the reporting period.
• If subject to the entity complying with specified conditions, the
right exists only if the entity complies with those conditions at
the end of the reporting period, even if the lender does not test
compliance until a later date.
Example Polling question #13

Loan repayment 31 Dec 20x6 Classification?

a) Current
Requires working capital exceed 1.0
(WC) b) Non Current
Testing dates End of Dec, Mar, Jun and Sep.
• Actual breach at period end (0.9 only)
Covenant Fail→ repayable on demand
• waiver is for only three months (Para 75: can
be non-current if waiver is at least twelve
months).
• Irrelevant entity expects future
▪ Year end 31 Dec 20x1: working capital ratio is 0.9 improvement.
▪ obtains a waiver for three month before year end with respect • Conclusion: Entity does not have the right to
to the breach. defer settlement for at least twelve months
after the reporting period.
▪ Expects WC ratio to be above 1.0 at 31 Mar 20X2 & after.
 Example Polling question #14
Loan repayment 31 Dec 20x6 Classification?
Requires working capital Exceed 1.0 at Dec 20x1 a) Current
(WC) Exceed 1.1 at Jun 20x2 & thereafter b) Non Current
Testing dates End of March 20x2

Covenant Fail→ repayable on demand • Satisfies the actual compliance test at 31 Dec 20x1
• However, it fails the hypothetical compliance test
with the future condition set for Jun 20x2 as its WC
ratio at 31 Dec 20x1 does not exceed 1.1
▪ Year end 31 Dec 20x1: working capital ratio is 1.05 • Irrelevant it expects WC ratio to be above 1.1 at 30
Jun 20x2
▪ Expects WC ratio to be above 1.1 by Jun 20X2 and thereafter • Conclusion: It does not have the right to defer
settlement for at least 12 months after the
reporting date
• Key points
• Hypothetical compliance test is required at the reporting
date for compliance of future conditions (to the extent
those conditions are due to be tested in the next 12
months)
• Use the financial information at the reporting date to
perform the hypothetical test
• Expectation and intention is disregarded
• No remedy for a breach of hypothetical test

Impact: More loans will be classified as current liabilities

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Eunice Chu .
EC Training & Advisory .
eunicechuchu@gmail.com .
Skype: chu.Eunice .
WhatsApp / WeChat: +852 9279-6283 .

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