Balance Sheet Assets Series Valuation in IFRS/ IAS and Convergence of Local Accounting Standards in Asia to IAS Valuation & Advisory Services December 2007 CONTENTS What is IFRS/ IAS? Valuation in IFRS/ IAS l 2 3 4 6 7 Accounting in Share-based Payment Accounting in Business Combination Accounting in Financial Instruments – Presentation l l l Accounting in Financial Instruments – Measurement 9 Accounting in Investment Property 12 15 20 l Convergence of Local Accounting Standards in Asia to IAS Looking Forward December 2007 CB RICHARD ELLIS 1 Valuation in IFRS/ IAS What is IFRS/ IAS? Founded in 1973, the International Accounting Standards Committee (IASC) has long spent lots of efforts in promoting uniformity of accounting principles and consistency of accounting practices by businesses and other organisations around the world and until the comprehensive reorganisation in 2001, IASC was replaced by the International Accounting Standards Board (IASB), which is an independent, private-sector body that develops and approves International Financial Reporting Standard (IFRS) and International Accounting Standards (IAS) and continues its mission to improve and harmonise financial reporting around the world. Financial statements are prepared and presented for various readers from many entities around the world. Despite the similarity of financial statements from country to country, difference in presentation is common. This is due to a variety of social economic and legal circumstances and different considerations for the needs of different users of financial statements when setting national requirements. These different circumstances have led to the use of a variety of definitions of the elements of financial statements; that is, for example, assets, liabilities, equity, income and expenses. They have also resulted in the use of different criteria for the recognition of items in the financial statements and in a preference for different bases of measurement. IASC is committed to narrowing the differences by seeking to harmonise regulations, accounting standards and procedures relating to the preparation and presentation of financial statements. IAS serves as an international benchmark for certain countries which develop their own requirements and as a basis for national accounting requirements in many countries. It is generally believes that further harmonization can best be pursued by focusing on financial statements that are prepared for the purpose of providing information that is useful in making economic decisions. PURPOSE OF FINANCIAL STATEMENTS According to IFRS, the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity, such objective is useful to a wide range of users in making economic decisions. Some common uses of financial statements include: l decide when to buy, hold or sell an equity investment; assess the stewardship or accountability of management; assess the ability of the entity to pay and provide other benefits to its employees; assess the security for amounts lent to the entity; determine taxation policies; determine distributable profits and dividends; prepare and use national income statistics; or regulate the activities of entities. l l l l l l l The Board of IASC believes that financial statements prepared on the basis of the above purposes would meet the needs of most users. However, it is recognized that governments may specify different or additional requirements for their own purposes, but these requirements should not affect financial statements published for the benefit of other users unless they also meet the needs of those other users. Financial statements are most commonly prepared in accordance with an accounting model based on recoverable historical cost and the nominal financial capital maintenance concept. Other models and concepts may be more appropriate in order to meet the objective of providing information that is useful for making economic decisions, although there is presently no consensus for change. A framework in IFRS has been developed so that it is applicable to a range of accounting models and concepts of cost and capital maintenance. 2 VALUATION & ADVISORY SERVICES Valuation in IFRS/ IAS To ensure the financial statements can serve their purpose, IFRS has promoted the concept of fair value assessment, which is considered as one of the reliable measures of the value of the components on the financial statements. However, there is currently a lack of clarity in IFRS as to the valuation methodology and thus, it is common that an independent valuer is appointed to give advice on the methodology required and provide appropriate valuations for the subject portfolio of assets. ROLE OF VALUER The role of valuers during the financial statement preparation is to provide the client with all relevant information and to provide a fair value of the subject assets (or liabilities), which enables the client to make decisions on the most appropriate accounting treatment and to account for the different assets (or liabilities) employed in the enterprise in a compatible fashion. The valuation report, which serves the purpose of financial reporting, includes, but not limited to, the effective date of valuation, the methods and significant assumptions applied in estimating fair value and if applicable, the extent to which the values were determined by reference to observable prices in an active market or recent market transactions at arm’s length terms or were estimated using other valuation techniques. December 2007 CB RICHARD ELLIS 3 Valuation in IFRS/ IAS VALUATION IN IFRS/ IAS The following tables summarize several requirements set in IAS and IFRS in relation to fair value assessment and particularly focuses on the following subject matters: • Share-based Payment (IFRS 2) • Business Combination (IFRS 3) • Financial Instruments Presentation (IAS 32 & IFRS 7) • Financial Instruments Measurement (IAS 39) • Investment Properties (IAS 40) ACCOUNTING IN SHARE-BASED PAYMENT – IFRS 2: Share-based Payment Objective The objective of IFRS 2 is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees. Definition of A share-based payment is a transaction in which the entity receives Share-based or acquires goods or services either as consideration for its equity Payment instruments, or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity. The accounting requirements for the share-based payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash, or (c) equity and cash. Measurement Depending on the type of share-based payment, fair value may be Guidance determined by the value of the shares or rights to shares given up, or by the value of the goods or services received: (a) General fair value measurement principle In principle, transactions in which goods or services are received as consideration for equity instruments of the entity should be measured at the fair value of the goods or services received. Only if the fair value of the goods or services cannot be measured reliably would the fair value of the equity instruments granted be used. (b) Measuring employee share options For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. (c) When to measure fair value — options For transactions measured at the fair value of the equity instruments granted (such as transactions with employees), fair value should be estimated at grant date. (d) When to measure fair value — goods and services For transactions measured at the fair value of the goods or services received, fair value should be estimated at the date of receipt of those goods or services. continues on next page 8 4 VALUATION & ADVISORY SERVICES (e) Measurement guidance For goods or services measured by reference to the fair value of the equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest. (f) More measurement guidance IFRS 2 requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm’s length transaction between knowledgeable, willing parties. The standard does not specify which particular model should be used. (g) If fair value cannot be reliably measured IFRS 2 requires the share-based payment transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise price) in those “rare cases” in which the fair value of the equity instruments cannot be reliably measured. However this is not simply measured at the date of grant. An entity would have to re-measure intrinsic value at each reporting date until final settlement. (h) Performance conditions IFRS 2 makes a distinction between the handling of market based performance features from non-market features. Market conditions are those related to the market price of an entity’s equity, such as achieving a specified share price or a specified target based on a comparison of the entity’s share price with an index of share prices of other entities. Market based performance features should be included in the grant-date fair value measurement. However, the fair value of the equity instruments should not be reduced to take into consideration non-market based performance features or other vesting features. Source: 1. International Financial Reporting Standards 2006, issued by International Accounting Standard Board 2. www.iasplus.com December 2007 CB RICHARD ELLIS 5 Valuation in IFRS/ IAS ACCOUNTING IN BUSINESS COMBINATION – IFRS 3: Business Combination Objective Goodwill The objective of IFRS 3 is to specify the financial reporting by an entity when it undertakes a business combination. The acquirer shall, at the acquisition date: (a) recognise goodwill acquired in a business combination as an asset; and (b) initially measure that goodwill at its cost, which is the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less any accumulated impairment losses. Goodwill acquired in a business combination shall not be amortised. Instead, the acquirer shall test it for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, in accordance with IAS 36. Excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost. If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised in accordance with paragraph 36 exceeds the cost of the business combination, the acquirer shall (a) reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and (b) recognise immediately in profit or loss any excess remaining after that reassessment. Disclosure The entity should disclose information that enables users of its financial statements to evaluate changes in the carrying amount of goodwill during the period. The entity should disclose a reconciliation of the carrying amount of goodwill at the beginning and end of the period, showing separately: (a) the gross amount and accumulated impairment losses at the beginning of the period; (b) additional goodwill recognised during the period except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with IFRS 5; (c) adjustments resulting from the subsequent recognition of deferred tax assets during the period in accordance with paragraph 65; (d) goodwill included in a disposal group classified as held for sale in accordance with IFRS 5 and goodwill derecognised during the period without having previously been included in a disposal group classified as held for sale; (e) impairment losses recognised during the period in accordance with IAS 36; (f) net exchange differences arising during the period in accordance with IAS 21, “The Effects of Changes in Foreign Exchange Rates;” (g) any other changes in the carrying amount during the period; and (h) the gross amount and accumulated impairment losses at the end of the period. Source: 1. International Financial Reporting Standards 2006, issued by International Accounting Standard Board 2. www.iasplus.com 6 VALUATION & ADVISORY SERVICES ACCOUNTING IN FINANCIAL INSTRUMENTS — PRESENTATION – IAS 32 and IFRS 7: Financial Instruments: Presentation and Disclosure Objective The objective of IAS 32 is to clarify the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments and prescribe strict conditions which financial assets and liabilities may be offset in the balance sheet. It also provides a guideline of the disclosures about financial instruments, including information as to their fair value. Definition of A financial instrument is a contract that results in a financial asset of one enterprise and a financial liability or equity instrument of another a financial enterprise. instrument It gives one party a contractual right to exchange financial assets with another party under conditions that are potentially favourable, or a contractual obligation to exchange financial assets with another party under conditions that are potentially unfavourable. Some instruments embody both a right and an obligation to make an exchange. Since the terms of the exchange are determined on inception of the derivative instrument, as prices in financial markets change, those terms may become either favourable or unfavourable. A financial asset is cash, a contractual right to receive cash or another financial asset, a contractual right to exchange financial instruments with another enterprise on terms that are potentially favourable, or an equity instrument of another enterprise. A financial liability is a contractual obligation to deliver cash or another financial asset or an obligation to exchange financial instruments with another enterprise on terms that are potentially unfavourable. Common examples of financial instruments include: • convertible bonds; • debt and equity securities; • asset-backed securities, such as collateralised mortgage obligations; • derivatives, including options, rights, warrants, futures contracts, forward contracts, and swaps; • rights and obligations with insurance risk under insurance contracts; and • employers’ rights and obligations under pension contracts. Disclosure The carrying amounts of each of the following categories, as defined in IAS 39, shall be disclosed either on the face of the balance sheet or in the notes: (a) financial assets at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with IAS 39; (b) held-to-maturity investments; (c) loans and receivables; (d) available-for-sale financial assets; continues on next page 8 December 2007 CB RICHARD ELLIS 7 Valuation in IFRS/ IAS (e) financial liabilities at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with HKAS 39; and (f) financial liabilities measured at amortised cost. If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it shall disclose: (a) the maximum exposure to credit risk of the loan or receivable at the reporting date. (b) the amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk. (c) the amount of change, during the period and cumulatively, in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset determined either: (i) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or (ii) using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset. Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates. (d) the amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated. If the entity has designated a financial liability as at fair value through profit or loss in accordance with IAS 39, it shall disclose: (a) the amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in the credit risk of that liability determined either: (i) as the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or (ii) using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the liability. Changes in market conditions that give rise to market risk include changes in a benchmark interest rate, the price of another entity’s financial instrument, a commodity price, a foreign exchange rate or an index of prices or rates. For contracts that include a unitlinking feature, changes in market conditions include changes in the performance of the related internal or external investment fund. (b) the difference between the financial liability’s carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation. Source: 1. International Financial Reporting Standards 2006, issued by International Accounting Standard Board 2. www.iasplus.com 8 VALUATION & ADVISORY SERVICES ACCOUNTING IN FINANCIAL INSTRUMENTS — MEASUREMENT – IAS 39: Financial Instruments: Recognition and Measurement Objective The objective of IAS 39 is to establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. There are several exclusions from the normal classification and accounting rules for financial assets. The items excluded are: (a) a hedged item in a fair value hedge; (b) interests in subsidiaries, associates and joint ventures, except where IAS 27, 28 or 31 requires them to be accounted for under IAS 39; (c) rights and obligations under leases, except for embedded derivatives included in lease contracts; (d) employee’s rights and obligations under employee benefit plans; (e) rights and obligations under an insurance contract as defined in IFRS 4 Insurance Contracts or under a contract that is within the scope of IFRS 4 because it contains a discretionary participation feature; (f) financial instruments issued by the entity that meet the definition of an equity instrument in IAS 32 (including options and warrants); (g) contracts for contingent consideration in a business combination; (h) contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date; (i) financial instruments, contracts and obligations under share-based payment transactions, except for contracts that can be settled net in cash or another financial instrument; and (j) loan commitments that cannot be settled net in cash and which the entity has not designated as at fair value through profit or loss. Classification There are four categories of financial assets: (a) Financial assets at fair value through profit or loss which has two subcategories: – any financial asset that is designated on initial recognition as one to be measured at fair value with fair value changes in profit or loss. – financial assets that are held for trading. All derivatives (except those designated hedging instruments) and financial assets acquired or held for the purpose of selling in the short term or for which there is a recent pattern of short-term profit taking are held for trading. (b) Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market, that are not intended for trading, that are not initially designated as available for sale or where the holder may not recover substantially all of its initial investment other than because of credit deterioration (e.g. interest only strip). Loans and receivables are subsequently measured at amortised cost using the effective interest method, and are subject to impairment testing. continues on next page 8 Scope Exclusion December 2007 CB RICHARD ELLIS 9 Valuation in IFRS/ IAS (c) Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. Held-tomaturity investments are measured at amortised cost. (d) Available-for-sale financial assets is a residual category, applicable to those financial assets that are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. Available-forsale financial assets are carried at fair value subsequent to initial recognition. Fair Value Underlying the definition of fair value is a presumption that an Measurement entity is a going concern without any intention or need to liquidate, to curtail materially the scale of its operations or to undertake a transaction on adverse terms. Active market: Quoted Price The existence of published price quotations in an active market is the best evidence of fair value and, when they are available, they must be used to measure fair value. The phrase “quoted in an active market” means that quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency. Those prices represent actual and regularly occurring market transactions at an arm’s length basis. The price can be taken from the most favourable market readily available to the entity, even if that was not the market in which a transaction would occur. The quoted market price cannot be adjusted for “lockage or liquidity” factors. The fair value of a portfolio of financial instruments is the product of the number of units of each instrument and its quoted market prices. The appropriate quoted market price for an asset held or a liability to be issued is the current bid price and for an asset to be acquired or liability held is the asking price. When an entity has assets and liabilities with offsetting risk positions, it may use mid-market prices and apply the bid or asking price to the net open position as appropriate. When current bid prices are unavailable, the price of the most recent transaction provides evidence of the current fair value, as long as there has not been a significant change in economic circumstances since the time of transaction. No active market: valuation technique If the market for a financial instrument is not active, fair value is established by using a valuation technique. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. The objective of a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length transaction motivated by normal business considerations. continues on next page 8 10 VALUATION & ADVISORY SERVICES Valuation techniques that are well established in financial markets include reference to a transaction that is substantially the same with adjustment for the differences, discounted cash flows and option pricing models. An acceptable valuation technique incorporates all factors that market participants would consider in setting a price, and should be consistent with accepted economic methodologies for pricing financial instruments. Entities are also required to periodically calibrate the valuation technique and test it for validity using prices from any observable current market transactions in the same instrument or based on any available observable market data. An entity obtains market data consistently in the same market where the instrument was originated or purchased. Normally the amount paid or received for a financial instrument is the best estimate of fair value at inception. However, where all data inputs to a valuation technique are obtained from observable market transactions, the resulting calculation of fair value can be used for initial recognition. In applying discounted cash flow analysis, an entity uses one or more discount rates equal to the prevailing rates of return for financial instruments having substantially the same terms and characteristics, including the credit quality of the instrument, the remaining term over which the contractual interest rate is fixed, the remaining term to repayment of the principal and the currency in which payments are to be made. No active market: equity instruments The fair value of investments in equity instruments that do not have a quoted market price in an active market and derivatives that are linked to and must be settled by delivery of such an unquoted equity instrument is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that instrument or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value. Source: 1. International Financial Reporting Standards 2006, issued by International Accounting Standard Board 2. www.iasplus.com December 2007 CB RICHARD ELLIS 11 Valuation in IFRS/ IAS ACCOUNTING IN INVESTMENT PROPERTY – IAS 40: Investment Property Objective Definition of Investment Property The objective of IAS 40 is to prescribe the accounting treatment for investment property and related disclosure requirements. Investment property is a 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 except: • the property is used in the production or supply of goods or services or for administrative purposes; • the property is for sale in the ordinary course of business or in the process of construction of development for such sale; • the property is being constructed or developed on behalf of third parties; • the property is an owner-occupied property including property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owner-occupied property awaiting disposal; and • the property is being constructed or developed for use as an investment property; A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property if: • the rest of the definition of investment property is met; • the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases; and • the lessee uses the fair value model set out in this Standard for the asset recognised. Recognition Investment property shall be recongised as an asset when, and only when: • it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and • the cost of the investment can be measured reliably. continues on next page 8 12 VALUATION & ADVISORY SERVICES Under which an investment property is measured, after initial Fair Value measurement, at fair value with changes in fair value recognised in Model and profit or loss; disclosure requirement Fair value should reflect the actual market state and circumstances as of the balance sheet date. The entity may refer to the current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. If the entity is not able to obtain such information, the current prices for properties of a different nature or subject to different conditions or the recent prices on less active markets with adjustments to reflect changes in economic conditions or discounted cash flow projections based on reliable estimates of future cash flows may be considered. The enterprise has to determine the fair value of an investment property reliably on a continuing basis. If a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available. For investment properties stated at fair value, the following should be disclosed: (a) the methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity shall disclose) because of the nature of the property and lack of comparable market data; (b) the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact should be disclosed; (c) a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing the following: (i) additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised in the carrying amount of an asset; (ii) additions resulting from acquisitions through business combinations; (iii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; (iv) net gains or losses from fair value adjustments; (v) the net exchange differences arising on the translation of the financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; (vi) transfers to; and (vii) other changes. continues on next page 8 December 2007 CB RICHARD ELLIS 13 Valuation in IFRS/ IAS Cost Model The cost model is specified in IAS 16 and requires an investment and disclosure property to be measured after initial measurement at depreciated requirement cost (less any accumulated impairment losses). An entity that chooses the cost model discloses the fair value of its investment property. For investment properties measured using the cost model, the following information should be disclosed: (a) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; (b) a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing the following: (i) additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised as an asset; additions resulting combinations; from acquisitions through business (ii) (iii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; (iv) depreciation; (v) the amount of impairment losses recognised, and the amount of impairment losses reversed, during the period in accordance with IAS 36; (vi) the net exchange differences arising on the translation of the financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; (vii) transfers to and from inventories and owner-occupied property; and (viii) other changes. (c) the fair value of investment property. Source: 1. International Financial Reporting Standards 2006, issued by International Accounting Standard Board 2. www.iasplus.com Other Balance Sheet Assets that may need fair value assessment Land Manufacturing factory and ancillary facilities Management Office Warehouse Sales Offices Staff quarters Retails shop Licence, Patent and Know-how Distribution Network Client base Trademark and Service Mark Goodwill Manufacturing Plant and Machinery Building Services Plant & Machinery Furniture & Office Equipment Tools, Jigs Moulds and Fixture 88 88 8 Balance Sheet Assets 14 VALUATION & ADVISORY SERVICES Convergence of Local Accounting Standards in Asia to IAS THE NEED OF CONVERGENCE Long gone are the days when local accounting standards primarily served the needs of domestic companies and investors, based on local regulations and unique practices in each country. Nowadays, the reality could not be more different. While globalisation is increasing the competition among countries, it is also providing a coherent strategic rationale for the formation of alliances and other cooperative arrangements across borders. Such alliances and cooperation offer the prospect of convergence of local accounting standards to international accounting standards, which enables the development of international consensus. THE NEW EU REQUIREMENT Beginning in 2007, European Union (EU) requires corporations based outside EU, and having their stocks listed on European exchanges to use “either the IFRS or another set of standards deemed equivalent” in their financial statements related to ongoing disclosure or new listings of their securities in the EU market. GROWING RECOGNITION OF IAS In view of the growing recognition and use of IAS, the local accounting profession has pulled together to develop one set of global accounting standards and enhance the accessibility of local financial statements to international investors. To gain widespread international recognition, some active local accounting standards board in Asia has strike to provide a clear, coherent and comprehensive set of accounting standards to model their own financial reporting requirements based on IAS. We have summarized the local accounting standard in some major cities in Asia for their roadmap to converge towards IAS as shown in the next page. December 2007 CB RICHARD ELLIS 15 Convergence of Local Accounting Standards in Asia to IAS Location China Accounting Standard Accounting Standards for Business Enterprises (ASBE) Local Accounting Standards Overview ASBE is set by the China Accounting Standards Committee (CASC) under the Ministry of Finance (MOF). The aim of the CASC is to provide advices and recommendations on setting and improving Chinese accounting standards and has been dedicated to provide support on the development of Chinese accounting standards since its establishment in October 1998. It has organized a number of national and international seminars on accounting standards and actively participated in the convergence of accounting standards internationally and worked closely with the international accounting profession. Hong Kong Hong Kong Financial Reporting Standards (HKFRSs) and Hong Kong Accounting Standard (HKAS) HKICPA was incorporated by the Professional Accountants Ordinances (Chapter 50 of the Laws of Hong Kong) on January 1, 1973 and it is the only statutory licensing body of accountants in Hong Kong responsible for regulation of the accountancy profession. The HKFRS set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial statements. HKFRS are based on The Framework for the Preparation and Presentation of Financial Statements, which addresses the concepts underlying the information presented in general purpose financial statements. India Statement of Accounting Standards Accounting standards in India are formulated by the Accounting Standards Board (ACB) of ICAI. In formulating the standards, ASB will give due consideration to IAS issued by IASC and try to integrate them to the extent possible, in the light of the conditions and practices prevailing in India. Indonesia Indonesian generally accepted accounting principles (PSAK, Pemyataan Standar Akuntansi Keuangan) The IAI established in Jakarta on December 23, 1957, is the only accountancy body recognized by the Government in the Republic of Indonesia. The mission of IAI is to provide a vehicle for continually enhancing the competence, integrity and commitment of its members, in developing the knowledge and practices of business finance, attestation services, nonattestation services and accountancy, in such a way that would contribute significantly to the society. DSAK is continuing its policy of harmonising PSAK with IAS. Japan Generally Accepted Accounting Principles in Japan (Japan GAAP) Financial reporting regulations and requirements in Japan are derived from the Triangular System: l The Securities Exchange Law (whose objective is to protect investors) requires the use of “business accounting standards that are recognized to be generally fair and appropriate” (Japan GAAP) as the basis for disclosure of securities reports, etc. The Commercial Code (whose objective is to adjust interest among creditors and shareholders) stipulates that “fair accounting practices should be taken into consideration” in the preparation of accounting records. In reality, records are prepared in accordance with the Japan GAAP . Under the Corporate Income Tax Law (whose objectives are fair taxation and tax revenue collection), taxable income is computed, based on the financial statements prepared in accordance with the Japan GAAP and finalized pursuant to the Commercial Code. l l South Korea Korean equivalents of International Financial Reporting Standards (K-IFRSs) Korea Accounting Standards Board (KASB) was created as of September 1, 1999, after the financial crisis in 1997 and it operates under a new Korea Accounting Institute, created as of July 1, 1999. KASB’s goal is to improve Korean accounting standards to a level consistent with international best practices. Since its establishment, the KASB has adopted a policy of harmonizing Korean Accounting Standards (KAS) with IAS. Source: www.iasplus.com 16 VALUATION & ADVISORY SERVICES Status of convergence towards IFRS/ IAS The ASBEs cover nearly all the topics under the current IFRs and will become mandatory for listed Chinese enterprises from January1, 2007. Other Chinese enterprises are also encouraged to apply the ASBEs. These standards are substantially in line with IFRSs, except for certain modifications which reflect China’s unique circumstances and environment. Regulatory Bodies Ministry of Finance of the PRC (MOF) It is the mission for the HKICPA to serve the accountancy profession and the public through an efficient and transparent system of self-regulation and effective professional development in line with the development of Hong Kong as a world city. HKFRSs were fully converged with IFRSs with effect from January 1, 2005. In converging with IFRSs, Hong Kong stands with other key capital markets such as Europe. Hong Kong Institute of Certified Public Accountants (HKICPA) The Council of ICAI has announced a plan to converge Indian Accounting Standards with IFRSs. However, the ICAI noted that it may make modifications to IFRSs to reflect “the Indian conditions”. The new standards will be effective for accounting periods beginning on or after April 1, 2011. They would be required for all listed companies as well as banks, insurance companies, and large-sized entities. Government approval of the plan is required. Institute of Chartered Accountants of India (ICAI) PSAK comprises 57 standards (PSAKs), 7 interpretations (ISAKs), and 2 technical bulletins. 28 of the PSAKs were developed by reference to IASs and IFRSs, though in most cases older versions (often pre-1994). 20 were developed by reference to US GAAP pronouncements (generally older versions). And the remainders are locally developed. Indonesian Accounting Standards Board (abbreviated DSAK in Indonesian) of Indonesian Institute of Accountants (IAI) A convergence project was announced in 2005 by the IASB and the Accounting Standards Board of Japan (ASBJ) which aims to reduce differences between IFRSs and Japanese accounting standards. As part of the agreement the two boards will seek to eliminate by 2008 major differences between Japanese GAAP and IFRSs (as defined by the July 2005 CESR Assessment of Equivalence), with the remaining differences being removed on or before June 30, 2011. Although the target date of 2011 does not apply to any major new IFRSs now being developed that will become effective after 2011, both boards will work closely to ensure the acceptance of the international approach in Japan when new standards become effective. Japanese Institute of Certified Public Accountants (JICPA) The Korean Roadmap towards IFRSs: • Listed companies. Listed companies (excluding financial institutions) will be required to prepare their annual financial statements under K-IFRSs beginning in 2011 and will be permitted to do so from 2009. Before adopting K-IFRSs, listed companies will continue to use current Korean Accounting Standards. • Unlisted companies. Unlisted companies will be allowed to use ‘simplified accounting procedures’ that KASB will adopt by 2011 but may elect to issue K-IFRS financial statements. Until KASB’s simplified standards are in place, unlisted companies will continue to use their current Korean Accounting Standards. Korea Accounting Standards Board (KASB) December 2007 CB RICHARD ELLIS 17 Convergence of Local Accounting Standards in Asia to IAS Location Philippines Accounting Standard Philippine Accounting Standards (PAS)/ Philippine Financial Reporting Standards (PFRS) Local Accounting Standards Overview All public companies and all companies with more than 20 shareholders must follow the rules of the Philippine Securities and Exchange Commission (SEC). The Accounting Standards Council (ASC) of the Philippines Institute of Certified Public Accountants (PICPA) issues accounting standards. ASC standards are recognised by the SEC and Central Bank of Philippines. After approval by the Board of Accountancy and the Professional Regulation Commission (government bodies), ASC standards become mandatory. ASC’s policy is to review and adopt both existing and new IASC Standards as Philippine standards such that “compliance with Philippine GAAP would mean automatic compliance with IASC standards”. Singapore Singapore Generally Accepted Accounting Standards/ Singapore Financial Reporting Standards (Singapore FRS) In 2002, the Singapore government created Corporate Disclosure and Governance (CCDG) to replace the Institute of Certified Public Accountants of Singapore as the accounting standard setter for all companies incorporated in Singapore and CCDG issues accounting standards and interpretations that are almost identical to the current set of IFRS. Taiwan Republic of China (ROC) GAAP/ Statements of Financial Accounting Standards (SFAS) The Securities and Exchange Commission of the Taiwan Ministry of Finance sets the financial reporting requirements for public companies. The Ministry of Economic Affairs issues accounting regulations for both public and nonpublic companies. ARDF was established in 1984 and publishes SFAS that are recognised by the Ministry of Finance. ARDF also publishes interpretive guidance in the form of Supplementary Explanation Statements. Accounting Standards in Thailand are issued by Federation of Accounting Professions (FAP) which was established in 2004. Prior to the establishment of the FAP accounting standards , were issued by Institute of Certified Accountants and Auditors of Thailand (ICAAT). Currently, there are a total of 57 accounting standards. Of those issued, 31 standards are currently effective, four standards are not yet required by Thai law, and 22 standards have been superseded. In addition, there are nine accounting standards interpretations, four of which are required by law. Under the Accountancy Act B.E. 2543, Thai Accounting Standards (TAS) must be approved by the Ministry of Commerce in Thailand and placed into law before companies are required to adopt such standards. Thailand Thai Accounting Standards (TAS) Vietnam Vietnamese Accounting Standards (VAS) All domestic companies, listed and unlisted, are required to use VAS, which have been developed by the Ministry of Finance. Generally, the VASs were based on IASs that were issued in 2003, though some modifications were made to reflect local accounting regulations and environment. Neither the IASB’s amendments to IASs nor new IFRSs have been adopted. The Ministry of Finance has temporarily suspended the development of Vietnamese Accounting Standards (VAS) due to resource constraints. The Ministry of Finance is considering whether to grant rights to the Vietnam Association of Certified Public Accountants (VACPA) to formulate and update Vietnamese Accounting Standards. If this is formalised under the law, VACPA would then serve as the accounting standard setting body in Vietnam, rather than the MOF. Source: www.iasplus.com 18 VALUATION & ADVISORY SERVICES Status of convergence towards IFRS/ IAS The Philippines has adopted all IFRSs for 2005 without modification. These Philippine equivalents to IFRSs apply to all entities with public accountability. That includes: • entities whose securities are listed in a public market or are in process of listing; • all financial institutions including banks, insurance companies, security brokers, pension funds, mutual funds, and investment banking entities; • public utilities; and • other economically significant entities, defined as total assets in 2004 of at least 250 million pesos (US$5 million) or liabilities of at least 150 million pesos (US$3 million). Non-publicly accountable entities (NPAEs, sometimes called SMEs) have been given a two-year deferral (2005 to 2007) from the transition to IFRS equivalents. Instead, they are permitted to use Philippines accounting standards that were in effect in 2004. CCDG has issued a set of accounting standards and interpretations that are almost identical to the current set of IFRS though some differences between Singapore Financial Reporting Standards and IFRSs remain, including the following: • Singapore FRS 16 Property, Plant and Equipment, one-off revaluations of such assets that took place between 1984 and 1996 are permitted without requiring ongoing use of the revaluation model. • Singapore FRS 17 removes the words in paragraph 14 and 15 of IAS 17, which indicates that land normally has an indefinite economic life and, if title is not expected to pass to the lessee by the end of the lease term, the lessee does not receive substantially all of the risks and rewards incident to ownership. • Singapore FRS 25 Accounting for Investments is retained until FRS 40 is effective. • There is no equivalent to IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions. IAS 30 will be superseded when IFRS 7 Financial Instruments: Disclosures is effective. • Some differences exist in the requirements to present consolidated financial statements and in accounting for associates and joint ventures as compared to IASs 27, 28 and 31. • Singapore FRS 39 has different transitional provisions as the standard was not previously required to be adopted. • Differences in effective dates. • The following have not yet been adopted: – IFRIC 2 Member’s Shares in cooperative Entities and Similar Instruments. – IFRIC 9 Reassessment of Embedded Derivatives There is currently no comprehensive roadmap for the convergence of SFAS towards IFRS. Regulatory Bodies Philippine Financial Reporting Standards Council (FRSC) / Philippine Institute of Certified Public Accountants (PICPA) Corporate Disclosure and Governance (CCDG) Accounting Research and Development Foundation (ARDF) A panel was established in Thailand in August 2006 to study and express opinions on International Financial Reporting Standards and International Standards on Auditing. The panel comprises regulators, representatives of the accounting and auditing profession, and academics. Yet, there is currently no comprehensive plan for the convergence of FAP towards IFRS. Federation of Accounting Professions (FAP) Vietnam has begun to adopt a body of VAS, that are based on, though not identical to the related IAS since 2003. Vietnam Association of Certified Public Accountants (VACPA)/ Ministry of Finance December 2007 CB RICHARD ELLIS 19 Valuation in IFRS/ IAS Looking Forward The growing recognition of IAS leads to the growing importance of fair value assessment, which is regarded as a more transparent way of measurement, as compared with historical cost based measurements, especially for liquid trading instruments. With adequate disclosures, Fair Value Accounting provides a reliable financial statement which reflects the economic substance of transactions and represents faithfully the financial position, financial performance and cash flows of the entity. And it is common for the accounting professions to work closely with valuers, who provide fair value assessments on a wide range of assets as required in the accounting standard and perform scenario analysis if necessary to assess potential impact on the valuation. The convergence of local accounting standards in Asia to IAS is a good first step towards developing enhanced guidance for Fair Value Accounting, which keeps moving forward, in the direction of making fair value estimates more reliable, verifiable and auditable. While the variety and complexity of financial instruments is increasing, the need for independent verification of fair value estimates is expected to trend up. 20 VALUATION & ADVISORY SERVICES Asia Contacts Head of Business & Intangible Assets Trackie Lam T: (852) 2820 2827 M: (852) 9453 8873 (HK) (86) 131 8913 9909 (PRC) F: (852) 2877 2439 E: email@example.com Senior Managing Director VAS Asia Kam-hung Yu T: (852) 2820 2832 F: (852) 2877 2439 E: firstname.lastname@example.org Senior Analyst Business & Intangible Assets Kevin Lai T: (852) 2820 2994 M: (852) 9680 9672 F: (852) 2877 2439 E: email@example.com Senior Analyst Business & Intangible Assets Stella Law T: (852) 2820 8187 M: (852) 9725 0242 F: (852) 2877 2439 E: firstname.lastname@example.org Head of Plant & Machinery Mario Maninggo T: (852) 2820 2911 F: (852) 2877 2439 E: email@example.com India Rami Kaushal T: (91) 11 2373 6859-62 F: (91) 11 2331 7670 E: firstname.lastname@example.org Indonesia Rengganis Kartomo T: (62) 21 523 7132 F: (62) 21 523 7133 E: email@example.com Japan Yumiko Kikuchi T: (81) 3 5470 8585 F: (81) 3 5470 8580 E: firstname.lastname@example.org Philippines Raffy Cenzon T: (632) 752 2580 F: (632) 752 2571 E: email@example.com Singapore Li Hiaw Ho T: (65) 6326 1208 F: (65) 6536 0451 E: firstname.lastname@example.org South Korea Alex Chan T: (822) 2170 5864 F: (822) 2170 5899 E: email@example.com Thailand Annop Sangprasit T: (66) 2 654 1111 F: (66) 2 685 3303 E: firstname.lastname@example.org Vietnam Jeremy King T: (848) 824 6125 F: (848) 823 8418 E: email@example.com December 2007 CB RICHARD ELLIS 21 Dalian Beijing Tianjin Qingdao Chengdu New Delhi Shanghai Hangzhou Seoul Tokyo Mumbai Pune Bangalore Hanoi Hyderabad Chennai Bangkok Taipei Guangzhou Shenzhen Hong Kong Phuket Manila Pattaya Ho Chi Minh City Cebu Samui Singapore Asia Office Locations Hong Kong 34/F Central Plaza 18 Harbour Road, Wanchai Hong Kong Telephone: (852) 2820 2800 Facsimile: (852) 2810 0830 Suite 2109-12, 21/F Sun Life Tower, The Gateway 15 Canton Road, Tsimshatsui Kowloon, Hong Kong Telephone: (852) 2820 8100 Facsimile: (852) 2521 9517 Beijing People’s Republic of China Suite 1203-1205, 12/F, Tower A Beijing Fortune Plaza 7 Dong San Huan Middle Road Chaoyang District Beijing 100020 People’s Republic of China Telephone: (86) 10 5820 9288 Facsimile: (86) 10 5820 9088/9188 Shanghai People’s Republic of China Suite 3201, 3203-3206 32/F, K. Wah Center 1010 Huai Hai Middle Road Shanghai 200031 People’s Republic of China Telephone: (86) 21 2401 1200 Facsimile: (86) 21 5403 7519 Suite 1004, 10/F, Azia Center 1233 Lu Jia Zui Ring Road Shanghai 200120 People’s Republic of China Telephone: (86) 21 2401 1200 Facsimile: (86) 21 5047 1171 Guangzhou People’s Republic of China Suite 1401-1402, Guangzhou International Electronics Tower 403 Huan Shi East Road Guangzhou 510095 People’s Republic of China Telephone: (86) 20 2883 9200 Facsimile: (86) 20 2883 9248 Shenzhen People’s Republic of China Suite 2404-05 Excellence Times Square Building Yi Tian Road, Futian District Shenzhen 518048 People’s Republic of China Telephone: (86) 755 3395 3700 Facsimile: (86) 755 2399 5370 Hangzhou People’s Republic of China Suite 1201, 12/F, North Tower Anno Domini Plaza, 8 Qiu Shi Road Hangzhou 310013 People’s Republic of China Telephone: (86) 571 2880 6818 Facsimile: (86) 571 2880 8018 Chengdu People’s Republic of China Suite 704A-706, Office Tower at Shangri-La Centre Chengdu, Block B 9 Bin Jiang East Road Chengdu 610021 People’s Republic of China Telephone: (86) 28 8447 0022 Facsimile: (86) 28 8447 3311 Tianjin People’s Republic of China Suite 903, Tower A, The Exchange 189 Nan Jing Road Heping District Tianjin 300051 People’s Republic of China Telephone: (86) 22 8319 2178 Facsimile: (86) 22 8319 2180 Dalian People’s Republic of China Suite 2104, 21/F Tian An International Tower 88 Zhong Shan Road Zhongshan District Dalian 116001 People’s Republic of China Telephone: (86) 411 3980 5855 Facsimile: (86) 411 3980 5866 Qingdao People’s Republic of China Units 401-404, Crowne Plaza 76 Hong Kong Middle Road Shinan District Qingdao 266071 People’s Republic of China Telephone: (86) 532 8077 7286 Facsimile: (86) 532 8077 7267 Taipei 13F/A, Hung Tai Center 170 Tun Hua North Road Taipei 105, Taiwan Telephone: (886) 2 2713 2266 Facsimile: (886) 2 2712 3065 Singapore 6 Battery Road #32-01 Singapore 049909 Telephone: (65) 6224 8181 Facsimile: (65) 6225 1987 Tokyo, Japan 5/F Shuwa Daiichi Hamamatsucho Building 2-2-12 Hamamatsucho, Minato-ku Tokyo 105-0013, Japan Telephone: (81) 3 5470 8711 Facsimile: (81) 3 5470 8715 1/F Shuwa Daiichi Hamamatsucho Building 2-2-12 Hamamatsucho, Minato-ku Tokyo 105-0013, Japan Telephone: (81) 3 5470 8800 Facsimile: (81) 3 5470 8801 *20 offices throughout Japan Jakarta Seoul, Korea 12/F, SC First Bank Building 100 Gongpyeong-dong, Jongno-gu Seoul, Korea 110-702 Telephone: (822) 2170 5800 Facsimile: (822) 2170 5899 New Delhi, India G/F P Building .T.I 4 Parliament Street New Delhi 110 001, India Telephone: (91) 11 4239 0200 Facsimile: (91) 11 2331 7670 Mumbai, India #5, 3/F Tower C, Laxmi Towers G-block, Bandra Kurla Complex Bandra (E), Mumbai 400 051, India Telephone: (91) 22 4069 0100 Facsimile: (91) 22 2652 7655 Bangalore, India 3/F The Hulkul 81/37, Lavelle Road Bangalore 560 001, India Telephone: (91) 80 4112 1240-49 Facsimile: (91) 80 4112 1239 Chennai (Madras), India 2H, 2/F Gee Gee Emerald 2C & 2D 151 Village Road, Nungambakkam Chennai 600 034, India Telephone: (91) 44 2821 4599/4571 Facsimile: (91) 44 2821 4607 Hyderabad, India Eden Garden 8-2-595/3/5 Road No.10, Banjara Hills Hyderabad 500 034, India Telephone: (91) 40 2335 8887/6683 4446 Facsimile: (91) 40 2335 8886 Pune, India 705-706, 7/F Nucleus Church Road Pune 411 001, India Telephone: (91) 20 2605 5437/5367 Facsimile: (91) 20 2605 5405 Jakarta, Indonesia 7/F Permata Bank Tower I Jalan Jenderal Sudirman Kav. 27 Jakarta 12920, Indonesia Telephone: (62) 21 523 7337 Facsimile: (62) 21 523 7227 Manila, Philippines Suite 1002-1005, 10/F Ayala Tower One & Exchange Plaza Ayala Avenue, Makati City Metro Manila 1226, Philippines Telephone: (632) 752 2580 Facsimile: (632) 752 2571 Cebu, Philippines 3/F, i2 Building Asiatown I.T. Park, Lahug Cebu City, Philippines 6000 Telephone: (632) 238 4211 Bangkok, Thailand 46/F, CRC Tower All Seasons Place 87/2 Wireless Road Lumpini, Pathumwan Bangkok 10330, Thailand Telephone: (66) 2 654 1111 Facsimile: (66) 2 685 3300-1 Phuket, Thailand 12/9 Moo 4, Thepkrasattri Road Kohkaew, Muang Phuket 83000, Thailand Telephone: (66) 76 239 967 Facsimile: (66) 76 239 970 Samui, Thailand 3/6 Moo 1, Baan Bophut - Plailaem Road Bophut, Koh Samui Surat Thani 84320, Thailand Telephone: (66) 77 430 737 Facsimile: (66) 77 430 740 Pattaya, Thailand 306/96-97 Moo12 Thappraya Road Nongprue, Banglamung, Chonburi 20150, Thailand Telephone: (66) 38 364 969 Facsimile: (66) 38 364 963 Ho Chi Minh City, Vietnam Suite 1301, Me Linh Point Tower 2 Ngo Duc Ke Street, District 1 Ho Chi Minh City, Vietnam Telephone: (848) 824 6125 Facsimile: (848) 823 8418 Hanoi, Vietnam Floor 12A, Vincom City Tower B 191 Ba Trieu Street Hanoi, Vietnam Telephone: (844) 220 0220 Facsimile: (844) 220 0210 We obtained the information above from sources we believe to be reliable. However, we have not verified its accuracy and make no guarantee, warranty or representation about it. It is submitted subject to the possibility of errors and omissions. You and your tax, accounting and legal advisors should conduct your own investigation of the property and transaction. CB Richard Ellis cannot be held responsible for any inaccuracles.