Half year report, IAS 34 para 16A (a), change of accounting policy to adopt IFRS 9

CLP Holdings Limited – Half year report – 30 June 2016

Industry: utilities

Notes to the Condensed Consolidated Interim Financial Statements (extract)

  1. Basis of Preparation

The unaudited condensed consolidated interim financial statements have been prepared in accordance with HKAS 34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants.

The interim financial statements have been prepared in accordance with the accounting policies which are consistent with those adopted in the Group’s annual consolidated financial statements for the year ended 31 December 2015, except for the early adoption of HKFRS 9 issued in July 2014 as described in Note 3 below. There are no other new standards and amendments to standards that are effective for the first time for this interim period that could be expected to have a material impact on the Group.

The financial information relating to the year ended 31 December 2015 that is included in the 2016 Interim Report as comparative information does not constitute the Company’s statutory annual consolidated financial statements for that year but is derived from those financial statements. Further information relating to these statutory financial statements required to be disclosed in accordance with section 436 of the Hong Kong Companies Ordinance (Cap. 622) is as follows:

The Company had delivered the financial statements for the year ended 31 December 2015 to the Registrar of Companies as required by section 662(3) of, and Part 3 of Schedule 6 to, the Hong Kong Companies Ordinance (Cap. 622).

The Company’s auditor has reported on those financial statements. The auditor’s report was unqualified; did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report; and did not contain a statement under sections 406(2), 407(2) or 407(3) of the Hong Kong Companies Ordinance (Cap. 622).

  1. Effect on Adoption of HKFRS 9

The Group has early adopted HKFRS 9 with the date of initial application on 1 January 2016 which resulted in changes in accounting policies and adjustments to certain amounts recognised in the financial statements. The new accounting policies replaced the provisions of HKAS 39 Financial Instruments: Recognition and Measurement (HKAS 39) in relation to (i) recognition, classification and measurement of financial assets and financial liabilities; (ii) derecognition of financial instruments; (iii) impairment of financial assets; and (iv) hedge accounting. HKFRS 9 also significantly amends other standards dealing with financial instruments such as HKFRS 7 Financial Instruments: Disclosures. The new accounting policies provide more reliable and relevant information for users to assess the amounts, timing and uncertainty of future cash flows.

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The general principle of HKFRS 9 is to apply the standard retrospectively in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except for hedge accounting, which is to be applied prospectively apart from certain limited retrospective application. For the new classification and measurement requirements, the Group has elected for the exception from the requirement to restate comparative information as set out in the transitional provisions. As a result, the comparative information provided continues to be accounted for in accordance with the Group’s previous accounting policy. For hedge accounting, except for the cost of hedging as described in (B)(c) below which is applied retrospectively, the general hedge accounting requirements are applied prospectively. Accordingly, comparative information is adjusted for the retrospective application of cost of hedging.

The changes in the accounting policies and the effects of the resulting changes are summarised below:

(A)  Changes in accounting policies

At initial recognition, for financial assets not at fair value through profit or loss, the Group measures them at their fair value plus transaction costs that are directly attributable to the acquisition of the financial assets. For financial assets carried at fair value through profit or loss, transaction costs are expensed in profit or loss.

(a) Debt instruments

Debt instruments that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are subsequently measured at amortised cost. A gain or loss on a debt instrument that is not part of a hedging relationship is recognised in profit or loss when the asset is derecognised or impaired. Interest income from these financial assets is included in finance income using the effective interest rate method.

(b) Equity investments

All equity investments are subsequently measured at fair value through profit or loss. However, at initial recognition, the Group may make an irrevocable election (on an instrument-by-instrument basis) to present in other comprehensive income subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination.

Where the management has elected to present fair value gains and losses on equity investments in other comprehensive income, there is no subsequent reclassification of fair value gains and losses to profit or loss. Dividends from such investments continue to be recognised in profit or loss when the right to receive payments is established.

(c) Impairment of financial assets

The impairment of financial assets has changed from the incurred loss model under HKAS 39 to the expected credit loss model under HKFRS 9. Under the new expected loss approach, it is no longer necessary for a loss event to occur before an impairment loss is recognised. Impairment is made on the expected credit losses, which are the present value of the cash shortfalls over the expected life of the financial assets. The Group assesses on a forward looking basis the expected credit losses associated with its financial assets carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For trade receivables and finance lease receivables, the Group applies the simplified approach permitted by HKFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables.

(d) Cost of hedging

When a forward contract is used in a hedge transaction, the Group may designate the full change in fair value of the forward contract (including forward points) as the hedging instrument. In such cases, the gains and losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in other comprehensive income if it is designated as a cash flow hedge or are recognised in profit or loss if it is designated as a fair value hedge. The Group may also elect to designate only the change in fair value of the forward contract related to the spot component as the hedging instrument. In such cases, the gains or losses relating to the effective portion of the change in the spot component of the forward contract are recognised in other comprehensive income if it is designated as a cash flow hedge or are recognised in profit or loss if it is designated as a fair value hedge. The change in fair value of the forward element of the contract that relates to the hedged item (aligned forward element) is recognised in other comprehensive income and is accumulated in a separate component of equity. The aligned forward element at the date of designation of the forward contract as a hedging instrument is amortised on a systematic and rational basis to profit or loss over the period.

When an option contract is used in a time-period related hedge transaction, the Group designates only the intrinsic value of the option contract as the hedging instrument. Gains or losses relating to the effective portion of the change in intrinsic value of the option contract are recognised in other comprehensive income if it is designated as a cash flow hedge or are recognised in profit or loss if it is designated as a fair value hedge. The change in fair value of the time value of the option contract that relates to the hedged item (aligned time value) is recognised in other comprehensive income and is accumulated in a separate component of equity. The aligned time value at the date of designation of the option as a hedging instrument is amortised on a systematic and rational basis to profit or loss over the period.

When a financial instrument that involves exchanges of cash flows that are denominated in different currencies is used in a hedge transaction, the foreign currency basis spread of the instrument is separated and excluded from the designated hedging instrument. The change in fair value of this excluded portion (to the extent it relates to the hedged item) is recognised in other comprehensive income and is accumulated in a separate component of equity. For time-period related hedged items, the currency basis spread at the date of designation (to the extent that it relates to the hedged item) is amortised on a systematic and rational basis to profit or loss over the period. For transaction related hedged items, the cumulative change of these elements is included in the initial carrying amount of any non-financial asset recognised when the hedged transaction occurs or is recognised in profit or loss if the hedged transaction affects profit or loss.

(B) Effects of changes in accounting policies

(a) Classification and measurement of financial instruments

(i) Reclassification of available-for-sale investments to equity investments at fair value through other comprehensive income The Group elected to present changes in the fair value of all its equity investments (previously classified as available-for-sale investments) in other comprehensive income as they are long-term and strategic investments. As a result, available-for-sale investments with an aggregated fair value of HK$1,644 million were reclassified to equity investments at fair value through other comprehensive income on 1 January 2016.

(ii) Reclassifications of financial instruments on adoption of HKFRS 9

All classes of financial assets and financial liabilities had the same carrying amounts in accordance with HKAS 39 and HKFRS 9 on 1 January 2016, the measurement categories of each material class of financial assets and liabilities were as follows:

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(b) Impairment of financial assets

The Group’s significant financial assets which are subject to the new expected credit loss model include: (i) loan to a joint venture; (ii) trade receivables; and (iii) finance lease receivables.

The Group has revised its impairment methodology under HKFRS 9 for each of these classes of assets. The results of the revision at 1 January 2016 are described below.

(i) Loan to a joint venture

For loan to a joint venture, management considers that its credit risk has not increased significantly since initial recognition as the joint venture has a low risk of default and a strong capacity to meet contractual cash flows. The impairment provision is determined based on the 12-month expected credit losses which is close to zero.

(ii) Trade receivables

The Group applies the simplified approach to provide for expected credit losses prescribed by HKFRS 9, which permits the use of the lifetime expected losses for all trade receivables. The adoption of the simplified expected loss approach under HKFRS 9 has not resulted in any additional impairment loss for trade receivables as at 1 January 2016.

(iii) Finance lease receivables

Finance lease receivables relate to a power purchase agreement under which CLP India Private Limited (CLP India) sells all of its electricity output to an offtaker are assessed individually and measured at an amount equal to lifetime expected credit losses. By considering both historical and forward looking elements, the Group considers that lifetime expected credit loss is close to zero.

(c) Hedge accounting

On adoption of HKFRS 9, the Group has applied the new hedge accounting model prospectively from 1 January 2016. All hedge accounting relationships designated under the previous HKAS 39 have continued to be valid hedge accounting relationships in accordance with HKFRS 9. The impact of changes in hedge effectiveness testing and in accounting for cash flow hedges was not material.

Under HKAS 39, the time value component of option instruments was recognised in profit or loss. Conversely, HKFRS 9 requires the option time value of a hedging relationship to be deferred in other comprehensive income for the duration of the relationship. Retrospective adjustment for the time value of option is required on transition to HKFRS 9. Upon adoption of HKFRS 9, this change has been applied retrospectively and resulted in a reclassification of reserves as of 1 January 2015.

Upon transition to HKFRS 9, the Group has elected the option to exclude forward elements of forward contracts and foreign currency basis spreads of financial instruments from the designation of hedging relationships retrospectively, resulting in a reclassification of reserves as of 1 January 2015.

The tables below summarise the adjustments made to reflect the adoption of HKFRS 9:

On adoption of HKFRS 9, the Group has applied the new hedge accounting model prospectively from 1 January 2016. All hedge accounting relationships designated under the previous HKAS 39 have continued to be valid hedge accounting relationships in accordance with HKFRS 9. The impact of changes in hedge effectiveness testing and in accounting for cash flow hedges was not material.

Under HKAS 39, the time value component of option instruments was recognised in profit or loss. Conversely, HKFRS 9 requires the option time value of a hedging relationship to be deferred in other comprehensive income for the duration of the relationship. Retrospective adjustment for the time value of option is required on transition to HKFRS 9. Upon adoption of HKFRS 9, this change has been applied retrospectively and resulted in a reclassification of reserves as of 1 January 2015.

Upon transition to HKFRS 9, the Group has elected the option to exclude forward elements of forward contracts and foreign currency basis spreads of financial instruments from the designation of hedging relationships retrospectively, resulting in a reclassification of reserves as of 1 January 2015.

The tables below summarise the adjustments made to reflect the adoption of HKFRS 9:

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