IFRS 9 adopted, IAS 8 para 28 disclosures, exemption taken not to restate prior periods for classification and measurement

CLP Holdings Limited – Annual report – 31 December 2016

Industry: utilities

2. Changes in Accounting Policies (extract)

(B) New standard effective after 2016 that has been early adopted in 2016

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 replace 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.

Details of impact on the adoption of HKFRS 9 are set out in Note 3 below.

  1. Effect on Adoption of HKFRS 9

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 costs of hedging as described in (B)(c) below which are applied retrospectively, the general hedge accounting requirements are applied prospectively. Accordingly, comparative information is adjusted for the retrospective application of costs of hedging.

(A)  Changes in accounting policies

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

At initial recognition, for financial assets not carried at fair value through profit or loss, the Group measures them at their fair values 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

Equity investments are subsequently measured at fair value through profit or loss. However, at initial recognition, the Group is permitted to 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. For those elected equity investments, there is no subsequent reclassification of fair value gains and losses to profit or loss.

(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) Costs 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 excluded portion 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 excluded portion is included in the initial carrying amount of non-financial asset recognised when the hedged transaction occurs or is recognised in profit or loss if the hedged transaction affects profit or loss.

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(B) Effects of changes in accounting policies

(a) Classification and measurement of financial instruments

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 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. Other than the change in the classification of equity investments, the classification of other financial assets and liabilities remained unchanged.

(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 in accordance with 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 consider 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 are 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 material impact to the carrying value of 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 losses are close to zero.

(c) Hedge accounting

The Group applies 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, changes in fair value of the time value of an option are required to be recognised in profit or loss, giving rise to volatility. However, HKFRS 9 allows the change in fair value of the time value to be deferred in other comprehensive income. Retrospective adjustment for the time value of options is required on transition to HKFRS 9, resulting in a reclassification adjustment to the Group’s reserves at 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. This change in accounting policy is applied retrospectively, resulting in a reclassification adjustment to the Group’s reserves at 1 January 2015.

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

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