Nov 2008, Issue 1 Reclassification of financial assets - What does it mean for tax? Introduction
The recent financial turmoil and deterioration in market conditions has brought about a slash in the value of equity and debt securities investments. Under HKAS 39 "Financial instruments: Recognition and measurement", Hong Kong companies holding these investments as trading assets have to account for these financial instruments under the classification of "Fair Value through Profit or Loss (FVTPL)" using the "fair value approach". They also have to report the changes in the values of these investments in their income statements as gains or losses for financial reporting purposes.
Originally, trading financial assets classified as FVTPL were not allowed to be reclassified to other categories according to HKAS 39. As such, any further declines in the value of the trading financial assets in the recent financial turmoil would have further impact on the profitability of companies holding these assets.
In response to the concerns raised by the business community, on 13 October 2008, the International Accounting Standards Board (IASB) issued amendments to IAS 39 "Financial instruments: Recognition and measurement" and IFRS 7 "Financial instruments: Disclosures", that permit reclassification of certain non-derivative financial assets if conditions specified in the amendments are met. On the following day, the Hong Kong Institute of Certified Accountants announced that it would adopt the IASB amendments for the equivalent Hong Kong Financial Reporting Standards (i.e. HKAS 39 and HKFRS 7). For more details about the HKAS 39 amendments from a financial reporting perspective, please refer to our HKFRS Newsletter - November 2008 Supplement entitled "
Reclassification of financial assets: Amendments to HKAS 39 Financial Instruments: Recognition and Measurement and HKFRS 7 Financial Instruments: Disclosures".
Accounting-wise, permitting companies to reclassify certain financial assets will allow companies not to report the further decline in the value of these assets in their income statements. However, what are the Hong Kong profits tax implications of the reclassification and the subsequent accounting treatments? This news flash looks at the key profits tax issues arising from the reclassification of financial assets under HKAS 39 amendments.
Get your copy hereRead more by downloading our
Hong Kong Tax News Flash (Nov 2008, Issue 1) (pdf file, 108KB) for your reference.
Other issues of Hong Kong Tax News Flash
Visit our Tax Library.
