1、1FRU issue 6 (September 2004)Accounting for the depreciation of hotelproperties and infrastructure facilitiesOn 28 September 2004, the HKICPA issued two new home-grown Interpretations expressing its views in respect of theappropriate accounting policies for the depreciation of hotelproperties and in
2、frastructure facilities. This issue of FinancialReporting Update (FRU) gives an overview of these two newInterpretations. For details of the requirements, please referto the original texts of the Interpretations and the applicableaccounting standards as mentioned in the context.Financial Reporting U
3、pdateThe HKICPA hasissued home-grownInterpretations ondepreciating hotelproperties andinfrastructure facilitiesKPMG HONG KONG - PROFESSIONAL PRACTICEIn this issue:Depreciating hotel properties1Depreciating infrastructure facilities4Depreciating hotel propertiesAt present, neither SSAP 13 Accounting
4、for investment properties nor SSAP 17Property, plant and equipment, specifically state they are applicable to hotelproperties, nor do they exclude them from their scope. The HKICPA has becomeaware of concerns expressed as to whether hotel owners might have applied ahybrid approach of treatments indi
5、vidually acceptable under SSAP 13 or SSAP 17,but not both, in their financial statements. This relates in particular todepreciation policies commonly adopted for owner-operated hotel properties,under which depreciation is not charged until the lease nears the end of itsterm.In response, the HKICPA h
6、as recently drafted and issued its own interpretation,Interpretation 23 The appropriate accounting policies for hotel properties.The new Interpretation becomes effective for annual periods beginning on orafter 1 January 2005. This coincides with the effective date of HKAS 16 Property,plant and equip
7、ment (which is based on the revised IAS 16 of the same nameand supersedes SSAP 17) and the proposed HKAS 40 Investment property(which is based on the revised IAS 40 of the same name and supersedes SSAP13). However, the Interpretation also states that earlier adoption is encouraged.The comments below
8、 assume that the Interpretation is not being early adoptedand therefore that HKAS 16 and HKAS 40 are being adopted at the same time.For further details of the requirements under HKASs 16 and 40, please refer toissues 2 and 5 of FRU.Classification of hotel propertiesAs highlighted in issue 2 of FRU,
9、HKAS 40 contains examples to illustrate whattypes of properties would, or would not, be considered to be investmentproperties. Unlike SSAP 13, paragraph 12 of HKAS 40 explicitly states that anowner-managed hotel is owner-occupied property, i.e. that it falls under HKAS16, rather than under HKAS 40 a
10、s an investment property.Note: On 8 September 2004 the HongKong Society of Accountants (“HKSA”)changed its name to the “Hong KongInstitute of Certified PublicAccountants“(“HKICPA”)?HKAS 40 is clear that owner-managed property is notinvestment property and thereforethat it falls under HKAS 16Septembe
11、r 2004Issue 6-2FRU issue 6 (September 2004)Interpretation 23 is based on this classification principle and therefore considersthe application of HKAS 16s depreciation rules to hotels.NB: although HKAS 40 will clarify the position for owner-managed hotels,judgment will still be required to determine
12、the appropriate classification wherethe hotel is being run by third parties. Where the owner simply receives a pre-determined income from the hotel management company then the property isclearly investment property. However, in between these two extremes are arange of management contracts where the
13、owner to a greater, or lesser, extentparticipates in the running of the hotel and shares in the operating profits andlosses. In such cases it will be necessary to make a judgement as to whether itis more appropriate to apply HKAS 16 or HKAS 40 to the hotel. A hybrid approachthat complies fully with
14、neither will not be acceptable.HKAS 40 indicates that where the owner is still significantly exposed to avariation in the cash flows generated by the hotel operations, the hotel is stillfirmly within the category of owner-managed, even though a managementcontract may have been entered into. Other in
15、dications may be the level ofinvolvement in key operating decisions. However, absent any limitations of thereturns to a pre-determined amount, this in itself would not be conclusive asoften hotel owners entrust such key decisions to expert chains of hotelmanagement companies, while still remaining s
16、ignificantly exposed tovariations in the cash flows.The benchmarks chosen for making this decision should be applied consistentlyfrom one hotel to the next in accordance with HKAS 40.14 and should bedisclosed under HKAS 40.75(c) if classification is difficult.Depreciation of hotel propertiesThe Inte
17、rpretation reaches the following conclusions concerning depreciation:?hotel property accounted for under HKAS 16 must apply HKAS 16sdepreciation rules regardless of whether the property is carried atdepreciated cost less impairment losses or revalued amount;?the depreciable amount of the hotel build
18、ing would be depreciated over itsremaining useful life; and?where the hotel is located on land held under an operating lease, the carryingamount of the leasehold land would be amortised over the remaining life ofthe lease.The important point to note here is the emphasis on depreciating over theremai
19、ning life of the building and/or lease. Given this Interpretation and thewithdrawal of SSAP 13, policies that defer depreciation until the lease is nearingthe end of its term will generally no longer be acceptable as from 1 January2005.The Interpretation also observes that:?it is highly likely that
20、residual values (as defined in HKAS 16) of buildingssituated on leasehold land will be insignificant relative to the depreciableamount; and?residual values of land held under an operating leases would typically be zero.The residual value is defined in HKAS 16 as (emphasis added):the estimated amount
21、 that an entity would currently obtain from the disposalof the asset, after deducting the estimated costs of disposal, if the asset werealready of the age and in the condition expected at the end of its useful life.?Judgement will still be neededto determine which HKAS toapply to hotels that are nei
22、therclearly owner-managed propertynor investment property?A hybrid approach that complieswith neither HKAS 16 nor HKAS40 will not be acceptable?The Interpretation concludes thatowner-managed hotels are subjectto HKAS 16s depreciation rulesover the whole of the remaininguseful life?The Interpretation
23、 indicates thatfor most leasehold interestsneither the building nor the landwill have a significant residualvalue?Residual values are calculated intodays prices, but these should betodays prices for the asset as if ithad already reached the end of itsuseful life?Benchmarks should be appliedconsisten
24、tly and may need to bedisclosed?To appropriately classify the hotel,it is important to consider whichparty is significantly exposed tothe cash flows of the hoteloperations3FRU issue 6 (September 2004)Note that the residual value is not todays selling price of the asset in its currentcondition. It is
25、 todays selling price of a comparable asset, which is of the ageand condition that management expects their asset to be in when it reaches theend of its useful life to the entity. Therefore material residual values generallyonly arise if:?the asset has a material scrap value (e.g. ships); or?managem
26、ent intends to dispose of the asset before it reaches the end of itseconomic life.This is the underlying reason why the HKICPA made the above observationsconcerning buildings and leasehold land. To justify any treatment for a hotel thatis different from the norm expected by the HKICPA, it would gene
27、rally benecessary for management to have the express intention to dispose of the hotelbefore the end of the buildings economic life and/or the lease term and to havereliably estimated the amount of the residual value in accordance with the abovedefinition and the expected date (year) of disposal. It
28、 would also be necessary torevisit these assertions and estimates at each reporting date to ensure they arestill materially appropriate.Component accountingWhen determining the appropriate accounting policy for depreciation under thenew Interpretation, hotel owners should bear in mind the rules in H
29、KAS 16 oncomponent accounting. These rules are particularly relevant as:?the physical hotel asset is actually a multitude of individual assets (forexample, the building structure, the integral plant, the fixed furnishings, thebeds etc.); and?hotels generally have a programme of periodic major overha
30、uls that may, ormay not, involve actual replacement of physical assets.Component accounting is a concept already dealt with in SSAP 17, but the rulesconcerning this and subsequent expenditure are rather unclear.HKAS 16 now states clearly that each part of an item of property, plant andequipment with
31、 a cost that is significant in relation to the total cost of the itemshall be depreciated separately. The consequence of this is that it is now clearfrom HKAS 16 that:?the replacement of each physical asset or part of any asset should be treatedas a disposal of the original asset (or part) and the a
32、cquisition of a new asset(or part); and?the costs of servicing an asset (i.e. rather than actually replacing it), when thatservicing is part of a major overhaul or inspection, should be treated as acomponent of the cost of an asset and depreciated over the period until thenext servicing.These requir
33、ements, of course, only have to be applied to the extent that theeffect would be material. For example, a practical approach, such as groupingindividually insignificant, but similar, assets together, would be devised toreduce the extent of financial record keeping. Such approaches are acceptableprov
34、iding reasonable estimates were arrived at.Adoption of the new InterpretationAs mentioned, Interpretation 23 is effective for annual periods beginning on orafter 1 January 2005, with earlier adoption encouraged by the HKICPA.The Interpretation allows any changes in accounting policy that arise as a
35、resultof the Interpretation to be dealt with in accordance with the normal rules. Thismeans that the changes should be adopted retrospectively (with adjustments to?When depreciating a hotel, theentity should take note of theclear rules in HKAS 16 oncomponent accounting?The Interpretation is effectiv
36、e forannual periods beginning on or after1 January 2005?Any changes in policy as result ofthe Interpretation should beaccounted for under HKAS 8 i.e.retrospective adjustments shouldbe made where practicable4FRU issue 6 (September 2004)comparatives and opening balances) to the extent practicable, in
37、accordancewith HKAS 8 Accounting policies, changes in accounting estimates and errors(which supersedes SSAP 2 as from 2005).However, although the comparative reported profit for the year will be reducedby any depreciation charge, there will be no net effect on net assets in thefollowing common set o
38、f circumstances:?the hotel is being carried at a valuation above cost; and?the valuations have been brought up to date at each period end.Depreciating infrastructure facilitiesThe HKICPA has become concerned about accounting treatments being appliedin respect of infrastructure facilities. Therefore,
39、 the HKICPA has also drafted andissued its own interpretation, Interpretation 22 The appropriate accountingpolicies for infrastructure facilities, which provides authoritative guidance.Infrastructure facilitiesThe background in the Interpretation indicates that by infrastructure facilities,the Inter
40、pretation is primarily concerned with the depreciation methods adoptedin Build, Operate and Transfer (BOT) franchise arrangements. These aregenerally agreements entered into with a government, under which the entityhas the right to build and operate the infrastructure facility (for example, a tollro
41、ad/tunnel) on a commercial basis for a finite period of time (for example, 30years) prior to handing that asset back to the government at nil or minimalconsideration.Use of the sinking fund methodThe HKICPA has noted that some financial statements purporting to be incompliance with Hong Kong Financi
42、al Reporting Standards disclosed anaccounting policy under which the capital cost of an infrastructure asset wasallocated by applying a sinking fund method.Interpretation 22 analyses the basic principles behind the allocation methods fordepreciation or amortisation based on the HKICPAs Framework for
43、 thepreparation and presentation of financial statements and the relevantaccounting standards (e.g. SSAP 17 and SSAP 29 Intangible assets).The Interpretation concludes that the sinking fund method is not an appropriatemethod of depreciating or amortising infrastructure assets, regardless ofwhether t
44、he asset (or components thereof) is classified as property, plant andequipment, intangible assets or operating lease prepayments. It accepts for thetime being that usage or time based methods may be acceptable, absent anyclear direction from the IASB.Adoption of the new InterpretationInterpretation
45、22 becomes effective on 1 October 2004 (earlier adoption isencouraged by the HKICPA). This means that the Interpretation has immediateeffect and therefore applies to any financial statements or interim financialreports that are approved after 30 September 2004.As with Interpretation 23, any change i
46、n accounting policies as a result of theapplication of the new Interpretation can be accounted for under the normalrules. In this case SSAP 2 may still be applicable, due to the effective date of thestandard. As with HKAS 8, SSAP 2 requires any changes in accounting policies tobe adopted retrospecti
47、vely, unless impracticable.?The infrastructure facilities inquestion are those that will bereturned to the government aftera fixed period of time?The Interpretation concludes thatthe sinking fund method is notacceptable?The Interpretation accepts thateither a usage or time basedmethod of allocation
48、of cost maybe acceptable?Where the hotel is carried at up todate valuation, this has no impacton net assets?The Interpretation is effective asfrom 1 October 2004. This meansit applies as from that date to anyfinancial statements or interimreports issued subsequently?Changes of policy should be dealt
49、with retrospectively under SSAP 2The information contained herein is of a general nature and is not intended to address the circumstances ofany particular individual or entity. Although we endeavour to provide accurate and timely information, therecan be no guarantee that such information is accurat
50、e as of the date it is received or that it will continue tobe accurate in the future. No one should act upon such information without appropriate professional adviceafter a thorough examination of the particular situation.2004 KPMG, the Hong Kong member firm ofKPMG International, a Swiss cooperative
