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The interaction between HKFRS 16 Leases and the Hong Kong Insurance (General Business) (Valuation) Rules

The Questions and Answers (Q&As) below were developed by the Financial Reporting Standards Committee ("FRSC") of the Hong Kong Institute of Certified Public Accountants (the HKICPA) and are for general reference only. The HKICPA, FRSC and their staff do not accept any responsibility or liability in respect of the Q&As and any consequences that may arise from any person acting or refraining from action as a result of any materials in the Q&As. Members of the HKICPA and other users of these Q&As should also read the original text of HKFRS 16 Leases, as found in the HKICPA Members’ Handbook for further reference and seek professional advice where necessary when applying the references contained in these Q&As.

The HKICPA's Standard Setting Department welcomes your comments and feedback on this paper, which should be sent to commentletters@hkicpa.org.hk.

The purpose of this frequently asked questions (FAQ) is to highlight the treatment of leased premises for general business insurers under HKFRS 16 Leases and the Insurance (General Business) (Valuation) Rules.

On 29 October 2020, the Insurance Authority issued a circular on Applying the provisions of Insurance (General Business) (Valuation) Rules in the valuation of right of use asset and related lease liability (the “circular”). The intention of that circular is to provide general guidance on the application of Insurance (General Business) (Valuation) Rules (Cap.41G) (the “Valuation Rules”) with respect to the determination of the value of a right-of-use (“ROU”) asset of leased premises and related lease liability, as set out in HKFRS 16 Leases.

The staff of the HKICPA have prepared this Q&A to notify members of the circular and explain its relation to Hong Kong Financial Reporting Standards. Members of the HKICPA and other users of this guidance should also read the original text of HKFRS 16 Leases, as found in the HKICPA Members’ Handbook, and the circular.

Q1.	Which Hong Kong Financial Reporting Standards cover the accounting for leased premises for general business insurers?

Accounting for leased premises, including their recognition and measurement basis, is covered by HKFRS 16 Leases, assuming that the contract for the premises is, or contains, a lease. Lessees should refer to the requirements in HKFRS 16 paragraphs 9-16 and B9-B33 to identify a lease. At the commencement date of a lease, lessees should recognise a right-of-use (ROU) asset and a corresponding lease liability. HKFRS 16 defines a ROU asset as an asset that represents a lessee’s right to use an underlying asset for the lease term.

Q2.	How should ROU assets and corresponding lease liabilities be presented under HKFRS 16?

HKFRS 16 states that a lessee is required to present ROU assets separately from other assets, and lease liabilities separately from other liabilities, in the statement of financial position. If a lessee chooses not to present ROU assets and corresponding lease liabilities separately in the statement of financial position, it should include ROU assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned, and disclose in the notes which line items include the ROU assets and the corresponding lease liabilities (see HKFRS 16 paragraphs 47-50).

Q3.	How do general business insurers apply the provisions of the Insurance (General Business) (Valuation) Rules (Cap. 41G) (“Valuation Rules”) for purposes of determining the value of the ROU assets of leased premises and the related lease liabilities?

General business insurers are advised to refer to the circular letter issued by the Insurance Authority on 29 October 2020, which takes effect on 1 November 2020. That circular notes that for the purpose of the Valuation Rules, where the ROU asset arises from a lease agreement entered into by an authorized insurer in respect of any premises used for carrying on insurance businesses, the value of such asset and the related lease liability would be determined in accordance with Rule 13 (Other asset or liability) of the Valuation Rules.

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The interaction between HKFRS 16 Leases and the Hong Kong Insurance (General Business) (Valuation) Rules