Revenue, Financial Instruments and IFRS Convergence Are you Ready for 2018?

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2 Revenue, Financial Instruments and IFRS Convergence Are you Ready for 2018? Reinhard Klemmer Chairman of ISCA Revenue Working Group, Partner & Technical Head, KPMG

3 What is changing and where we are Overview of the changes and timeline Where we are Survey Results Root causes and the way forward ISCA Guidance on Transition to IFRS Revenue ISCA Guidance on specific Real Estate issues Financial Instruments

4 What is changing Today The changing topics All entities IAS 11, 18, IFRIC 13, 15, 18, SIC 31 IFRS 15 Revenue Listed entities IFRS 1 First-time adoption of IFRS All entities IAS 39 IFRS 9 Financial Instruments All entities IAS 17 IFRS 16 Leases 31 Dec Dec Dec Dec Dec 19 Disclosure on impact of standards not yet effective as part of FY 2017 financial statements!

5 The timeline for transition 1 Jan Dec Dec 2018 IFRS comparatives First IFRS financial year IFRS 15 comparatives IFRS 15 SFRS 39 comparatives IFRS 9 Date of transition to IFRS / opening IFRS balance sheet IFRS comparative FS First IFRS reporting date for full financial year Complex transition provisions in IFRS 1, IFRS 9 and IFRS 15 require a plan to manage transition

6 The shorter timeline for transition 1 Jan Dec Dec 2018 IFRS comparatives First IFRS financial year IFRS 15 comparatives IFRS 15 SFRS 39 comparatives IFRS 9! Date of transition to IFRS / opening IFRS balance sheet IFRS comparative FS Q reporting First IFRS reporting date for full financial year Comparative information needs to be prepared under the new requirements for the first interim Financial Statements!

7 Where we are Survey Results ISCA conducted a poll for listed companies on their preparedness for the coming change in the accounting framework from Singapore Financial Reporting Standards (SFRS) to the equivalent IFRS framework. For 235 listed companies the results are presented. For the survey the external auditors of the listed companies were asked for their assessment on their clients status of preparedness.

8 Survey Results The Questions The 7 questions were focusing on various stages of preparedness starting with awareness and ending with completion of the process and being ready to comply with IFRS: Q1: Has work started or is interest being expressed in preparing? Q2: Are the requirements understood, has knowledge been gained? Q3: Has an implementation plan been drafted leading to the first publication of IFRS results (interim or annual results)? Q4: Has execution of the plan commenced with resources allocated? Q5: Is the impact assessment substantially complete? Q6: Is the quantification of the impact substantially complete? Q7: Is the company ready to go is the entire conversion plan substantially complete?

9 Q1) Has the listed company commenced preparation work or expressed interest in preparing for IFRS Convergence? 70% 60% 50% 40% 30% 20% 10% 0% 63% 31% 6% Yes No Not applicable % of responses 9

10 Q2) Has the listed company understood what entails IFRS Convergence - e.g. attended training, enquired with auditors, read up on publications relating to IFRS Convergence? 80% 70% 60% 50% 40% 30% 20% 10% 0% 69% 22% 9% Yes No Not applicable % of responses 10

11 Q3) Has the listed company formulated a strategy and an implementation roadmap to prepare the company to be IFRS compliant ready for announcing its interim results in 2018 (quarterly/half-yearly)? For example, set up a task force, engaged external consultants help, obtained Board of Directors approval on the implementation plan and required resources 60% 56% 50% 40% 30% 34% 20% 10% 0% 10% Yes No Not applicable % of responses 11

12 Q4) Has the listed company executed the implementation roadmap with the required resources and people in place? 70% 60% 50% 40% 30% 20% 10% 0% 63% 25% 12% Yes No Not applicable % of responses 12

13 Q5) Has the listed company substantially completed assessing and quantifying the impact of mandatory exceptions and optional exemptions to be applied? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 77% 9% 14% Yes No Not applicable % of responses 13

14 Q6) Has the listed company completed the assessment and quantification of the transition adjustments to be put through? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 83% 12% 4% Yes No Not applicable % of responses 14

15 Q7) Has the listed company completed the due process and able to assert compliance with IFRS? For example, reported to the Board of Directors and Audit Committee on the results of the assessment; obtained Board of Directors approval for the transition adjustments put through 100% 90% 80% 60% 40% 20% 0% 1% 9% Yes No Not applicable % of responses 15

16 Distribution of responses by market capitalization of the company 11% 17% Large cap (S$1 billion) 72% Mid cap (S$300 million to S$1 billion)) Small cap (< S$300 million) 16

17 Possible Root Causes Myth #1 The switch from SFRS to IFRS is easy just replace the S with I Myth #2 Transition rules will allow me to carry over all SFRS balances Myth #3 I still have time as we only need to be ready at 31 December 2018

18 The shorter timeline for transition 1 Jan Dec Dec 2018 IFRS comparatives First IFRS financial year IFRS 15 comparatives IFRS 15 SFRS 39 comparatives IFRS 9! Date of transition to IFRS / opening IFRS balance sheet IFRS comparative FS Q reporting First IFRS reporting date for full financial year Comparative information needs to be prepared under the new requirements for the first interim Financial Statements!

19 The shorter timeline for transition 1 Jan Dec Dec 2018 IFRS comparatives First IFRS financial year IFRS 15 comparatives IFRS 15 Timeline SFRS 39 comparatives + Readiness = Plan B IFRS needed 9! Date of transition to IFRS / opening IFRS balance sheet IFRS comparative FS Q reporting First IFRS reporting date for full financial year Comparative information needs to be prepared under the new requirements for the first interim Financial Statements!

20 1 Gather SWAT-team (internal + external), sponsorship from Board and C-level; Fast deployment through workshops involving all information-bearers of the company (sales, legal, business, engineering and finance) Fast deployment of a wide range of resources; immediate mobilization An example Plan B 2 Establish clusters of most significant impact based on business knowledge and available information; In a team effort prioritize clusters for detailed analysis using specialists for efficiency Identification of most impacted areas; creating awareness with stakeholders 3 Quantification of impact using sample contracts for prioritized clusters and significant individual contracts; prepare disclosure for 2017 year end and first interim FS; agree materiality levels with stakeholders including external auditors Quantification of impact; precision level acceptable to stakeholders and achievable under time and resource constraints

21 Transition to IFRS: Companies impacted The ASC has clarified that Singapore-incorporated companies are those that have issued, or are in the process of issuing, equity or debt instruments for trading in a public market in Singapore. Non-listed Singapore-incorporated companies may also voluntarily apply the new framework at the same time. Registered business trusts will apply IFRS-identical Financial Reporting Standards as well (same as Singapore listed companies). Real estate investment trusts ( REITs ) must comply with the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore, and will continue to prepare their financial statements in the manner prescribed under Institute of Singapore Chartered Accountant s ( ISCA ) Statement of Recommended Accounting Practice 7 ( RAP 7 ) Reporting Framework for Unit Trusts! Note: There may be a potential deviation from IFRS for Banks due to MAS 612 requirements for Individual and Collective Impairment Provisions as the notice is currently being amended for IFRS 9.

22 General principle of IFRS 1 IFRS 1 The Principle IFRSs effective at the date of an entity s first IFRS financial statements should be applied retrospectively in the opening IFRS statement of financial position, the comparative period and the first IFRS reporting period. [IFRS 1.7] IFRS 1 contains all transitional recognition, measurement, presentation and disclosure requirements applicable for a first-time adopter preparing its first annual and interim financial statements in accordance with IFRS. The standard represents special rules for first-time application of IFRS - These special rules are unique to transition to IFRS - normally accounting standards are applied fully retrospectively. IFRS 1 includes numerous mandatory exceptions and optional exemptions from retrospective application requirements.

23 The application process of IFRS 1 Recognise / de-recognise as necessary Reclassify Estimates made under previous GAAP no change permitted, unless such estimates not relevant under IFRS or contained error Estimates not required to be made previously should reflect the conditions at the relevant yearends Re-measure Between captions (e.g., revaluation reserve transferred to retained earnings if deemed cost exemption is elected) Estimates Select IFRS accounting policies Consider mandatory exceptions and optional exemptions Based on the version of IFRSs at the end of the first reporting period Selecting appropriate accounting policies for use Facilitates transition in a cost-effective manner Can only be applied in the context of IFRS 1

24 The list of exemptions and exceptions 1. Estimates Mandatory exceptions 2. Derecognition of financial assets and financial liabilities 3. Government loans 4. Hedge accounting 5. Non-controlling interests 6. Assets and liabilities of subsidiaries, associates and joint ventures (Applies to a parent/investor that adopts IFRS after Group entities) 7. Assets and liabilities of a parent IFRS 9 8. Assessment of the business model and SPPI criterion 9. The SPPI criterion - a modified time value of money element 10. The SPPI criterion - a prepayment feature 11. Effective interest method 12. Impairment - assessment of a significant increase in credit risk 13. Separation of an embedded derivative 1. Business combinations 2. Insurance contracts 3. Arrangements containing a lease* 4. Cumulative translation differences (not relevant for foreign currency transactions) 5. Fair value measurement of financial assets and financial liabilities at initial recognition 6. Borrowing costs 7. Extinguishing financial liabilities with equity instruments 8. Joint arrangements 9. Stripping costs in the production phase of a surface mine 10. Transfer of assets from customers 11. Share-based payments transactions 12. Fair value or revaluation as deemed cost (PPE, intangible assets and IP under cost model) 13. Deemed cost for oil and gas assets (full cost accounting) 14. Deemed cost of property, plant and equipment or intangible assets used in certain rateregulated activities Optional exemptions 15. Compound financial instruments 16. Designation of previously recognised financial instruments 17. Decommissioning liabilities included in the cost of PPE 18. Decommissioning liabilities related to oil and gas assets 19. Service concession arrangements 20. Investments in subsidiaries, associates and joint ventures; separate FS of a parent/investor - cost or deemed cost method 21. Assets and liabilities of subsidiaries, associates and joint ventures (Applies to Group entities that adopt IFRS after the parent/investor) 22. Measurement of assets and liabilities at fair value for entities previously under hyperinflationary economies 23. Election not to restate comparatives (IFRS 9) 24. Designation of previously recognised financial instruments (IFRS 9) 25. Designation of contracts to buy or sell a non-financial item (IFRS 9) 26. Transition to IFRS 15 based on the Retrospective method with practical expedients Group alignment required *FORTHCOMING REQUIREMENTS (with effect from 1 January 2019) IFRS 16 supersedes IAS 17 and IFRIC 4, and the optional exemption for arrangements containing a lease and the reassessment of lease determination are removed from IFRS 1. An optional exemption for IFRS 16 has been added to IFRS 1

25 The key decision Optimize transition by evaluating transition options Preserve SFRS accounting and achieve minimal-impact transition

26 The ISCA IFRS Convergence 2018 Implementation Roadmap ISCA published a Guide to help with the Convergence to IFRS. Some parts are focused on Directors and Management as readers, but all the details necessary to prepare for Convergence are also provided to help companies in their switch to IFRS. Director oversight of IFRS Conversion Management Actions to implement IFRS Bird s eye view of IFRS Convergence Step-by-Step Application Guide of SG-IFRS 1 Transitional Provisions in SG-IFRS 1 Various Appendices

27 ISCA Guidance on Revenue Recognition for Sale of Uncompleted Residential Properties in Singapore

28 Where we are now Considerations Type Standard residential DPS EC DBSS Mixed Ability to deal - sub-sell, mortgage and lodge caveat 1 1 Trust monies in Project Account Progressive instalment payment scheme Ministerial step-in provisions to complete development Buyers cannot rescind contract 2 2 Conclusion POC COC COC COC POC 1 Buyer is subject to a 5-year minimum occupation period and therefore cannot sub-sell the uncompleted unit. 2 If the buyer fails to meet the eligibility conditions under the HDB rules. POC = percentage of completion COC = completion of construction

29 Where we will be under SFRS 115 Type Considerations Standard residential DPS EC DBSS Mixed Collection is probable? Developer cannot direct sold unit to another buyer (no alternative use) Right to payment is enforceable Type Progress payments/billings or right to payment approximate the selling price of the WIP transferred to date/contract is non--cancellable Conclusion OT? PIT PIT OT 1 Progress payment will be refunded to the buyer if buyer fails to meet the eligibility conditions under the HDB rules on TOP date. 2 If the units are sold under the progressive payment scheme. 3 Depends on the terms of contract OT = over time PIT = point in time

30 And don t forget Financial Instruments IFRS 9/ SFRS Classification and Measurement: No more AfS watch out for the cookie-jar All equity instruments at Fair Value no longer at cost More instruments at Fair Value Impairment: Expected Credit Loss Model All receivables need to be assessed for Impairment Modelling with many judments will be necessary Hedge Accounting: Close alignment with the risk management strategy Component hedging and combined exposure hedging will be possible Documentation will be much easier

31 Summary Action is required NOW Time to first Interim FS under IFRS is running out The effort required might be more than what you had hoped for it is not changing the S for an I Make use of the ISCA Guide and other available tools Focus on the material issues of IFRS 1, IFRS 15 and IFRS 9

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33 Important disclaimer This Presentation (the Presentation) has been prepared by ISCA for the exclusive use of the recipients to whom it is addressed. Each recipient agrees that it will not permit any third party to, copy, reproduce or distribute to others this Presentation, in whole or in part, at any time without the prior written consent of ISCA, and that it will keep confidential all information contained herein not already in the public domain. The Preparers expressly disclaim any and all liability for representations or warranties, expressed or implied, contained in, or for omissions from, this Presentation or any other written or oral communication transmitted to any interested party in connection with this Presentation so far as is permitted by law. In particular, but without limitation, no representation or warranty is given as to the achievement or reasonableness of, and no reliance should be placed on, any projections, estimates, forecasts, analyses or forward looking statements contained in this Presentation which involve by their nature a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied in this Presentation. In furnishing this Presentation, the Preparers reserve the right to amend or replace this Presentation at any time and undertake no obligation to update any of the information contained in the Presentation or to correct any inaccuracies that may become apparent. This Presentation shall remain the property of ISCA.

34 To download the guidance, please go to: IFRS Convergence 2018 Implementation Roadmap Report Findings: Poll on Readiness Level of Listed Companies to issue IFRS compliant interim results in For more information on IFRS Convergence 2018, please visit: For any enquiries, please contact ISCA s Corporate Reporting & Ethics (CoRE) core@isca.org.sg.

35 To download the guidance, please go to: Revenue Recognition on Sale of Uncompleted Residential Properties in Singapore: Application of FRS 115 Revenue from Contracts with Customers For any enquiries, please contact ISCA s Corporate Reporting & Ethics (CoRE) core@isca.org.sg.