Global Financial Reporting.

Transcription

1 Asia Pacific Dbriefs Presents: Global Financial Reporting. IFRS: Important Developments Randall Sogoloff / Philip Barden 18 October 2011

2 Agenda Updated IASB work plan Revenue recognition Exposure Draft (ED) Questions & Answers 2

3 Keep in mind This webcast does not provide official Deloitte Touche Tohmatsu Limited interpretive accounting guidance Check with a qualified advisor before taking any action 3

4 Learning objective To enhance participants understanding of important accounting issues and developments pertaining to recent actions of the IASB 4

5 Updated IASB work plan Project Financial instruments Exposure Draft (ED) Final standard Offsetting N/A Q Hedging N/A Q Impairment 2012? Macro hedging 2012? Deferral of IFRS 9 Q3 2011? Insurance contracts 2012? Leases Q / 2013 Revenue recognition Q Consolidation investment entities Q3 2011? Agenda consultation Q N/A 5

6 Exposure Draft (ED) Revenue from contracts with customers Original Exposure Draft (ED) issued in June 2010 Revised ED expected to be issued November 2011 Why re-expose and what changes do we expect to see? 6

7 Exposure Draft (ED) Revenue from contracts with customers (cont d) Replaces IAS 18 Revenue and IAS 11 Construction Contracts Joint project with FASB (identical ED, comments shared) June 2010 November 2011? March 2012? Later in 2012? Not before 1 January 2015? First ED Second ED Comment period ends Final standard Effective date 7

8 Core principle Recognize revenue To depict the transfer of goods or services to customers Upon transfer of control (not risks and rewards) In an amount that reflects the consideration the seller receives or expects to receive Estimate using probability-weighted amount or most likely amount, whichever is more predictive 8

9 Application of the core principle Step 1: Identify contract(s) Step 2: Identify separate performance obligations Step 3: Determine transaction price Step 4: Allocate transaction price Step 5: Recognize revenue on transfer to customer Deliver equipment CU 60 When delivered Provide training services CU 30 When performed Contract with X Deliver accessories CU 5 When delivered Provide ongoing support CU 3 When provided Provide warranty CU 2 When provided 9

10 ED questions for respondents Boards expected not to seek specific comments on all aspects of ED, as much will be similar to previous ED Instead, the ED will focus on Questions on five specific areas Overall, are the proposed requirements clear? Can the proposed requirements be applied in a way that effectively communicates to users of financial statements the economic substance of a seller s contracts with customers? 10

11 ED questions for respondents (cont d) Specific questions likely on five new areas When is revenue recognized over time? Treatment of customer credit risk Approach to variable consideration Onerous performance obligations Applying requirements to transfers of other assets (e.g., property, plant, and equipment or investment property) 11

12 Recognition of revenue over time When is revenue recognized over time? Approach to services very unclear in previous ED New ED likely to include substantially more guidance Proposal still focuses on when customer obtains control but specific guidance where asset constructed does not have alternative use to seller 12

13 Recognition of revenue over time (cont d) Revenue recognized over time if either Seller s performance creates or enhances asset controlled by customer (assessing control in same way as for sales of goods ), or Asset does not have alternative use to seller and specific criteria are met Asset has alternative use if practically and contractually it could be supplied to a different customer 13

14 Recognition of revenue over time (cont d) Examples Building being constructed on customer s land typically seller s performance creates or enhances asset controlled by customer Motor manufacturer typically customer does not have control during construction, and asset does have alternative use Construction of condominium? 14

15 Recognition of revenue over time (cont d) If asset does not have alternative use, recognize revenue over time if one or more of the following applies Customer receives or consumes benefit as seller performs, or Another entity would not need to reperform work done by seller to date (but must assume entity does not get benefit of assets controlled by seller, e.g., work-in-process), or Seller has right to be paid for performance to date and expects to fulfill contract as promised 15

16 Recognition of revenue over time (cont d) Right to be paid for performance to date If customer cannot cancel, seller should only need to consider whether it expects to fulfill contract If customer can cancel, need to consider what (if anything) customer would have to pay on cancellation 16

17 Recognition of revenue over time (cont d) What is the overall effect of this proposal? Consider two specific scenarios Contracts that failed IAS 11 and IFRIC 15 Contracts for services where customer can cancel without paying compensation 17

18 Treatment of customer credit risk Previous ED proposed customer credit risk taken into account in measuring amount of revenue Some respondents argued that this obscures useful information about level of bad debts Boards agreed new ED likely to propose Revenue line = gross amount due Adjacent line adjusting for impairment / collectability 18

19 Treatment of customer credit risk (cont d) Where transaction includes significant financing component, instead treat as akin to Sale for cash plus Separate loan Practical expedient no need to identify financing component if gap between transfer of goods / services and customer payment expected to be 12 months 19

20 Approach to variable consideration Previous ED proposed to require use of probability-weighted amount Respondents argued that, in some circumstances, this could be complex to apply and not meaningful Boards agreed new ED likely to allow choice of Probability-weighted amount, or Most likely amount Whichever is more predictive of consideration 20

21 Approach to variable consideration (cont d) Original ED proposed variable consideration should be allocated to elements only when it could be reasonably estimated Boards likely to revise this for new ED Constrain revenue recognized to date to amounts to which seller is reasonably assured to be entitled 21

22 Approach to variable consideration (cont d) Only reasonably assured if Seller has previous experience (or evidence) and That experience / evidence is predictive To assess whether predictive, need to consider Impact of factors outside seller s control Whether period of uncertainty is long Whether past experience is too limited Whether range of possible outcomes is very wide 22

23 Onerous performance obligations Previous ED proposed that IAS 37 onerous contract approach should be applied to individual performance obligations New ED likely to restrict this to performance obligations that are Satisfied over time, and Expected at inception to be satisfied over > 1 year 23

24 Transfers of other assets New ED likely to propose that disposal of other non-financial assets property, plant, and equipment (PP&E), investment property should be subject to proposed requirements on Transfer of control Measurement of consideration 24

25 Polling question 1 If the revenue recognition standard is published in late 2012, what should be its effective date? Don't know / not applicable 25

26 Other issues multiple elements Previous ED focused on whether goods and services are distinct New ED likely to refine this approach but will also add a new, over-riding requirement Good or service is distinct if Seller regularly sells it separately, or Customer can benefit from good / service by itself or with other resources readily available 26

27 Other issues multiple elements (cont d) New requirement do not unbundle goods / services if Goods / services are highly interrelated and transferring them to customer requires seller to provide significant service of integrating them into combined item(s) for which customer has contracted, and Bundle of goods / services is significantly modified or customized to fulfill contract 27

28 Other issues allocation of transaction price Previous ED proposed to require allocation based on stand-alone selling prices New ED expected to clarify that residual approach can be used where stand-alone selling price is highly variable or uncertain 28

29 Other issues disclosures Objective to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers Disclosures likely to be more extensive than at present Judgment needed over level of detail / aggregation 29

30 Other issues disclosures (cont d) Disclosures in respect of contracts Analyze contracts into categories Reconcile opening and closing contract balances Information about performance obligations For contracts > 1 year, transaction price allocated to remaining performance obligations and when likely to be recognized as revenue Explanation and reconciliation of onerous performance obligations 30

31 Other issues disclosures (cont d) Disclosures in respect of significant judgments Timing of satisfaction of performance obligations Determining transaction price and allocation to performance obligations Assets recognized from costs to obtain or fulfill a contract 31

32 Other issues transition Apply retrospectively subject to expedients No need to restate prior periods for contracts that began and ended within same period For contracts completed in prior periods, can estimate variable consideration based on price when completed Usually do not need to account for onerous performance obligations in prior periods Small exemptions from disclosure requirements in prior periods 32

33 The bottom line There is a lot more detail than could be covered today Boards seem unlikely to change their minds on core principles This is an opportunity to flag unforeseen consequences and practical issues 33

34 Polling question 2 What impact do you believe the revenue recognition proposals would have on your organization? Significant impact Some impact No impact Don t know / not applicable 34

35 Questions & Answers

36 Thank you for joining today s webcast To view the archive on PC or mobile devices, visit To request CPE attendance record, DbriefsAP@deloitte.com

37 Join us 20 October at 2 PM HKT (GMT+8) for an Asia Pacific Tax International Tax webcast: Supply Chain Planning in Australia: Practical Considerations For more information, visit

38 Contacts Randall Sogoloff Global IFRS Communications Tel: Deloitte IFRS Global Office Phil Barden Partner, IFRS Center of Excellence Tel: Deloitte London, UK

39 Disclaimer This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, any of its member firms or any of the foregoing s affiliates (collectively the Deloitte Network ) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

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