IFRS Update Event Ralph ter Hoeven & Dingeman Manschot

Transcription

1 IFRS Update Event 2017 Ralph ter Hoeven & Dingeman Manschot 27 November 2017

2 Agenda Introduction Accounting developments Implementation IFRS 9 Financial instruments Implementation IFRS 15 Revenue from contracts with customers Implementation IFRS 16 Leases Conclusion

3 Ralph ter Hoeven Partner IFRS Centre Deloitte Nederland Dingeman Manschot Director IFRS Centre Deloitte Nederland

4 IFRS Update Event 2017 Introduction

5 Introduction IFRS 9 Credit crisis; impairment losses too little, too late Replacement of an interim standard published in March 2004 IFRS 15 IASB-FASB conversion project driven by poor quality US GAAP Only IFRS 15 is successfull in terms of convergence with US GAAP Delayed wish of the previous chairman of the IASB; showing the leverage IFRS 17 Biggest change in the GAAP platform since introduction IFRS IFRS 16 4

6 Accounting developments IFRS Update Event 2017

7 Accounting developments IASB work plan

8 IASB work plan Completion of the remaining standard-setting projects Better communication in financial reporting Continued development of implementation support A more focused research programme

9 IASB work plan Standard-setting projects Conceptual framework Conceptual framework Q Definition of material (amendments to IAS 1 and IAS 8) ED feedback Q Rate-regulated activities DP or ED H

10 IASB work plan Research projects Business combinations under common control DP H Discount rates Research summary H Dynamic risk management DP H Financial instruments with characteristics of equity DP H Goodwill and impairment DP or ED H Post-implementation review IFRS 13 Request for information feedback December 2017 Primary financial statements DP or ED H Principles of disclosure DP feedback Q Share-based payment Research summary H

11 IASB work plan Maintenance projects (1) Accounting policies and accounting estimates ED feedback Q Accounting policy changes ED Q Availability of a refund IFRS amendment H Borrowing costs eligible for capitalisation IFRS amendment December 2017 Classification of liabilities IFRS amendment H Definition of a business IFRS amendment H Fees in the 10 per cent test for derecognition Improvements to IFRS 8 ED ED feedback November

12 IASB work plan Maintenance projects (2) Income tax consequences of payments on instruments classified as equity Plan amendment, curtailment or settlement Previously held interests in a joint operation Property, plant and equipment: Proceeds before intended use IFRS amendment Research summary ED feedback ED feedback December 2017 January 2018 December 2017 December

13 Accounting developments Changes to IFRS

14 Changes to IFRS Major changes IFRS 9 Financial instruments 1 January 2018 IFRS 15 Revenue from contracts with customers 1 January 2018 IFRS 16 Leases 1 January 2019 IFRS 17 Insurance contracts 1 January

15 Changes to IFRS Other changes (1) Amendments to IAS 12: Recognition of deferred tax assets for unrealised losses 1 January 2017 Amendments to IAS 7: Disclosure initiative 1 January 2017 Amendments to IFRS 2: Classification and measurement of sharebased payment transactions 1 January 2018 Amendments to IFRS 4: Applying IFRS 9 Financial instruments with IFRS 4 Annual improvements to IFRSs 1 January January 2017/ 1 January

16 Changes to IFRS Other changes (2) IFRIC 22 Foreign currency transactions and advance consideration 1 January 2018 Amendments to IAS 40: Transfers of investment property 1 January 2018 Amendments to IFRS 9: Prepayment features with negative compensation Amendments to IAS 28: Long-term interests in associates and joint ventures 1 January January 2019 IFRIC 23 Uncertainty over income tax treatments 1 January

17 Amendments to IAS 7: Disclosure initiative Reconciliation of liabilities arising from financing activities 1 January 2017 Cash flows Acquisition Non-cash changes 31 December 2017 Foreign exchange movements Fair value changes Long-term borrowings (1.000) Short-term borrowings (500) Lease liabilities (800) Assets held to hedge long-term borrowings (675) (25) (550) Total liabilities from financing activities (2.150) (25) NB Include comparatives 16

18 IFRIC 22 Foreign currency transactions and advance consideration Issue How to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency 17

19 IFRIC 22 Foreign currency transactions and advance consideration Consensus The date on which an entity initially recognises the non-monetary asset or nonmonetary liability arising from the payment or receipt of advance consideration 5 November 2017 Prepayment (USD 100) EUR Cash (USD 100) EUR January 2018 Inventory EUR Prepayment EUR 86 18

20 IFRIC 23 Uncertainty over income tax treatment Whether an entity considers uncertain tax treatments separately Which approach better predicts the resolution of the uncertainty? For example: how the entity prepares its income tax filings and supports tax treatments; or how the entity expects the taxation authority to make its examination and resolve issues that might arise from that examination 19

21 IFRIC 23 Uncertainty over income tax treatment Examination by taxation authorities Assume that Assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those a examinations taxation authority will examine amounts it has a right to examine; and have full knowledge of all related information when making those examinations 20

22 IFRIC 23 Uncertainty over income tax treatment Determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates ( tax position ) Is it probable that a taxation authority will accept an uncertain tax treatment? Probable Not probable Determine tax position consistently with the tax treatment used or planned to be used in its income tax filings Reflect the effect of uncertainty in determining the tax position by using either of the following methods: the most likely amount; or the expected value 21

23 Impact IFRS on Dutch Accounting Standards Accounting developments

24 Impact IFRS on Dutch Accounting Standards 23

25 Impact new IFRSs on Dutch accounting standards (RJ) IFRS 9 IFRS 15 IFRS 16 IFRS 17 Expected loss model applicable on voluntary basis RJ-Uiting IFRS 15 applicable on voluntary basis RJ-Uiting No Working on new standard based on principles of IFRS 15?? 24

26 ESMA enforcement activities Accounting developments

27 ESMA enforcement activities Enforcement decisions 229 Disclosures on a reverse factoring transaction IAS 1, IAS Assessment of control over investment funds IFRS Fair value measurement disclosures of unobservable inputs IFRS Recognition and measurement of the proceeds from an arbitration agreement IAS 18, IAS 37, IAS Impairment test of trademarks IAS Recognition of deferred tax assets for carry forward of unused IAS 12 tax losses 235 Definition of economic environment and separation of foreigncurrency embedded derivatives in a power contract IAS

28 ESMA enforcement activities Disclosures on a reverse factoring transaction Liability towards the financial institution arising from the reverse factoring agreement should be classified as a financial liability rather than as a trade payable Substantial modifications made to the original payable, namely: the extension of maturity is significant with regard to customary terms of payment in the specific jurisdiction once a supplier enters into the agreement, all its invoices are automatically processed as part of the factoring scheme compensation is paid to extend the maturity of the original payable the creditor is no longer the supplier, but a financial institution An exchange of debt instruments with substantially different terms is accounted for as an extinguishment of the original liability and the recognition of a new financial liability 27

29 ESMA enforcement priorities Accounting developments

30 ESMA enforcement priorities Disclosure on anticipated impact of IFRS 9, IFRS 15 & IFRS 16? Discussion of the impact that initial application is expected to have on the financial statements If that impact is not known or reasonably estimatable, a statement to that effect ESMA expects a higher level of disclosure of the quantitative impact of the new standards Disclosure should include sufficiently disaggregated information on both: accounting policy choices expected to be applied, including those relating to the transition approach and the use of practical expedients; and the amount and nature of the expected impacts compared to previously recognised amounts 29

31 ESMA enforcement priorities Listed companies 2017 financial statements Specific issues relating to IFRS 3 Business combinations; and IAS 7 Statement of cash flows Disclosure of non-performing loans by credit institutions Fair presentation of financial performance Disclosure on the impact of Brexit Disclosure non-financial and diversity information 30

32 ESMA enforcement priorities Specific issues relating to IAS 7 Disclosure of an entity-specific accounting policy relating to definition of cash and cash equivalents ESMA expects disclosure of whether, and to what extent, overdraft bank facilities (notably those repayable on demand) and balances resulting from cash pool facilities are considered as cash and cash equivalents Disclosure of cash and cash equivalents balances not available for use by the group required (IAS 7.48) is also required by IFRS 12 which refers to the disclosure of significant restrictions (e.g. statutory, contractual and regulatory) on the ability of an entity to access the assets of the group, including cash Such disclosure might be particularly relevant in case of material balances held in a jurisdiction whose currency is subject to limited exchangeability or capital controls 31

33 Alternative performance measures (APMs) Accounting developments

34 Alternative performance measures (APMs) Examples Any adjusted earnings measure Any other measure based on adjusted earnings, such as adjusted margin or adjusted earnings per share Operating profit/earnings before interest and tax (EBIT) Earnings before interest, tax, depreciation and amortisation (EBITDA) Free cash flow Balance sheet or operating gearing Net debt Same-store sales/constant currency/revenue growth Value of order book 33

35 Alternative performance measures (APMs) ESMA Guidelines APMs should be meaningfully labelled and defined The purpose of APMs should be clearly set out Equivalent GAAP measures should be presented with equal or greater prominence Comparatives should be given for all APMs Clear reconciliations should be given RJ

36 Alternative performance measures (APMs) Deloitte publication Alternative Performance Measures IFRS in Focus A practical guide July

37 Non-financial reporting Accounting developments

38 Non-financial reporting Background EU law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges This helps investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business Directive 2014/95/EU lays down the rules on disclosure of non-financial and diversity information by large companies This directive amends the accounting directive 2013/34/EU Implemented in Dutch law (Decree disclosure of non-financial information, Decree disclosure of diversity policy & Decree disclosure content management board s report) 37

39 Non-financial reporting Decree disclosure of non-financial information Large public interest entities (PIEs) > 500 employees A brief description of the business model of the entity A description of the policies, including the applied due diligence procedures and the results of this policy, with regards to the following themes: environmental, social and human affairs; human rights; and corruption and bribery The main material risks with regards to the topics mentioned above related to the activities of the entity including, where relevant and proportional, the business relations, products or services of the entity likely to have adverse effects on these subjects and how the entity manages these risks Non-financial performance indicators that are relevant to the specific business activities of the entity 38

40 Non-financial reporting Decree disclosure content management board s report (revised Dutch Corporate governance code) Decree disclosure of diversity policy Listed entities Compliance with the principles and best practice provisions of the Corporate governance code The main features of the control system of the entity related to the financial reporting process The functioning of the shareholders meeting, including its main powers, and the rights of shareholders The composition and functioning of the management board, the supervisory board, and their committees (e.g. nomination, remuneration and audit committees) To the extent applicable, all information to be included based on Decree article 10, takeover directive (Besluit artikel 10 overnamerichtlijn) of 5 April 2006 The diversity policy relating to the composition of the management board and the supervisory board 39

41 Non-financial reporting Deloitte publication Non-financial information in the management board s report for listed companies and other public interest entities 40

42 Implementation IFRS 9 IFRS Update Event 2017

43 Measurement Based on SPPI test & business model 42

44 Measurement Based on SPPI test & business model Are the cash flows considered to be solely principal and interest ( SPPI test)? What is the business model? Hold to collect contractual cash flows Amortised Cost Are alternative options available? FVTPL option (in case of acc. mismatch) Yes Hold to collect contractual cash flows AND to sell FVOCI FVTPL Option (in case of acc. mismatch) All other strategies FVTPL No FVTPL FVOCI option for equity investments (dividends in P&L) Certain modifications of the relationship between principal and interest are permissible 43

45 Measurement Trade receivables Are contractual cash flows solely payments of principal and interest ( SPPI test)? Business model assessment Held to collect Held to collect and sell Other Amortised cost FVOCI FVTPL 44

46 Measurement Equity investments IFRS 9 requires all equity investments to be measured at fair value Indicators that cost might not be representative of fair value include: Changes in expectation of achieving technical product milestones Evidence from external transactions in the investee s equity, either by investee or by transfers between third parties Significant change in global economy or economic environment Internal matters such as fraud, disputes, litigation, changes in management or strategy Significant change in market for investee s equity or its products Significant change in performance compared to budgets, plans or milestones Significant change in performance of comparable entities or valuations implied by overall market 45

47 Impairment Expected losses 46

48 Impairment Expected loss model Incurred loss model (IAS 39) Expected loss model (IFRS 9) Impairment loss only recognised when there is a loss event Impairment loss recognised on day 1, even if no loss event No loss rate for not past due, unless event identified Include loss rate for not past due Only consider objective evidence of an event impacting future cash flows Consider forward looking information (e.g., forecast changes in economic conditions) Ignores losses that may result from future events Loss rates must include expected losses from future events 47

49 Impairment Expected loss model No significant increase in credit risk Significant increase in credit risk and greater than low credit risk but no objective evidence of impairment Objective evidence of impairment Stage 1 Stage 2 Stage 3 12-month expected credit losses interest calculated on gross carrying amount lifetime expected credit losses interest calculated on gross carrying amount lifetime expected credit losses interest calculated on net carrying amount Simplifications and exceptions: Low credit risk model Purchased or originated credit-impaired financial assets Trade receivables and contract assets 48

50 Impairment Trade receivables Can use provision matrix Loss percentage required for receivables not past due Loss percentages must be assessed to ensure historic loss experiences continue to be relevant Loss percentages must be updated to take into account forward looking information 49

51 Implementation issues Trade receivables Expected default rate Gross carrying amount Credit loss allowance Not past due 0,3% 15 million days past due 1,6% 7,5 million days past due 3,6% 4 million days past due 6,6% 2,5 million More than 90 days past due 10,6% 1 million million

52 Hedge accounting Closer alignment with risk management 51

53 Hedge documentation Still required Hedged item Hedge Documentation Requirements Still required to document Hedging instrument Nature of relationship - e.g. cash flow, fair value, net investment Risk management objective and strategy of greater importance under IFRS 9 52

54 Hedge documentation New Documentation of effectiveness assessment approach Hedge Documentation Requirements What s new/different under IFRS 9? Analysis of sources of ineffectiveness Determination of hedge ratio 53

55 Implementation IFRS 15 IFRS Update Event 2017

56 Revenue recognition Control approach 55

57 Revenue recognition 5-steps approach based on transfer of control Recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Identify the contract with a customer (Step 1) Identify the performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the performance obligations (Step 4) Recognise revenue when a performance obligation is satisfied (Step 5) 56

58 Identify the performance obligations in the contract Performance obligations Promises to transfer goods or services to a customer If those goods or services are distinct, the promises are performance obligations and are accounted for separately 57

59 Identify the performance obligations in the contract Disctinct goods/services Identify all (incl. implicit) promised goods/services in the contract Is the good/service distinct? CAPABLE OF BEING DISTINCT Can the customer benefit from the good or service on its own or together with other readily available resources? AND DISTINCT IN CONTEXT OF CONTRACT Is the good or service separately identifiable from other promises in the contract? YES Account for as a separate performance obligation NO Combine two or more promised goods or services 58

60 Variable consideration Estimating Which method to use? Expected value OR Most likely amount The same method should be used to estimate the transaction price throughout the life of a contract Do not include in the transaction price an estimate of sales or usage-based royalties from licences of intellectual property until the customer s subsequent sales or usage occur 59

61 Recognise revenue when a performance obligation satisfied (step 5) Transfer of control Performance satisfied over time = Revenue recognised over time The seller s performance creates or enhances an asset controlled by the customer or The customer simultaneously receives and consumes the benefit of the seller s performance as the seller performs or The seller creates an asset that does not have an alternative use to the seller and the seller has the right to be paid for performance to date IF NOT Revenue recognised at a point in time 60

62 Principal vs agent Presentation of revenue Is the entity a principal or an agent? Principal Analysis required Agent Present revenue at the gross amount Present revenue at the net amount 61

63 Implementation issues Unlinking of contracts Linked accounting will cease to exist if contracts are not combined in accordance with IFRS 15 Losses on contracts will no longer be capitalised 62

64 Implementation issues Example Rolls-Royce The Telegraph, 16 November 2016 Speaking at an investor day, executives at the FTSE 100 company admitted earnings will fall as the company unlinks income from sales of its engines - which are often sold at a loss - from highly profitable and long-term revenue from servicing them. Previously, Rolls pulled forward revenues from the servicing contracts, but now must wait until it actually receives them. Under the new IFRS 15 rules, Rolls s 2015 profits would have been 900m lower than the 1.4bn it reported. 63

65 Contract combination Criteria The criteria for contract combination consider the interrelatedness of separately drawn contracts based on the existence of one or more of the following conditions: The inception of these contracts occurred at or near the same time; The contracts are negotiated as a package with a single commercial objective; The amount of consideration to be paid in one contract depends on the price or performance of the other contract; and The goods or services promised in the contract are a single performance obligation 64

66 Implementation Attention points A desktop review is not enough Look at real contracts and work through steps Are there any surprises? Will you have all the data you need? Challenge everything Think carefully about each step Don t just assume previous approach will survive Look at the examples They sometimes shed more light on what the IASB was expecting Is there an example similar to your circumstances? 65

67 Implementation Attention points Do you need to change your systems? Can you do revenue calculations as workarounds or do they need to be embedded in systems? Do you need to track a lot of new data? It s good to talk Do you know how others in your industry have approached key judgements? Are you an outlier? Think about the wider impacts If profits change, will you pay tax sooner? What else might be affected bonus plans, covenant compliance etc? 66

68 Implementation Attention points Don t forget about costs New guidance is more detailed and more prescriptive Don t forget about contract modifications No previous guidance New guidance very prescriptive Answers can be counter intuitive Don t forget about disclosures Leave enough time to plan properly Do you have all the data you need? If not, how will you get it? 67

69 Implementation IFRS 16 IFRS Update Event 2017

70 Lessee accounting On balance 69

71 Operating leases Impact on financial statements IAS 17 IFRS 16 Balance Sheet FY 2018 Balance Sheet FY 2019 Lease assets Lease liabilities xxx xxx Income statement FY 2018 Lease payments xxx EBITDA xxx Profit before tax xxx Cash flow statement FY 2018 Income statement FY 2019 Low-value/short-term leases xxx EBITDA xxx Depreciation and amortisation xxx Finance cost xxx Profit before tax xxx Cash flow statement FY 2019 Operating activities Financing activities xxx Operating activities Financing activities xxx xxx 70

72 Exemptions Short-term leases (12 months or less) Low-value leases A lease that contains a purchase option is not a short-term lease Assessment on an absolute basis Election by class of underlying asset Election on a lease-by-lease basis 71

73 Low value leases USD

74 Discount rate To determine present value of lease payments Cost of right-of-use asset Payments made less incentives received before commencement date Measurement of lease liability Payments made less incentives receivable after commencement date Discounted at: Rate implicit in the lease or Incremental borrowing rate Commencement date 73

75 Variable lease payments Excluded from measurement Penalty for terminating (if reasonably certain) Fixed payments less incentives Variable payments (e.g. CPI/rate) Exercise price of purchase option (reasonably certain) Expected residual value guarantee Estimated cost for dismantling restoring asset Payments less incentives before commencement date Initial direct costs Lease liability Lease liability Right-of-use asset 74

76 Implementation issues Foreign currency lease payments A lessee accounts for a lease contract under IFRS 16 and recognises a right-of-use asset and a lease liability. The lease payments of the lease contract are denominated in a currency different from the functional currency. How should this impact the financial statements? 75

77 Implementation issues Foreign currency lease payments Right-of-use asset Lease liability Nonmonetary asset IAS 21 Monetary asset Measured at cost: Translated using the rate at the transaction date Measured at fair value: Translated using the exchange rates at the date of fair value measurements and exchange differences follow fair value movements (OCI or P&L) Translated using the closing rate and exchange differences recognised in P&L 76

78 IFRS Update Event 2017 Conclusion

79 Conclusion Key questions Ready for implementation IFRS 9 & IFRS 15? Started planning for implementation IFRS 16 & IFRS 17? Other platform changes applicable? Are you aware of disclosure requirements regarding impact of new standards? Are you aware of alternative performance measures (APMs) guidance? Do you understand the new requirements relating to non-financial information? 78

80 Conclusion Publications on new standards 79

81 Conclusion Other relevant publications 80

82 Conclusion Other relevant publications 81

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