A S C ACCOUNTING STANDARDS COUNCIL

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1 A S C ACCOUNTING STANDARDS COUNCIL CPA Forum Towards A Stronger Financial Reporting Standards Framework 9 May 2014 Presented by: Mr Cheung Pui Yuen, Member, ASC 1

2 Agenda A. About the ASC Background Structure Standard-Setting Process B. High Level Overview of Upcoming New Major Standards IFRS [15] Revenue Recognition IFRS 9 Financial Instruments Phase 1 Classification and Measurement Phase 2 Expected Credit Losses Phase 3 General Hedge Accounting C. Other Key Global Developments in the Standard Setting Domain Leases Conceptual Framework Disclosure Initiative D. Concluding Remarks 2

3 About the ASC 3

4 Background Accounting Standards Act National Accounting Standard Setter [Since Nov 2007] Companies Charities Co-operative societies Societies Singapore Financial Reporting Standards (SFRS) SFRS for Small Entities * Charities Accounting Standard * International Financial Reporting Standards (IFRS) International Equivalent IFRS for Small & Medium-Sized Entities * Optional financial reporting framework for companies or charities that meet specified criteria 4

Structure Conceptual Framework WG Revenue WG Leases WG ASC 12 independent members appointed by the Minister for Finance from diverse stakeholder group

5 Structure Conceptual Framework WG Revenue WG Leases WG ASC 12 independent members appointed by the Minister for Finance from diverse stakeholder group [academia, auditors, preparers, regulators, etc] Financial Instruments WG Insurance Contracts WG Full-time ASC Secretariat Provides technical & other support 5

6 Standard-Setting Process (1/6) Our key considerations Benefits outweigh costs Requirements reflect economic substance 6

7 Standard-Setting Process (2/6) Our activities Identify issues Pre-issuance Invite feedback & consult stakeholders Issuance Post-issuance Research, analyse & deliberate Engage & influence Create awareness 7

8 Standard-Setting Process (3/6) We set you thinking Watch this space Revised%20ED_Upload_Version.pdf 8

Asian-Oceanian Standard-Setters Group (AOSSG) (Member)

9 Standard-Setting Process (4/6) Our engagement IASB International Forum of Accounting Standard Setters (Member) ASC Asian-Oceanian Standard-Setters Group (AOSSG) (Member) Investors Preparers Auditors Analysts Academia Policy Makers Regulators Researchers 9

Financial Instruments, IASB Accounting Standards Advisory Forum (Member) 26 members (including Aust, China, HK, India, Jpn, Korea,

10 Standard-Setting Process (5/6) We are a key player 1. Chairman s Advisory Committee (Member) 2. Working Groups Consolidation, Leases, Revenue (Leader/Co-leader) Acquisitions & Reporting Entity Issues, Conceptual Framework, Financial Instruments, IASB Accounting Standards Advisory Forum (Member) 26 members (including Aust, China, HK, India, Jpn, Korea, NZ, S pore) Contributes ~ ⅓ of world GDP & market capitalisation 80% of members completed or announced IFRS adoption or convergence Place of origin for > ¼ of IASB members 10

11 Standard-Setting Process (6/6) Our views make a difference 11

12 High Level Overview of Upcoming New Major Standards 12

13 Revenue Recognition: At last, a common universal language for top line reporting * Expected issuance May Information in next slides based on IASB s project updates. 13

14 Revenue Recognition A New Beginning Five steps in new revenue recognition model Determine transaction price 4 Allocate transaction price to POs Recognise revenue as PO is satisfied 1 Identify contract Identify performance obligations (POs) Effective date 1 Jan 2017 Core Principle Depict the transfer of the control of goods or services to customers in an amount that reflects the consideration 14

15 Revenue Recognition Dissecting Contracts with Customers 2 Your No free lunch... Recognise revenue for each distinct good or service (G/S) or PO... Customer can benefit from G/S on its own or together with other readily available resources Bundle of G/S (1) Car G/S is separable from others in the contract PO: Distinct G/S (3) Holiday package (free) (2) Maintenance service (free) 15

Revenue Recognition Control Dictates Timing of Top Line Reporting 5 Ability to direct use

time revenue recognition, if 1 Customer simultaneously receives & consumes benefits as entity

s performance does not create an asset with alternative use; & Entity has an enforceable

16 Revenue Recognition Control Dictates Timing of Top Line Reporting 5 Ability to direct use Obtain substantially all benefits Over time transfer of control to customer, & hence over time revenue recognition, if 1 Customer simultaneously receives & consumes benefits as entity performs 2 Entity s performance creates or enhances an asset that customer controls 3 Entity s performance does not create an asset with alternative use; & Entity has an enforceable right to payment for performance to date Control Otherwise, point in time transfer & revenue recognition 16

17 Financial Instruments: End in sight for reform of financial instruments accounting 17

18 IFRS 9 Phase 1 Reducing Complexity & Arbitrary Rules Financial Assets Impairment Impairment Impairment Key problems IAS 39 L&R AC HTM AC Debt AFS [FVOCI] Debt FVPL Equity AFS [FVOCI] Equity FVPL Arbitrary classification Bifurcation complexity Impairment Recycle Recycle Impairment * No impairment IFRS 9 Debt AC Debt FVOCI * Debt FVPL Equity FVOCI Equity FVPL Recycle No recycle * Under drafting by IASB 18

19 IFRS 9 Phase 1 Business Model Overrules Business model Contractual cash flows Actual contractual cash flows likely from Basic lending-type return Collection Amortised cost * Sale FVPL Time value of money Liquidity risk Others Credit risk Profit margin Interest * If & only if contractual cash flows = basic lending-type return; Otherwise, FVPL. 19

20 IFRS 9 Phase 2 IAS 39 s Incurred Loss Model: A Case of Too Little, Too Late Earnings management Financial reporting Prudential regulation Delayed loss recognition only on trigger Reduce pro-cyclicality Expected Loss Model Alignment with capital charge Risk management Faithful representation Forward looking 20

21 IFRS 9 Phase 2 More Timely Credit Loss Recognition Loss allowance (% of gross carrying amount) Significant increase in credit risk ~ significant change in probability of default (PD) Incurred loss IFRS 9 Expected Loss * [day-1 recognition] ^ IAS 39 Incurred Loss [delayed recognition] Initial recognition * Under drafting by IASB # 12-month PD x Lifetime EL Increase in credit risk ^ Imperfection: Faithful representation vs. Implementation costs 21

IFRS 9 Phase 2 Some Simplifications Expected Loss (EL) Model Simplified Approach 12-month EL Lifetime EL Choice of EL Model or Simplified Approach

22 IFRS 9 Phase 2 Some Simplifications Expected Loss (EL) Model Simplified Approach 12-month EL Lifetime EL Choice of EL Model or Simplified Approach Significant deterioration Lease receivables Trade receivables with significant financing Trade receivables no significant financing Lifetime EL 22

23 IFRS 9 Phase 3 Improved Alignment with Risk Management Activities Voluntary discontinuation 2 More eligible hedging instruments 1 More eligible hedged items NEW 3 Accounting for time value of options/forward element of forwards Re-balancing hedge ratio Risk components of non-fis (e.g. oil price component of jet fuel price exposure) An exposure + a derivative (e.g. US$ exposure of [a US$ coffee purchase contract + a US$ coffee future]) Net positions 1 Non-derivative FVTPL FIs (except FL whose FV change on own credit is taken to OCI) However, following do not qualify: 2 - FVOCI equity instruments (for foreign currency hedge) Out 80%-125% bright line hedge effectiveness test - Derivatives embedded in FA hosts (bifurcation prohibited) May be deferred or amortised 3 23

24 IFRS 9 Key Timelines Phase 1 (Financial Assets) Issued by IASB Nov 2009 Phase 1 (Financial Liabilities) Issued by IASB Oct 2010 Phase 3 Issued by IASB Nov 2013 Phase 1 (Ltd Amendments) Phase 2 IASB expected issuance Q Tentative effective date 1 January

25 Other Key Global Developments in the Standard Setting Domain 25

26 Leases Where are we? IASB s current thinking Single right-of-use model 2013 ED: Dual consumptionbased model More relief: Small-asset leases Portfolio assessment Trigger-based reassessment of lease term Dual risk-&-reward model 26

Leases Lessee s Right-of-Use Model 2013 ED

Similar to amortised cost No: Amortisation +

27 Leases Lessee s Right-of-Use Model 2013 ED Right-of-use asset Financial liability Lessee consumes > insignificant economic benefits of underlying asset? Similar to amortised cost No: Amortisation + Interest = Single straightline expense Yes: Amortisation on straight-line or another systematic basis Final Standard? 27

Leases Lessor s Risk-&-Reward Model 2013 ED Final Standard Retain IAS 17? Lessee consumes > insignificant economic benefits of underlying asset (UA)?

28 Leases Lessor s Risk-&-Reward Model 2013 ED Final Standard Retain IAS 17? Lessee consumes > insignificant economic benefits of underlying asset (UA)? Lessor transfers substantially all risks & rewards of UA? No No Yes Similar to operating lease accounting Yes New Residual Asset Derecognise UA Recognise lease receivable + residual asset In-substance Sale (similar to finance lease accounting) Derecognise UA Recognise lease receivable 28

Temporary parking ground? Notion of recycling as no change in equity? P/L primary perf. measure?? What s recyclable & what s not?

29 Conceptual Framework The P/L & OCI Divide (1/2) Global quest for what constitutes financial performance (perf.) Total Comprehensive Income 20X0 20X1 20X2 P/L excluding recycling OCI recycled to P/L OCI net of recycling Some questions What s OCI? Temporary parking ground? Notion of recycling as no change in equity? P/L primary perf. measure?? What s recyclable & what s not? Distinction between P/L & OCI items? * Non-GAAP perf. measure necessary? One-size fits all? * Realised vs. Unrealised; Recurring vs. Non-recurring; Operating vs. Non-operating; Short vs. Long-term; etc? 29

Conceptual Framework The P/L & OCI Divide (2/2) Approaches considered in IASB Discussion Paper Prohibits recycling Some issues Narrow use of OCI always recycled 2A* 1 Broad use of OCI not always

30 Conceptual Framework The P/L & OCI Divide (2/2) Approaches considered in IASB Discussion Paper Prohibits recycling Some issues Narrow use of OCI always recycled 2A* 1 Broad use of OCI not always recycled 2B* Practical challenges with recycling in some cases Non-recycling vs. P/L provides primary information Temporary parking ground concern addressed? * P/L provides primary information about returns on resources made in a period 30

Disclosure Initiative A Case of Communication vs. Compliance?

.. information overload... The Disclosure Dilemma.

.. Mary Jo White, Chairwoman of US SEC Hans Hoogervorst, Chairman of IASB Behavioural issues.

31 Disclosure Initiative A Case of Communication vs. Compliance? When disclosure gets to be too much or strays from its core purpose, it could lead to... information overload... The Disclosure Dilemma... One investor s disclosure clutter is another investor s golden nugget of information... Mary Jo White, Chairwoman of US SEC Hans Hoogervorst, Chairman of IASB Behavioural issues... * A common conclusion was that many aspects of the disclosure problem have to do with behavioural factors... Hans Hoogervorst, Chairman of IASB * Erring on side of caution? Regulators & auditors comply or explain approach? 31

32 Disclosure Initiative Is there a Solution? Improved disclosure Materiality IAS 1 amendments Research on presentation & disclosure Standardslevel review of disclosure Short-term projects Medium-term projects 32

33 Concluding Remarks 33

for implementation of new standards early do not underestimate wide ranging impact &

34 Concluding Remarks RECAP & assess impact of new major standards & proposals early upcoming & proposed changes to standards & their implications to BOD, management & other stakeholders early for implementation of new standards early do not underestimate wide ranging impact & implementation efforts actively in ASC s stakeholder consultation & engagement activities & provide timely feedback 34

35 Thank You 35

Media Industry Accounting Group Annual conference 2017

www.pwc.com/miag Media Industry Accounting Group Annual conference 2017 London 15 June 2017 General accounting update Katie Woods UK E: Katie.woods@uk.pwc.com Slide 2 What s new in 2017? Not much again!