IFRS Update Event 2015 Highlighting the key issues. Groenekan, 19 November 2015

Transcription

1 IFRS Update Event 2015 Highlighting the key issues Groenekan, 19 November 2015

2 Peter Bommel CEO Deloitte Nederland

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

4 Agenda IFRS Developments; Ralph s Top 10 Break IFRS 9 Financial instruments IFRS 15 Revenue from contracts with customers Other platform changes Draft IFRIC Interpretations Attention points for 2015 FSs

5 IFRS Developments Ralph s Top Deloitte Global Services Limited

6 Ralph s Top Disclosure initiative 2. IFRS 15 Input TRG 3. Insurance contracts 4. IFRS 9 & Insurance industry 5. Leases 6. Conceptual framework 7. Post-implementation reviews IFRS 3 & IFRS 8 8. Rate-regulated activities 9. Accounting for dynamic risk management 10. Implementation issues

7 1. Disclosure initiative 2008 Deloitte Global Services Limited

8 Disclosure problem Not enough relevant information Too much irrelevant information Cutting the clutter (Financial Reporting Council, 2011) Losing the excess baggage - reducing disclosures in financial statements to what s important (The Institute of Chartered Accountants of Scotland & New Zealand, 2011) IASB s public forum to discuss disclosure overload (28 January 2013) & IASB s Feedback Statement of this Forum (May 2013)

9 Breaking the boilerplate 1. Clarify in IAS 1 the materiality principle 2. Clarify that a materiality assessment applies to the whole of the financial statements, including the notes 3. If a Standard is relevant, it does not automatically follow that every disclosure requirement is material 4. Remove prescriptive language from IAS 1 5. Flexibility about where they disclose accounting policies in the financial statements 6. Consider adding a net-debt reconciliation requirement 7. Look into the creation general application guidance on materiality Hans Hoogervorst IFRS Foundation conference Amsterdam, 27th June point plan to make financial reporting disclosure more effective 8. Less prescriptive wordings for disclosure requirements when developing new standards 9. Create a new disclosure framework (fundamental review of IAS 1, 7 & 8) 10. Undertake a general review of disclosure requirements in existing Standards

10 Disclosure initiative activities Projects Completed projects Ongoing activities Implementation projects Research projects Amendments to IAS 1 Digital reporting Proposed amendments to IAS 7 (reconciliation of liabilities from financing activities) Distinction between a change in accounting policy and estimate Materiality Practice Statement Principles of disclosures (Fundamental review of IAS 1 & IAS 8) Standards level review of disclosures

11 Presentation Disclosure initiative activities Amendments to IAS Materiality Not obscure useful information by aggregating or disaggregating information. Materiality considerations apply to the primary statements, notes, and specific disclosure requirements. Disaggregation and subtotals Specific line items can be disaggregated and aggregated as relevant. Additional guidance on the presentation of subtotals. Notes structure Flexibility when designing the structure of the notes.. Other Presentation of OCI items

12 IFRS Practice Statement Application of Materiality to Financial Statements Objective To help management apply the concept of materiality when preparing general purpose financial statements in accordance with IFRS Overview of ED Characteristics of materiality How to apply the concept when presenting and disclosing information in the financial statements ED Omissions and misstatements Will not be promoted to formal IFRS (non-mandatory)

13 Principles of disclosure (PoD) project Focus is on reviewing the general disclosure guidance in IAS 1 and IAS 8 Objective A Disclosure Standard that improves and brings together the principles for determining the basic structure and content of the financial statements, in particular the notes.

14 Standards level review of disclosures project Review of existing disclosure requirements Objective To review disclosures in existing Standards to identify targeted improvements and to develop a drafting guide. This project will be informed by the principles being developed in the Principles of Disclosure (PoD) project.

15 Good Practice: Sligro Food Group Financial Statements 2014

16 2. IFRS 15 Input TRG 2008 Deloitte Global Services Limited

17 IFRS 15 TRG FASB/IASB Transition Resource Group for Revenue Recognition US influence

18 3. Insurance contracts 2008 Deloitte Global Services Limited

19 Insurance contracts Types of contracts Non-participating contracts Participating contracts Insurance contracts without participation features. Insurance contracts with participation features. The participation feature gives rise to payments to the policyholder, paid out from a distinct share of surpluses, after providing the guaranteed benefits.

20 Insurance contracts Measurement & allocation of contractual service margin Contractual service margin Fulfilment cash flows Future cash flows: expected cash flows from premiums and claims and benefits Risk adjustment: an assessment of the uncertainty about the amount of the future cash flows Discounting

21 Insurance contracts Other matters An optional simplified measurement approach for simpler insurance contracts, based on the unearned premium reserve approach used in many jurisdictions Accounting requirements for reinsurance contracts that an entity holds, based on the general model Accounting requirements for investment contracts with discretionary participating features

22 4. IFRS 9 & Insurance industry 2008 Deloitte Global Services Limited

23 IFRS 9 & New insurance contracts standard Consequences EU endorsement? Addressing the consequences of different effective dates of IFRS 9 and the new insurance contracts standard IFRS 9 Financial Instruments IFRS XX Insurance Contracts 1 January January 202X? Solution 1: Overlay approach (effects in mismatch in OCI) Solution 2: Deferral approach (deferral of IFRS 9 for insurance industry)

24 5. Leases 2008 Deloitte Global Services Limited

25 Leases The IASB has completed its decision making for the Leases project The IASB plans to issue the new standard before the end of 2015 The new Leases standard will be effective from 1 January 2019

26 6. Conceptual framework 2008 Deloitte Global Services Limited

27 Conceptual framework ED Chapters 1 The objective of general purpose financial reporting 2 Qualitative characteristics of useful financial information 3 Financial statements and the reporting entity 4 The elements of financial statements 5 Recognition and derecognition 6 Measurement 7 Presentation and disclosure 8 Concepts of capital and capital maintenance

28 Conceptual framework ED Objective and qualitative characteristics The objective of general purpose financial reporting is to provide useful financial information Fundamental characteristic 1 Relevance Relevant financial information is capable of making a difference in decisions made by users Fundamental characteristic 2 Faithful representation Representation of relevant economic phenomena and faithful representation of the phenomena that it purports to represent Complete, neutral and free from error Enhancing characteristics Comparability Verifiability Timeliness Understandability Cost constraint

29 Conceptual framework ED Objective and qualitative characteristics Stewardship IASB has given more prominence to the need to provide information to assess management s stewardship of the entity s resources Primary users of financial statements IASB has confirmed focus on existing and potential investors, lenders and other creditors (including long-term investors)

30 Conceptual framework ED Objective and qualitative characteristics Prudence IASB has reintroduced an explicit reference to the notion of prudence (exercise of caution when making decisions under conditions of uncertainty) No overstatement or understatement of assets, liabilities, income or expenses (ie neutral) Measurement uncertainty If an estimate is too uncertain, it might not provide relevant information Trade-off against other factors that affect relevance Substance over form IASB has reintroduced explicit reference to substance over form within description of faithful representation

31 Conceptual framework ED Definitions of assets and liabilities Asset Liability Economic resource A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Not defined Current ED A present economic resource controlled by the entity as a result of past events A present obligation of the entity to transfer an economic resource of a result of past events A right that has the potential to produce economic benefits

32 Conceptual framework ED Present obligation An entity has a present obligation to transfer an economic resource if both: the entity has no practical ability to avoid the transfer; and the obligation has arisen from past events, ie the entity has received the economic benefits, or conducted the activities, that establish the extent of its obligation. Consequence for IAS 37 Provisions / IFRIC 21 Levies

33 Conceptual framework ED Performance reporting Income or expenses could be reported outside income only if: the income or expenses relate to assets or liabilities measured at current values; and excluding those items from the statement of profit or loss would enhance the relevance of the information in the statement of profit or loss for the period. Income OCI

34 7. Post-implementation reviews IFRS 8 & IFRS Deloitte Global Services Limited

35 Post-implementation reviews IFRS 8 & IFRS 3

36 Post-implementation reviews IFRS 8 Consistent description of the entity across presentations to investors, the management commentary and operating segments disclosures CODM is a function that makes operating decisions Disclosure of the nature of the entity s CODM Extend the number of examples of similar economic characteristics Additional guidance about the type of information that is most useful to investors (e.g. non-cash expenses, non-recurring items)

37 Post-implementation reviews IFRS 3 The effectiveness and complexity of testing goodwill for impairment The subsequent accounting for goodwill Challenges in applying the definition of a business Identification and fair value measurement of intangible assets such as customer relationships and brand names

38 8. Rate-regulated activities 2008 Deloitte Global Services Limited

39 Rate-regulated activities Discussion Paper published in September 2014 What information is needed to help investors understand the financial effects of rate regulation? Definition of rate regulation? How does rate regulation affect the amount, timing and certainty of revenue, profit and cash flows? How should IFRS be amended, if at all, to provide relevant information to investors through IFRS financial statements?

40 9. Accounting for dynamic risk management 2008 Deloitte Global Services Limited

41 Accounting for dynamic risk management Macro hedging

42 10. Implementation issues 2008 Deloitte Global Services Limited

43 Narrow scope amendments Selection projects Annual Improvements cycle Annual Improvements cycle IFRS 13 Fair Value Measurement: unit of account IAS 12 Income Taxes: Recognition of deferred tax assets for unrealised losses IAS 40 Investment Property: Transfers of investment property

44 Break

45 IFRS 9 Financial instruments 2008 Deloitte Global Services Limited

46 IAS 39 Classification IFRS 9 Classification Classification & Measurement What are the differences? Rule-Based Principle-based Complex and difficult to apply Own credit gains and losses recognized in P&L for fair value option (FVO) liabilities Classification based on business model and nature of cash flows Own credit gains and losses recognized in OCI for FVO liabilities Complicated reclassification rules Business model-driven classification

47 Classification & Measurement Financial assets Are the cash flows considered to be solely principal and interest ( SPPI )? What is the business model? Hold to collect contractual cash flows What is the measurement category? Amortized Cost Are alternative options available? FVTPL option (in case of acc. mismatch) Yes Hold to collect contractual cash flows AND to sell FVTOCI FVTPL Option (in case of acc. mismatch) New 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 New

48 Impairment Why have changes been made to the impairment model? Reduce reliance on identifying incurred loss triggers Reduce complexity of multiple impairment measures Enhance comparability Financial crisis delayed recognition of credit losses Incurred loss model earnings management reduce the cliff effect

49 Impairment Scope of impairment provisions of IFRS 9 Financial assets in the scope of IFRS 9 Loan commitments FVTPL) Financial guarantees FVTPL) Lease receivables Contract assets (IFRS 15) Subsequent measurement FVTPL/FVTOCI Option for certain equity instruments AC FVTOCI Outside the scope of the impairment model Within the scope of the impairment model

50 Expected credit loss (ECL) model General impairment 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 lifetime expected credit losses lifetime expected credit losses interest calculated on gross carrying amount interest calculated on gross carrying amount 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

51 Measurement of expected credit losses Time value of money Discounted to the reporting date using the effective interest rate at initial recognition or an approximation thereof. Information All reasonable and supportable information, which is available without undue cost or effort including information about past events, current conditions, and forecasts of future economic conditions. Expected value The estimate shall always reflect: the possibility that a credit loss occurs; and the possibility that no credit loss occurs. Period Maximum contractual period under consideration of extension options. Cash shortfalls Shortfalls of principal and interest as well as late payment without compensation. Collective assessment Measurement on individual instrument or on portfolio level.

52 Assessment of a significant increase in credit risk Acc. policy choice: assume no increase if low credit risk at the reporting date May assess credit risk increases on a collective basis Relative assessment compare inception and reporting date Assessment of the increase in credit risk Rebuttable presumption when more than 30 days past due Significant increase normally occurs before creditimpairment Use reasonable and supportable forward-looking information that is available without undue cost/effort

53 Exemptions to the general impairment model Lease receivables Contract assets with a significant financing component Trade receivables with a significant financing component Policy choice General model Stage 1 Stage 2 Stage 3 Contract assets without significant financing component Simplified model Stage 2 Stage 3 Trade receivables without a significant financing component Purchased or originated credit-impaired financial assets Special provisions No loss allowance on initial recognition Apply a credit-adjusted effective interest rate (based on the expected cash flows at inception including expected credit losses) Stage 3

54 Purchased or originated credit-impaired financial assets Purchased or originated credit-impaired financial assets are those that at the date of initial recognition are credit-impaired. A financial asset is considered to be credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. On initial recognition, measure at FV Calculate a creditadjusted EIR, incorporating expected lifetime credit losses Subsequently measure the asset by applying the credit-adjusted EIR to its amortized cost Recognize cumulative changes in the lifetime ECLs as an impairment gain/loss in P&L Even if lifetime ECLs have decreased since initial recognition

55 Hedge accounting Changes compared to IAS 39 Eligibility of hedged items and hedging instruments Treatment of the time value of options, forward elements of forward contracts, foreign currency basis spread New effectiveness requirements (removal of 80%-125%) Closer alignment of the hedge accounting model with risk management Extension of FV option when managing credit risks + own use contract Disclosures (IFRS 7 amendments) Concept of rebalancing

56 Effective date of transition for IFRS 9 (2014) Date of Initial Application date when an entity first applies IFRS 9 (2014) If an entity with a Dec 31 YE does not early adopt, DIA = January 1, 2018 Effective for annual periods beginning on or after January 1, 2018 Retrospective application, with a number of practical elections and expedients available at transition. Early application permitted. Concurrent application of all requirements with certain exceptions. IFRS 9:7.2.22: hedge accounting requirements will generally be applied prospectively Choice of whether to restate comparatives, but restatement not allowed if this requires use of hindsight.

57 IFRS 15 Revenue from contracts with customers 2008 Deloitte Global Services Limited

58 Overview The core principle 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. Five-step model to apply the core principle: 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 each performance obligation is satisfied (Step 5) Control approach (differs from the risks and rewards approach under IAS 18)

59 Step 1: Identifying the contract Step 1 Step 2 Step 3 Step 4 Step 5 A legally enforceable contract (incl. oral or implied) must meet all of the following requirements: Contracts are approved and the parties are committed to perform. Each party s rights can be identified. Payment terms can be identified. Commercial substance. A contract It is is probable outside the that scope the entity if: will collect the consideration to which it will be entitled. The contract is wholly unperformed AND Each party can unilaterally terminate the contract without compensation

60 Step 2: Identifying performance obligations Step 1 Step 2 Step 3 Step 4 Step 5 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

61 Step 3: Determining the transaction price Step 1 Step 2 Step 3 Step 4 Step 5 What is the transaction price? What does it include? Variable consideration Estimated and potentially constrained e.g., discounts, rebates, refunds, etc. Definition Consideration amount to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. Consideration payable to customers Reduces transaction price unless payment is made for a distinct good/service. Significant benefit of financing If identified, leads to adjustment in transaction price. Practical expedient available. Transaction price Fixed consideration Non-cash consideration Consideration in a form other than cash Shall be measured at FV The amount is fixed and not contingent on the outcome of future events. Excluding credit risk The transaction price would not be reduced for the effects of customer credit risk.

62 Step 4: Allocating the transaction price Step 1 Step 2 Step 3 Step 4 Step 5 Determine standalone selling price Estimate the price if unobservable Acceptable methods: Adjusted market assessment approach Expected cost plus a margin approach Residual approach (under conditions) Maximize the use of observable inputs and apply consistently Allocate the transaction price Allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. Allocate discounts proportionally to all performance obligations unless certain criteria are met. Allocate variable consideration and changes in transaction price to all performance obligations unless two criteria are both met. Do not reallocate changes in standalone selling price after inception.

63 Step 5: Recognising revenue Step 1 Step 2 Step 3 Step 4 Step 5 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

64 Key impact on revenue recognition Step 5 Step 1 Identify the contract with a customer Step 2 Identify the performance obligations in the contract Step 3 Determine the transaction price Step 4 Allocate the transaction price to performance obligations Recognise revenue when each performance obligation is satisfied Collectability Healthcare Technology Unbundling of contracts Telecom Software Automotive Uncertain revenue or contingent revenue Life Science Consumer & Industrial Products Allocation of total revenue to the unbundled parts Telecom Recognition of revenue at a point in time or over time Contract Manufacturer Real estate

65 Disclosures Enable users to understand the amount, timing, and uncertainty of revenue and cash flows Contracts with customers Description of significant judgments applied/transaction price, allocation methods and assumptions Significant judgments Disaggregation of revenue Contract balances (including reconciliation) Information about performance obligations Remaining performance obligations Practical expedients Policy decisions time value of money and cost to obtain a contract Contract costs Others

66 Transition to IFRS 15 Jan 2014 Jan 2018 Initial application Jan 2020 Option 1: Modified Retrospective Option 2: Fully Retrospective Current GAAP Adjust opening balance of equity as at date of initial application IFRS 15 All restated under IFRS 15

67 Clarifications to IFRS 15 (ED/2015/6) Determining when a good or service is separately identifiable Determining whether an entity is a principal or an agent Determining the nature of an entity s promise in granting a licence Application of the exemption for sales- and usage-based royalties Practical expedients upon transition

68 Other platform changes 2008 Deloitte Global Services Limited

69 Accounting for acquisitions of interests in joint operations that constitute a business 2016 Investor acquires an interest in a JO Does the activity of the JO constitute a business under IFRS 3? New guidance on the accounting for acquisitions of interests in JO, in which the activity constitutes a business No Account for as the acquisition of assets Yes Apply the business combinations principles under IFRS 3 and other IFRSs Apply the principles under IFRS 3 and other relevant IFRSs if the JO activity meets the definition of business under IFRS 3 Allocate the total cost of the acquisition on the basis of relative fair value of the assets and liabilities of JO Fair value measurement of identifiable assets and liabilities Recognize goodwill, deferred tax assets, and liabilities Expense acquisition-related costs

70 Simplified measurement of bearer plants 2016 Apples at fair value less costs to sell (IAS 41) Tree at cost (IAS 16)

71 Draft IFRIC Interpretations 2008 Deloitte Global Services Limited

72 Draft Interpretation Uncertain tax positions > 50% If an entity concludes that it is probable that the taxation authority will accept an uncertain tax treatment, or group of uncertain tax treatments, it shall determine the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings.

73 Draft Interpretation Uncertain tax positions 50% Reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates. It shall reflect the effect by using one of the following methods: The most likely amount The expected value Apply approach which will provide the better prediction of the resolution of the uncertainty

74 Draft Interpretation Foreign currency transactions and advance consideration If non-monetary prepayment asset or non-monetary deferred income liability is recognised in advance of the related asset, expense or income How to determine the date of transaction and thus the exchange rate to use to translate the asset, expense or income on initial recognition?

75 Draft Interpretation Foreign currency transactions and advance consideration The date of the transaction, for the purpose of determining the spot exchange rate used to translate the related asset, expense or income (or part of it) on initial recognition is the earlier of: a) the date of initial recognition of the non-monetary prepayment asset or the non-monetary deferred income liability; and b) the date that the asset, expense or income (or part of it) is recognised in the financial statements.

76 Example: Foreign currency and advance consideration ED An entity enters into a contract with a supplier on 1 March to purchase a machine for use in its business. The entity pays the supplier a non-refundable fixed purchase price of USD 1000 on 1 April. On 15 April the entity takes delivery of the machine. The functional currency of the entity is the Euro. 1 March 1 April 15 April Date of transaction

77 Attention points for 2015 FSs 2008 Deloitte Global Services Limited

78 ESMA European enforcement priorities for 2015 financial statements Impacts of the financial markets on the financial statements Statement of cash flows and related disclosures Fair value measurement and related disclosures

79 Eumedion Focus points Acquisitions: improved transparency and meaningful shareholder involvement Improved transparency on tax policy and associated risks Continued support for integrated reporting

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