Reporting on Audited Financial Statements - IAASB Exposure Draft

Transcription

1 DI / FSR Danish Accounting Forum 04. nov. 13 The Conceptual Framework - IFRS Discussion Paper Reporting on Audited Financial Statements - IAASB Exposure Draft

2 DI / FSR Danish Accounting Forum 04. nov. 13 Welcome by/ Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors 2

3 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 3

4 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 4

5 International Financial Reporting Standards Conceptual Framework 4 November 2013 Denmark The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

6 Session overview 6 Why? Where are we? High level overview of proposals Assets and liabilities and recognition Presentation & disclosure (including profit or loss and OCI) Background

7 Why? 7 Previous project suspended in 2010 Agenda consultation Priority project Purpose of Conceptual Framework project Not a fundamental rethink Update, improve and fill in gaps Focus on problems in standard-setting Purpose of the Discussion Paper Starting point for discussion and outreach Seek views on key issues from interested parties

8 Where are we? 8 Objective of financial reporting Qualitative characteristics Completed ED (2010) Reporting entity Everything else on financial statements Now

9 International Financial Reporting Standards Definitions of assets, liabilities and recognition The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

10 Elements: Existing definitions 10 Asset [of an entity] Liability [of an entity] a resource controlled by the entity a present obligation of the entity as a result of past events arising from past events from which future economic benefits are expected to flow to the entity the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Proved useful tool for many years, but some problems

11 Elements: Problems with existing definitions and recognition 11 Risk of confusing: the resource or obligation, with the inflows or outflows of economic benefits that the resource or obligation may generate What does expected mean? How about probability from the recognition criteria? More guidance needed? What is a resource? What is an obligation?

12 Possible revised definitions 12 Clarify definitions Asset [of an entity] A present economic resource controlled by the entity as a result of past events Liability [of an entity] a present obligation of the entity to transfer an economic resource as a result of past events An economic resource = a right, or other source of value, that is capable of producing economic benefits

13 Summary of further guidance proposed 13 To support asset definition To support liability definition To support both definitions meaning of economic resource constructive obligations reporting substance of contractual rights and obligations meaning of controlled impact of future events executory contracts

14 Recognition & derecognition 14 Recognition Recognise items that meet definitions of elements, unless results do not provide useful information (relevant, faithful representation) or costs exceed benefits Derecognition Derecognise when no longer meet the definition of an asset or liability Consider how best to portray transactions when an entity retains a component of an asset or liability (eg disclosure, presentation, continued recognition)

15 International Financial Reporting Standards Profit and loss, other comprehensive income (OCI) and recycling The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

16 Why distinguish between profit or loss and OCI? 16 Agenda consultation Users ignore changes in OCI Recycling? Lack of clarity on role of profit or loss and OCI IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

17 Distinguish using an attribute? 17 Profit or loss Realised Recurring (persistent) Operating Measurement certainty Short-term Under management control OCI Unrealised Non-recurring Non-operating Measurement uncertainty Long-term Outside management control IASB s view: No one way to distinguish profit or loss and OCI IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

18 Profit or loss and OCI: suggested approaches 18 IASB s preliminary view: Retain profit or loss as a subtotal or total Profit or loss communicates the primary picture of the return an entity has made on its resources Some items of income or expense should be reported outside profit or loss (in OCI) Two approaches to distinguish profit or loss and OCI: Narrow approach Broad approach Alternative approach No subtotal (ie profit or loss or OCI) defined in the Conceptual Framework No recycling Not well supported IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

19 Narrow use of OCI 19 All recycle Bridging Two different measures Eg IFRS 9 Classification and Measurement ED [changes in FV], Insurance contracts ED [changes in discount rate] Profit or loss OCI All recycle Mismatched Current remeasurement information incomplete Eg Effective portion of changes in fair value in cash flow hedge

20 Two different measures (bridging) 20 Example (IFRS ED): In 20X1, financial assets are measured at amortised cost in the statement of profit or loss and fair value in the balance sheet. In 20X4, the financial assets are sold. Statement of profit or loss Statement of comprehensive income 20X1 20X1 Interest income A Profit or loss A-B Impairment (B) Fair value changes C Profit or loss A-B Total comprehensive income A-B+C C = Differences between amortised cost (in profit or loss) and fair value (in balance sheet) IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

21 Two different measures (bridging) (2) 21 Statement of profit or loss Interest income Impairment Gain on sale (reclassification adjustment) 20X4 A (B) D Statement of comprehensive income Profit or loss Fair value changes during the year Reclassification adjustment to profit or loss 20X4 A-B+D C (D) Profit or loss A-B+D Total comprehensive income A-B+C D = cumulative change in fair value until date of sale = sales proceeds less amortised cost IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

22 Broad use of OCI 22 All recycle Bridging Mismatched Profit or loss OCI Some recycle, if relevant Transitory remeasurements Long-term remeasurement expected to reverse or change significantly remeasurement enhances profit or loss as the primary indicator of the return the entity has made on its economic resources Eg pensions remeasurement

23 Transitory remeasurements 23 Example Pensions 20X1: Estimate of employee service cost is CU10 per year 20X2: Revised estimate of employee service cost is CU12 per year - revision due to change in inflation forecast Relevant information about 20X2 service costs Transitory effect of inflation is separately presented Impact on comprehensive income 20X2 CU Profit or loss 12 OCI: Pension liability remeasurement 2 Total 14 Impact on financial position 20X2 CU 20X2 service cost 12 20X1 service cost 10 20X1 catch-up 2 Pension liability 24 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

24 Summary When can OCI be used? Items eligible? Recycling Result Narrow Approach Use of OCI is only where permitted or required by IFRS Mismatched remeasurements Bridging items Always Driven by the category and the reason why the item went into OCI Limited items in OCI Less discretion for the IASB 24 Broad Approach Use of OCI is only where permitted or required by IFRS Mismatched remeasurements Bridging items Transitory remeasurements Sometimes Bridging and mismatched always Transitory remeasurements only if it provides relevant information More items in OCI (in line with current use) More discretion for the IASB IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

25 Timetable Jul 2013 Issue DP 6-month comment period (14 Jan 2014) Q Issue ED End 2015 Final

26 Background 26 Other sections in the Discussion Paper: Measurement Distinguishing between liabilities and equity Derecognition Going concern Business model Unit of account Capital maintenance Objective of financial reporting & qualitative characteristics (stewardship, prudence, reliability)

27 More information 27 Discussion Paper Snapshot Conceptual Framework website Existing Conceptual Framework including (Chapters 1 & 3) ework.pdf

28 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 28

29 A Review of the Conceptual Framework for Financial Reporting Copenhagen - 4 November 2013

30 Definitions of assets, liabilities and recognition

31 Elements of financial statements (1/2) Definitions of assets and liabilities seem easier to understand but should be tested Income and expenses should be defined on the basis of changes in balance sheet items Would be useful to define contributions to equity, distributions of equity and transfers between classes of equity

32 Elements of financial statements (2/2) Consider what the statement of cash flows should communicate Should the definition of an economic resource be: A right, or other source of value, that is capable of producing economic benefits to the entity?

33 Additional guidance to support the asset and liability definitions Liabilities should encompass both legal and constructive obligations Description of a constructive obligation is too narrow A present obligation must have arisen from past events and be practically unconditional Definition of control may result in changes Additional guidance on the role of economic compulsion when distinguishing equity and liabilities

34 Recognition and derecognition (1/3) Relevance and faithful representation should be considered Should there be a probability threshold? Yes: Guidance is needed in the Conceptual Framework No: Would reduce flexibility in standard setting / not possible to make a threshold that is suitable for all cases

35 Recognition and derecognition (2/3) Does the asset or liability represent an outcome risk? No Yes Recognise Can the various outcomes be determined reliably/verifiably? Yes Recognise when probability of inflow/outflow > 50 % No Recognise liability unless outflow is remote Recognise asset when inflow is virtually certain

36 Recognition and derecognition (3/3) EFRAG supports the proposals on derecognition However, guidance should be included on the difference between a modification of an asset or liability and derecognition of an asset or liability and recognition of another

37 Profit and loss, other comprehensive income (OCI) and recycling

38 Presentation in the statement(s) of comprehensive income Profit or loss should be presented as it is the primary measure of an entity s performance The business model should play a role in what goes to profit or loss and OCI EFRAG supports that OCI should include bridging items, mismatched remeasurements and transitory remeasurements Recycling should take place unless it would not provide relevant information in profit or loss

39 More information EFRAG draft comment letter and short summary on preliminary position available from the EFRAG website. Comments are requested by 31 December 2013 Bulletins published in partnership with the National Standard Setters of France, Germany, Italy and United Kingdom: Accountability the Objective of Financial Reporting Prudence Reliability of Financial Information the Asset/Liability Approach the Role of a Conceptual Framework the Role of the Business Model in Financial Reporting Uncertainty All bulletins are available from the websites of EFRAG and partner National Standard Setters 39

40 Thank you for your attention! And now Questions? and answers! EFRAG receives financial support of the European Union-DG Internal Market and Services. The contents of this presentation is the sole responsibility of EFRAG and can under no circumstances be regarded as reflecting the position of the European Union.

41 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 41

42 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 42

43 DI / FSR Danish Accounting Forum 04. nov. 13 Coffee 43

44 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 44

45 IAASB Exposure Draft Reporting on Audited Financial Statements The Danish Accounting Forum Dan Montgomery, IAASB Deputy Chair Copenhagen, Denmark 4 November 2013 Page 45

46 Responding to the Changing Audit Environment Evolving nature of financial reporting Changing demand from users ( we want to hear more ) Global financial crisis triggered key questions e.g., Quality of auditing effectiveness, professional judgment, professional skepticism Relevance of audit and trust in the audit profession In June, IAASB unanimously approved Exposure Draft Informed by research, public consultation and global outreach Page 46

47 Potential Benefits of the Proposed ISAs Auditor s report is the key deliverable from the audit, so enhancing its communicative value may: Have positive benefits to audit quality or users perception of it Increase users confidence in the audit and the financial statements Renewed focus of the auditor on matters to be reported Enhance communications between the auditor and TCWG Increased focus by management and TCWG on financial statement disclosures Page 47

48 Key Proposals Opinion preferably first New section to address Key Audit Matters New section to address Going Concern New section to address Other Information when applicable Other proposed improvements to enhance transparency or clarify responsibilities and the key features of the audit Page 48

49 Key Audit Matters (KAM) New ISA 701 Objective: To communicate those matters that, in the auditor s judgment, were of most significance in the audit of the financial statements of the current period Required for audits of financial statements of listed entities Selected from matters communicated with TCWG Engagement partner and team often will have an intuitive assessment of the areas of most significance or difficulty Proposed standard includes considerations for areas of significant auditor attention and robust application material to guide the auditor s determination of KAM to be communicated in the auditor s report Page 49

50 Key Audit Matters (KAM) (continued) Description in the auditor s report intended to provide insight about why the matter was determined to be a KAM IAASB agreed the nature and extent of the description of an individual KAM is a matter of professional judgment, including whether it is necessary to describe certain audit procedures or findings (i.e., the effect on the audit) Detailed application material developed to support this judgment Revised illustrative examples highlight the different approaches that would be permitted under the standard Page 50

51 Going Concern (GC) Revisions to ISA 570 Heightened attention on GC, particularly in light of the global financial crisis and the EC proposals on audit reform New section in the auditor s report for all audits that would include: A statement regarding the appropriateness of management s use of the GC basis of accounting in preparing the entity s financial statements A statement about whether the auditor has identified a material uncertainty (MU) that may cast significant doubt on the entity s ability to continue as a GC When MU is identified, second statement above is modified Current EOM paragraph replaced by this statement in the GC section Page 51

52 Going Concern (GC) (continued) Active liaison with the IASB and US FASB to facilitate holistic approach to addressing going concern in financial reporting IASB has added going concern to its broader disclosure initiative Some indication that amendments to IAS 1 for GC are not needed Status and planned actions of IASB and FASB will need to be considered as the IAASB finalizes its auditor reporting proposals Also monitoring with interest the PCAOB project on going concern Page 52

53 Other Proposed Improvements Explicit statement about Other Information based on the auditor s work Auditor s report wording to be determined when finalizing ISA 720 (Revised) Explicit statement that the auditor is independent, with reference to the relevant ethical requirements, and that the auditor has fulfilled the auditor s other responsibilities under those ethical requirements Disclosure of the name of the engagement partner responsible for the audit (required for listed entities only) Clarification of respective responsibilities for preparing the financial statements and conducting the audit Page 53

54 Looking Ahead Exposure draft open for comment through November 22, 2013 Comments on proposals, including illustrative reports, strongly encouraged Represents a significant change in practice, but critical to the continuing perceived value of the audit and relevance of the profession Now is the time for all stakeholders to begin thinking about implementation and how to help ensure success Field testing by firms can help inform views on IAASB proposals and plans for adopting the new reporting model Page 54

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56 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 56

57 Reporting on audited financial statements Dansk regnskabsforum Jon Beck and Lars Engelund Members of FSR's auditing standards committee Side 57

58 FSR's auditing standards committee prelimiary comments on exposure draft regarding auditor reporting Significant improvement compared to the consultation paper Risk of information overload / difficult for users of audit report to understand. However good that the opinion comes first. Description regarding fulfillment of relevant ethical requirements in the basis for opinion paragraph creates uncertainty as to the quality of the audit. The paragraph should be renamed "Conduct of the audit", so that the basis for modified opinions/modified opinions are more clearly identifiable Side 58

59 FSR's auditing standards committee prelimiary comments on exposure draft regarding auditor reporting Key Audit Matters Should only be required for listed companies, were required by local legislation or were requested by the shareholders Criteria for when KAM should be disclosed should be clearer, for example only Significant Risks. What should be included in KAM should be consistent and clearer, for example Why KAM, Disclosures in FS and audit approach Most relevant information for users could be the auditors findings, but this could be construed as a separate opinion or information that is not publically available Side 59

60 FSR's auditing standards committee prelimiary comments on exposure draft regarding auditor reporting Going concern Going concern paragraph is to long when there are no material uncertainties - should be redrafted in a more direct way. Explanations regarding going concern should be included in the financial statements and not the Auditor's report, as this is managements responsibility Going Concern issues are not clearly identifiable for users Paragraph can be interpreted by users as a way of reducing the auditor responsibility, which could increase the expectation gap The interaction between KAM, Going concern and Emphasis of matter paragraphs is not clear and may confuse users. If Going concern is a significant risk, this should be included as a KAM Audit report should either include KAM or Emphasis of matter paragraphs not both Positive that there is an option to make reference to a description of auditor's responsibility on common website Side 60

61 Structure of Auditor's Report Side 61

62 DI / FSR Danish Accounting Forum 04. nov. 13 IAASB Proposal Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard 62

63 DI / FSR Danish Accounting Forum 04. nov. 13 IAASB Proposal and the audit proposal being discussed in EU EU Parliament (Regulation Art PIE's) (fa): Description of most important assessed risks of material misstatements (incl. fraud) + Key observations arising from the audit work + Clear reference to the relevant disclosure (l): Conclusion on appropriateness of management's use of the going concern assumption Council (Directive Art ALL) (f2) Report if the auditor has become aware of any key areas of risk of material misstatement (f1): Statement on any material uncertainties that may cast significant doubt about going concern IAASB-proposal Key Audit Matters Conclusion on appropriateness of management's use of the going concern assumption Side 63

64 DI / FSR Danish Accounting Forum 04. nov. 13 Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements. Key audit matters are selected from the matters communicated with [those charged with governance], but are not intended to represent all matters that were discussed with them. Our audit procedures relating to these matters were designed in the context of our audit of the consolidated financial statements as a whole. Our opinion on the consolidated financial statements is not modified with respect to any of the key audit matters described below, and we do not express an opinion on these individual matters. Side 64

65 DI / FSR Danish Accounting Forum 04. nov. 13 Key audit Maters - Example 1 Goodwill Why KAM: Under IFRSs, the Group is required to annually test the amount of goodwill for impairment. This annual impairment test was significant to our audit because the assessment process is complex and highly judgmental and is based on assumptions that are affected by expected future market or economic conditions, particularly those in [Countries X and Y]. Procedures performed (no conclusion): As a result, our audit procedures included, among others, using a valuation expert to assist us in evaluating the assumptions and methodologies used by the Group, in particular those relating to the forecasted revenue growth and profit margins for [name of business lines]. We also focused on the adequacy of the Group s disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount of goodwill. Disclosures in the financial statements: The Group s disclosures about goodwill are included in Note 3, which specifically explains that small changes in the key assumptions used could give rise to an impairment of the goodwill balance in the future. Side 65

66 DI / FSR Danish Accounting Forum 04. nov. 13 Key audit Maters - Example 2 Valuation of Financial Instruments Disclosures in the financial statements: The Group s disclosures about its structured financial instruments are included in Note 5. Why KAM: The Group s investments in structured financial instruments represent [x%] of the total amount of its financial instruments. Because the valuation of the Group s structured financial instruments is not based on quoted prices in active markets, there is significant measurement uncertainty involved in this valuation. As a result, the valuation of these instruments was significant to our audit. The Group has determined it is necessary to use an entity-developed model to value these instruments, due to their unique structure and terms. Procedures performed (with conclusion): We challenged management s rationale for using an entity-developed model, and discussed this with [those charged with governance], and we concluded the use of such a model was appropriate. Our audit procedures also included, among others, testing management s controls related to the development and calibration of the model and confirming that management had determined it was not necessary to make any adjustments to the output of the model to reflect the assumptions that marketplace participants would use in similar circumstances. Side 66

67 DI / FSR Danish Accounting Forum 04. nov. 13 Key audit Maters - Example 3 Acquisition of XYZ Business Disclosures in the financial statements: As described in Note 2, in December 20X1, the Group completed the acquisition of XYZ Business. Why KAM: XYZ Business was a division of a large private company. As of December 31, 20X1, the Group has completed the initial acquisition accounting on a preliminary basis. The Group will finalize the initial acquisition accounting during 20X2, and the amounts recorded as of December 31, 20X1 could change. We focused on this transaction because it is material to the consolidated financial statements as a whole and the fact that values had not previously been assigned to the division as a standalone operation. In addition, determining the assumptions that underlie the initial acquisition accounting and the useful lives associated with the acquired intangible assets involves significant management judgment given the nature of the [name of industry]. Procedures performed (with conclusion): No procedures Side 67

68 DI / FSR Danish Accounting Forum 04. nov. 13 KAM(4) - Revenue Recognition Relating to Long-Term Contracts Why KAM: The terms and conditions of the Group s long-term contracts in its [name of segment] affect the revenue that the Group recognizes in a period, and the revenue from such contracts represents a material amount of the Group s total revenue. The process to measure the amount of revenue to recognize in the [name of industry], including the determination of the appropriate timing of recognition, involves significant management judgment. We identified revenue recognition of long-term contracts as a significant risk requiring special audit consideration. This is because side agreements may exist that effectively amend the original contracts, and such side agreements may be inadvertently unrecorded or deliberately concealed and therefore present a risk of material misstatement due to fraud. Procedures performed (with conclusion): In addition to testing the controls the Group has put in place over its process to enter into and record long-term contracts and other audit procedures, we considered it necessary to confirm the terms of these contracts directly with customers and testing journal entries made by management related to revenue recognition. Based on the audit procedures performed, we did not find evidence of the existence of side agreements. Disclosures in the financial statements: The Group s disclosures about revenue recognition are included in the summary of significant accounting policies in Note 1, as well as Note 4. Side 68

69 DI / FSR Danish Accounting Forum 04. nov. 13 Going concern Explanation of the going concern assumption (the accounting framework): The consolidated financial statements of the Group have been prepared using the going concern basis of accounting. The use of this basis of accounting is appropriate unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Auditor's assessment (reasonable assurance): As part of our audit of the consolidated financial statements, we have concluded that management s use of the going concern basis of accounting in the preparation of the Group s consolidated financial statements is appropriate. Management has not disclosed that there is material uncertainty: Management has not identified a material uncertainty that may cast significant doubt on the Group s ability to continue as a going concern, and accordingly none is disclosed in the consolidated financial statements of the Group. The Auditor has not identified material uncertainty (limited assurance): Based on our audit of the consolidated financial statements of the Group, we also have not identified such a material uncertainty. Management and the Auditor: However, neither management nor the auditor can guarantee the Group s ability to continue as a going concern. Side 69

70 DI / FSR Danish Accounting Forum 04. nov Welcome and introduction Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors Introduction to the IFRS Discussion Paper on the Conceptual Framework with emphasis on new definitions of assets/liabilities and content of Other Comprehensive Income IASB Preliminary EFRAG comments to the DP Rasmus Sommer, EFRAG Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountant Stig Enevoldsen, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Coffee Introduction to IAASB Exposure Draft: Reporting on Audited Financial Statements Dan Montgomery, deputy chair of IAASB Open floor debate for participants to discuss their views Interventions prepared by State authorized public accountants Jon Beck and Lars Engelund, FSR Danish Auditors Vice President Tina Aggerholm, Carlsberg Debate led by: Kristian Koktvedgaard Wrap up and close Jan Peter Larsen and Kristian Koktvedgaard 70

71 DI / FSR Danish Accounting Forum 04. nov. 13 Wrap up and close by/ Kristian Koktvedgaard, DI Jan Peter Larsen, FSR - Danish Auditors 71