First Quarter Accounting & Tax Update

Transcription

1 First Quarter Accounting & Tax Update Monday, April 11, 2016 kpmg.ca/quarterlyupdate International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 1

2 Welcome Trevor Hammond Partner Audit T: E: International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 2

3 Agenda Accounting standards update and Q1 financial reporting reminders Jassie Kang Lease reporting standard Sharlene Wilson Highlights from Federal and Provincial budget releases Wanda Rumball & Adrian Adams Strategies for stakeholder relations in a challenging environment Neil Honess & Ryan Adlington International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 3

4 Q1 financial reporting reminders Jassie Kang Senior Manager Audit T: E: International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 4

5 Q1 financial reporting reminders Considerations for March 31, 2016: Impairment considerations How are you tracking relative to year end cash flow projections Banking arrangements and covenants (current and forecast) Implications of timing of getting waivers for covenant failure Liquidity and going concern considerations Assets held for sale criteria Inventory valuation International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 5

6 Accounting standards Major Project Updates Lease accounting issued in January 2016 by IASB Revenue recognition Financial instruments Insurance Contracts Project Other Standards Amendments to IFRS 10 and IAS 28 postponement of effective date indefinitely International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 6

7 Lease reporting standard Sharlene Wilson Partner Audit T: E: International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 7

8 Why a new leasing standard? Currently analysts adjust financial statements for off-balance sheet leases Under IFRS 16, companies will bring these leases on-balance sheet, using a common methodology International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 8

9 Lessees face major changes All major leases on-balance sheet Balance sheet Asset = Right-of-use of underlying asset Liability = Obligation to make lease payments P&L Lease expense Depreciation + Interest = Front-loaded total lease expense International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 9

10 Impact on balance sheet Companies who currently have operating leases will appear to be more asset-rich, but also more heavily indebted Asset Liability International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 10

11 Impact on the income statement Total lease expense will be front-loaded even when cash rentals are constant Depreciation Interest Cash rental payments International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 11

12 Impact on financial ratios Profit/loss Balance sheet Ratios EBITDA Total assets Debt/equity EPS (in early years) Net assets Interest coverage Asset turnover International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 12

13 Lease definition The new on/off-balance sheet test for lessees a key judgement area Lease classification test ON OFF New standard Old standard Lease ON Finance lease Service Operating lease International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 13

14 Lease definition control The new definition increases focus on who controls the asset and may change which contracts are leases Lease Not a lease? International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 14

15 Lease definition exemptions Two optional exemptions make the standard significantly easier to apply Short term leases Leases of low value items 12 months USD 5,000 for example International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 15

16 Measuring the lease liability Lease liability = Present value of lease rentals + Present value of expected payments at end of lease International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 16

17 Measuring the right-of-use asset ROU asset = Initial direct costs + Prepaid lease rentals + Lease liability + Estimated costs to dismantle - Lease incentives received International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 17

18 Lease reporting standard: multiple transition options International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 18

19 Applying the new lease definition Apply the new definition to all contracts OR Grandfather existing contracts and apply the new definition only to new contracts Cost Comparability International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 19

20 Applying the new standard A lessee can choose to apply the standard Cost Comparability Retrospectively to all accounting periods OR As a big bang at the date of initial application International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 20

21 Federal and Provincial Budgets Wanda Rumball Partner Tax T: E: Adrian Adams Manager Corporate Tax T: E: International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 21

22 Federal Budget What WASN T included Changes to employee stock option rules Changes to Canadian exploration expense deductibility International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 22

23 Federal Budget 2016 Corporate tax measures Eligible Capital Property (ECP) The budget proposes to repeal the ECP regime and replace it with class % ECE expenditures will be included in new class 14.1 and subject to depreciation at a rate of 5% Disposition of ECP will give rise to recapture and capital gains Expenditures and receipts that do not relate to a specific property considered to relate to the goodwill of the business Proposals include rules for calculating the cost of property acquired prior to January 1, 2017 for the purpose of computing capital gains and recapture International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 23

24 Federal Budget 2016 Corporate tax measures Eligible Capital Property (ECP) Transitional Rules The CEC balance as at January 1, 2017 will be transferred to new class 14.1 The depreciation rate for the first 10 years will be 7% for expenditures made before January 1, 2017 Certain receipts after January 1, 2017 will relate to expenditures prior to that date, as such certain qualifying receipts will reduce the CCA class at 75% International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 24

25 Federal Budget 2016 Corporate tax measures Debt Parking and Foreign Exchange Currently certain debt exchange transactions undertaken with non-arm s length person to ensure foreign exchange gains not realized from debtor s perspective New rules will deem foreign exchange gain to be realized when debt becomes a parked obligation Measures apply to foreign currency debt that meets conditions to be a parked obligation on or after March 22, 2016 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 25

26 Federal Budget 2016 Corporate tax measures Honourable Mention Emissions trading regimes Valuation for derivatives International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 26

27 Federal Budget 2016 International tax measures Cross-Border PUC Amendments Current rules prevent increase in cross-border paid-up capital ( PUC ) without realization of a deemed dividend subject to withholding tax Rules apply where A non-resident (NR) disposes of shares of a Canadian corporation (Canco1) to another Canadian corporation (Canco2) NR does not deal at arm s length with Canco2 Immediately after the disposition Canco1 and Canco2 are connected Results Fair Market Value (FMV) of non-share consideration received by NR from Canco2 in excess of PUC of Canco1 shares immediately before disposition deemed to be a dividend subject to withholding tax PUC of Canco2 shares received as consideration limited to PUC of Canco1 shares Exception Rules not applicable where sandwich structure exists purchaser corporation controls nonresident immediately before disposition International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 27

28 Federal Budget 2016 International tax measures Cross-Border PUC Amendments Illustration #1 Operation of Rule PUC $100 FMV$500 Non-Resident Consideration Debt and Shares of Canco2 Canco1 Subject Corp Canco2 Purchaser Corp Canco1 Subject Corp PUC $100 FMV$500 Debt received by non-resident in excess of Canco1 PUC = deemed dividend PUC of Canco2 shares = PUC of Canco1 shares International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 28

29 Federal Budget 2016 International tax measures Cross-Border PUC Amendments Illustration # (4) Exception Canadian Acquiror Non-Resident Target Target s Canadian Subco Exception in subsection 212.1(4) provides exemption from subsection 212.1(1) where purchaser controls vendor Example eliminate sandwich structure resulting from acquisition of non-resident target Sale of Canadian Subco by Non-Resident Target to Canadian Acquiror is not subject to subsection 212.1(1) International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 29

30 Federal Budget 2016 International tax measures Cross-Border PUC Amendments Tightening of exception will not apply where A non-resident owns, directly or indirectly, shares of purchaser corporation, and does not deal at arm s length with purchaser corporation Introduction of deemed consideration rule Non-resident deemed to receive non-share consideration equal to fair market value (FMV) of subject corporation shares less increase in FMV of purchaser corporation s shares as a result of disposition Amendments apply to dispositions occurring on or after March 22, 2016 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 30

31 Federal Budget 2016 International tax measures Back-to-Back Royalty Arrangements Current back-to-back loan rules apply for purposes of thin cap and withholding tax provisions Intermediary is interposed between Canadian borrower and related non-resident lender Canadian borrower deemed to have received loan from related non-resident rather than from intermediary such that thin cap rules apply Withholding tax rate applicable to interest paid directly to non-resident rather than to intermediary Back-to-back royalty arrangements subject to same withholding tax rules Canadian resident makes royalty payments under terms of a lease, license, or similar arrangement to intermediary Intermediary has obligation to pay amount to a non-resident under terms of a lease, license, or similar arrangement Arrangements are interconnected in some way Withholding tax rate applicable to royalties paid directly to non-resident rather than to intermediary Amendments apply to royalties paid after 2016 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 31

32 Federal Budget 2016 International tax measures Back-to-Back Arrangements Character substitution rules Back-to-back loan and royalty withholding tax rules also applicable to arrangements that provide for payments that are economically similar to interest and royalty payments Amendments apply to interest and royalties paid after 2016 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 32

33 Federal Budget 2016 International tax measures Back-to-Back Shareholder Loan Arrangements Current shareholder benefit rules apply to loans made by Canadian corporation to shareholder or related party If loan remains outstanding for one year after year in which it is made, deemed income inclusion results If loan made to non-resident, deemed to be a dividend subject to withholding tax Back-to-back shareholder loan arrangements now caught Canadian corporation makes loan to intermediary, who on-lends to shareholder Canadian corporation deemed to have made loan directly to shareholder Amendments apply to back-to-back loan arrangements in place on March 22, 2016 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 33

34 Federal Budget 2016 International tax measures Canada and BEPS Country-by-Country Reporting Action 13 of OECD s Action Plan on BEPS Budget proposes to implement country-by-country reporting requirements for MNEs with total annual consolidated group revenue of 750 Million Applicable to taxation years beginning after 2015 Legislation to be released in coming months Filing requirements Budget documents address Country-by-Country Report only summary data by jurisdiction including revenue, income, taxes, indicators of economic activity International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 34

35 Federal Budget 2016 International tax measures Canada and BEPS Other Measures Revisions to Transfer Pricing Guidelines support CRA s current interpretation of arm s length principle Two areas where CRA not adjusting its administrative practice work still on-going by OECD Development of a threshold for proposed simplified approach to low value-adding services Clarification of definition of risk-free and risk-adjusted returns for minimally functional entities Budget confirms Canada s commitment to address treaty abuse and treaty shopping in accordance with minimum standard Will apply minimum standard on a case-by-case basis No comments made on interest deductibility or hybrid arrangements International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 35

36 Federal Budget 2016 CCPC changes Highlights Previously announced rate reductions cancelled New proposals target Multiplication of small business deduction Avoidance of business limit and taxable capital limit Life insurance changes See full explanation on our latest webcast here International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 36

37 Provincial budgets British Columbia Extension of the Mining Exploration Tax Credit for an additional three years until the end of 2019 Extension of the Mining Flow-Through Share Tax Credit for an additional year until December 31, 2016 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 37

38 Provincial budgets Ontario Reduction to certain research and development expenditure tax credits Ontario Research and Development Tax Credit reduction in credit from 4.5% of eligible expenditures to 3.5% of eligible expenditures Ontario Innovation Tax Credit reduction in credit from 10% of eligible expenditures to 8% of eligible expenditures Reductions will be effective June 1, 2016 the rate used to calculate the credit will be pro-rated for tax years that straddle June 1 International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 38

39 Provincial budgets Quebec Reduction to Health Services Fund contribution rate for small and medium sized businesses Change to qualification criteria for small business deduction New deduction for innovative manufacturing corporations Enhancement to refundable tax credit for the integration of information technologies Increases to Refundable Tax Credit for Exploration Expenses To 38.75% (from 31%) for eligible exploration (non-operating) companies in the Near North and Far North To 18.75% (from 15%) for eligible producer (operating) companies in the Near North and Far North Applies to eligible expenses incurred on or after March 18, 2016 Political donations made on or after March 18, 2016 will not be deductible International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 39

40 Provincial budgets New Brunswick Tax rate increases effective April 1, 2016 General corporate tax rate increased to 14% from 12% Capital tax for banks increased to 5% from 4% Real property transfer tax increased to 1% from 0.5% Tax rate increases effective July 1, 2016 HST rate will increase to 15% from 13% International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 40

41 Strategies for stakeholder relations in a challenging environment International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 41

42 Communication Critical to maintain communications with all stakeholders Customers Employees Company Lenders Suppliers/Creditors Shareholders Ensure messages are timely, consistent, accurate and realistic Proactive communication strategy allows retention of control in stressed situations Source: KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 42

43 What are some of the lender s core issues? Essential to understand the lender s key concerns to ensure communications are tailored appropriately Common issues Source: KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 43

44 Controlling the message with stakeholders Source: KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 44

45 Forecasting is essential A fundamentally sound forecasting process will be critical to developing and discussing options with the lenders and/or other stakeholders: Identifies the key drivers of a company s cash flow and highlights the controls needed to deliver the forecast result Can undertake variance analysis of forecast vs actual and forecast vs reforecast Enables management to proactively manage the cash flow, as they have visibility of potential issues in advance A forecast identifies trends in the business and possible opportunities to drive out head-room A forecast is a key element of embedding a cash culture within a business International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 45

46 Look to address liquidity concerns Creating liquidity under existing loan agreements Work with administrative agent and other lenders in advance of borrowing base redeterminations to help minimize downward adjustments to borrowing base Amend loan agreements to temporarily waive financial covenants and extend maturity dates Lock in commodity hedges at values higher than the price deck used by lenders Reduce existing capital expenditures budget Possible to the extent that failure to invest capex does not jeopardize existing borrowing base assets Identify new sources of liquidity Sell redundant or surplus assets Monetize current assets through conveyances of royalty interests and production payments Monetize hedges where value of hedges exceeds their incremental borrowing base credit Holistic approach to consider all aspects of the business International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 46

47 Communicating with lenders/stakeholders Be pro-active in your communications if you are forecasting liquidity and/or covenant issues Take time to really understand your lender/lending syndicate (patient versus aggressive) Analyze various scenarios and options go the lenders with potential solutions not just issues Seek appropriate legal and financial advisory (if needed) advice in an attempt to maintain control of the process Do not underestimate the time and resources that will be spent dealing with various stakeholders during a potential restructuring International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 47

48 Thank you Neil Honess Partner Restructuring & Turnaround T: E: Ryan Adlington Partner Restructuring & Turnaround T: E: International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 48

49 Questions? Download today s presentation kpmg.ca/quarterlyupdate International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 49

50 Detail Heading Detail Heading Detail Heading Detail Heading kpmg.ca 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.