Q Interim report market watch Disclosures on impact of IFRS 9 and IFRS 15

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Winfred Adrian Payne
5 years ago
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1 Q Interim report market watch Disclosures on impact of IFRS 9 and IFRS 15

2 2 Q Interim report market watch Introduction KPMG recently released a 2017 annual report market watch where we summarized and analyzed transition disclosures in light of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments coming into effect on 1 January In this article, we focus on disclosures made by companies in their Q interim financial statements in accordance with IAS 34. As there is little guidance on the extent of disclosures required by IAS 34 Interim Financial Reporting in respect of newly effective accounting standards, the purpose of this article was to identify the general consensus. In addition, as the number of companies publishing Q1 interim financial statements in accordance with IAS 34 is rather limited, this exercise provides a first glimpse of what can be expected from the larger group of Q2 filers.

3 Q1 2018 Interim report market watch Analysis Picking up from where we left off in the 2017 annual report market watch, we identified top Dutch companies 1 filing Q1 interim financial statements in

3 3 Q Interim report market watch Analysis Picking up from where we left off in the 2017 annual report market watch, we identified top Dutch companies 1 filing Q1 interim financial statements in accordance with IAS 34. This comprises 6 out of 75 companies included in the annual market watch. We supplemented this sample with top 8 European filers 2. 1 Top 75 Dutch entities included in AEX, AMX and AScX-indices 2 Top entities included in STOXX Europe Large 200 index

4 4 Q Interim report market watch IAS 34 Interim Financial Reporting prescribes the minimum content of an interim financial report and the principles for recognition and measurement in complete or condensed financial statements for an interim period. The interim financial report is intended to provide an update on the latest complete set of annual financial statements. Accordingly, it focuses on new activities, events, and circumstances and does not duplicate information previously reported. IAS 34 requires a statement that the same accounting policies and methods of computation are followed in the interim financial statements as compared with the most recent annual financial statements or, if those policies or methods have been changed, a description of the nature and effect of the change. Thus, the extent of interim disclosures in respect of the newly effective standards is directly tied to the extent of IAS 8 transition disclosures presented in the companies 2017 annual report. Our 2017 annual market watch had found that IAS 8 transition disclosures were still rather limited, with a significant portion of the companies having completed their initial impact assessments 3. However, full accounting policies are inherently not part of IAS 8 transition disclosure, thus raising the question whether companies would include this in their interim reports. In reviewing the Q1 IAS 34 reports, we focused on whether the companies have disclosed the full accounting policies in accordance with the newly effective IFRSs, have commented on the significance of the impact, and the extent of quantitative disclosures in this regard. We have also analyzed whether there has been a change in the estimated impact on equity on transition date as reported in the 2017 annual report. As a supplement to our analysis in respect of IFRS 15, we looked at 8 largest US companies 4 with Q1 interim reporting and their disclosures in relation to the newly effective ASC 606 Revenue from Contracts with Customers. 3 IFRS 9, 15, and 16 a leap forward: 4 Top 8 companies from S&P 500 index (by market cap) with fiscal year end as at 31 December 2017

5 KPMG s Q1 2018 Interim report market watch Findings Accounting policies We found that from the sample of 14 Dutch and European companies, 1 disclosed the full accounting policy for IFRS 15 only and

5 5 KPMG s Q Interim report market watch Findings Accounting policies We found that from the sample of 14 Dutch and European companies, 1 disclosed the full accounting policy for IFRS 15 only and 1 other disclosed the full accounting policy for IFRS 9 and IFRS 15. We further noted that 1 company did not make any reference to the newly effective accounting standards and reported that the accounting policies are unchanged from those applied in the 2017 financial statements. Significance of impact From the sample of 14 Dutch and European companies, 2 explicitly assessed the impact of transition to IFRS 9 to be insignificant, while 7 have done so in relation to IFRS 15. In our sample, 1 company in telecommunications industry explicitly stated that IFRS 15 had a material impact on the presentation of its results of operations and financial position, but not on the results themselves. Other companies did not qualify the impact, however, majority did provide a quantitative disclosure.

6 6 Q Interim report market watch Quantitative disclosure IFRS 9 From the sample analyzed, 11 companies provided quantitative disclosures about the impact of IFRS 9. Out of those, 5 companies quantitative disclosure was presented as part of the general narrative about the impact of the standard or in a simple table with impact on opening equity only. The remaining 6 provided much more detailed disclosures in tabular format including impact of classification and measurement changes per balance sheet line. One of these companies, being a financial institution, disclosed current period breakdowns of expected credit losses. None of the companies reported a financial impact from change in accounting for non-substantial modification of loans. This is consistent with our expectation that the change will have a lesser impact on public companies than those privately owned due to the difference in how they manage their capital. IFRS 9 Impact disclosure 6 Qualitative description only Quantitative impact on equity only Quantitative impact per balance sheet line 3 5

7 7 Q Interim report market watch Hedge accounting The impact of transition to IFRS 9 for hedge accounting appears to be limited, with most entities confirming that existing hedge relationships are allowed to continue under the new standard. A few filers include a narrative explanation of the retrospectively applied cost-ofhedging method, hedging with options, and hedging of components of non-financial items resulting in less ineffectiveness. Only 1 company in the sample quantified the amount of the impact, being a reclassification from retained earnings to OCI, while others stated the impact to be not significant. IFRS 15 With regards to IFRS 15, for 3 of the 14 companies the adoption of IFRS 15 has a significant impact and, in total, 8 companies included a quantitative disclosure. The extend of the quantitative information varies and ranges from a few numbers mentioned in the narrative where the effect was deemed not material to tables showing the effect on opening equity, balance sheet line items and the income statement. As expected, the more significant the impact the more extensive the disclosure. A good example is Galapagos, a biotechnology company, who provided extensive disclosure of the analysis of their Collaboration contracts. IFRS 15.C8 This paragraph of IFRS 15 deals with disclosure requirements for reporting periods including the initial date of application of the standard. It requires that, when the company applies the retrospective transition approach without restating comparative figures (IFRS 15.C3(b)), disclosures include the amount by which each financial statement line item is affected in the current reporting period by the application of this standard as compared to IAS 11, IAS 18 and related Interpretations that were in effect before the change. One of the companies for which the adoption of IFRS 15 is significant choose to adopt IFRS 15 fully retrospective, the other 2 companies applied the guidance in IFRS 15.C8 and provided the required disclosures for both the balance sheet and (relevant line items of the) income statement. Deutsche Telecom is a good example of such disclosure.

8 8 Q Interim report market watch 2017 YE vs Q Our findings from the 2017 Annual report market watch showed that companies were still not fully finished with their impact assessments and that quantifications of expected impact, if any, were caveated. For this reason, we decided to compare the impact disclosures in the 2017 year-end reports and Q reports to see if the assessments have changed. We found that from the 14 companies analyzed, 8 have disclosed impact assessments which were different from their disclosure in the 2017 financial statements. The difference was either a change in the amount of the impact on total equity or disclosure of an amount where none was previously available. Fortunately, for all companies reporting a change, the magnitude of the impact on total 2018 opening equity has reduced as compared to the amount reported in the 2017 yearend financial statements. Although, it is not possible to tell exactly where the change in estimate is coming from due to the different level of detail provided in the annual and interim reports, the changes are expected as companies refine their initial impact assessments. Further revisions to the initial estimates can still be expected until finalization of the 2018 year-end reporting. Change of impact disclosure from year-end Impact of transition is smaller than disclosed at year-end Impact of transition is disclosed where none was disclosed at year-end Both

9 Q1 2018 Interim report market watch ASC 606 How do we compare?

9 9 Q Interim report market watch ASC 606 How do we compare? ASC 606 Revenue from Contracts with Customers has come into effect for US GAAP reporters for financial years beginning on or after 15 December This standards was developed by FASB in a joint project with IASB and is largely equivalent to IFRS 15 Revenue for Contracts with Customers. Although the two standards are not formally linked, we investigated the Q disclosures of 8 largest US companies to see how it measures up to their European counterparts. We have found that the level of disclosure detail related to the new revenue standards was largely comparable between US and European filers. Of the 8 companies in our sample, 1 presented the effect of ASC 606 in a tabular format for total opening equity, assets, and liabilities. Others disclosed the amount of the impact on total opening equity in a narrative with brief explanations of the change and/or description of when performance obligations are considered to be met under the new accounting policy. Closing remarks Overall, we found that the extent of disclosures provided by companies in their Q1 interim financial statements regarding the effect of transition to IFRS 9 and IFRS 15 was proportionate to its significance. More disclosures were provided where the magnitude of the effect was higher. Following publication of Q2 interim financial statements in accordance with IAS 34, we will perform a similar survey on the wider group of filers to see if the level of detail in transition-related disclosures remains consistent.

10 Sources The contacts at KPMG in connection with this publication are: Ruben Rog Partner Capital Markets Accounting Advisory Services T M E rog.ruben.@kpmg.nl Valeria Kornooukhova Manager Capital Markets Accounting Advisory Services T M E kornooukhova.valeria@kpmg.nl Wietse Koster Director Department of Professional Practice T M E koster.wietse@kpmg.nl 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 endeavor 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., registered with the trade register in the Netherlands under number , is 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 name KPMG and logo are registered trademarks of KPMG International.

IFRS 9, 15, and 16 - a leap forward KPMG s 2017 Annual report market watch

IFRS 9, 15, and 16 - a leap forward KPMG s 2017 Annual report market watch June 2018 2 IFRS 9, 15, and 16 - a leap forward IFRS 9, 15, and 16 - a leap forward Introduction With the introduction of IFRS