London School of Mines Financial reporting update 14 June 2018

Transcription

1 London School of Mines Financial reporting update 14 June 2018

2 Agenda 1. Regulators 2. Proposed amendment to IAS 16 Accounting for proceeds during development stage 3. IFRS 16 Leases for miners 4. IFRS 9 Financial instruments for miners 5. IFRS 15 Revenue recognition for miners 6. IASB pipeline 7. Other regulatory matters PwC

3 Regulators

4 Over the last 18 months the FRC has published several thematic reviews and indicated its points of focus for 2018/19 Regulators Thematic reviews and points of focus 17/18 and prior Tax Pensions APMs Judgements/Estimates 18/19 focus Implementation IFRS 9 & 15 Impact IFRS 16 Effect of Brexit on principal risks/uncertainties PwC

5 CRRT June 2018 Hot topics FRC has published a briefing note ahead of the June interim reporting season Impact of IFRS 9 & 15 in interims Accounting and disclosure of Supplier financing Asset impairments objective judgements not influenced by spirit of optimism Issues from recent reviews - Materiality - Cash flow restatements - EPS - Illegal Dividends PwC

6 Alternative Performance Measures

7 Alternative performance measures ( APM ) Have you reported non-gaap measures in your financial statements? Non-GAAP measures are becoming more popular A. B. I am reporting APM in my financials Not yet but I am considering to report APM C. Not yet and I don t intend to report APM PwC

8 Some Favourite Mining APM s PwC 8

9 Non-GAAP performance measures 1 Be clear and consistent in definitions of measures no bias or confusingly similar names 2 Explain why APM is used 3 Reconcile back to GAAP 4 Give equal prominence to GAAP and non-gaap measures in all communications 5 Consistency over time

10 Judgement/Estimates

11 FRC thematic review 7 Sensitivity analysis/range of possible outcomes 1 Judgements vs Estimates 6 Quantify underlying assumptions FRC Thematic Disclose significant judgements 2 Amounts of estimates at risk 5 Companyspecific disclosures 4 Short-term vs. Long-term significant 3 estimates

12 Specific Disclosure considerations Useful information Disclosures convey to the users what they need to know Specific disclosures vs. Boilerplate Consistent disclosures within stats Consistency All correct disclosures included Accurate and complete

13 Proposed amendment to IAS 16

14 Proposed amendment to IAS 16 Accounting for proceeds during development stage IASB has published an exposure draft 'Property, Plant and Equipment Proceeds before Intended Use (Proposed amendments to IAS 16). IASB proposes to prohibit deducting from the cost of PPE any proceeds from selling items (i.e. revenues) produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity would recognise the proceeds from selling such items, and the cost of producing those items, in profit or loss. IASB deliberating the feedback received. 71 comment letters, strong disagreement with proposals. Discussed at IFRIC June 2018 IFRIC considered recommending to IASB either Proceed with ED as published; or Proceed with the ED with some modifications

15 IFRS 16 Leases for miners

16 Impacts of IFRS 16 Which of the following metrics you believe is the most important to your stakeholders (including creditors)? Many financial metrics will be affected A. B. EBITDA Debt to equity (leverage ratio) C. Cash flow from operations PwC

17 IFRS 16: Leases Overview What s changed Old treatment for lessees: Finance leases on balance sheet Operating leases off balance sheet Service contracts off balance sheet Almost all leases > 12 months on balance sheet Service contracts off balance sheet PwC

18 Impact on net profit $ Operating leases IAS 17 Applicable leases * IFRS 16 Revenue X X Operating expenses Single expense EBITDA Depreciation and amortisation Depreciation Year Operating profit Finance cost Interest Operating lease Depreciation Interest expense Net profit impact PBT * Excluding low value / short term / variable

19 What does this mean for your business? Ratio Calculation Impact Explanation Gearing Liabilities/ Equity Reported debt increases EBITDA Profit before interest, tax, depreciation and amortisation There will be no operating lease expense included Equity Carrying amount of leased assets reduces faster than the reduction of the lease liability in early years of lease Profit before tax Lease expense (depreciation and interest expense) is greater than previous operating lease expense in early years of lease EPS Profit/Number of shares on issue Lease expense (depreciation and interest expense) is greater than previous operating lease expense in early years of lease

20 How would IFRS 16 affect miners? Challenges expected in practice Watch out for embedded lease in mining service, transportation and storage contracts. Long-term power supply contracts may contain leases of power plants. Sale and leaseback transactions will no longer provide offbalance sheet financing structure anymore. Consider negotiating your covenants early if you expect significant adverse effects on day of adoption.

21 Implementing IFFRS 16 What we ve seen in practice 80-85% of leases are managed in spreadsheets. 40% of spreadsheets contain errors Potential future capital and tax implications Typically 9-12 month lead time to find contracts which can be cross-currency and/or cross-language Some have found cost savings

22 Our Observations IFRS Only refers to IFRS 16 Provides detail on impact with quantification Provides some detail on impact Nothing disclosed Source: 73 listed companies (excluding financial institutions) with year ends in December 2017 through to February 2018 PwC June

23 IFRS 15 Revenue recognition for miners

24 Our Observations IFRS Only refers to IFRS 15 No material impact Material impact and gives more information No material impact and gives more information Source: 73 listed companies (excluding financial institutions) with year ends in December 2017 through to March 2018 PwC June

25 IFRS 15 Revenue recognition for miners The five-step approach Identify contract with customer FOB/CIF arrangements evaluate whether there are separate performance obligations for freight services. 5-Step Revenue Recognition Model Provisional pricing watch out for embedded derivatives and variable considerations. Take-or-pay arrangements is there a lease (IFRS 16)? Consider breakage if customers never take all of the commitment. Transactions with related parties not always a customer Disclosures disaggregation of revenue from customers Disclosure - - amount of incomplete perf obligations (on LTC)

26 IFRS 9 Financial instruments for miners

27 Our Observations IFRS Only refers to IFRS 9/No conclusion on impact No material impact IFRS 9 not mentioned Material impact and gives more information No material impact and gives more information Source: 73 listed companies (excluding financial institutions) with year ends in December 2017 through to March 2018 PwC June

28 IFRS 9 Financial instruments for miners A new classification framework for financial asset: based on cash flow characteristics and business model. Expected lifetime credit loss impairment for receivables: using forward looking instead of historical assumptions. 1. Expected credit loss Entities need to provide allowance for bad debt expense from day 1, based on expected credit loss (i.e. forward looking approach). Of those surveyed none stated ECL was material with 63% explicitly stating impact is immaterial 2. Debt renegotiation Expect P&L impact whenever an entity renegotiates its debt. A gain (loss) is calculated comparing the original cash flows and the modified cash flows discounted at the original effective interest rate. So expect to see adjustments for prior year on transition to IFRS9 but not mentioned in survey 3. Hedge accounting becomes more attractive - No 80% - 125% bright line test anymore. - Hedging with options, a new model that reduces P&L volatility. - Hedging a risk component. None in the survey indicated a change in approach. PwC IFRS 9 changes the way how a mining company will determine the classification of financial assets. It also takes away the exemption of using cost approach to measure investment in equity securities.

29 IASB pipeline what s coming

30 IASB workplan Things of interest on the IASB Workplan due over the next year Definition of a business Business combinations under common control Outcome of IFRS13 PIR Rate regulated activity DP or ED Goodwill/impairment Agenda decisions that drive policy changes PwC

31 Other new trends in regulatory reporting

32 Financial reporting developments Are your stakeholders demanding more disclosure of any of the following? Stakeholders are paying more attention to risks disclosure A. B. Tax strategy and uncertainties Liquidity risks C. Financial impact of climate PwC

33 What is tax transparency? A number of regulators have reviewed tax reporting and want to encourage more transparent reporting of the relationship between tax charges and accounting profit Focus on: the transparency of tax reconciliation disclosures how well the sustainability of the effective tax rate is conveyed; and uncertainties relating to tax liabilities and assets totality of reporting (i.e. disclosures in strategic, other narrative reports and accounting disclosures) More data disclosed telling the story Publish what you pay / Country by Country reporting Cash paid versus tax expense PwC 33

34 Liquidity disclosures Higher gearing means greater investor and regulatory focus on liquidity disclosures Liquidity is a risk that needs to be managed, and disclosed Transparent net debt and liquidity disclosures valued tell the story Introduction of viability statements longer term focus Covenant compliance Particularly EBITDA related, a new focus and can require more precise forecasting and monitoring Impact of covenant breaches, even if subsequently remedied, is to reclassify related debt as short term borrowings Off balance sheet debt and classification. Impact of lease accounting and revenue recognition think ahead. PwC

35 Climate-related financial disclosures The Task Force on Climate-related Financial Disclosure (TCFD) was established in 2015, by the G20 Financial Stability Board, to develop recommendations for more and effective climate-related financial disclosures. The recommendations go beyond current climate disclosures, like CDP, in two significant ways: Disclosures should be quantified in financial terms and in mainstream financial filings, shifting responsibility for climate risk analysis to the CFO and audit committee; Companies should use scenario analysis to assess the financial implications of climate risks. This is a concern for many companies who haven t used scenario analysis in the past or applied it in this context to their P&L. PwC

36 Q & A This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP (a limited liability partnership in the PwC United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity