The Application of IFRS: Food, drink and consumer goods companies

Transcription

1 EXECUTIVE SUMMARY The Application of IFRS: Food, drink and consumer goods companies November 2012 kpmg.com/ifrs

2 2 The Application of IFRS: Food, drink and consumer goods companies Contents Foreword 1 About this executive summary 2 Our Global FDCG Practice 2 Revenue 3 Intangible assets 4 Inventory 5 Property, plant and equipment 6 Impairment of non-financial assets 7 Business combinations 8 Operating segments 9 Critical judgements and key sources of estimation uncertainty 10 Provisions and contingencies 11 Financial instruments 12 Interests in joint ventures 13 Biological assets 14 Performance measures 15 Presentation of comprehensive income and cash flows 16 Contact us IBC KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

3 The Application of IFRS: Food, drink and consumer goods companies 1 Foreword The IASB is at a crossroads in terms of its future direction. Having launched its Agenda Consultation in July 2011, the Board is now in the process of setting its priorities and finalising its feedback statement to constituents. What remains clear is that the Board is still committed to completing its four high-priority projects: financial instruments, insurance contracts, leases and revenue recognition. The IASB has been collaborating with the FASB on these projects, but the convergence of the final standards remains unclear. The Boards joint project on revenue recognition currently appears to be the main success story, with a converged standard expected in The food, drink and consumer goods (FDCG) sector is marked by intense competition and uncertainty, presenting a host of challenges for global FDCG businesses. Rising input costs, technology, sustainability concerns and global sourcing options are driving manufacturers to constantly examine their supply chains and processes to ensure cost efficiency and compliance. Economic, social, cultural and demographic shifts are fundamentally changing consumer preferences and behaviour. Developed markets are growing slowly, while emerging markets are experiencing tremendous growth. And regulation is impacting the FDCG sector more than ever before. Our survey discusses many of the key sector accounting issues and provides illustrations of how FDCG companies have sought to address them. We provide examples of sector-specific accounting disclosures, including in some cases detailed explanations of the business context in which accounting judgements have been made. For companies already applying IFRS, it gives some idea of the extent of consistency within the sector; for companies that haven t yet adopted IFRS, it gives some idea of what your reporting future might be. We hope that this publication serves as a useful resource for both existing users of IFRS and FDCG companies seeking to understand the potential impact of adopting IFRS. Willy Kruh Mark Baillache Guilherme Nunes Global Chair Global Audit Sector co-lead Global Audit Sector co-lead Consumer Markets and FDCG FDCG FDCG KPMG International KPMG in Hong Kong KPMG in Brazil

4 2 The Application of IFRS: Food, drink and consumer goods companies About this executive summary This executive summary has been drawn from our publication The Application of IFRS: Food, drink and consumer goods companies, and focuses on the results of a survey of the IFRS financial statements of 27 FDCG companies from 15 countries. This publication has been produced by the KPMG International Standards Group, in collaboration with KPMG in Japan. This executive summary should be read in conjunction with that publication in order to understand more fully the findings from the survey. In addition, that publication includes disclosures made by FDCG companies in their consolidated financial statements that we believe may be useful in assessing the type of information being disclosed in practice. That publication also includes a chapter on significant differences between IFRS and US GAAP in respect of the issues discussed. IFRS-related technical information is available at For access to an extensive range of accounting, auditing and financial reporting guidance and literature, visit KPMG s Accounting Research Online. This web-based subscription service can be a valuable tool for anyone who wants to stay informed in today s dynamic environment. For a free 15-day trial, go to and register today. Our Global FDCG Practice KPMG s Global Food, Drink and Consumer Goods (FDCG) practice is a network of experienced professionals based in member firms around the world. The Global FDCG practice encompasses food, drink, tobacco, apparel, consumer durables, fast moving consumer goods (FMCG), and luxury goods. Our aim is to help member firms clients make the most of the challenges and opportunities presented by a constantly changing business environment. We offer a number of services to help clients address the issues facing their industry, in the key areas of governance, performance and growth. For more information, visit

5 The Application of IFRS: Food, drink and consumer goods companies 3 Revenue Revenue is the key financial measure for any consumer-facing organisation, and this is especially true for FDCG companies. There is no shortage of revenue recognition issues for the sector, mainly because of the different terms and conditions of sale to customers, including product returns, sales incentives, product warranties, discounts and rebates. One of the challenging issues facing some FDCG companies is the treatment of salesrelated taxes, such as excise duties, which can be accounted for differently depending on the tax regulations in a particular jurisdiction. Some of the examples are included in this chapter. It is interesting to see how these issues are reflected in the disclosures that FDCG companies include in their financial statements. All companies provided a generic revenue recognition policy around the sale of goods and services, with the most common specific policies relating to sales incentives, items excluded from revenue and returns. The timing of revenue recognition varied between companies, from the dispatch or shipment of goods to the delivery or acceptance by a customer, depending on terms and conditions used for trading. Nearly all companies provided a breakdown of revenue within their segment disclosures. When operating segments were not organised by products, companies presented a separate breakdown of revenue by types of products or services; vice versa, when operating segments were not organised by geography, companies presented a separate breakdown of revenue by geographic location.

6 4 The Application of IFRS: Food, drink and consumer goods companies Intangible assets Despite the slowdown in M&A activity in 2011, intangible assets remain a key feature of statement of financial position. Key categories of intangible assets in the FDCG sector include brands, trademarks and customerrelated intangibles. Accounting for intangible assets involves significant judgements, such as determining whether these assets could be recognised or not, whether they have finite or indefinite useful lives, how long they should be amortised for and whether they show any signs of impairment. All companies disclosed an accounting policy for intangible assets. Threequarters of companies provided a detailed accounting policy for different categories of intangible assets. The most common intangible assets included brands, trademarks, software and customer-related intangibles. Nearly all companies recognised either brands or trademarks as intangible assets. All companies that discussed the amortisation of intangible assets applied the straight-line method. Estimated useful lives of intangible assets of similar nature varied greatly between companies. The classification of brands and trademarks as indefinite- or finite-lived also varied between companies.

7 The Application of IFRS: Food, drink and consumer goods companies 5 Inventory Typically, FDCG companies carry a large volume of inventory, including raw materials, work in progress, and finished goods. Some goods produced by FDCG companies require special storage conditions and have fairly short shelf life, and some goods may be exposed to high volatility in prices on the market. Therefore, one of the critical issues for FDCG companies is a regular review of inventory for any signs of impairment. While all companies disclosed an accounting policy for inventory, the level of detail in disclosures varied. Nearly all companies disclosed their inventory costing policy. Weightedaverage cost was the most common method. Some companies applied different costing methods for different groups of inventory. More than two-thirds of companies disclosed the basis for determining net realisable value. Just under three-quarters of companies wrote down inventory during the period surveyed, although write-downs were generally not significant. The presentation of write-downs of inventory and movements in the allowance for obsolescence varied between companies.

8 6 The Application of IFRS: Food, drink and consumer goods companies Property, plant and equipment By its very nature, the FDCG sector is highly capital intensive, with manufacturing being integral to the success of most companies. For that reason, property, plant and equipment is typically a large item in the statement of financial position of a FDCG company. The number of challenging issues in respect of accounting for property, plant and equipment should not be underestimated. Amongst significant issues facing companies are accounting for returnable containers, component accounting and estimates in respect of the useful life of assets and their recoverable amounts. All companies disclosed an accounting policy for property, plant and equipment, encompassing recognition, measurement and depreciation. All companies applied the straight-line method of depreciation. In addition, some companies applied the reducing balance and the unit-of-production methods to some groups of assets. The estimated useful lives of assets of similar type varied significantly between companies. Only one company elected to revalue certain property, plant and equipment. There was limited disclosure in respect of returnable containers.

9 The Application of IFRS: Food, drink and consumer goods companies 7 Impairment of non-financial assets FDCG companies face a variety of risks that can lead to possible impairment issues, such as cyclical fluctuations in customer demand, the increasing influence of low-cost competitors from Asia, and restructuring that can introduce new production frameworks. Therefore, impairment testing is a critical accounting topic for the sector. The economic turmoil of the last few years has seen particular pressure on impairment testing, and part of the challenge that companies face these days is whether any of those previously recorded impairment losses should be reversed. Impairment testing requires significant judgement, and relies heavily on discounted cash flow projections as well as on the appropriate determination of cash-generating units. It is therefore interesting to see the disclosures that FDCG companies All companies disclosed an accounting policy for the impairment of nonfinancial assets. A large majority of companies specified how cash-generating units (CGUs) were determined. The majority determined CGUs at a level that was lower than operating segments. A majority of companies recognised an impairment loss in the period surveyed. Although the reasons for impairment varied, economic downturn was cited most often. Few companies recognised a reversal of an impairment loss during the period surveyed. Value in use was the most common approach used by companies in determining recoverable amount. The inputs used for calculating recoverable amount, including the cash flow forecast period, discount rates and growth rates, varied significantly between companies. provided about their approach to impairment testing and critical judgements and estimates used for performing the tests.

10 8 The Application of IFRS: Food, drink and consumer goods companies Business combinations In 2010, M&A activity had climbed steadily and by the end of that year, market participants saw the growing volume and value of deals being completed as an encouraging sign that companies and economies were recovering from the global economic downturn of the past three years. Globally, 2011 saw a gradual decline in M&A deals in both the FDCG manufacturing and retail sectors, followed by signs of recovery in the fourth quarter. However, while the momentum continued throughout 2011 in many growing markets including Brazil, China and Mexico, economic disruptions, particularly the euro zone crisis in the summer of 2011, all but stagnated activity in others, especially the UK, Germany and Italy. The quantity and size of business combinations is closely related to companies financial position. In recent years, a tightening capital market has led to some difficulty for companies The majority of companies had a business combination in the period surveyed. Nearly half of companies that reported a business combination disclosed information that revealed the extent of fair value adjustments in the acquisition accounting. The most common fair value adjustments were to deferred tax balances, intangible assets, and property, plant and equipment. The most commonly recognised intangible assets in the acquisition accounting were brands, trademarks and customer relationships. The factors that gave rise to the recognition of goodwill included synergies, developing a position in strategic markets and assembled workforce. in securing the required funds. Consequently, those FDCG companies with sufficient capital and a willingness to assume risk would have been more likely to have expanded successfully through acquisitions than others that were less well-funded or more riskaverse. Typical issues arising in accounting for a business combination that could be encountered by a FDCG company include establishing fair values and useful lives of acquired property, plant and equipment and identifying intangible assets, particularly brands, trademarks and customer relationships.

11 The Application of IFRS: Food, drink and consumer goods companies 9 Operating segments Communicating a company s performance to shareholders is a challenge, requiring disaggregation to explain the trends and results that have been affected by different factors or that have different prospects. FDCG companies are used to discussing their performance on a disaggregated basis in the narrative sections of their annual reports. These sections are often relatively free-form, allowing flexibility to management to choose the most appropriate way to describe their business. FDCG companies may have diverse operations and operate in various geographical locations. In our experience, companies in the FDCG sector tend to manage their operations by grouping together risks based on the nature of the operations to align with their strategic and operating goals. However, there Over half of companies discussed how the chief operating decision maker (CODM) was identified. The role of the CODM was usually performed by the board of directors or executive committee. Just under half of companies used products and services as a basis for determining their reportable segments. The most common range of reportable segments was 4 to 6. The measure of segment profit or loss disclosed by companies varied; however, adjusted operating profit was used most frequently. Nearly all companies reported sales by destination and sales by the type of product either in the entity-wide disclosures or in the reportable segment disclosures. The other most frequently reported entity-wide disclosures included non-current assets or assets by geographic location and capital expenditure by geographic location. were some companies in the survey that managed risks with a greater focus on geography and therefore identified segments accordingly.

12 10 The Application of IFRS: Food, drink and consumer goods companies Critical judgements and key sources of estimation uncertainty FDCG companies make a number of key estimates and judgements, some of which are sector-specific and others that apply across sectors. One of the most important areas for FDCG companies is estimates applied in impairment testing, which requires assumptions about future cash flow projections, expected future growth and the useful lives of assets, all of which are based upon strategic operating models and business decisions. The changing customer behaviour and economic downturn make reliable estimates difficult to achieve. Another key area frequently cited by FDCG companies in which management applies estimates is employee benefits. Developing appropriate estimates for defined benefit obligations can be a particularly complex area for a number of reasons. The worldwide nature of most companies operations requires the development of assumptions that can vary widely between jurisdictions due to differences in anticipated salary inflation, retirement age, return on assets and discount rates. Key messages from our survey group The majority of companies presented separate note disclosure on critical judgements and estimation uncertainty. The impairment of intangible assets and goodwill, and employee benefits, were the most commonly disclosed areas of critical judgement and key sources of estimation uncertainty. They were followed by provisions and taxes.

13 The Application of IFRS: Food, drink and consumer goods companies 11 Provisions and contingencies FDCG companies are exposed to a variety of risks in their day-today operations and from historical activities that might result in future cash outflows. These risks frequently relate to the products sold, litigation from competitors and customers and obligations in connection with various restructuring programmes. One of the challenging accounting issues for the sector is determining whether a claim received from a customer or a competitor gives rise to a provision. FDCG companies often use restructuring to adjust to the rapidly changing environment, changing Nearly all companies disclosed their accounting policies for provisions and contingencies, specifically for restructuring and litigations. Most companies provided detailed note disclosures for provisions. The most frequently disclosed provisions related to restructuring, litigations and onerous contracts. Nearly half of companies disclosed contingent liabilities relating to litigations. consumer behaviour and changing trends in fashion. Under IFRS, there are strict criteria to be met before a provision for restructuring can be recognised, as well as detailed disclosure requirements about the nature of the obligation and the timing of expenditure.

14 12 The Application of IFRS: Food, drink and consumer goods companies Financial instruments Most large FDCG companies tend to have a number of foreign operations, and are involved in various investing and financing activities, which expose them to a variety of financial risks. These risks include credit risk, market risk (foreign currency risk, interest rate risk, and commodity price risk) and liquidity risk. Derivatives are frequently used to manage these risks. Various factors influence a FDCG company s hedging strategy, including the company s risk management objective, the nature of risks being hedged, the company s risk appetite, the nature of its selling arrangements, the general economic outlook, and the company s funding structure. All companies discussed their exposure to liquidity, foreign currency and interest rate risks. Nearly all companies discussed their exposure to credit and commodity price risks. Nearly all companies hedged foreign currency exchange risk and interest rate risk. Almost all companies that applied hedge accounting used cash flow hedging and a large majority used fair value hedging. These wide-ranging factors mean that hedging and risk management activities vary from company to company within the FDCG sector, not just in terms of the type of risks being managed, but also in terms of the specific instruments that they use for the purpose of achieving those objectives.

15 The Application of IFRS: Food, drink and consumer goods companies 13 Interests in joint ventures FDCG companies often enter into collaborative arrangements to expand their business into new markets or to share the financial burden and risks associated with the high competition in the sector. One strategy is to enter into co-production arrangements or form alliances with others in the sector. Benefits of this approach include sharing initial investing costs as well as jointly exploiting assets such as new brand or customer relationship or the know-how of production. Alliances can take various forms, including joint ventures. Under IFRS, there are strict criteria that must be met in order for joint venture accounting to be applied, and when an FDCG company refers to an operational involvement in a joint venture it does not necessarily follow that the arrangement will be accounted for as a joint venture in accordance with IAS 31 Interest in Joint Ventures. In May 2011, the IASB published IFRS 11 Joint Arrangements, which requires companies to evaluate the contractual rights and obligations agreed to by the parties to joint arrangements; the legal form of the arrangement is no longer the most significant consideration in determining the accounting for joint arrangements. The standard requires that a company recognise an interest in a joint venture, previously a jointly controlled entity, using the equity method. Unlike IAS 31, proportionate consolidation is not permitted as an accounting policy choice. As the effective date of IFRS 11 (annual periods beginning on or after 1 January 2013) approaches, investors will be increasingly interested in the financial statement impact of any required changes in accounting policy. Key messages from our survey group Most companies disclosed an accounting policy for joint ventures. All joint ventures were in the form of jointly controlled entities. A small majority of companies with an interest in a jointly controlled entity applied the equity method. Proportionate consolidation, which was used by the remaining companies, will no longer be permitted as an accounting policy choice under IFRS 11 Joint Arrangements, which becomes effective in 2013.

16 14 The Application of IFRS: Food, drink and consumer goods companies Biological assets Biological assets are essential to the operations of many FDCG companies, and their nature may vary from vines and grapes to livestock of pigs or poultry. Accounting for biological assets under IFRS is not without a challenge. One of them is determining the fair value of biological assets. This task involves significant estimates and judgements. Just under a third of companies carried biological assets in their statement of financial position. The nature of the biological assets varied from trees, vines and grapes to livestock. The fair value of biological assets was determined by applying various techniques, depending on the nature of the assets.

17 The Application of IFRS: Food, drink and consumer goods companies 15 Performance measures FDCG companies use a wide variety of KPIs to measure both financial and operating performance. Often these indicators are intended to provide meaningful insights to shareholders and analysts about the financial health and social responsibility of the company, and represent measures emphasised by the investor community. Whether in the management discussion and analysis (MD&A), part of a board report, within commentary from company executives, or business overviews, all companies surveyed provided performance analysis as part of their annual report. Though this analysis frequently focused on financial All companies used key performance indicators (KPIs) to discuss their performance, with about three-quarters of companies presenting them in a separate section in the annual report. Performance measures widely varied. Indicators of financial performance were more common than indicators of operating performance. The most common indicators of performance included revenue and operating profit. Just over half of companies mentioned alternative performance measures in their financial statements, and the majority of them provided reconciliations with the amounts reported in the financial statements. performance, varying degrees of emphasis were also placed on nonfinancial measures.

18 16 The Application of IFRS: Food, drink and consumer goods companies Presentation of comprehensive income and cash flows IFRS requires the following as a complete set of financial statements: a statement of financial position (balance sheet); a statement of comprehensive income, presented either in a single statement of comprehensive income (which includes all components of profit or loss and other comprehensive income) or in the form of two statements, being an income statement (which displays components of profit or loss) followed immediately by a separate statement of comprehensive income (which begins with profit or loss as reported in the income statement and displays components of other comprehensive income to sum to total comprehensive income for the period); a statement of changes in equity; a statement of cash flows, in which cash flows from operating activities can be presented using either the direct or indirect method; notes, comprising a summary of significant accounting policies and other explanatory information; and a statement of financial position as at the beginning of the earliest comparative period when a company restates comparative information following a change in accounting policy, correction of an error or reclassification of items in the financial statements. All financial statements within a complete set of financial statements are presented with equal prominence. Key messages from our survey group Most companies presented their performance using two statements: an income statement and a separate statement of comprehensive income. The majority of companies presented expenses by function on the face of the income statement or statement of comprehensive income. Most companies presented cash flows from operating activities using the indirect method.

19 Contact us Willy Kruh Global Chair, Consumer Markets and FDCG KPMG International T: E: Mark Baillache Global Audit Sector co-lead, FDCG KPMG in Hong Kong T: E: Guilherme Nunes Global Audit Sector co-lead, FDCG KPMG in Brazil T: E: Dan Coonan Global Executive, Consumer Markets KPMG International T: E: Nick Debnam Head of Consumer Markets and FDCG Asia Pacific region KPMG in Hong Kong T: E: John Morris Head of Consumer Markets Europe, Middle East and Africa region KPMG in the UK T: E: Pat Dolan Head of Consumer Markets and FDCG Americas region KPMG in the US T: E: Elaine Pratt Global Head of Marketing, Consumer Markets KPMG International T: E:

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