Administrative. IFRS Institute Webcast. New IFRS Requirements for Consolidation 5/29/2013

Transcription

1 IFRS Institute Webcast New IFRS Requirements for Consolidation May 29, 2013 Administrative CPE regulations require online participants take part in online questions. Participants are required to respond to a minimum of four questions in order to be eligible for CPE credit. Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization. Send questions via the Ask a Question button. Help Desk: or outside the United States at

2 Today s presenters Paul Munter U.S. IFRS Professional Practice Leader KPMG LLP New York Mike Hall Advisory Partner KPMG LLP New York John Nabial Vice President Financial Reporting Sumitomo Corporation., U.S. 2 Learning objectives By completing this module, you should be able to: 1) Understand the overall impact of the new suite of consolidation standards under IFRS 2) Explain the key principles including an understanding of selected application examples when applying the consolidation model under IFRS 10 3) Understand the transition provisions under IFRS 10 4) Understand key differences between U.S. GAAP and IFRS regarding consolidation. 2

3 A new suite of consolidation standards Accounting Disclosure Separate FS Subsidiaries Associates Joint ventures Joint operations IFRS 10 Consolidated Financial Statements IAS 28 Investments in Associates and Joint Ventures IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 27 Separate Financial Statements IFRS 11 Joint Arrangements Unconsolidated structured entities IFRS 12 Disclosure of Interests in Other Entities 4 From IAS 27/SIC-12 to IFRS standards IFRS 10 Exemptions from preparing consolidated financial statements Similar requirements Determination of investees to be consolidated IAS 27 control model SIC-12 R&R model New single control model Consolidation procedures Similar requirements 5 3

4 Knowledge check 1 Which of the following statements is correct? A. IFRS 10 provides new guidance for reporting entities regarding investments it controls and over which it exercises significant influence. B. IFRS 10 contains accounting and disclosure guidance. C.IFRS 10 supersedes IAS 27 in its entirety once adopted. D.IFRS 10 introduces a single control model for purposes of evaluating whether or not an investment should be consolidated. 6 Knowledge check 1 Debrief: Correct answer is D A. Incorrect B. Incorrect C.Incorrect D.Correct, IFRS 10 introduces a single control model for purposes of evaluating whether or not an investment should be consolidated. 7 4

5 IFRS 10 consolidated financial statements in a nutshell Exposure to Control = Power + variability + in returns Link between power and returns To have power, it is necessary for investor to have existing rights that give it current ability to direct the activities that significantly affect the investee s returns, i.e., the relevant activities Control assessed on continuous basis 8 The new single control model 1 Identify the investee (legal entity or silo) 2 Identify the relevant activities of the investee 3 Identify how decisions about the relevant activities are made 4 Assess whether the investor has power over the relevant activities 5 Assess whether the investor is exposed to variability in returns 6 Assess whether there is a link between power and returns 9 5

6 Knowledge check 2 Which of the following is a correct statement regarding the six-step approach as outlined on the previous slide? A. These six steps are specifically included in IFRS 10 and have to be applied when implementing IFRS 10. B. These six steps are specifically included in IFRS 10 but reporting entities have an option whether to apply them. C.Following these six steps will ensure conclusions between U.S. GAAP and IFRS will be the same. D.These six steps are not specifically included in IFRS 10 but have been developed by KPMG as a framework of how an evaluation of an investment could be approached in order to conclude whether or not a reporting entity should consolidate the investment. 10 Knowledge check 2 Debrief: Correct answer is D A. Incorrect B. Incorrect C.Incorrect D.Correct, these six steps are not specifically included in IFRS 10 but have been developed by KPMG as a framework of how an evaluation of an investment could be approached in order to conclude whether or not it should be consolidated. 11 6

7 Identify investee (legal entity or silo) 1 Control by investor generally assessed at entity level, but also can be assessed over only specified assets and liabilities (a silo) Silo = portion of an entity treated as a deemed separate entity In substance, assets, liabilities, and equity are separate from overall investee such that none of the assets can be used to pay other obligations of the entity and they are the only source of payment for specified liabilities of the silo Parties other than those with the specified liability have no rights or obligations related to the specified assets or to the residual cash flows of those assets 12 Identify relevant activities of investee 2 Relevant activities = activities that significantly affect the investee s returns A range of operating and financing i activities iti significantly affects returns There are different relevant activities iti (which h can occur at different times) Determine which of these activities most significantly affects returns Relevant activities occur only when particular circumstances or events occur (direction of activities predetermined until this date) Assessment of power made at investee s level Assessment of power made at this activity s level Only decisions when those events occur relevant for assessment of power 13 7

8 Identify how decisions about relevant activities are made 3 Are voting rights relevant in assessing whether investor has power over investee? Gating question Investee controlled by means of voting rights More complex cases Investees designed so that voting rights not relevant (generally structured entities) Focus on which investor has voting rights sufficient to direct investee s relevant activities Number of factors relevant in assessing what is determinative in assessing power Focus on rights other than voting rights 14 Voting rights are relevant 4 Majority of voting rights Less than a majority of voting rights consider: consider: Rights held by others Agreements with other vote holders Other contractual agreements Potential voting rights De facto power 4B 4C 15 8

9 Only substantive rights considered 4A Substantive rights The rights are exercisable when decisions about the relevant activities of an investee need to be made and their holder has a practical ability to exercise the rights Are there barriers that prevent holder from exercising the rights? Factors to consider Would party holding the rights benefit from their exercise? Do several parties need to agree for the rights to become exercisable or operational? 16 Potential voting rights 4B Potential voting rights considered only if substantive Purpose and design also considered Option to acquire majority of voting shares in C exercisable in 25 days and deeply in the money Next shareholder meeting, at which decisions to direct the relevant activities are made, is in eight months Special meeting to change existing policies over relevant activities can be called at any time with 30 days notice B C B is likely to control C: its rights are essentially equivalent to those of ordinary shareholders in C 17 9

10 Knowledge check 3 Which of the following statements is correct with regard to potential voting rights? A. Consideration of potential voting rights is a new principle p introduced in IFRS 10 for the first time. B. Consideration of potential voting rights is not a new principle introduced in IFRS 10 for the first time, but its consideration differs from that under IAS 27. C.The consideration of potential voting rights in IFRS 10 results in convergence between IFRS and U.S. GAAP. D.The consideration of potential voting rights only is applicable for the evaluation of investees which are special purpose vehicles. 18 Knowledge check 3 Debrief: Correct answer is B A. Incorrect B. Correct, consideration of potential voting rights is not a new principle introduced d in IFRS 10 for the first time, but its consideration differs from IAS 27. C.Incorrect D.Incorrect 19 10

11 Assess whether investor has de facto power over investee 4C Investor considers all facts and circumstances Size of investor s holding of voting rights relative to size and dispersion of holdings of other vote holders Potential voting rights Other contractual arrangements Step 1 This is sufficient evidence that investor has power Control analysis continued (returns ) This is not conclusive This is sufficient evidence that investor does not have power Investor does not have control Step 2 Investor considers additional facts and circumstances 20 Assess whether investor has de facto power over investee (continued) 4C These factors may Investor holds 48 percent of investee be sufficient Remaining voting rights held by thousands of evidence of power shareholders, h none >1 percent These factors may be sufficient evidence that the investor does not have power Investor holds 45 percent of investee Two other investors each hold 26 percent of the voting rights No other arrangements that affect decision making These factors may not be conclusive Step 2 analysis required Investor holds 35 percent of investee? Three other investors each hold 8 percent of voting rights Remaining 41 percent widely dispersed No other arrangements that affect decision making 21 11

12 Assess whether investor has de facto power over investee (continued) 4C Investor considers additional facts and circumstances Additional factors Step 2 Pattern of participating in voting at previous shareholder meetings Evidence of power Special relationships Level of investor s exposure to variability in returns If this is unclear Investor does not control investee 22 Assess whether investor has de facto power over investee (continued) 4C Step 1 not conclusive Investor holds 35 percent of investee Three other investors each hold 8 percent of voting rights Remaining 41 percent widely dispersed No other arrangements that affect decision making Decisions about relevant activities require approval of majority of votes At recent shareholder meetings, 75 percent of voting rights cast That is, P holds only 47 percent (35/75) of active voting rights 23 12

13 Knowledge check 4 Which of the following statements is correct with regard to de facto power? A. IFRS and U.S. GAAP are converged with respect to de facto power. B. IFRS 10 brings forward guidance that t existed previously in IAS 27 with respect to de facto power. C.An investor must hold at least 40 percent of the voting interest in an entity to conclude that it has de facto power. D.IFRS 10 is explicit that de facto power can lead to consolidation of an investee even when an investor owns less than a majority of the investee s voting interest. 24 Knowledge check 4 Debrief: Correct answer is D A. Incorrect B. Incorrect C.Incorrect D.Correct, IFRS 10 is explicit that de facto power can lead to consolidation of an investee even when an investor owns less than a majority of the investee s voting interest

14 Rights other than voting rights are relevant 4D Purpose and design Involvement, decisions, i contractual arrangements at investee s inception Circumstances in which relevant activities occur Commitment to ensure that investee continues to operate as designed Other factors to consider Evidence of practical ability to direct, e.g., investor can appoint or approve investee s key management personnel who direct relevant activities Special relationships, e.g., significant portion of investee s activities either involve or conducted on behalf of investor Greater weight given to evidence of practical ability to direct Large exposure to variability in returns 26 Is investor exposed to or has rights to variable returns? 5 Distributions and changes in value of investment in investee Returnsvaryasa as a result of performance of investee and can be only positive, only negative, or positive and negative Fees, exposure to loss from providing credit or liquidity support, residual interest in the net assets, tax benefits, etc. Returns that are not available to other interest holders, such as investor s ability to use investee s assets in combination with its own to achieve economies of scale 27 14

15 Knowledge check 5 Which of the following statements is correct with regard to variable returns? A. Variable returns only include exposure to downside but not upside. B. Variable returns is a concept which h exists under U.S. GAAP and the IFRS 10 definition is the same of for U.S. GAAP. C.Variable returns include only exposure to net income and changes of the fair value of equity of the investee. D.Variable returns is a broad concept and would include for various forms of returns and exposures to upside and downside including share of net income, fees, and synergies available to the investor from its investment. 28 Knowledge check 5 Debrief: Correct answer is D A. Incorrect B. Incorrect C.Incorrect D.Correct, variable returns is a broad concept and would include for various forms of returns and exposures to upside and downside including share of net income, fees, and synergies available to the investor from its investment

16 Assess whether there is a link between power and returns 6 Power + Exposure to variability in returns + Use of the power to generate returns for itself = The investor is a principal Power + Exposure to variability in returns + Use of the delegated power for the benefit of others = The investor is an agent 30 Is investor a principal or an agent? 6 Does a single party hold substantive rights to remove the decision maker without cause? no Is the remuneration at market, i.e., Is it commensurate with services provided Does it include only terms, conditions, amounts customarily present in arrangements for similar services and level of skills on arm s-length basis? yes no yes Continue the analysis Investor is a principal Investor is an agent 31 16

17 Is investor a principal or an agent? (continued) 6 Consider the four indicator groups ( Economic interests aggregated) Scope of decisionmaking authority Rights held by other parties Remuneration Other interests held Investor is a principal Investor is an agent 32 Relationships with other parties Investor considers whether other parties act on its behalf, i.e., as its de facto agents Decision-making rights delegated to an agent are treated as held by investor directly Examples of entities that may be acting as de facto agents: Related parties of investor Party that has a close business relationship with investor Party whose governing body/key management personnel is almost the same as investor s Party that received its interest in investee as contribution or loan from investor Party that cannot finance its operations without subordinated support from investor Party that has agreed not to sell, transfer, or encumber its interest in the investee without investor s prior approval 33 17

18 Effective date: January 1, 2013 Consolidation suite effective for years beginning on or after January 1, 2013 Early adoption permitted provided that entire suite of consolidation standards adopted at the same time Entities encouraged to provide IFRS 12 information before effective date This doesn t trigger early adoption The IASB issued in June 2012 an amendment to provide additional transitional relief limiting the requirement to provide adjusted comparative information to only the preceding comparative period. Furthermore, it provides relief from certain disclosure requirements for periods before IFRS 12 is first applied. 34 Knowledge check 6 Which of the following statements is correct with regard to the effective date and transition requirements of IFRS 10? A. An entity can opt to apply ppy IAS 27 (2008) indefinitely if it meets the definition of a financial institution. B. An entity cannot early adopt IFRS for its fiscal year ending December 31, C.IFRS 10 has to be applied retrospectively without exception. D.IFRS 10 is mandatorily effective for fiscal years beginning on or after January 1,

19 Knowledge check 6 Debrief: Correct answer is D A. Incorrect B. Incorrect C.Incorrect D.Correct, IFRS 10 is mandatorily effective for fiscal years beginning on or after January 1, IFRS compared with U.S. GAAP IFRS Single consolidation model U.S. GAAP 1) Variable Interest Entity 2) Voting Interest Entity De facto control principle No de facto control principle for voting interest entities Consider potential voting rights if substantive In general, no consideration of potential voting rights for voting interest entities 37 19

20 IFRS compared with U.S. GAAP (continued) IFRS Uniform accounting policies required by the group entities U.S. GAAP No uniform accounting policies required by the group entities Silo accounting concept applicable for all investees Silo accounting only applicable to VIEs 38 KPMG Institutes and training About the KPMG IFRS Institute The KPMG IFRS Institute, part of the KPMG Institute Network, has been created as an open forum where board and audit committee members, executives, management, stakeholders, academia, and government representatives can share knowledge, gain insight, and access thought leadership about the evolving global financial reporting environment. To visit the IFRS Institute, go to Executive Education Group live, instructor-led CPE credit accounting courses, seminars, workshops, and update conferences for corporate accountants and financial executives 39 20

21 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 upon such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 21