PwC Nigeria IFRS Newsletter Q1 2015

Transcription

1 PwC Nigeria IFRS Newsletter Q1 2015

2 Content Introduction IFRS 2 Share based payments IAS 19 Employee benefits disclosures IAS 40 Investment property Upcoming Events PwC IFRS Trainings Introduction This newsletter highlights some of the current hot topics in the IFRS realm. Should you have any further queries with regards to this newsletter please do not hesitate to contact PwC Nigeria via: Tola Ogundipe - Partner T: +234 (1) M: +234 (0) tola.a.ogundipe@ng.pwc.com Tony Oputa - Partner T: +234 (1) M: +234 (0) tony.oputa@ng.pwc.com Omobolanle Adekoya - Partner T: +234 (1) M: +234 (0) omobolanle.adekoya@ng.pwc.com IFRS CMACS pwcifrs.advisory@ng.pwc.com PwC 2

3 IFRS 2 Share based payments Overview In recent times, businesses are finding it incredibly hard to find, recruit and retain high performing employees as top talent is always in demand. For many CEOs and employers of labour, keeping employees committed while being fairly remunerated is a constant challenge. That s why a lot of companies have devised employee share options schemes and this accounts for their increasing popularity. IFRS 2 applies to all share-based payment arrangements other than just employee shares options. The standard addresses transactions for goods and services that are settled either by the issue of an equity instrument of the entity (such as shares or options), or cash payments, the amounts of which are based on the price of the entity s equity instrument or where there is a choice of settlement. Our focus however, for this newsletter shall be on share based payments with employees. How do I identify the various types of share based payments? Share based payment arrangements typically fall into either one or more of three categories. These are considered below: a. Equity settled share based payment arrangements are arrangements where the Company issues its shares to its employees in their capacity as employees and not shareholders in exchange for employee service or as a reward. Such transactions include employee share option and share incentive plans. b. Cash settled share based payment arrangements are arrangements where the Company settles its obligation by paying out cash to the employee which is equivalent to its share price as at the date of the transaction. Typical examples include phantom share schemes, share appreciation rights and certain long-term incentives. c. There are also instances where a Company can settle its obligation using a mix of either cash-settled or equitysettled transactions. The IFRS scopes out transactions with employees and suppliers in their separate capacity as shareholders of the Company rather than in consideration for services rendered or goods provided to the Company. Common terminologies In order to understand the accounting for share based payments, we have to define some of its common terminologies as follows: The grant date this is a very important date. There is a rebuttable presumption that it is the date when the employee is made aware of the conditions of the share based payment arrangement by the employer. It constitutes a rebuttable presumption as if the award of the share options is subject to say, shareholder approval for instance, then the date of the approval could be seen as the grant date. It is the date on which the fair value of the share options is determined. Vesting conditions are conditions that must be satisfied before a party becomes unconditionally entitled to equity instruments or cash payment under a share-based payment arrangement. They could either be service or performance conditions (performance conditions could be either market or non-market conditions). Service conditions require the employee to complete a specified period of service. Performance conditions are conditions such as meeting an earnings target within 2 years, or growth in profit before tax by ten percent per annum. These performance conditions are not included in determining the fair value of the options granted to employees. Market conditions require the employee to complete objectives marked directly to one of the market indices, say, share price appreciation or increased earnings per share ratio. The vesting period this simply refers to the period between when the share options where granted to the employees and the period when they can start to exercise their rights to this options. In most companies, this is usually attributed to a particular length of service period within the company, say 3 years. The vesting period is included in the determination of the fair value of the share options granted. Recognising a share-based payment transaction The goods or services acquired in a share-based payment transaction should be recognised when they are received. For an equity-settled transaction (explained above), the corresponding entry is within equity. For cash-settled transactions (explained above) a liability is recognised. Measurement of share-based payment transactions Measurement of share-based payment transactions places emphasis on the fair value of the services received. If there is a difficulty in reliably determining the fair value of the services received (as in the case of the services rendered by the employees of an entity), the fair value of the equity instrument being given up is used. For transactions with employees, fair value is determined by reference to the fair value of the equity instrument granted (the standard notes that it is typically not possible to reliably estimate the fair value of services received by employees). The fair value of equity-settled share-based payments is not subsequently re-measured, whereas for a liability-settled share based payment, the fair value is re-measured at each reporting date. Many companies involved in share-based payment transactions are not listed on the stock exchange. This makes it difficult to determine the fair value of their equity instruments and consequently, this makes measurement IFRS Newsletter Q

4 difficult. IFRS 2 requires a valuation technique to be used, incorporating all factors and assumptions that knowledgeable, willing market participants would consider in setting the price. Group share-based payment arrangements IFRS 2 provides a clear basis to determine the classification of awards in both consolidated and separate financial statements by setting out the circumstances in which group share-based payment transactions are treated as equitysettled and cash-settled. The entity receiving goods or services should assess its own rights and obligations as well as the nature of awards granted in order to determine the accounting treatment. The amount recognised by the group entity receiving the goods or services will not necessarily be consistent with the amount recognised in the consolidated financial statements. Group share-based payment transactions are treated as equity-settled when: the awards granted are the entity s own equity instruments; or the entity has no obligation to settle the share-based payment transaction. In all other situations, the entity receiving the goods or services should account for the awards as cash-settled. Let s consider an illustrative example Resejums, a listed Nigerian entity, grants 100 options to each of its 100 employees. The conditions listed by the directors of Resejums are: Each employee must have stayed a minimum of three years in service 10% increase in share price by end of third year. It has been estimated that 15% of employees will leave during the vesting period and forfeit options. Also, fair value of one option at grant date has been determined to be 15 Naira. Year 1 charge 42,500 (85 x 1,500 x 1/3) Year 2 charge 42,500 (85 x 1,500 x 1/3) Year 3 charge 42,500 (85 x 1,500 x 1/3) Total charge 127,500 The disclosure requirements The following disclosures are required by the IFRS 2: The nature and extent of share-based payment arrangements that existed during the period, including: a description of each type of share-based arrangement; details of share options at the beginning and end of the period and movements during the period. How the fair value of the goods or services received, or the fair value of the equity instruments granted during the period, was determined, including details of inputs to option pricing models used. The effect of share-based payment transactions on the entity s profit or loss for the period and balance sheet giving: the total expense charged and, separately, the amount charged in respect of equity-settled share-based transactions; the amount of any liabilities arising from share-based payment transactions (cash-settled awards) and the amount of vested share appreciation rights. Challenges in making IFRS 2 disclosures in Nigerian environment Lack of suitable qualified valuation experts of specialized unquoted companies. Availability of complete data and information to make disclosures. Availability of information on fair value of unquoted equity instruments and lack of information on option pricing models. Access to information by preparers of the financial statements. Knowledge of preparers of financial statements. Solution: a. Determine the fair value of the award: 100 options at N15 = N1,500 b. Determine the total number of awards expected to vest 85% of 100, which is equal to 85 awards. c. Calculate the total expense Number of awards multiplied by fair value of an award 1,500 x 85 = N127, 500 Everything turns out as expected (ie. 15% of the 100 employees leave) PwC 4

5 IAS 19R: Employee benefits: disclosures for defined benefit plans Overview It is almost impossible to have an existing organization without employees. Employees are a key human resource in the functioning of an organization. They provide a service and thus have an expectation to receive fair compensation for the services they provide to an organization within a particular period. All forms of consideration paid or payable to an employee (e.g. salaries, allowances, pension contributions) are considered to be employee benefits. For most of these benefits, e.g. monthly salaries or pension contributions, the accounting requirements are fairly simple. The company would recognize an expense in the period in which its employees have rendered service and a corresponding liability to the extent that the benefit remains unpaid as at the end of the reporting period. The complexity comes from defined benefit plans whereby a Company has promised its employees, benefits that will be payable in the future, usually on completion of employment, with these benefits linked to a metric such as a percentage of the employee s final salary for each period of service. These complexities mean that experts would be required to assist the Company in determining the expense and corresponding liabilities to recognize within a particular period so as to reflect the Company s commitment to its employees. These valuations come with attendant disclosure requirements that are required to be included in the Company s financial statements. The disclosure requirements Disclosures are an integral part of a Company s set of financial statements. They are required in order to provide more information about the nature of the Company s activities within the periods being considered. While a lot of Companies usually carry out the valuations of its existing plans through the engagement of an actuary, they tend to miss out including the disclosure requirements under such plans within their financial statements. The objectives of these disclosure requirements are to provide relevant information to the users of the Company s financial statements that seeks to achieve the following: explain the characteristics of its defined benefit plans and risks associated with them; identify and explain the amounts in its financial statements arising from its defined benefit plan; and describes how its defined benefit plans may affect the amount, timing and uncertainty of the entity s future cash flows. Let s consider an illustrative example Ajoke Salons Plc (ASP) is a multinational organization that employs about 500 employees within Nigeria, with a presence in all the 36 states and the Federal Capital Territory, Abuja. ASP runs a gratuity scheme for its employees and makes contributions into a separate fund, for the benefit of the employees. The Company also invests in the shares of publicly listed companies quoted on the Nigerian Stock Exchange. ASP is preparing its financial statements for the period ended 31 March 2015, and is thus required to include the minimum disclosure requirements on defined benefit plans. Some of the specific disclosure requirements and what they entail include the following: 1. Information about the characteristics of the defined benefit plans ASP would be required to provide some description about the nature of the benefits provided by the plan, any governing regulatory framework that guides the operations of the plan and a description of the Company s responsibilities with respect to the functioning of the plan. The Company should also include a description of the risks to which the plans expose the entity e.g. if the investments in the plan assets are in equities securities thus exposing the Company to fluctuations in the prices of the equities. In addition, if there has been any changes to the plan or if entry to the plan has been restricted after a certain period, the Company is required to disclose this as well. Ajoke Salons Plc (ASP) operates defined benefit plans in Nigeria that is governed by a regulatory framework. ASP s employees are entitled to a gratutity payment on their retirement, which is based on 5% of their final salary. The level of benefits provided depends on the employee s length of service and their salary in the final years leading up to retirement. The responsibility for the governance of the plans i.e. overseeing investment decisions and contributions due lies with the Company. 2. Reconciliation of the net defined benefit liability/asset ASP is also expected to provide a numerical reconciliation from the opening to closing balance for the net defined benefit liability/asset showing various details. This reconciliation helps to make a user understand how the effects of an employee rendering service in a particular period has impacted on the numbers reporting in the financial statements as either a defined benefit liability/asset. For ASP, an example is shown in table 1 below for its net defined benefit liability and the movement in the fair value of its plan assets. IFRS Newsletter Q

6 Table 1 Reconciliation of change in defined benefit obligation Details Present value of obligation Fair value of plan assets Opening defined benefit obligation/ plan assets xx (xy) Current service cost xx - Interest expense/(income) xx (xy) xx (xy) Remeasurements: Return on plan assets, excluding amounts included in interest expense/(income) - (xy) (Gain)/loss from change in xx - demographic assumptions (Gain)/loss from change in xx - financial assumptions Experience (gains)/losses xx - xx (xy) Contributions/premiums paid: - (xy) Employers Payments from plans: Benefit payments (xx) xy Closing defined benefit obligation xx (xy) 3. Disclosing the classes for fair values of plan assets Companies also invest in plan assets in order to use the returns from these assets to settle its obligation. The standard requires a listing of the plan assets and their fair values to be disclosed. Examples of plan assets include but are not limited to: equity investments, debt instruments (corporate or government bonds), property, qualifying insurance policies, cash and cash equivalents, investment funds etc. 4. Disclosure of significant actuarial assumptions and methods used and sensitivity analysis. It is increasingly complex to make assumptions about the future that would stand the tests of time. Thus in carrying out the valuation of a defined benefit plan, an actuary considers a lot of factors that form the inputs into the valuation computations. ASP has included a disclosure of the most significant actuarial assumptions used in the determination of its defined benefit obligation as shown in the table below. Table 2 Actuarial assumptions Details Description % Mortality rate Examining the likelihood of an employee 5% attaining a certain age at a future date. Increases in life expectancy would increase plan liabilities. Discount rate Used to determine the values as at the 3% reporting dates because the obligation is going to be settled in the future. Inflation rate Likelihood that inflation would rise or fall 4% and its consequent effects on liabilities. Salary growth rate Estimating the number of promotions the employee would enjoy that would cause a consequent increase in salaries. 1% PwC 6

7 In addition, a sensitivity analysis is also required. This sensitivity analysis seeks to determine the effects on the defined benefit liability/asset if there is a relative change in one or more of the assumptions used in the calculation of the defined benefit obligation. 5. IAS 24 Related party disclosures This provides that a post-employment benefit plan established for the benefit of an entity s employees is a related party of the entity. Hence, transactions between an entity and its pension plan fall within the scope of IAS 24. IAS 24 also contains a requirement to disclose compensation of key management personnel, which comprises all employee benefits as defined in IAS 19, together with share-based payments as dealt with in IFRS 2. IAS 40: Investment property Overview Investment property is defined as property held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business. They could be land, building or a part of, or both, and also include property under construction. Investment property is quite different from a property that is used say, for instance, as an head office building or a corporate headquarters as they generate independent cash flows that are separate from the other assets the Company holds. In the next few sections, we would consider the identification, recognition and disclosure requirements for investment properties. How do I identify an investment property? Investment property is distinguished from owner-occupied property by the fact that it is held to earn rentals and/or for capital appreciation and thus generates cash flows independently from the other assets of the Company. In contrast, owner-occupied property do not generate cash flows independently but instead is used in conjunction with the other assets of the entity for the production or supply of goods or services, such as plant and machinery and inventory. I want to measure an investment property. What should I do? That is a pretty straightforward question. The initial measurement of all investment property is at cost. Following initial measurement, your Company then has a choice of either using the cost model, or the fair value model, to measure investment property. This decision would be considered to be an accounting policy choice and as such, there has to be consistency across years that will be applicable to all investment properties held by your Company. Measuring investment property at cost is quite easy. The property would only be subject to depreciation during the course of its useful life, and impairment losses, if any. However, the fair value of such investment property will still have to be determined for disclosure purposes. On the other hand, the choice of the fair value model would require that a valuation of the investment properties, need to be carried out as frequently as possible, such that its carrying amounts does not differ significantly from its fair value. A sudden decision to change course, and adopt the cost model instead will be subject to a reasonableness test. It is difficult to argue successfully that a change to a cost model will provide more reliable and relevant information, about the effects of transactions, other events or conditions, per IAS 8 Accounting policies, changes in accounting estimates and errors. Let s introduce some complexities: properties with multiple uses In a typical world, there are instances where a property is only partially owner-occupied, with the rest of the property being held for rental income or capital appreciation. In such circumstances, the Company would have to ascertain if the portions could be sold separately (or separately leased out under a finance lease) and would therefore have to account for the portions separately. This means that the portion that is owner-occupied is accounted for as property, plant and equipment and the portion that is held for rental income or capital appreciation or both is treated as investment property. An illustrative example. Barbeach Properties Ltd (BPL) owns and run a beach resort, which includes a karaoke club, housed in a separate building that is part of the premises of the entire beach resort. BPL operates the beach resort and other facilities within the surrounding area, with the exception of the karaoke cluab, which can be sold or leased out under a finance lease. The karaoke club will be leased to an independent operator. BPL has no further involvement in the karaoke club. The karaoke club s new operator will not be prepared to operate it without the existence of the beach resort and other facilities. In this scenario, management should classify the beach resort and other facilities as property, plant and equipment and the karaoke club as investment property. This is because, the karaoke club can be sold separately or leased out under a finance lease. IFRS Newsletter Q

8 Can there be transfers into or out of investment property? Yes. Where there is an evidence of a change of use, you are allowed to reclassify investment properties into other categories. Change of use can be any of the following: owner occupation of investment property; owner-occupied property becomes investment property; or property held as inventories becomes investment property. What should be disclosed? A Company that uses either the cost or fair value model for its investment property needs to comply with the disclosure requirements of IFRS 13 on Fair value measurement as well as the disclosures required by IAS 40. In addition, the Company should disclose the extent to which an independent professional valuer has been involved. If there has been no independent valuation that fact should be disclosed. Upcoming events PwC IFRS Training Calendar 2015 In 2014, PwC IFRS Training Workshops, held towards the end of the year. For 2015, we have carefully selected this year s sessions based on feedback from participants at the training sessions held last year as well as problem areas identified from working closely with our numerous clients. As always, each session promises to be practical and relevant drawing on the experience of our seasoned subject matter experts. A snapshot of the PwC 2015 IFRS Training Calendar is detailed below: Quarter 2, 2015 S/N Dates Courses Synopsis 1 To be determined IFRS for SMEs This course covers the details of the IFRSs for SMES, which are different from the full IFRSs. 2 June Industry Focus: Manufacturing & retail 3 June Industry Focus: Banking and finance 4 June Industry Focus: Oil & Gas upstream Quarter 3, 2015 S/N Dates Courses Synopsis 1 July Standard in Focus IFRS 15 Half-day discussion event 2 July Industry Focus: Banking and finance fair value accounting 3 September September Quarter 4, 2015 Industry Focus: Power and utilities Industry Focus: Insurance S/N Dates Courses Synopsis 1 October IFRS 9 roundtable/ifrs 9 in focus This session would focus on IFRSs specific to the manufacturing and retail industry and their applications. This session would focus on IFRSs specific to the banking and finance industry and their applications. This session would focus on IFRSs specific to the oil and gas upstream industry and their applications. This half-day session would focus on the new revenue standard effective in 2017 and the effects it will have across all industries. This session would focus on IFRSs specific to the banking and finance industry and their applications. This session would focus on IFRSs specific to the banking and finance industry and their applications. This session would focus on IFRSs specific to the banking and finance industry and their applications. This session would focus on the new financial instruments standard effective in 2018 and the effects it will have across all industries. 2 November IFRS refresher course This is a refresher course on new IFRS standards, and will provide updates on existing standards. 3 November IFRS financial reporting training This course would provide guidance on financial reporting errors and their correction. If you would like to take advantage of this opportunity, please send us an on pwcifrs.advisory@ng.pwc.com or call , extensions 3110, 3117 or 3120 to speak with Femi, Tomi or Anne. If you would require any specific training not covered in this training plan, we are happy to discuss further on how to meet your training needs. PwC 8

9 How PwC can help PwC has vast experience in applying the IFRS requirements across a wide range of businesses and sectors. We can help you consider the impact on your business not only from an accounting, tax, and legal point of view, but also the impact on your systems and processes. PwC is structured through three service lines- Assurance, Advisory and Tax- each staffed with highly qualified, experienced professionals and leaders in our profession. The Capital Markets and Accounting Consulting Services business unit (CMACS) is a unit within the Assurance business. The CMACS unit provides professional advisory services to clients as they work their way through the regulatory and technical accounting aspects of deals in the following two areas: Capital Market Transactions We assist clients as they plan and execute their capital market transactions. In particular, we offer advice on raising finance through equity, initial public offerings (IPO) and debt offerings. Accounting Consulting Services (ACS) We provide a variety of services including but not limited to deals accounting, treasury accounting, divestiture, restructuring, complex projects advisory, conversion to International Financial Reporting Standards (IFRS) or other standards, review of financial statements and the provision of IFRS training and update sessions. PwC helps organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more by visiting us at PwC. All rights reserved. PwC refers to the Nigeria member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see structure for further details. IFRS Newsletter Q