Your next stop to accelerate your IFRS 16 implementation 6 October PDF Free Download

IFRS 16 Seminar Your next stop to accelerate your IFRS 16 implementation 6 October 2017

Agenda for today Introduction One year ahead Project Management Project accelerator Coffee Break Tooling going forward Transition Challenges Tax perspective Drinks 2

Today s presenters (1/2) IFRS 16 One year ahead Project Management Project Accelerators Niels Ebbinkhuijsen Ruben Rog Janpiter Nijp 3

Today s presenters (2/2) Tooling Landscape Transition challenges Tax perspective Gerben de Roest Robert de Boer Johan Swagers 4

Polling statements and questions

A few polling statements and questions to start Please get your mobile phone Go to: www.menti.com Fill in the code: 42 60 89 And lets get started! 6

One year ahead - what has happened so far?

IFRS 16: One year on some observations from KPMG ACCOUNTING JUDGEMENTS PROJECT STATUS EXTERNAL Early stages/impact assessment Few companies have made decision on transition approach Not early adopting (generally) Limited disclosure in FY15 reporting cycle Limited comment from the taxation authorities IASB - no current intention to permit a lighter approach enabling restatement of comparatives! Revisiting assessment of embedded leases Inclusion of service related items in lease liability: EBITDA boost! Challenges of determination of discount rate not seen any developed methodologies Use of Parent discount rate for subsidiaries Move to lease payments based on usage, especially for internal leases usage PRACTICAL CHALLENGES Data collection - who holds the info? Manual versus automated? Resourcing (needs sponsorship) System selection/database early stages Project leadership & sponsorship is key CFO by-in ideal! Observations COMMUNICATIONS Need to determine plan to communicate with investors Limited interest from analysts to date! Will there be any information content from adoption of IFRS 16 as no change in cash! - How close will IFRS16 liabilities be to the disclosure in the operating lease note? - Improve note to avoid surprises? TRANSITION Most companies would ideally go fully retrospective But frustrated at complexity of this approach Presentation of Non-GAAP measure for prior year + adopt modified retrospective? Impact on distributable reserves important 13

Disclosure on IFRS 16 so far a survey 59% of the companies expect IFRS 16 will have a significant impact In 38% of the financial statements no explicit statement is made whether the impact will be significant or not The vast majority of the companies seems to be still in progress of the impact assessment. 14

Disclosure on IFRS 16 so far a survey The amount of operational lease commitment disclosure has increased on average with 8%. We expect the operating lease commitment to become more precise upcoming years in order to prevent to explain a gap in the year of transition Most companies report in their financial statements; Just a few comments on the impact in the Director s report / risk paragraph 15

Disclosure prior to effective date & Our expectation IAS 8.30 disclosure known/reasonably estimable possible impact of IFRSs issued but not yet effective. Considerations Pre-adoption disclosures progressing in level of detail as your application date approaches? Pre-adoption disclosures meeting external stakeholder expectations? In 2016, ESMA issued guidance on their expected IFRS 15 impact disclosure in 2016 financial statements We expect similar guidance will be issued in the near future on IFRS 16 This means Companies will need to quantify more clearly the expected impact of IFRS 16 16

Project Management

Illustrative time line IFRS 16 issued Expected Endorsement EU Effective date 1 January 2019 and Go live date Annual report 31 December 2019 2016 2017 2018 2019 Complete data collection Q1 Report First results based on IFRS 16 Lease tool selection Tool implementation 18

Lease accounting impact assessment milestones Data extraction plan Lease accounting solution strategy Dashboard from data to insight PMO Tool selection process Impact assessment Scope and assess phase Key accounting choices Insight provided through the tools Application of your decisions 19

Compelling IFRS 16 tooling suite Supported by D&A capability ENABLING TOOLS Tools readily available Live demos in the presentation DATA EXTRACTION DATA REVIEW IMPACT ASSESSMENT KLT IMPLEMENTATION TRUSTED ANALYTICS FOR LEASING INTEGRATION 20

IFRS 16 project considerations Other Procurement Legal Systems Leasing database System solution Finance Transition options Data collection Tax KPIs Treasury Covenants Credit rating Regulatory capital (banks) IFRS 16 project considerations Investor relations Analyst queries KPI s (e.g. Operating profit) Credit rating Strategy Real Estate Lease vs buy Lease structuring Employee benefits Management remuneration KPI s 21

Project Governance Steering Committee Decision making and progress monitoring Project Management Day-to-day monitoring of the project Opco leads Project management role and team at Opco Topic leads (design authority) Ensure high and consistent quality across all topics. Involved as required 22

Project accelerators

Demo: Contract Validation Tool Extraction of data points from contracts in PDF Full audit trail of the review process Validation of data obtained through the automated text recognition process Cloud based review solution accessible for users around the world 24

Demo: Impact assessment on Sofy Impact assessment for the entire lease portfolio and individual leases Supports IAS 17, and IFRS 16 - Full retrospective, modified retrospective option 1 and 2 Interactive scenario analysis for lease term and discount rates Cloud based solution accessible for users around the world 25

Tooling in operations going forward

Why tooling? IFRS16 requires complex calculations Tooling is available for both project acceleration, as well as ongoing operations. Ongoing operations require support on lease management and lease accounting As 1/1/2019 is rapidly approaching, we see organizations tilting towards temporary IFRS16-compliancy solutions 28

Considerations for your IFRS 16 solution Considerations for IFRS 16 solutions Data input/extraction Data validation/identification Contract management Dual reporting (IFRS / USGAAP) Audit trail Internal controls Data output/automated postings Lessee / sub-lease / lessor accounting Deployment (Cloud/SaaS vs. on premise) Integration with existing systems Support Fit for the Future Implementation effort Cost (implementation and going forward) 29

Possible lease accounting solution roadmap A possible lease accounting solution roadmap is to (1) ensure IFRS16 compliancy in time, and (2) embed an end state solution that is in line with IT strategy. With this approach: state 1 and 2 solutions are temporary, where state 3 is the end state solution. This can be achieved by a roadmap with 3 states as depicted below. STATE 1: INITIAL COMPLIANCE IFRS16 compliant reporting based on the initial data load Static reporting Key for change management STATE 2: COMPLIANCE OVER TIME IFRS16-compliant reporting over time Flat file interfacing including manual upload of journal entries, payment files, new contracts, vendor MD STATE 3: INTEGRATED SOLUTION End state solution in line with IT strategy Automated synchronization using APIs Interim SaaS solution Lease reporting Interim SaaS solution Lease accounting End state embedded solution Lease accounting General ledger General ledger ERP / Lease administration ERP / Lease administration ERP / Lease administration ERP system(s) ERP system(s) ERP system(s) Legend: Flat file data transfer Integrated data transfer 30

IFRS16 intermediate solution: integration is key Notifications Process KLT Lease Changes Reconcile Lease Admin and KLT Leases KLT / Lease Admin Integration Reconcile Lease against Hash Batch Validations Pull Active Leases Pull All KLT Leases Lease Admin system Audit Reports Master Data BI / Cons. solution Dual reporting STATE2 ERP systems AP GL Pull Master Data Pull Payment Data Push to GL Push to AP KLT / Master Data Integration Reconcile with KLT Payment Reconciliation Reconcile with KLT Journal Entry Integration Generate GL File Payment Integration Generate AP File Approve Audit Report Approve Audit Report Process KLT Master Data Changes Process KLT Payment Changes Generate Audit Report Generate Audit Report SFTP SFTP SFTP IFRS GAAP Dual reporting STATE1 INPUT OUTPUT 31

Transition challenges

Purpose of this session Highlight the 5 key accounting decisions every company must take on transition to IFRS 16 For each key decision, assess the pros and cons for: Financial reporting Data requirements Implementation Compare notes on the decisions you have already taken 33

Key transition questions will you? 1 Early adopt? 2 Grandfather the assessment of which contracts are leases? 3 Use a retrospective or modified retrospective approach? 4 Measure ROU assets equal to the lease liability? 5 Use any of the practical expedients? #4 & #5 modified retrospective approach only 34

Retrospective vs modified retrospective Approach 2018 2019 Date of equity adjustment Full retrospective IFRS 16 1 IAS 17 2 IFRS 16 1 January 2018 Modified retrospective IAS 17 IFRS 16 1 January 2019 3 (1) Comparatives in 2019 annual report will reflect balances under IFRS 16 (2) The 2018 Annual Report will reflect balances under IAS 17 (3) The 2019 annual report will include an explanation of the differences between the balances recognised on transition to IFRS 16 and previously disclosed operating lease commitments 35

Modified retrospective lease liability Lease liability = + Present value of remaining rentals Present value of payments at end of lease Discount at lessee s incremental borrowing rate at date of initial application 36

Modified retrospective ROU asset Option 1 Measurement Option 2 options for ROU asset Correct Measure retrospectively using transition discount rate P&L Key benefit for individually significant leases No Lease liability +/- prepaid/accrued payments historical information needed Key benefit for high volume, low value leases Apply this option on a lease-by-lease basis 37

Optional practical expedients PE#1 Account for leases expiring within 12 months as short term leases. Lease liability ROU asset PE#2 Apply single discount rate to similar leases. PE#4 Exclude initial direct costs from ROU asset. PE#3 Use of hindsight e.g. determining lease term. PE#5 Onerous contracts adjust ROU asset. *Modified retrospective approach only 39

Choosing a transition method Significance of change in accounting Comparability of information and investor perceptions Availability of historical information Costs Future profit trends Systems and processes Disclosure requirements Contract structure and volume of contracts 40

Tax perspective

Local GAAP remains leading for tax Generally European countries are using local GAAP accounts as the starting point for the computation of taxable income and will continue to do so but exceptions may exist! Local GAAP (if unchanged) Tax rules (if unchanged) Tax Return No changes expected or announced Leasebesluit continues to be in place Qualification of lease for tax purposes is based on commercial accounting concepts Public consultation - HMRC to consult further in autumn 2017 earliest Changes being made to US GAAP Potential impact on federal and state tax positions 42

Deferred tax Tax (if unchanged) Local GAAP (if unchanged) IFRS 16 (new) No impact expected Temporary differences Front loaded effect = net deferred tax asset during the lease 43

IFRS 16 Potential Tax impacts Tax accounting take aways 1. make sure that your tax department / tax accounting is involved in your IFRS 16 implementation project 2. jurisdiction by jurisdiction review to determine any local changes to tax rules and/or local GAAPs 44

IFRS 16 Potential Tax impacts Other potential tax impacts 1. Non-deductibility and / or withholding tax on interest component in the lease payment 2. Existing (tax) lease structures to be tested for continued working as intended 3. Country by Country reporting: differences between IFRS and Tax books may raise questions 4. Wage tax impact for incentive plans based on EBITDA metrics 5. Transfer pricing and valuation models relying on EBITDA should be revisited. Benchmarking more complex 45

Some relevant tax terms. ATAD European Anti Tax Avoidance Directive CFC Interest limitation! Exit tax GAAR Hybrids 2019 2022 46

Impact on interest deductions European Anti Tax Avoidance Directive Interest Limitation Rule Main rule: Net interest expenses will be deductible only up to 30% of the tax payer s EBITDA (based on tax books). Escapes: Excess interest may still be deductible on the basis of one of two group escapes: 1. Compare tax payer s equity : assets ratio with the same ratio of the group; or 2. If the group s net interest expense : group EBITDA is higher than 30%, otherwise main rule is more favourable. Escapes rules are based on IFRS books! IFRS 16 impact: more assets but also more debt; what is impact on escape #1? Positive impact when tax payer s equity:assets ratio increases compared to the same ratio of the group to which it belongs. IFRS 16 impact: group EBITDA increases, but also the net interest expense, net impact for escape #2? Unclear whether interest element in an operational lease payment is included in the tax definition of interest Similar interest limitation rules already exist in Germany, Spain, Italy, Finland. 47

Q & A

What Questions Do You Have? 49

Resources First Impressions Transition Options Lease Definition Discount Rates IFRS 16 Webinar (Podcast) IFRS 16 Leases website 50

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