UK GAAP and IFRS is there a role for internal audit 13 March 2012 Charles Batchelor, Senior Manager, KPMG Martin Robinson, Chartered Institute of Internal Auditors
Agenda 09:30-10:00 Registration, coffee and buffet breakfast 10:00-10:10 Welcome and introductions 10:10-11:00 UK and IFRS - is there a role for internal audit? Charles Batchelor, Senior Manager, KPMG 11:00:11:10 Question and answer session 11:10-11:30 Tea and coffee 11:30-12:20 Facilitated workshop and discussion 12:20-12:30 Feedback, summary and close
Chartered Institute of Internal Auditors UK GAAP and IFRS Is there a role for internal audit? 13 March 2012
Agenda Overview of UK GAAP and IFRS Requirements for IFRS Future developments in UK GAAP Emerging issues New accounting standards On the agenda 4
Overview of UK GAAP and IFRS Overview of the UK Accounting Regime Listed Groups EU listed companies Apply EU-adopted IFRS to consolidated accounts for periods beginning on or after 1 January 2005 AIM listed companies Apply EU-adopted IFRS for consolidated financial statements from 1 January 2007 Private companies and groups All companies have had the option to use IFRS from 2005 in both consolidated (unlisted companies) and individual company accounts Current ASB proposals for current UK GAAP to be replaced with new UK GAAP based on IFRS for periods beginning 1 January 2015. Full comparatives will be required and hence IFRS must be considered from 1 January 2014. 5
Overview of UK GAAP and IFRS IFRS in UK listed group Option 1 Option 2 Option 3 Consolidated accounts IFRS IFRS IFRS Parent accounts UK GAAP IFRS IFRS Subsidiary accounts UK GAAP UK GAAP IFRS The majority of groups decided to stay with UK GAAP for nongroup accounts, why was this? 6
Overview of UK GAAP and IFRS Conversion projects - Future of UK GAAP 30 January 2012: ED published and comment period begins 30 April 2012: Comment period ends Over the last few months, the ASB has finalised its revised proposals for the replacement of UK Financial Reporting Standards The ASB has published three Financial Reporting Exposure Drafts (FREDs) setting out revised proposals for the future of financial reporting in the UK and Republic of Ireland: 1 January 2015: Earliest date of adoption 31 December 2015: Earliest financial statements in which proposals would apply FRED 46 Application of Financial Reporting Requirements (FRS 100) FRED 47 Reduced Disclosure Framework (FRS 101) FRED 48 The Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) 7
Overview of UK GAAP and IFRS Future of UK GAAP Summary of revised proposals The revised proposal recommends a financial reporting structure whereby: Full EU IFRS* Those required to apply by law or regulation and optional for others Group accounts of EU listed entities Group accounts of AIM listed entities FRS 102 Replacing all current UK accounting standards with a single FRS for large and medium sized entities based on the IFRS for SMEs Parent company in a listed group Subsidiaries in a listed group Large and medium private companies Qualifying small entities FRSSE Small private entities *Certain public interest entities will have to apply FRS 101 (FRED 47) being full IFRS with a reduced disclosure framework 8
Agenda Overview of UK GAAP and IFRS Requirements for IFRS Future developments in UK GAAP Emerging issues New accounting standards On the agenda 9
IASB current project plan 2012 Q1 2012 Q2 2012 Q3 2012 Q4 Financial Crisis related projects: Impairment Re exposure IFRS 9 General Hedge Accounting Review draft Target IFRS Macro Hedge Accounting Memorandum of Understanding projects: Target Exposure Draft Leases Re exposure Revenue Recognition Comment period Other projects: Insurance Contracts Review draft or revised ED Annual improvements: 2009-2011 Target completion Annual improvements: 2010-2012 Target Exposure Draft Annual improvements: 2011-2013 Target Exposure Draft 10
The EU endorsement status report Arc vote When might endorsement be expected? IASB Effective Date Expected to be endorsed before effective date? STANDARDS: IFRS 9 Financial Instruments (issued 12 November 2009) and subsequent amendments (amendments to IFRS 9 and IFRS 7 issued 16 December 2011) Postponed Postponed 1/1/2015 Discussions ongoing IFRS 10 Consolidated Financial Statements (Issued 12 May 2011) Q2 2012 Q3 2012 1/1/2013 E IFRS 11 Joint Arrangements (Issued 12 May 2011) IFRS 12 Disclosures of Interests in Other Entities (Issued 12 May 2011) IFRS 13 Fair Value Measurement (Issued 12 May 2011) Q2 2012 Q3 2012 1/1/2013 E Q2 2012 Q3 2012 1/1/2013 E Q2 2012 Q3 2012 1/1/2013 E AMENDMENTS: Deferred tax: Recovery of Underlying Assets (Amendments to IAS 12) Q1 2012 Q2 2012 1/1/2012 x Amendments to IAS 19 Employee Benefits (Issued 16 June 2011) 7/12/2012 Q1 2012 1/1/2013 E 11
IFRS 9 Phase 1 - Classification and measurement Standard IAS 39: Financial assets classification categories: Fair value through profit and loss Available for sale Loans and receivables Held to maturity IFRS 9: Financial assets classification categories: Fair value through profit and loss Amortised cost Business model Business model determined by key management. Applied before assessing the contractual terms of the financial asset. Is the objective of the business to hold the financial assets in order to collect the contractual cash flows? Contractual terms Do the contractual cash flows give rise solely to payments of principal and interest on the principal outstanding? 12
IFRS 10 - Main requirements Standard Control Consolidation based on the principle of control Control arises when an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Three elements must be present for control: Power over the investee Exposure, or rights, to variable returns from the investee Ability to use power to affect the variable returns Power Ability to direct the relevant activities main activities that affect investee returns Variable returns Can be wholly positive, wholly negative or both and can be returns in any way cash, intellectual property, ability to obtain synergies etc 13
IFRS 10 - Key questions for SPVs Standard Who is the investee? In most cases probably the SPV in entirety Could be potential for Silos strict rules on this: Specified assets of the investee are the only source of payment for specified liabilities of the SPV What are the relevant activities? On-going debate about whether an SPV has to have relevant activities. If full autopilot possibly no relevant activities so no consolidation by any party STILL IN DISCUSSION Assuming there are relevant activities, examples could be Collection Management of collateral Management of defaults Action on rapid amortisation Ability to put assets back to originator 14
Forecasts and projections IFRS 11 - Joint Ventures Standard Differences between the joint agreement classification and accounting models of the existing IAS 31 and the new IFRS 11 15
IFRS 13 overview Standard Definition of fair value Exit price; market based, not entity specific New Standard Effective date 1.1.2013 (or earlier) Prospective application How to measure fair value Market conditions; guidance on inactive markets Disclosures about fair value measurement Transparency; measurement uncertainty 16
Potential impacts IFRS 13 Standard Non-financial instruments at fair value increased disclosure requirements Re-assess current fair value practices against IFRS 13 requirements the devil is in the details! Interim disclosures required for financial instruments 17
Impairment of financial assets Under discussion 1 2 3 Impairment based on losses expected in the next 12 months All assets to be included in this bucket on initial recognition Move out of bucket 1 based on deterioration in credit quality Same impairment methodology: Lifetime expected losses Collective measurement Individual measurement 18
Hedge accounting Exposure Draft and updates Closer integration of hedge accounting with risk management Derivatives as part of an aggregate exposure can be designated as hedged items More scope to use non-derivatives as hedging instruments Certain risk components of nonfinancial items potential as eligible hedged items Net position hedging of a group of items can be permitted Elimination of 80-125% bright line thresholds Comprehensive disclosures linking hedging with risk management 19
Leasing - Background Exposure Draft and updates Background of leasing proposals The existing accounting models for leases require lessees to classify their leases as either finance (capital) leases or operating leases. However, those models have been criticised for failing to meet the needs of users of financial statements because they do not provide relevant information about rights and obligations that meet the definitions of assets and liabilities. The models also lead to a lack of comparability and undue complexity because of the sharp bright-line distinction between finance and operating leases. As a result, many users of financial statements adjust the amounts presented in the statement of financial position to reflect the assets and liabilities arising from operating leases. 20
Leasing Exposure Draft and updates High level summary of current leasing proposals Removal of the distinction between a finance and an operating lease The proposals are expected to mean that the majority of operating leases are accounted for in a fashion similar to the current finance lease model (Dr asset Cr Liability) as opposed to simply disclosing the future commitment and holding off balance sheet. These plans are particularly controversial and have been subject to much comment and debate, an seconded exposure draft expected in Q2 of 2012. External impacts for entities Balance sheets will be grossed up for operating leases currently held off balance sheet. Characterising nearly all leases as financing transactions leads to a front-loaded profile of income/expense. All short-term leases may be out of scope for lessees and lessors. More recently, the Boards decided to exempt all leases of investment property by lessors which leads to an inconsistent accounting approach between landlords and tenants. Discussion potential impact Reporting Business Systems / processes People and change 21
Revenue recognition Exposure Draft and updates 14 November 2011: ED published and comment period begins 13 March 2012: Comment period ends Overview A single revenue standard would apply to all contracts Two ways to recognise revenue: at a point in time or continuously over time A contract based, 5-step analysis, focusing on transfer of control Significant judgement and extensive new disclosures How to apply the standard: 1 January 2015: Earliest date of adoption 31 December 2015: Earliest financial statements in which proposals would apply Step 1: Identify the contract Step 2: Identify the separate performance obligations Step 3: Determine the transaction price Step 4: Allocate the transaction price to separate performance obligations Step 5: Recognise revenue as each performance obligation is satisfied 22
Revenue recognition Exposure Draft and updates Internal impacts for entities Revenue recognition may be accelerated or deferred Revenue may be recognised at a point in time or continuously over time New estimates and judgements required Extensive new disclosure requirements New systems and process Retrospective application External impacts for entities Contract terms and business practices may need to change to achieve or maintain a particular revenue profile Changes in timing of revenue recognition may impact the timing of dividends, taxation and sales incentives Communications with stakeholder will require careful consideration Bottom line Impacts may be felt right across the organisation All financial ratios may be impacted, which could impact share price Review contracts now both existing and those entered into prior to 2015 Discussion: potential impact Reporting Business Systems / processes People and change 23
Presenter Charles Batchelor Accounting Advisory Services charles.batchelor@kpmg.co.uk Tel +44 (0) 207 694 5808 Mobile +44 (0) 777 183 1349 2012 KPMG LLP, a UK Limited Liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). This presentation has been prepared for internal use only.