The IASB s technical agenda - PDF Free Download

IFRS Foundation The IASB s technical agenda Martin Edelmann September 2016 The views expressed in this presentation are those of the presenter, not necessarily those of the International Accounting Standards Board (the Board) or IFRS Foundation. Copyright IFRS Foundation. All rights reserved

IFRS Foundation Financial Instruments Major discussion topics within the TRG for Impairment of Financial Instruments Insurance Contracts an overview of the new requirements The new research agenda Copyright IFRS Foundation. All rights reserved

The new impairment model 4 Concern raised about incurred losses Impairment recognised too late Impairment was too little Multiple impairment models How IFRS 9 responds Expected credit losses accounted for from initial recognition All reasonable and supportable information including historical, current and forward-looking information must be used Only one impairment model for financial assets

Overview of the impairment model 5 IFRS 9 Impairment: Expected Credit Loss Model 3-Stage model Stage 1: performing Stage 2: Underperforming Stage 3: Nonperforming Balance Sheet Allowance 12-month ECL Lifetime ECL Lifetime ECL Criterion No significant increase in credit risk Credit risk increased significantly. Credit risk increased significantly & objective evidence of impairment Interest Revenue based on: Gross Carrying Amount Gross Carrying Amount Net Carrying Amount Change in Credit Risk

Exceptions to the general model 6 Simplified approach Trade receivables & contract assets Trade receivables & contract assets that do not contain a significant financing component => must always measure the loss allowance at an amount equal to lifetime ECL Trade receivables & contract assets that contain a significant financing component => accounting policy choice to measure the loss allowance at an amount equal to lifetime ECL Lease receivables Accounting policy choice to measure the loss allowance at an amount equal to lifetime ECL

Impairment Transition Resource Group 7 Four meetings held; one introductory conference call in 2014 and three face-to-face meetings during 2015. Only one issue was raised with the Board: the staff did not propose any further action in relation to this issue the Board noted the issue but observed that the requirements of IFRS 9 were clear. No further meetings have been scheduled: need to balance the provision of implementation support with creating uncertainty that could delay implementation; however the group will remain in place and further meetings will be convened if circumstances warrant it. All ITG agenda papers and meeting summaries can be found on the following web page: http://www.ifrs.org/about-us/iasb/advisorybodies/itg-impairment-financial-instrument/pages/meetings.aspx

Reasonable and supportable 8 Discussed by the Impairment Transition Group (ITG) in September 2015. The ITG discussed first order affects ie what events could happen and their likelihood and second order effects ie the effects of such events on ECLs. Requires judgment not only in determining what events might happen that affect ECL but also the quantification of the same. Information should not be excluded simply because: the event has a low or remote likelihood of occurring; or the effect of that event on the credit risk or the amount of expected credit losses is uncertain. The ITG acknowledged that sometimes the information will not be reasonable and supportable. Emphasised importance of IFRS 7 disclosures.

Forward-looking scenarios Measuring ECL 9 The measurement of ECL is required to reflect an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. There should be consistency, to the extent relevant, between the forward-looking information used for the measurement of ECL and for the assessment of significant increases in credit risk.

Forward-looking scenarios Measuring ECL 10 Example: Future unemployment level Likelihood of occurrence Resulting ECL (in CU) 4% 20% CU30 5% 50% CU70 6% 30% CU170 If an entity used a single central economic scenario based on the most likely outcome of 5% future unemployment, this would give rise to an ECL of CU70 However, if the entity used a probability-weighted range of those scenarios, the ECL would be CU92 ((CU30 0.2) + (CU70 0.5) + (CU170 0.3)) In this example, using a single central forward-looking economic scenario would not result in an unbiased and probability-weighted amount in accordance with IFRS 9

Need for a global insurance Standard 12 IFRS 4 Insurance Contracts is an interim Standard Permits continuation of diverse practice Temporary exemption from the general requirement that accounting policies should be relevant and reliable No transparent information for effects on financial statements New Standard must be transparent on: Effects on financial performance / The nature and extent of risks Profits or losses through underwriting activity and investing premiums Comparisons are difficult on products companies and jurisdictions New Standard: Replaces a variety of treatments that depend on the contract and companies Will be easier to compare insurance with other types of contracts

Improving accounting for insurance contracts 13 Existing issues Variety of treatments depending on type of contract and company 13 How our proposals improve accounting Consistent accounting for all insurance contracts by all companies Estimates for long-duration contracts not updated Discount rate based on estimates does not reflect economic risks Lack of discounting for measurement of some contracts Little information on economic value of embedded options and guarantees Estimates updated to reflect current market-based information Discount rate reflects characteristics of the cash flows of the contract Measurement of insurance contract reflects time value where significant Measurement reflects information about range of possible outcomes

Identify and recognise the contract 15 Limited separation of components from an insurance contract The defining feature of an insurance contract is the presence of significant insurance risk Insurance component Goods, services Embedded derivatives Investment Under new insurance contracts Standard Under new financial instrument Standard Under new revenue recognition Standard Recognition from the beginning of the coverage period, unless the contract is onerous or payments are due before

Measure contract at initial recognition 16 The measurement of an insurance contract incorporates all available information, in a way that is consistent with observable market information Contractual service margin Fulfilment cash flows Future cash flows Risk adjustment Discounting Difference between the risk-adjusted present value of expected inflows and outflows at inception Expected cash flows from premiums and claims and benefits Uncertainty assessment about the future cash flows and its costs An adjustment that converts future cash flows into current amounts

Re-measure in subsequent periods 17 The Board believes that a current value measure of an insurance contract provides the most useful information about insurance contracts in the statement of financial position Contractual service margin Fulfilment cash flows Future cash flows Risk adjustment Discounting Adjusted by changes in estimates relating to the future Allocated to profit or loss on the basis of provision of insurance contracts (ie the passage of time) In each reporting period, an entity remeasures the fulfilment cash flows using current assumptions

Re-measure in subsequent periods: Recognition of changes in estimates 18 Changes in estimates related to future service* Contractual service margin Fulfilment cash flows Future cash flows Risk adjustment Discounting P&L: underwriting result Release on provision of insurance coverage Changes in cash flows related to past and current periods services Release based on the provision of the risk in the current period P&L: investment result Insurance investment expense at cost or current basis Accounting policy choice: OCI Differences between insurance investment expense determined at current and cost basis *For some contracts, changes in the fee specified in the contracts adjusted against the contractual service margin

Disclosures 19 The Board proposes to extend the existing disclosures in IFRS 4 relating to the risks and amounts reported in the financial statements Amounts Expected PV of future paymentsreceipts Risk and the contractual service margin New contracts written in the period Time value of money (insurance investment expense) Judgements Estimating inputs and methods Effects of changes in the methods and inputs used Reason for change, identifying the type of contracts affected Risk Nature and extent of risks arising Extent of mitigation of risks arises from reinsurance and participation Quantitative data about exposure to credit, market and liquidity risk

Responding to feedback 21 Main concerns Changes in the current value measurement recognised immediately in profit or loss do not reflect performance appropriately The Board s response Changes recognised in future periods if related to future underwriting service ( unlocking ) Optional presentation of changes in market variables in OCI Profit recognition for contracts with participating features does not reflect performance appropriately For some contracts with participating features, the effect of some market variables should be regarded as a variable fee for service Complexity of proposals as a whole Reduced complexity through simplifications, for example: measurement for simple contracts transition requirements

Concerns on the effect of changes in current value measurement 22 22 Some question whether all changes in current value measurement should affect the current period performance The Board decided that some changes in current value measurement should not be recognised in the current period s profit or loss, as follows: an entity is required to recognise in profit or loss changes relating to future service in future periods. Achieved by adjusting the contractual service margin for those changes (so-called unlocking ). an accounting policy choice on whether to present the effects of market variable changes in OCI or profit or loss. The Board has also permitted the use of a top-down approach to determine the discount rate used to measure insurance contracts. As a result changes in credit spreads are reflected in both asset and liability measurement, thus significantly reducing accounting mismatches caused by credit spread changes.

Concerns on the accounting for contracts with participating features 23 23 Some were concerned that profit recognition for contracts with participating features does not reflect performance appropriately The Board decided that some contracts with participating features should be viewed as providing the entity with an expected fee for service. Changes in the estimate of the expected fee are adjusted in the contractual service margin, provided that: The contractual terms specify that the policyholder participates in a defined share of a clearly identified pool of underlying items The entity expects to pay to the policyholder an amount equal to a substantial share of the returns from the underlying items A substantial proportion of the cash flows that the entity expects to pay to the policyholder should be expected to vary with the cash flows from the underlying items

Concerns on complexity of the proposals as a whole 24 24 Reflects inherent complexity. Significant complexity arises from decisions taken to address feedback The Board has sought to reduce complexity through: pragmatic scope exceptions to avoid imposing unnecessary costs optional simplified measurement approach for simpler insurance contracts contracts are not recognised until the coverage period begins, unless onerous limited unbundling of components within insurance contracts simplified transition requirements allow more entities to approximate retrospective application principles instead of detailed prescription on techniques or methods

Next steps towards publishing the new insurance contracts Standard 25 25 Now Drafting process, including if any sweep issues arise Effective date decided when publication date more certain Earliest 2020? Possible effective date of the Standard At the end of 2016 Publication of Standard

2015 Agenda Consultation 27 The Board issued a Request for Views (RFV) on: the balance of our activities, split between standard-setting, implementation support and research; what research topics should be prioritised and how we should do that prioritisation; whether we provide sufficient implementation support; whether the pace of change to IFRS Standards is too high, too low, or about right. Links with the Trustees RFV

Key messages 28 Received 119 comment letters; discussed in 30+ forums Focus on finishing insurance contracts and Conceptual Framework we have already finished IFRS 16 Leases Focus on implementation activities, rather than standardslevel projects. Important implementation activities include: support for new and recently-issued Standards; maintenance activities; and post-implementation reviews. Most respondents support our evidence-based approach

Information that is useful to investors 29 Another key message was the importance of providing information that is useful to investors Projects that are important to investors were identified as high priority by many respondents: primary financial statements principles of disclosure Better communication is a central theme for the coming years

Period of calm 30 Many respondents requested a stable platform: because change is a burden on all, especially small entities; to enable preparers to develop and enhance their reporting processes and systems; to allow stakeholders to implement new Standards. The level of change that will be required to implement IFRS 9 Financial Instruments, IFRS 15 Revenue from Contract with Customers and IFRS 16 Leases will be considerable Limitations on stakeholders capacity for change is a key constraint on the Board s activities including outreach fatigue

Work plan strategy 2017 2021 31 Switch away from transaction-specific Standards-level projects to place more emphasis on: better communication in financial statements; implementation, and the support of consistent application; standard-setting that builds on the revised Conceptual Framework and enhances consistency between Standards; a realistic, achievable research programme. The research programme has become more focussed

Active research projects 32 Projects that result in better communication in financial statements will be a central theme in the forecast period The other active research projects will be carried out in a more timely manner: business combinations under common control dynamic risk management financial instruments with characteristics of equity goodwill and impairment

Research pipeline 33 The Board has also identified a pipeline of research projects that will be carried out later in the period 2017-2021 equity method for associates and joint ventures extractive activities pollutant pricing mechanisms provisions, contingent liabilities and contingent assets variable and contingent consideration The pipeline also includes feasibility studies on: high inflation, rather than hyperinflation (scope of IAS 29) pensions: benefits that depend on asset returns SMEs that are subsidiaries

2015 Agenda consultation: Completed topics 34 The Board completed its assessment of these research topics before the RFV was issued: foreign currency translation high inflation The following topics will be completed before the end of 2016: share-based payment discount rates

2015 Agenda consultation: Topics removed from the work plan 35 The topics removed from the Board s draft work plan as a result of messages received were: income taxes intangible assets and R&D post-employment benefits Topics proposed by respondents, but not included in the draft work plan, include collaborative arrangements, general principles for separate financial statements or for combined financial statements, a review of government grants and non-reciprocal transactions

IFRS Foundation 36 Better communication A new theme

A central theme for 2017 2021 37 Our theme of Better Communication in financial reporting will include our work on: primary financial statements the disclosure initiative, including principles of disclosure financial instruments with characteristics of equity the IFRS Taxonomy materiality The scope of some of these projects, such as primary financial statements, is still being developed. Other topics, such as materiality, are more advanced.

Primary financial statements: Initial scope 38 Likely Structure and content of statement of financial performance Additional line items Subtotals Disaggregation Alternative performance measures Evaluating whether there are problems with Statement of cash flows Statement of financial position Assess the implications of digital reporting Unlikely Defining a single measure of performance Statement of changes in equity (considered in Financial instruments with characteristics of equity project)

Principles of Disclosure Discussion Paper 39 Why Requests for the Board to develop presentation and disclosure principles that apply across IFRS Standards. Purpose is to: help the Board set better disclosure requirements; and enable preparers to make better judgements about disclosures. Output Discussion Paper covers overall principles and specific issues. ultimate goal is to produce: the basis for a new or revised general disclosure Standard for preparers (IAS 1, currently); drafting guidance for the Board for its internal use in setting disclosure requirements.

Financial instruments with characteristics of equity 40 Investigating potential improvements to: classification of liabilities and equity in IAS 32 definitions of liability and equity in the Conceptual Framework presentation and disclosure requirements, for instruments that have characteristics of both liabilities and equity Future discussions will include: derivatives and compound instruments conditional alternative settlement outcomes improvements to disclosures Next step is likely to be a Discussion Paper

IFRS Taxonomy: Areas of focus 41 41 IFRS Taxonomy content Publication of Annual IFRS Taxonomy 2016 and three IFRS Taxonomy Updates Governance Adoption and implementation Educational and supporting materials Trustees review Finalisation of the revised IFRS Taxonomy due process IFRS filing profiles and outreach Management of entity-specific disclosures Guide to IFRS Taxonomy common practice content Enhancements to the IFRS Taxonomy Illustrated Strategy relating to the IFRS Taxonomy and wider impact of technology upon the relevance of the IFRS Standards

Other topics on better communication 42 Other topics: Materiality Standards-level review of disclosures Part of the disclosure initiative The object of this project is to help preparers, auditors and regulators to use judgment when applying the concept of materiality Scope of review will be determined once we have received feedback on the Principles of Disclosure Discussion Paper