Financial Reporting Developments
New control definition Page 2
Consolidated financial statements Consolidated financial statements Holding company Controlled entities Other strategic investments Page 3 29 August 2012
Objective of consolidated financial statements A holding entity treats net assets and activities of controlled entities as if they were part of the holdings entity s own net assets and activities The aim is to present the financial position and results of operations of the holding entity and its subsidiaries as if they were a single entity Page 4 29 August 2012
Definition of control The definition of control determines whether an investee is controlled by the holding entity and therefore be included in the consolidated financial statements of the holding entity New definition will change requirements for how entity determines which investees to consolidate Page 5 29 August 2012
Why change? To address concern arising from the global financial crisis that started in 2007 regarding off balance sheet vehicles The financial crisis heightened criticism that some entities were not consolidating other entities they appear to control To reflect economic substance of the relationship between a reporting entity and an investee Page 6 29 August 2012
New definition of control Power Linkage Returns Page 7 29 August 2012
Entities most likely to be affected Have significant, but not majority equity interests in investee Hold potential voting rights over investments Investment, asset or fund managers Use special purpose entities as part of operation Page 8 29 August 2012
How will the change affect businesses? Management judgment Data accumulation Financial statement metrics Communication with stakeholders Structuring transactions Page 9 29 August 2012
Proposed changes to lease accounting Page 10
Background Major criticism of existing lease accounting is that lessees do not record all lease obligations on their balance sheet Therefore, main objective is to have all leases being reported on the balance sheet Page 11 29 August 2012
Current lease accounting Depends on classification as either operating or finance lease Page 12 29 August 2012
Lessee accounting No significant changes to the accounting for finance leases Significant changes to the accounting for operating lease Balance sheet Profit and loss Operating lease Page 13 29 August 2012 No asset or liability recorded Rental expense Proposed lessee model Right-of-use asset Lease liability Amortization expense Interest expense
Lessor accounting Significant changes to lessor accounting for both operating and finance leases (receivable and residual approach) Balance sheet Profit and loss Operating lease Underlying asset Rental income Depreciation expense Finance lease Lease receivable Revenue Cost of sales Finance income Proposed lessee model Lease receivable Residual asset Revenue Cost of sales Finance income Accretion of residual asset Page 14 29 August 2012
Leases of property by lessors Apply receivable and residual approach if Lease term is major part of economic life; or Present value of lease payments accounts for substantially all of the fair value of the underlying asset Otherwise, apply approach similar to current operating lease accounting Page 15 29 August 2012
Relieve for short-term leases Can choose to apply current operating lease accounting to short-term leases A short-term lease would have a maximum possible lease term, including any options to renew, of 12 months Page 16 29 August 2012
How will the changes affect businesses? Financial statement metrics Data gathering Processes and internal controls Information technology and systems Lease structuring and modification Tax issues Page 17 29 August 2012
Disclaimers These slides are for information purposes only and are not intended, and should not be relied upon, as accounting, tax or valuation or any other form of advice. This presentation contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this presentation. On any specific matter, reference should be made to the appropriate advisor. The views expressed by speakers in this seminar are not necessarily those of Ernst & Young LLP or any member of the global Ernst & Young organization. Page 18 29 August 2012
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