ifrs technical update - eyfile/... · page 3 overview of ifrs 16 lessors dual lease accounting...

IFRS Technicalupdate4th Annual Financial Reporting InsightsAthens, 13 December 2017

IFRS 16 Leases

Financial Reporting Insights – December 2017

Overview of IFRS 16

Lessors

Dual lease accounting model substantially unchanged

Lessees

Single on-balance sheet accounting model for most leases

New presentation and disclosure requirements

New standard is effective for annual periods beginning on or after1 January 2019

Optional exemption for short-term leases and leases of low-value items

Lease classification test based on IAS 17 criteria


Overview of IFRS 16Impact on all business areas

§ EBITDA based incentives§ Debt/equity finance ratios§ Loan Covenants§ Update systems & processes§ Management KPIs

§ The new accounting standard changesfinancial statements presentation but notany of the underlying cash flows and risks

TreasuryIT

systems

Data governanceand management

Commercial,sales andmarketing

Procurement andlegal

Tax

HumanResources

BusinessPerformance

Planning

Internalaudit

Externalreporting

IFRS 16:impacts more

than accounting

Think about:


`

Overview of IFRS 16What are the “big” issues?

Separation of components

§ Separate lease and non-leasecomponents

§ Practical expedient (for lessees) - treatas single lease component

Choose transition method

§ Full or modified retrospective

§ Practical expedients

Apply judgment in calculation inputs

§ Lease term (extension / terminationoptions)

§ Lease payments

§ Discount rates

Identify (embedded) leases

§ Implicit or explicit asset

§ Substitution rights of suppliers

§ Right to control


Identified assetRight to control the use of theasset throughout the period

of useLease

Definition of a lease

WHOBENEFITS ?

Reassess only if the terms andconditions of the contract change

► Right to obtain substantially all the economicbenefits from use

AND

► Right to direct the use of the asset throughoutthe period of use


Definition of a lease (cont)Separating components

Separate lease component if both:

► The lessee can benefit from use of the asseton its own or together with other readilyavailable resources.

► The asset is neither highly dependent on, norhighly interrelated with, the other assets inthe contract.Account for each lease component separately from non-lease

components, unless:

Practical expedient for lessees only:► Elect, by class of underlying asset, not to separate

non-lease components► Each lease component + associated non-lease

components = a single lease component

Building Equipment

CONTRACT

Maintenance services


Lease term

Non-cancellable periods Periods covered by options toextend the lease (*)

Periods covered by optionsto terminate the lease (**)

(*) if the lessee is reasonablycertain to exercise

(**) if the lessee is reasonablycertain not to exercise

Commencementdate

Rent-free period


Lease paymentsVariable lease payments


Are the lease paymentsgenuinely variable?

Do not include in the leaseliability

Recognise in P&L whenincurred

Is there an amount which isunavoidable for the lessee?

Not genuinely variable

Include in lease liability

Initially measure based onindex or rate at the

commencement date

Do not forecast futurechanges in the index or rate

Re-measure only when thereis a change in cash flows

Determination of discount rate


► Lessors use the interest rate implicit in the lease (IRIL) that causes thefollowing

The presentvalue (PV) of

lease payments

The PV of theunguaranteedresidual value

FV of theunderlying asset

Any initial directcosts of the

lessor+ +=

► Lessees use their incremental borrowing rate (IBR) when IRIL cannot be readilydetermined

► Lessee’s IBR is the rate of interest that a lessee would have to pay to borrowover a similar term, and with a similar security, the funds necessary to obtain anasset of a similar value to the ROU asset in a similar economic environment

Determination of discount rate

► Determining the Incremental Borrowing Rate


Readily observablestarting point

May include:• “Security” – Start from

unsecured rate• Repayment profile• Lessee credit risk• Currency

Consider:• Recent borrowings• Hypothetical loan rates• Property yield (property

leases)

Adjustments

Effective date and transition


q IFRS 16 is effective for annual periods beginning on or after 1 January 2019q Early application permitted if IFRS 15 has been applied or is applied at the

same date

Effectivedate

q Lessees are permitted to choose between two transition approaches appliedconsistently to all leasesq Full retrospectiveq Modified retrospective

q Cumulative effect recognised at the date of initial application in opening equity

Lessees

q Lessors carry forward IAS 17 balances on transitionq Except for intermediate lessors in a sublease

Lessors

Full retrospective approach

Transition method impacts data requirements

q Do not restate comparative information

q Adjust opening retained earnings on transition

q Provide additional transition date disclosure

q Optional practical expedients, including:

q Do not transition leases ending within 12months

q Simplified right-of-use asset measurement

In accordance with IAS 8:

q Restate comparatives as if IFRS16 always applied

q Provide line by line comparisondisclosure


1 Cumulative catch-up approach2

Cumulative catch up

Fully retrospective

Status of implementation


?

Not yet started1

Where is your company / group on the timeline for adoption?

Gaining an understanding of leasing activities and datarequirements2

Gathering complete set of lease data3

Designing and developing IFRS 16 solution4

Deploying solution5

Data requirementsdo not stop attransition

More than a transition exercise


Change ahead

New systems and procedureswill be required to capture:q New leasesq Lease modificationsq Lease disposalsq Asset impairment reviews

Will you be readyon time?

IFRS 9 Update for Corporates


Key Topics for our discussion

► IFRS 9: Financial Instruments► Summary: key areas of impact► Classification and Measurement

► Key challenges: Classification and Measurement► IASB developments

► Impairment► Key challenges: Impairment

► Hedge accounting► Key challenges: Hedge accounting► Other matters


IFRS 9: Financial Instruments



IFRS 9: key areas of impact

Classification &Measurement

q “Common” financial instruments:No significant changesanticipated, but accounting forothers may change

q Some changes to financial assetsthat might have been AFS underIAS 39, both:q DEBT - FVOCI (with

recycling) / FVPLq EQUITY –FVOCI (no

recycling)

q Debt factoring (financing vs sale)

q No embedded derivativebifurcation on assets

q New methodology, but changelimited for many corporates, biggerissue for banks

q Debt securities not recorded atFVPL

q Impact on trade receivables

q Long-term receivables affected,including INTRAGROUP LOANS inseparate financial statements

q Contract assets and finance leasereceivables

Impairmentq Less rules-based, but still complex

q Basic models for hedge accounting(cash flow, fair value, netinvestment) unchanged

q Sophisticated hedge accountingarrangements may change (e.g.commodities, inflation)

Hedge accounting

Classification and Measurement



What does the standard say? Challenges► Prepayment options can change the

timing and/or amounts of cash flows[IFRS 9.B4.11-12]

► Absence of prepayment fees does notbreach the SPPI criterion

► Prepayment options at par:► Pass the test if prepaid amount

substantially represents unpaidprincipal and interest

► May include reasonablecompensation for early termination

► If asset was purchased at apremium or discount, fair value ofprepayment feature must beinsignificant at initial recognition

How to evaluate whetherprepaid amount‘substantially representsunpaid principal andinterest’?

How to assess prepayable financialinstruments acquired at a premiumdue to changes in the interest rateenvironment?

Does non-genuine/deminimise play a role?

?

?Judgement

Challenge

Can a ‘negative compensation’meet the SPPI criterion?

How to interpret the‘reasonable compensation’threshold in the standard?

?

Key challenges: Classification & MeasurementPrepayment features


Does a debt instrument meet theSPPI condition for measurement atamortised cost if the contractualterms of the instrument include asymmetric ‘make whole’prepayment option or a fair valueprepayment option?

► In October 2017, the Board publishedthe narrow scope amendment to IFRS 9which makes a debt instrument withsymmetrical prepayment feature eligibleto be measured at amortised cost or atFVOCI, provided eligibility condition ismet

► There may be circumstances in whichfair value prepayment amount (or the fairvalue cost to terminate an associatedhedging instrument) may be consistentwith the notion of ‘reasonablecompensation for the early termination ofa contract’, but not always the case

► Amendments for negative compensationare effective from 1 January 2019, withearly application permitted

IASB developments:Prepayment features with negative compensation

IASB developments:Modification of a financial liability –no derecognition

► IFRS 9.B5.4.6 catch up approach (i.e., AG 8 approach under IAS 39) applies tomodifications of financial liabilities, consistent with modifications of financial assets

► Modification gain or loss is immediately recognised in profit or loss, calculated bydiscounting the change in contractual cash flows at the original effective interest rate

► Clarification only applies to IFRS 9

► On transition to IFRS 9, any change in accounting from IAS 39 would need to bemade retrospectively

What does the standard say? Challenges► If a financial instrument represents an

investment in particular assets or cashflows, or

► If the borrower has limited other assetsand/or equity

The SPPI test is failed

How to differentiatebetween returnscompensating primarily forthe ‘credit risk’ and that of‘performance risk of otherassets or variable’?

How to differentiate betweeninstruments that have contractualcash flows determined by the cashflows on specified assets and cashflows of which are just secured byanother assets?

Does the non-recourse loan fail theSPPI test?

?

?

► The lender needs to assess theunderlying assets (e.g., collateral) andcash flows to determine whether thecontractual cash flows are SPPI [IFRS9.B4.1.17]

► If the financial instrument’s returndepends from performance of anunderlying asset or another variable

Judgement

Challenge

Key challenges: Classification & MeasurementsNon-recourse loans


What does the standard say? Challenges

► A debt instrument is normally measured atamortised cost if it is held within a businessmodel whose objective is to hold assets in orderto collect contractual cash flows, provided it alsopasses the SPPI test.

What if sold in legal form but noteconomic substance?

What factors to consider when factoring?

Additional disclosures?

?

?

► Sales, in themselves, do not determine thebusiness model and cannot be considered inisolation

► Past sales and expectations for future salesprovides evidence related to how the entity’sstated objective for managing the financialassets is achieved

Judgement

Challenge

Should receivables berecorded at FVTPL or atamortised cost?

Additional provision or valuationadjustment when factoring?

At what time to reclassifyand derecognise?

Key challenges: Classification & MeasurementsDebt factoring


Impairment


Key challenges: ImpairmentGeneral

► Measurement of expected credit losses include probability weighting of credit losses (even ifunlikely)

► Most probable outcome = collection of probability weighted outcomes► Data (PD and LGD)

► External (agency e.g. Experian or market e.g. Bloomberg ) vs internal► Forward looking adjustments - current and forecast future conditions

► Documentation of new processes and I/C arrangements based on substance► Systems - external vs internal models► Disclosures

► Anticipate more extensive disclosures► Movements in loss allowances► Explanations of methods and estimates, credit risk, etc.


Key challenges: ImpairmentInter-company loans

ECL model applies to inter-company loans for parent company separate financial statements:

► Examples:► Interest free inter-company loan to subsidiary (i.e., off-market)► Capital investment which is unlikely to be repaid or can only be repaid after a number of years

but contractually on demand► Loans between group companies with an implicit guarantee by parent

► Practical challenges► Terms may not be ‘arm’s length’, or terms not documented terms at all► What is the initial fair value? Is there a capital contribution component?

Will it pass SPPI?► How do we assess for significant increase in credit risk?► What PD, LGD, and maturity date should be used to measure the ECL?


Hedge accounting



Tran

sitio

nMigration of existing hedge accountingDefault approach: prospective application of IFRS 9 model► Continue hedge accounting if meet IFRS 9 requirements► Rebalancing on transition (if applicable) à against profit or lossExceptions to the default approach:► Items: for ‘risk components’ of derivatives excluded from designation as the

hedging instrument under IAS 39► Scope: only for those hedging relationships that existed in earliest balance

sheet presented or designated thereafter

Time value of options:Must applyretrospectively ifonly intrinsic value wasdesignated under IAS 39

Forward element of forwardcontracts:May apply retrospectively ifspot element was designatedunder IAS 39 (election)

Note: May de-designate any hedging relationship on last day of applying IAS 39

FX basis spread:May apply retrospectivelyon a hedge relationship byhedge relationship basis

Key challenges: Hedge accountingTransition

Key challenges: Hedge accountingOther matters

► Cost of hedging

► Time value of options –mandatory

► Forward points of forwards –voluntary

► Foreign currency basis spread –voluntary

► Disclosures

► Other matters► Systems

► Hedge documentation (effectiveness testing; cost of hedging)


Risk management strategy

Effects of hedging on amount, timing and uncertaintyof future cash flows

Other disclosures for particular situations (dynamic strategies and creditrisk hedging)

Effects of hedge accounting on the primary financial statements

Key challenges: Hedge accountingOther matters


IFRS - Other Developments


Overview

► Better Communication in Financial Reporting► Recent IFRS Standards► Other projects

– Conceptual Framework– Active Research Programme


Better Communication in Financial Reporting


Central theme of Board’s work

Content and its organisation Content delivery

PrimaryFinancialStatements

DisclosureInitiative

IFRSTaxonomy™


Primary Financial Statements – scope

Statement(s) offinancial performance

Statement ofcash flows

Statementof financial

position

Statementof changes

in equity

Requiring additional Eliminating options

No planned change –except possible

development of templatefor primary financial

statements and greaterdisaggregation

EBIT subtotal (interest/dividends)

Providing guidance on Aligning the operatingpresentation of section between themanagement operating statements of cash flowsperformance and and financialalternative EPS performanceBetter ways to Requiring a consistentcommunicate OCI starting point for the

reconciliation


Better Communication

Principles of effective communication suggested in the Discussion Paper

Entity-specific Tailoring information to a company’s own circumstances.

Simple and direct Using simple descriptions and sentence structures without omitting usefulinformation.

Better organised Ranking pieces of information to help users of financial statementsunderstand their importance.

Better linked Linking information to help users of financial statements understand therelationships between pieces of information.

Better formatted Selecting a suitable format for the type of information companiesprovide.

Free of duplication Avoiding unnecessary duplication that obscures communication.

Enhanced comparability Disclosing information in a way that enhances comparabilityamongcompanies and across reporting periods without compromising itsusefulness.

Major Standards Effective date

IFRS 9 Financial Instruments* 1 January 2018

IFRS 15 Revenue from Contracts withCustomers** 1 January 2018

IFRS 16 Leases 1 January 2019

IFRS 17 Insurance Contracts 1 January 2021

2015 Amendments to theIFRS for SMEs Standard 1 January 2017

* includes Prepayment Features with Negative Compensation, issued October 2017**includes Clarifications to IFRS 15, issued April 2016

Recent IFRS Standards


Narrow-scope amendments—Effective 1 January 2017

Recognition of Deferred Tax Assets for Unrealised Losses(amended IAS 12)Disclosure Initiative (amended IAS 7)Annual Improvements 2014-2016 (amended IFRS 12)

Recent IFRS Standards (cont.)



IFRIC 22 Foreign Currency Transactions and Advance Consideration

Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts(amended IFRS 4)

Classification and Measurement of Share-based Payments(amended IFRS 2)

Transfers of Investment Property (amended IAS 40)

Annual Improvements 2014-2016 (amended IFRS 1, IAS 28)





IFRIC 23 Uncertainty over Income Tax Treatments

Long-term Interests in Associates and Joint Ventures (amends IAS28)


IFRIC 23 Uncertainty over Income Tax Treatments

► Effective for annual periods after 1 January 2019

► Clarifies accounting for uncertain income tax treatments

► Scope:► Current and deferred income taxes► Interest and penalties within the scope of IAS 12► Not applicable to other taxes or levies

► Specifically addresses:► Unit of account► Examination of tax treatments by taxation authorities► Determination of taxable profit (loss), tax bases, etc.► Changes in facts and circumstances



Exposure Drafts

Open for comment

Accounting Policies and Accounting EstimatesDefinition of Material (would amend IAS 1 and IAS 8)

Others

Availability of a Refund (would amend IFRIC 14)Classification of Liabilities (would amend IAS 1)Definition of a Business (would amend IFRS 3)Improvements to IFRS 8 Operating Segments

Property, Plant and Equipment: Proceeds before Intended Use


Why are we revising the Conceptual Framework?

• For example, providesconcepts onpresentation anddisclosure andmeasurement

• For example, updatesthe definitions ofassets and liabilities

• For example, clarifiesthe roles in financialreporting of:▪ stewardship▪ prudence▪ substance over

form▪ measurement

uncertainty

Existing Conceptual Framework useful but someimprovements needed

► Fill in the gaps Update Clarify


What are the improvements?

Recognition &Derecognition

Measurement Use of OCI

Uncertainliabilities

Role ofprudence andstewardship


Active research projects

Project Target

Financial instruments withcharacteristics of equity DP H1 2018

Goodwill and impairment DP H1 2018

Business combinations under common control DP H2 2018

Dynamic risk management DP H2 2018

Thank you!

4th Annual Financial Reporting Insights

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