IFRS Update A discussion on the recent changes to IFRS and the road to convergence with US GAAP.

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  • IFRS Update A discussion on the recent changes to IFRS and the road to convergence with US GAAP

  • SpeakersColm Homan, Partner, PwCAnna Burns, Senior Manager, Deloitte & ToucheJames Berry, Director, KPMG

    ModeratorTom Kelly, Partner, KPMG

  • AgendaWhat is IFRSUS Regulatory DevelopmentsInsurance ContractsFinancial InstrumentsIFRS 1, First-time Adoption of International Financial Reporting StandardsIAS 37, Provisions, Contingent Liabilities and Contingent Assets,

  • What is IFRSInternational Financial Reporting Standards (IFRS)IFRS is a high-quality, comprehensive, globally-accepted set of accounting standardsIn many instances, IFRS contains similar concepts to U.S. GAAPIFRS is a less extensive body of literature than U.S. GAAP, with limited industry-specific guidance and less detailed application guidanceThere are more circumstances where application of IFRS will require exercise of judgment, supported by contemporaneous analysis and documentationIFRS requires transparent disclosures in the financial statements of critical accounting policies and estimates, particularly in areas requiring application of judgment

  • What is IFRSJoint IASB/FASB effortsConvergence continues, with the following key joint projects: revenue recognition; financial statement presentation; lease accounting; financial instruments; derivatives and hedging; de-recognition; consolidation; and fair value measurementWorldwideOver 100 countries either require or allow IFRS (or a national variant) for listed companiesOther countries have plans to adopt or converge to IFRS by 2011: Brazil, Canada, Chile, India, Mexico, Singapore, South KoreaJapan: optional early adoption for FY 2010 and possible mandatory adoption by 2016

  • What is IFRSBermudaIFRS conversion activity is mainly focused in the following areas:Several large reinsurance companies are assessing the impact of converting from US GAAP to IFRS due to the SEC roadmap/work plan and Solvency IIPublic interest entities (includes listed companies and local insurers) who currently prepare financial statements under Canadian GAAP have to prepare IFRS financial statements from 2011

  • RoadmapNov 17, 2008Comment lettersApr 20We need a single set of global standardsRegulatory ReformJune 17We need a single set of global standardsG20 London SummitApr 2We need a single set of global standardsG-20 Pittsburgh Summit Sep 24-25 We call on international accounting bodies to develop a single set of standards by June 2011Mary Schapiro speech at IOSCO Oct 8 I am committed to focusing our efforts this fall to following up with a work plan that expands upon the concepts proposed in the roadmapSEC DraftStrategic Plan Oct 9 We will promote a single set of high-quality global accounting standards Statement on Global Accounting Standards Feb 24US Regulatory Developments

  • US Regulatory DevelopmentsSEC work plan pointing towards IFRS adoption by U.S. issuersFebruary 2010: SEC Statement and work plan in support of convergence and global accounting standardsSEC reaffirmed its support for a single set of high-quality, globally accepted accounting standards and for the convergence of U.S. GAAP and IFRSStatement that IFRS is best-positioned to be able to serve the role as the single set of global standards

  • US Regulatory DevelopmentsWork plan describes 6 specific areas relevant to SECs decision on adopting IFRS, including: Areas most relevant for SECs decision to adopt IFRS: sufficient development and application of IFRS andindependence of standard setting for the benefit of investors

    Transitional considerations:investor understanding / education regarding IFRSexamination of how the U.S. regulatory environment would be affectedImpact on issuers, such as changes to accounting systems, including evaluation for both large and small issuers and human capital readiness, such as education and audit capacity

  • US Regulatory DevelopmentsSEC work plan pointing towards IFRS adoption by U.S. issuers (contd)Next stepsBeginning no later than October 2010: SEC staff will provide periodic progress reports on work plan2011: SEC will consider whether, and if so, how to incorporate IFRS into the U.S. financial reporting system2015 or 2016: Estimated first time U.S. issuers would be required to report under IFRS; SEC will further evaluate timeline as a part of the work planPossible that early adoption may be allowed for some issuers once decision on IFRS is made

  • Insurance Contracts

  • Phase II of the Insurance Standard

    BackgroundTentative Decisions and TimetablePotential Impact

  • Background to Insurance Contracts ProjectCurrent situation for accounting for insurance contracts is a mixed modelResulted in too much diversity, less relevance and reliability, and inconsistencyThe IASB started with a clean slate to develop Phase IIWe are hereFASB joins project

  • Insurance Contracts ProjectThe FASB joined with the IASB for Phase II of the IFRS 4 Insurance Contracts projectPurpose comprehensive financial reporting standard for Insurance contracts (life and non-life) It is expected that the outcome of Phase 2 will become US GAAP irrespective of if and when there is overall convergence of US GAAP and IFRS

    Current TimetableIASB and FASB are committed to July 2010 Exposure Draft, with a comment deadline of 3 months. FASB have not concluded as to whether they issue a DP or ED.Final IFRS standard is due by June 2011 (when key IASB membership turns over)

  • Phase II of the Insurance Standard

    BackgroundTentative Decisions and TimetablePotential Impact

  • Tentative decisions made

    Measurement objective and approachIASB marginally support a 4 building block approachExpected value of cash flowsDiscounting for time value of moneyExplicit risk adjustmentResidual margin (amount to avoid a day 1 gain)FASB in favor of a composite marginBoth methods likely to be included in exposure draft

    IASB and FASB discussions to date

  • Tentative decisions madeDiscounting for time value of moneyIASB and FASB apply discounting, and the discount rate should not be impacted by changes in own credit standingIASB- not an asset backed discount rateIASB- characteristics of liability

    Explicit risk adjustmentReflect insurers view of uncertaintyUpdated each reporting periodAdditional guidance on measurement tbd

    IASB and FASB discussions to date

  • IASB and FASB discussions to date

    Tentative decisions made (cont)

    Residual marginsAt inception, no day 1 gainSubsequent treatment of residual margins being discussedAmortized in some predetermined mannerNot updated each period for experience, i.e., not a shock absorber

    Unearned/Earned premium expedient for short duration contractsDefinition of a short duration contract under debate

  • IASB and FASB discussions to date

    Tentative decisions made (cont)Acquisition costsInclude incremental costs at the contract level as cash flows in building block modelUnbundling (e.g., deposit vs. insurance vs. service)Not required for recognition or measurement if components are significantly interdependent (proposal around notion of significant and interdependent being refined)Performance statementNarrowed view to summarized margin vs. expanded marginMost recent vote in favor of summarized margin with supplemental disclosure about volume of business

  • IASB and FASB discussions to date

    Tentative decisions made (cont)Reinsurance AccountingGenerally, follow same approach as insurance accountingDefinition of insurance contractCompensation for loss (excluding manufacturer/dealer warranties, fixed service fee contracts)Must include significant underwriting or timing risk with proviso to examine certain timing delaysRisk transferIASB and FASB: focus on existence of possible outcomes in which the PV of cash flows is negative

  • Phase II of the Insurance Standard

    BackgroundTentative Decisions and TimetablePotential impact

  • Potential impactFinancial reportingEarnings volatility as assumption unlockedRevised income statement presentationPotential for significant additional disclosure

    Finance transformationNeed appropriate resourcesManage competing projects such as solvency IIEnsure proper trainingImplement internal controls

  • Potential impactSystems requirementsActuarial systems may need to provide cash flow projectionsEnhance systems configurations to meet new demandsMay require new or updated ERP implementation

    Business issuesImpact on new product designChanges to agent compensation structure to reduce up front commissionsPlanning, budgeting and forecasting impactedEducate users of financial information

  • Financial Instruments

  • Financial InstrumentsFinancial InstrumentsIFRS 9: Financial InstrumentsWhat does it mean?Changes to classification and measurementEffect on impairmentIAS 39 replacement timelineExposure Draft: Amortized cost and Impairment

  • Financial InstrumentsIFRS 9Financial InstrumentsIFRS 9: Financial InstrumentsEffective for periods beginning on or after January 1, 2013 with early adoption permitted.New classification and measurement model for financial assets.Financial liabilities currently scoped out.

  • Financial InstrumentsRevised classification and measurement

  • Financial InstrumentsSo what will change?

    Government/corporate bonds managed on a contractual yield basis

    Unquoted equity previously held at cost (elected to FVTOCI)

    Balance sheet volatility

    P&L volatility

    Quoted equity investments (elected at FVTOCI)







    Trade receivables / payablesDerivativesHeld for trading instrumentsIssued debt (generally)

    Quoted equity (not elected at FVTOCI)Government/corporate bonds not managed on a contractual yield basis

    Unquoted equity previously held at costMost CDOs and other asset-backed instruments (unless most senior in waterfall)

  • Financial InstrumentsImpact on impairmentsImpact on impairment requirements:

    InstrumentIAS 39 classificationsImpairment testing required?New classificationsImpairment testing required?Equity investmentsAvailable-for-saleCost less impairmentFVTPLYesYesNoFVTOCIFVTPLNoNoDebt instrumentsAvailable-for-saleLoan and receivableHeld-to-maturityFVTPLYesYesYesNoAmortised costFVTPLYesNo

  • Financial InstrumentsIAS 39 replacement project timeline2013 Hedge accounting DerecognitionClassification and Measurement ImpairmentQ4 2009H2 2010H1 2010Mandatory adoption effective dateIFRS 9 Financial assetsExposure draftExposure draftFinalised standard for early adoptersED Financial Liabilities Re-exposure?Final standard ImpairmentFinal standard Hedge AccountingFinal standard DerecognitionFinal standard Financial Liabilities

  • Financial InstrumentsED Amortized cost and ImpairmentED Amortized cost and ImpairmentED issued 5 November 2009Comment deadline: 30 June 2010Objective: improve information on effective return over expected life of a loanIntroduces expected loss model - removes incurred loss modelOnly applies to amortised cost assets (e.g. loans & other debt instruments)

  • IFRS 1, First-time Adoption of International Financial Reporting Standards

  • IFRS 1: First-time adoptionIFRS 1 sets out transition guidance for adoption of IFRSGenerally IFRS accounting policies at the first reporting date are retrospectively appliedExemptions and exceptionsOpening balance sheet at beginning of comparative periodComparative financial statements and reconciliation to previous GAAPTransition rules apply to annual and interim financial statements

  • Example timeline: 2011 adopterJan 1, 2010Dec 31, 2010Dec 31, 2011Restate previous GAAP to IFRSFirst IFRSstatementsCurrent balance sheet dateIFRS opening balance sheetEquity reconciliationsProfit reconciliationOpening balance sheet create at start of earliest period for which entity presents full comparative information under IFRS

  • Types of exemptionsRetrospective application prohibited

    Hedge accountingEstimatesElective exemptions include Deemed costEmployee benefitsCumulative translation differencesDecommissioning liabilities Share-based paymentsTwo types of exemptions from general rule of retrospective applicationCan pick and choose elective exemptions!

  • IAS 37, Provisions, Contingent Liabilities and Contingent Assets

  • IAS 37 (Provisions)IAS 37 addresses liabilities of uncertain timing or amount that are not within the scope of another standard.IASB aiming to replace IAS 37 with a new IFRS in 2010 (probably not effective before 2012)Closer alignment with US GAAPCloser alignment with other IFRSsMore specific measurement requirements

  • Current IAS 37 requirementsCurrently effective requirementsLegal or constructive obligationProbable outflow that can be reliably estimatedMeasurement is at best estimateDiscounting if effect is material

  • Proposed IAS 37 replacementIASB proposalsHigh level measurement objective lower of:Present value to fulfill obligationAmount to be paid to cancel obligationAmount to be paid to transfer obligation to 3rd partyExpected present value measurementInclusion of a risk adjustmentRemoval of probable outflow criterionRemoval of reimbursement asset capInsurance contracts excluded from scope



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