ifrs update event 2017 - deloitte united states · ifrs update event 2017 ralph ter hoeven &...

IFRS Update Event 2017

Ralph ter Hoeven & Dingeman Manschot27 November 2017

Agenda

Introduction

Accounting developments

Implementation IFRS 9 ‘Financial instruments’

Implementation IFRS 15 ’Revenue from contracts with customers’

Implementation IFRS 16 ‘Leases’

Conclusion

Ralph ter Hoeven

Partner | IFRS Centre Deloitte Nederland

Dingeman Manschot

Director | IFRS Centre Deloitte Nederland


Introduction

© 2017 Deloitte The Netherlands

Introduction

4

Biggest change in the GAAP platform since introduction IFRS

Credit crisis; impairment losses‘too little, too late’

IASB-FASB conversion project driven by poor quality US GAAP

Only IFRS 15 is successfull in termsof convergence with US GAAP

Replacement of an interim standard

published in March 2004

IFRS 17

IFRS 9IFRS 15

IFRS 16

Delayed wish of the previouschairman of the IASB; showing the leverage


IASB work plan


IASB work plan

7

2017-2021

Completion of the remaining standard-setting projects

Better communicationin financial reporting

Continued development of implementation support

A more focused research programme


Standard-setting projects

IASB work plan

8

Conceptual framework Conceptual framework Q1 2018

Definition of material

(amendments to IAS 1 and IAS 8)ED feedback Q1 2018

Rate-regulated activities DP or ED H1 2018


Research projects

IASB work plan

9

Business combinations under common control DP H2 2018

Discount rates Research summary H1 2018

Dynamic risk management DP H2 2018

Financial instruments with characteristics of equity

DP H1 2018

Goodwill and impairment DP or ED H1 2018

Post-implementation review IFRS 13Request for

information feedbackDecember 2017

Primary financial statements DP or ED H1 2018

Principles of disclosure DP feedback Q1 2018

Share-based payment Research summary H1 2018


Maintenance projects (1)

IASB work plan

10

Accounting policies and accounting estimates ED feedback Q1 2018

Accounting policy changes ED Q1 2018

Availability of a refund IFRS amendment H1 2018

Borrowing costs eligible for capitalisation IFRS amendmentDecember 2017

Classification of liabilities IFRS amendment H2 2018

Definition of a business IFRS amendment H1 2018

Fees in the 10 per cent test for derecognition ED

Improvements to IFRS 8 ED feedbackNovember 2017


Maintenance projects (2)

IASB work plan

11

Income tax consequences of payments on instruments classified as equity

IFRS amendmentDecember 2017

Plan amendment, curtailment or settlement Research summaryJanuary 2018

Previously held interests in a joint operation ED feedbackDecember 2017

Property, plant and equipment: Proceeds before intended use

ED feedbackDecember 2017


Changes to IFRS


Major changes

Changes to IFRS

13

IFRS 9 Financial instruments 1 January 2018

IFRS 15 Revenue from contracts with customers 1 January 2018

IFRS 16 Leases 1 January 2019

IFRS 17 Insurance contracts 1 January 2021


Other changes (1)

Changes to IFRS

14

Amendments to IAS 12: Recognition of deferred tax assets for unrealised losses

1 January 2017

Amendments to IAS 7: Disclosure initiative 1 January 2017

Amendments to IFRS 2: Classification and measurement of share-based payment transactions

1 January 2018

Amendments to IFRS 4: Applying IFRS 9 Financial instruments with IFRS 4

1 January 2018

Annual improvements to IFRSs1 January 2017/

1 January 2018


Other changes (2)

Changes to IFRS

15

IFRIC 22 Foreign currency transactions and advance consideration 1 January 2018

Amendments to IAS 40: Transfers of investment property 1 January 2018

Amendments to IFRS 9: Prepayment features with negative compensation

1 January 2019

Amendments to IAS 28: Long-term interests in associates and joint ventures

1 January 2019

IFRIC 23 Uncertainty over income tax treatments 1 January 2019


Reconciliation of liabilities arising from financing activities

Amendments to IAS 7: Disclosure initiative

16

1January 2017

Cash flows

Non-cash changes 31 December

2017Acquisition Foreign

exchangemovements

Fair value

changes

Long-term borrowings 22.000 (1.000) - - - 21.000

Short-term borrowings 10.000 (500) - 200 - 9.700

Lease liabilities 4.000 (800) 300 3.500

Assets held to hedge long-term borrowings

(675) 150 - - (25) (550)

Total liabilities from financing activities

35.325 (2.150) 300 200 (25) 33.650

NB Include comparatives


Issue

17

How to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency

IFRIC 22 Foreign currency transactions and advance consideration


Consensus

18

The date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration

5 November 2017

Prepayment (USD 100) EUR 86@ Cash (USD 100) EUR 86

17 January 2018

Inventory EUR 86@ Prepayment EUR 86

IFRIC 22 Foreign currency transactions and advance consideration


Whether an entity considers uncertain tax treatments separately

IFRIC 23 Uncertainty over income tax treatment

19

For example:

• how the entity prepares its income tax filings and supports tax treatments; or

• how the entity expects the taxation authority to make its examination and resolve issues that might arise from that examination

Which approach better predicts the resolution of the uncertainty?


Examination by taxation authorities

Assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations


20

Assume that

• a taxation authority will examine amounts it has a right to examine; and

• have full knowledge of all related information when making those examinations


Determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates (‘tax position’)


21

Probable

Determine tax position consistently with the tax treatment used or planned to be used in its income tax filings

Reflect the effect of uncertainty in determining the tax position by using either of the following methods:• the most likely amount; or• the expected value

Not probable

Is it probable that a taxation authority will accept an uncertain tax treatment?


Impact IFRS on

Dutch Accounting Standards


Impact IFRS on Dutch Accounting Standards

23


Impact new IFRSs on Dutch accounting standards (RJ)

24

No

IFRS 9 IFRS 15 IFRS 16 IFRS 17

? ?Working on new

standard based on principles of IFRS 15

Expected loss

model applicable

on voluntary basis

RJ-Uiting 2017-7

IFRS 15 applicable

on voluntary basis

RJ-Uiting 2017-9


ESMA enforcement

activities


Enforcement decisions

ESMA enforcement activities

26

229 Disclosures on a reverse factoring transaction IAS 1, IAS 39

230 Assessment of control over investment funds IFRS 10

231 Fair value measurement disclosures of unobservable inputs IFRS 13

232 Recognition and measurement of the proceeds from an

arbitration agreement

IAS 18, IAS 37,

IAS 39

233 Impairment test of trademarks IAS 36

234 Recognition of deferred tax assets for carry forward of unused

tax losses

IAS 12

235 Definition of ‘economic environment’ and separation of foreign-

currency embedded derivatives in a power contract

IAS 39

https://www.iasplus.com/en/news/2017/11/esma-enforcement-decisions

https://www.iasplus.com/en/news/2017/11/esma-enforcement-decisions


Disclosures on a reverse factoring transaction

ESMA enforcement activities

27

• Liability towards the financial institution arising from the reverse factoring agreement should be classified as a financial liability rather than as a trade payable

• Substantial modifications made to the original payable, namely:

− the extension of maturity is significant with regard to customary terms of payment in the specific jurisdiction

− once a supplier enters into the agreement, all its invoices are automatically processed as part of the factoring scheme

− compensation is paid to extend the maturity of the original payable

− the creditor is no longer the supplier, but a financial institution

• An exchange of debt instruments with substantially different terms is accounted for as an extinguishment of the original liability and the recognition of a new financial liability


ESMA enforcement

priorities


Disclosure on anticipated impact of IFRS 9, IFRS 15 & IFRS 16?

• Discussion of the impact that initial application is expected to have on the financial statements

• If that impact is not known or reasonably estimatable, a statement to that effect

• ESMA expects a higher level of disclosure of the quantitative impact of the new standards

• Disclosure should include sufficiently disaggregated information on both:

− accounting policy choices expected to be applied, including those relating to the transition approach and the use of practical expedients; and

− the amount and nature of the expected impacts compared to previously recognised amounts

ESMA enforcement priorities

29


Listed companies’ 2017 financial statements

• Specific issues relating to

− IFRS 3 Business combinations; and

− IAS 7 Statement of cash flows

• Disclosure of non-performing loans by credit institutions

• Fair presentation of financial performance

• Disclosure on the impact of Brexit

• Disclosure non-financial and diversity information


30


Specific issues relating to IAS 7

• Disclosure of an entity-specific accounting policy relating to definition of cash and cash equivalents

• ESMA expects disclosure of whether, and to what extent, overdraft bank facilities (notably those repayable on demand) and balances resulting from cash pool facilities are considered as cash and cash equivalents

• Disclosure of cash and cash equivalents balances not available for use by the group required (IAS 7.48) is also required by IFRS 12 which refers to the disclosure of significant restrictions (e.g. statutory, contractual and regulatory) on the ability of an entity to access the assets of the group, including cash

• Such disclosure might be particularly relevant in case of material balances held in a jurisdiction whose currency is subject to limited exchangeability or capital controls


31


Alternativeperformance

measures(APMs)


Examples

• Any ‘adjusted’ earnings measure

• Any other measure based on ‘adjusted’ earnings, such as adjusted margin or adjusted earnings per share

• Operating profit/earnings before interest and tax (EBIT)

• Earnings before interest, tax, depreciation and amortisation (EBITDA)

• Free cash flow

• Balance sheet or operating gearing

• Net debt

• Same-store sales/constant currency/revenue growth

• Value of order book

Alternative performance measures (APMs)

33


ESMA Guidelines

• APMs should be meaningfully labelled and defined

• The purpose of APMs should be clearly set out

• Equivalent GAAP measures should be presented with equal or greater prominence

• Comparatives should be given for all APMs

• Clear reconciliations should be given


34

RJ 430


Deloitte publication


35

Alternative Performance Measures

IFRS in Focus – A practical guide

July 2016


Non-financial reporting


Background

• EU law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges

• This helps investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business

• Directive 2014/95/EU lays down the rules on disclosure of non-financial and diversity information by large companies

• This directive amends the accounting directive 2013/34/EU

• Implemented in Dutch law (Decree disclosure of non-financial information, Decree disclosure of diversity policy & Decree disclosure content management board’sreport)


37



38

Decree disclosure of non-financial information

Large public interest entities (PIEs) > 500 employees

• A brief description of the business model of the entity

• A description of the policies, including the applied due diligence procedures and the results of this policy, with regards to the following themes: • environmental, social and human affairs; • human rights; and • corruption and bribery

• The main material risks with regards to the topics mentioned above related to the activities of the entity including, where relevant and proportional, the business relations, products or services of the entity likely to have adverse effects on these subjects and how the entity manages these risks

• Non-financial performance indicators that are relevant to the specific business activities of the entity



39

Decree disclosure content management board’s report (revised Dutch Corporate governance code)

Listed entities

• Compliance with the principles and best practice provisions of the Corporate governance code

• The main features of the control system of the entity related to the financial reporting process

• The functioning of the shareholders’ meeting, including its main powers, and the rights of shareholders

• The composition and functioning of the management board, the supervisory board, and their committees (e.g. nomination, remuneration and audit committees)

• To the extent applicable, all information to be included based on ‘Decree article 10, takeover directive’ (Besluit artikel 10 overnamerichtlijn) of 5 April 2006

• The diversity policy relating to the composition of the management board and the supervisory board

Decree disclosure of diversitypolicy



40

Deloitte publication

Non-financial information in the management board’s report for

listed companies and other public interest entities


ImplementationIFRS 9


Measurement

42

Based on ‘SPPI’ test

& business model


Based on ‘SPPI’ test & business model

Measurement

43

Are the cash flows considered to be solely principal and interest (‘SPPI’ test)?

What is the business model?

Are alternative options available?

Yes

No

Certain modifications of the relationship

between principal and interest are

permissible

Hold to collect contractual cash

flows

Hold to collect contractual cash flows AND to sell

All other strategies

Amortised Cost

FVOCI

FVTPL

FVTPL

FVTPL option (in case of acc.

mismatch)

FVTPL Option(in case of acc.

mismatch)

FVOCI option for equity investments (dividends in P&L)


Trade receivables

Measurement

44

Are contractual cash flows solely payments

of principal and interest (‘SPPI’ test)?

Business model assessment

Amortised

costFVTPLFVOCI

Held to collect

Held to collectand sell

Other


Equity investments IFRS 9 requires all equity investments to be measured at fair value

Measurement

45

Changes in expectation of

achieving technical product

milestones

Significant change in global

economy or economic

environment

Internal matters such as

fraud, disputes, litigation,

changes

in management or strategy

Significant change in

market for investee’s

equity or its products

Evidence from external

transactions in the

investee’s equity, either by

investee or by transfers

between

third parties


performance compared to

budgets, plans or milestones


performance of comparable

entities or valuations implied

by overall market

Indicators that cost might not be representative of fair value include:


Impairment

46

Expectedlosses


Expected loss model

Impairment

47

Expected loss model

(IFRS 9)

Impairment loss recognised on day 1, even if no

loss event

Include loss rate for not past due

Consider forward looking information (e.g., forecast

changes in economic conditions)

Loss rates must include expected losses from future events

Incurred loss model (IAS 39)

Impairment loss only recognised when there is a loss event

No loss rate for not past due, unless event identified

Only consider objective evidence of an event impacting future

cash flows

Ignores losses that may result from future events


Expected loss model

Impairment

48

Stage 1 Stage 2 Stage 3

No significant increase in credit

risk

Significant increase in credit risk and greater than

low credit risk but no objective evidence of

impairment

Objective evidence of impairment

12-month expected credit

losses

lifetime expected credit losses

lifetime expected credit losses

interest calculated on

gross carrying amount

interest calculated on

gross carrying amount

interest calculated on netcarrying amount

• Low credit risk model• Purchased or originated credit-impaired financial assets• Trade receivables and contract assets

Simplifications and exceptions:


Impairment

49

Trade receivables

Loss percentage required for receivables not past due

Loss percentages must be assessed to ensure historic loss experiences continue to be relevant

Loss percentages must be updated to take into account forward looking information

Can use provision matrix


Trade receivables

Implementation issues

50

Expected

default rateGross carrying

amountCredit loss allowance

Not past due 0,3% 15 million 45.000

1-30 days past due 1,6% 7,5 million 120.000

31-60 days past due 3,6% 4 million 144.000

61-90 days past due 6,6% 2,5 million 165.000

More than 90 days past due 10,6% 1 million 106.000

30 million 580.000


Hedge accounting

51

Closer alignment with risk

management


Still required

Hedge documentation

52

Hedged item

Hedging instrument

Nature of relationship - e.g. cash flow, fair value, net investment

Risk management objective and strategy – of greater importance under IFRS 9

Still required to document

Hedge Documentation Requirements


New

Hedge documentation

53

Documentation of effectiveness assessment approach

Analysis of sources of ineffectiveness

Determination of hedge ratio

What’s new/different under IFRS 9?

Hedge Documentation Requirements


Revenue recognition

55

Control approach


5-steps approach based on transfer of control

Recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Revenue recognition

56

Identify the contract with a

customer

(Step 1)

Identify the performance obligations in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate the transaction price to the performance obligations

(Step 4)

Recogniserevenue when a performance obligation is

satisfied

(Step 5)


Performance obligations


57

If those goods or services are distinct, the promises are performance obligations and are accounted for separately

Promises to transfer goods or services to a customer


Disctinct goods/services


58

Identify all (incl. implicit) promised goods/services in the contract

Can the customer benefit from the good

or service on its own or together with other

readily available resources?

Is the good or service separately identifiable from other promises in

the contract?

CAPABLE OF BEING DISTINCT

DISTINCT IN CONTEXT OF CONTRACT

Is the good/service distinct?

AND

Account for as a separate performance

obligation

Combine two or more promised goods or

services

YES NO


Estimating

Variable consideration

59

Which method to use?

Expected value Most likely amount

The same method should be used to estimate the transaction price throughout the life of a contract

OR

Do not include in the transaction price an estimate of sales or usage-based royalties from licences of intellectual property until

the customer’s subsequent sales or usage occur


Transfer of control

Recognise revenue when a performance obligation satisfied (step 5)

60

The seller’s performance creates

or enhances an asset controlled by

the customer

The customer simultaneously receives and consumes the benefit of the

seller’s performance as the seller

performs

The seller creates an asset that does

not have an alternative use to the seller and the seller has the right

to be paid for performance to date

Revenue recognised at a point in time

IF NOT

or or

Performance satisfied over time = Revenue recognised over time


Presentation of revenue

Principal vs agent

61

Is the entity a principal or an agent?

Analysisrequired

Principal Agent

Present revenue at the gross amount

Present revenue at the net amount


Unlinking of contracts


62

Linkedaccounting willcease to exist

if contracts are not combinedin accordancewith IFRS 15

Losses on contracts willno longer becapitalised


Example Rolls-Royce

The Telegraph, 16 November 2016

Speaking at an investor day, executives at the FTSE 100 company admitted earnings will fall as the company “unlinks” income from sales of its engines -which are often sold at a loss - from highly profitable and long-term revenue from servicing them.

Previously, Rolls “pulled forward” revenues from the servicing contracts, but now must wait until it actually receives them.

Under the new “IFRS 15” rules, Rolls’s 2015 profits would have been £900m lower than the £1.4bn it reported.


63


Criteria

The criteria for contract combination consider the interrelatedness of separately drawncontracts based on the existence of one or more of the following conditions:

• The inception of these contracts occurred at or near the same time;

• The contracts are negotiated as a package with a single commercial objective;

• The amount of consideration to be paid in one contract depends on the price or performance of the other contract; and

• The goods or services promised in the contract are a single performance obligation

Contract combination

64


Attention points

• A desktop review is not enough

− Look at real contracts and work through steps

− Are there any surprises?

− Will you have all the data you need?

• Challenge everything

− Think carefully about each step

− Don’t just assume previous approach will survive

• Look at the examples

− They sometimes shed more light on what the IASB was expecting

− Is there an example similar to your circumstances?

Implementation

65


Attention points

• Do you need to change your systems?

− Can you do revenue calculations as workarounds or do they need to be embedded in systems?

− Do you need to track a lot of new data?

• It’s good to talk

− Do you know how others in your industry have approached key judgements?

− Are you an outlier?

• Think about the wider impacts

− If profits change, will you pay tax sooner?

− What else might be affected – bonus plans, covenant compliance etc?

Implementation

66


Attention points

• Don’t forget about costs

− New guidance is more detailed and more prescriptive

• Don’t forget about contract modifications

− No previous guidance

− New guidance very prescriptive

− Answers can be counter intuitive

• Don’t forget about disclosures

− Leave enough time to plan properly

− Do you have all the data you need?

− If not, how will you get it?

Implementation

67


Lessee accounting

69

On balance


Impact on financial statements

Operating leases

70

IAS 17 IFRS 16

Balance Sheet FY 2019

Lease assets xxx

Lease liabilities xxx

Income statement FY 2019

Low-value/short-termleases xxx

EBITDA xxx

Depreciation and amortisation xxx

Finance cost xxx

Profit before tax xxx

Cash flow statement FY 2019

Operating activitiesFinancing activities

xxxxxx

Balance Sheet FY 2018

Income statement FY 2018

Lease payments xxx

EBITDA xxx

Profit before tax xxx

Cash flow statement FY 2018

Operating activitiesFinancing activities

xxx


Exemptions

71

Short-term leases (12 months or less)

Low-value leases

A lease that contains a purchase option is not a short-term lease

Assessment on an absolute basis

Election by class of underlying asset Election on a lease-by-lease basis


Low value leases

72

USD 5000


Discount rate

To determine present value of lease payments

73

Measurement of lease liability

Commencement date

Discounted at:Rate implicit in the lease or Incremental

borrowing rate

Cost of right-of-use asset

Payments made less incentives receivable aftercommencement date

Payments made less incentives received before commencement date


Variable lease payments

Excluded from measurement

Lease liability

Exercise price of

purchase option

(reasonably certain)

Fixed payments

less incentives

Variable payments

(e.g. CPI/rate)

Penalty for terminating

(if reasonably

certain)

Expected residual value

guarantee

Right-of-use asset

Initial direct costs

Payments less

incentives before

commence-ment date

Estimated cost for

dismantling restoring

asset

Lease liability

74


Foreign currency lease payments

A lessee accounts for a lease contract under IFRS 16 and recognises a right-of-use asset and a lease liability.

The lease payments of the lease contract are denominated in a currency different from the functional currency.

How should this impact the financial statements?


75


Foreign currency lease payments


76

Non-monetary

asset

Right-of-use asset

Monetary asset

Translated using the closing rateand exchange differencesrecognised in P&L

Measured at cost: Translated using the rate at the transaction date

Measured at fair value: Translatedusing the exchange rates at the date of fair value measurements andexchange differences follow fair valuemovements (OCI or P&L)

IAS 21

Lease liability


Conclusion


Key questions

• Ready for implementation IFRS 9 & IFRS 15?

• Started planning for implementation IFRS 16 & IFRS 17?

• Other platform changes applicable?

• Are you aware of disclosure requirements regarding impact of new standards?

• Are you aware of alternative performance measures (APMs) guidance?

• Do you understand the new requirements relating to non-financial information?

Conclusion

78


Publications on new standards

Conclusion

79


Other relevant publications

Conclusion

80


Other relevant publications

Conclusion

81

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