ifrs update lincoln miles

7/28/2019 IFRS Update Lincoln Miles

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BPP BUSINESS SCHOOL

IFRS UPDATEPresented by:

Lincoln Miles B.A. Hons, FCCA, FCMI


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IFRS UPDATE IFRS9 Financial Instruments

IFRS10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interest in Other Entities

IFRS 13 Fair Value Measurement

Exposure Draft Leases

Exposure Draft Revenue Recognition


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1st January 2013

IFRS 10: consolidatedfinancial statements

IFRS 11: JointArrangements

IFRS 12: Disclosures of

interests in otherentities


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IFRS 10 Consolidation


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IntroductionIFRS10

Whether an entity should consolidate not how Single Control Model

Significant judgement on control

Change which entities are consolidated

Criticism of off balance sheet

IFRS 12 Disclosure

No Equity

Structured Entities

Potential Exemption for Investment Entity


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3 Control CriteriaIFRS10

An investor controls an entity if and only if the investor has all 3 of thefollowing:

Power over the investee

Exposure, or rights to variable returns for its involvement with the

investee

The ability to use its power over the investee to affect the amount of

the investees returns


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PowerIFRS10

An investor has power when it has existing rights thatgive it the current ability to direct the relevant activities

When it is not clear that control is held through voting

rights must consider the relevant activities of the entity.

Relevant activities are the activities that

significantly affect the investees return.


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PowerIFRS10

Relevant activities are the activities that significantly affect the investeesreturn.

Examples of Relevant activities

Deciding or changing operating or financing policies

Selling and purchasing goods and services

Managing financial assets during their life or upon default

Selecting acquiring or disposing of assets

Making capital or funding decisions

Appointing, remunerating or terminating employment of

Investor 1

Investor 2

If two or more investors have existing rights that give them the ability to

direct different relevant activities, the investor that has the current ability

to direct the activities the most significantlyaffect the returns of the

investee has power over the investee


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PowerIFRS10

Relevant activities are the activities that significantly affect the investeesreturn.

Significant activities ALL directed by the same investors

Common with voting rights

Does not matter which activity most significantly affects the

investees returns


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PowerIFRS10

An investor has power when it has existing rights that give it the currentability to direct the relevant activities

Existing rights: to have power over an investee an investor must have

existing rights that give the investor the current ability to direct the relevant

activitiesExamples of existing rights:

Voting rights, potential voting rights

Right to appoint of remove key management personnel

Rights to appoint or remove entities that direct the relevant activities Right to direct the investee to enter into or veto transactions

Terms of a management contract


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PowerIFRS10

An investor has power when it has existing rights that give it the currentability to direct the relevant activities

Existing rights only give power if they are substantive

To be substantive the holder must have the practical ability to

exercise the rights


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PowerIFRS10

To be substantive the holder must have the practical ability to exercise the

rights

Factors Examples

Economic, operational barriers that would

prevent the holder from exercising

Financial penalties

High exercise or conversion price

Narrow exercise period

Lack of other parties willing to be able totake over

Practical ability when to exercise requires

agreement by more than one investor.

The more parties needed to come

together the less likely to be substantive

Would the investor that holds the rights

benefit from exercise

An investor would benefit from synergies

between the investor and investee

Are there rights exercisable when the

decisions need to be made

An investor can direct certain activities of

an investee when a particular

circumstance or event occurs


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PowerIFRS10

Protective rights

These are rights designed to protect the interest of the party

holding those rights without giving that party power over the entity to which

those rights related.

Protective rights are typically held to prohibit fundamental changes in the

activities of an investee that the holder does not agree with and are usually

only applied in exceptional circumstances i.e. contingent events

Holding protective rights cannot prevent another investor from having

power over an investee


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PowerIFRS10

Protective rights are rights designed to protect the interest of the partyholding those rights without giving that party power over the entity to which


Examples:

A change in activities that could change the credit risk of the investee

Approve capital expenditure greater than the norm

Approve issue of debt or equity

Seize assets if an investee fails to meet loan repayments

Veto transactions between related parties


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PowerIFRS10

Protective rights are rights designed to protect the interest of the partyholding those rights without giving that party power over the entity to which


Examples:

Franchisors rights do they give power to the franchisor or are they

merely protective rights

Generally franchisors rights do not restrict the ability of parties other than

the franchisor to make decisions that have a significant effect on the

franchisees returns.

The lower the level of financial support provided by the franchisor and

the lower the franchisors variability of returns the more likely that the

franchisor has only protective rights

IFRS10


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PowerIFRS10

Voting Rights

Power with a majority of the voting rights

A majority of voting rights without power

Relevant activities are directed by contract

Relevant activities are directed by government

Voting rights are not substantive

Voting rights are held as a de facto agent of another investor

Evaluating voting rights during bankruptcy

IFRS10


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PowerIFRS10

Voting Rights

Power without a majority of voting rights

Size of holding relative to size and dispersion of other vote holders

Potential voting rights held by other investors

Rights arising from other contractual arrangements

Additional facts and circumstances

Examples:

A holds 48% of the voting rights of B, the remaining 52% is widely held by thousands of other

shareholders, non of whom holds more than 1%.

IFRS10


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PowerIFRS10

Voting Rights


Size of holding relative to size and dispersion of other vote holders

Potential voting rights held by other investors

Rights arising from other contractual arrangements

Additional facts and circumstances

Examples:

A holds 45% of the voting right of B. The other 55% is held by two other parties 26% each,

with the remaining 3% held by three other shareholders at 1% each.

IFRS10


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PowerIFRS10

Voting Rights


How large does an investors interest need to be relative toothers ?

How widely dispersed are the other investors ?

Are past voting conditions indicative of future voting patters. ?

Significant judgement required no bright lines all facts and

circumstances need to be considered.

IFRS10


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PowerIFRS10

Potential voting rights


If an investor has less than a majority of the voting

rights but holds a substantive option that if

exercised would give the investor a majority of

voting rights that investor would have power.

IFRS10


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PowerIFRS10

Potential voting rights


Evaluation Non

Substantive

Depends on

facts andcircumstances

Substantive

Exercise price Deeply out of

the money

Out of the

money

At market value

or in the money

Financial ability

to exercise

No ability Holder would

have to raisefinance

Has cash or

financingavailable

Exercise period Not exercisable Excisable

before

decisions need

to be made

Currently

exercisable

PIFRS10


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PowerIFRS10

Contractual Arrangements

Sometimes the relevant activities are not directed through votingrights.

Implicit or explicit decision making rights embedded in thecontractual arrangements that are closely related to the investee

need to be considered.

It is common that the relevant activities of a structured entity aredirected by contractual arrangement.

Same approach for deciding control for both traditional and

structured entities Although structured entities require different disclosure. Therefore

still need to define:

PIFRS10


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PowerIFRS10

Structured entity has some of these features:

Restricted activities

Narrow and well defined objective

Insufficient equity to finance operations without other financing

Being involved in the design of an investee alone is not sufficient to givean inventor control

There are few structured entities that have no substantive decisionmaking, Virtually all have some level of decision making.

If that decision making can significantly affect the returns of thestructured entity, the investor with the rights to make those decisionswould have power.

E pos re or has rights to ariable ret rns from its IFRS10


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Exposure, or has rights to variable returns from its

involvement with the investee.

IFRS10

Examples of exposures to variable returns

Dividends

Fixed interest on debt that expose the investor to the credit risk of theissuer.

Remuneration for servicing investees assets and liabilities

Economies of scale

Synergies

Exposures to variable returns that are not available to other investors

The greater an investors exposure to the variability of returns, the greaterthe incentive to obtain rights that give the investor power.

When an investors exposure to variable returns is disproportionatelygreater than its voting or other rights this may be indicative of control.

Exposure or has rights to variable returns from its IFRS10


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Exposure, or has rights to variable returns from its

involvement with the investee.

IFRS10

Returns that appear fixed can be variable

Variable

An investor holds a bond with fixed interest payments.

The fixed interest payments are considered exposure to variable returns, becausethey expose the investor to the credit risk of the issuer. How variable those returns

are depends on the credit risk of the bond.

Fixed performance fees earned for managing an investees assets are consideredexposure to variable returns because they expose the investor to the performancerisk of the investee. That is the amount of variability depends on the investeesability to generate sufficient income to pay the fee.

Fixed

A non refundable fee received up front would be considered fixed the investordoes not have exposure to credit risk or performance risk.

Must have the ability to use its power over the investee IFRS10


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Must have the ability to use its power over the investee

to affect the amount of the investors returns.

IFRS10

An investor that has power over an investee, but cannot benefit from

that power does not control the investee.

Delegated Power: principles and agents

An investor may delegate decision making authority to an agent on

some or all relevant activities but ultimately, the investor as principalretains the power.

Considerations:

A decision maker is not an agent simply because others benefit from the decisions that it

makes

An obligation to act in the best interest of those who have delegated the power does notprevent the decision maker from being a principal.



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IFRS10




Terms and conditions are considered to determine whether principal

or agent:

Scope of decision making:

Relevant

Involvement in design

Narrow or broad



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IFRS10





or agent:

Rights Held by Other Parties

Kick out rights (held by one party or lots of parties requiring agreement)

Approval from other required



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IFRS10




Kick out rights - determine how substantive they are:

Available replacements operational barrier

Exercise period not exercisable until the future.



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IFRS10





or agent:

Remuneration of decision maker

Magnitude

Variability

IFRS10


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Consider whether there are other parties who are

acting on behalf of the investor by virtue of their

relationship

IFRS10

Examples:

Investors related parties

A party that has agreed no to sell it shareholding prior the investorapproval

A party that cannot finance its operations without financial support

from the investor

An investee for which the members of the governing body are the

same key management personnel ad the investor

A party with a close business relationship

De Facto Agents

Consider whether there are other parties who are IFRS10


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Consider whether there are other parties who are

acting on behalf of the investor by virtue of their

relationship

IFRS10

Customer supplier relationships

Normal customer supplier relationship does no result in a de facto

agent situationHowever, a close business relationship could. Consider:

The entity has only one significant customer

Customer and supplier have common management or shareholders

Customer has the ability to direct product design

De Facto Agents

Reassessment of Control IFRS10


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Reassessment of Control IFRS10

An investor increases or decreases holdings

A potential voting right is granted or changes from substantive

to non substantive

No longer governed through voting rights

Bankruptcy filings

Troubled debt restructurings

Interest held by other investors are acquired from each other

Voting patters

A fund manager provides all the seed money for a new fund

upon inception until such time as investors invest in the fund.

Principles of IFRS 12 IFRS10


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Principles of IFRS 12 IFRS10

The objective is to disclose information that helps users of

the financial statements to evaluate:

Nature of and risks associated with its interests in other

entitiesThe effects of those interest on its financial positions,

performance and cash flow.

One of the new requirements of IFRS 12 is that anentity discloses the significant judgements and

assumptions that it has made in determining whether

it has control or not over an investee.

Transitional Rules IFRS10


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Transitional Rules

IFRS 10 will be applied retrospectively which means

that IFRS 10 is also applied in the comparative period

(assuming it is not impractical to do so)

No adjustments are needed for:

Entities previously consolidated and continue to be

consolidated

Entities that were previously unconsolidated and

continue not to be consolidated.

Transitional Rules IFRS10


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Transitional Rules

Practical Issues With retrospective consolidation

Equity Method Consolidation Impact

When to test for

impairment

Equity investment to be

tested for impairment

when indicators exist

Goodwill tested for

impairment annually

If goodwill is now being

recognised, an investor

will have to test goodwill

for impairment when

consolidating for the first

time even if no

indicators

What is tested The entire equity

accounted investment

Only the assets for

which there are

indicators or CGUs

containing goodwill

Each CGU impairment

analysis and the

allocation of impairment

losses may be affected

Reversal of impairment The embedded goodwill

is considered an

element of the equity

investment and can be

reversed

Goodwill impairment

cannot be reversed

Any impairment that was

revered might not be

permitted when

consolidated.


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IFRS 10 Consolidation

Investment Entity Exemption


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Investment Entities

Exposure Draft August 2011

The exposure draft proposes that an

investment entity should be required to

measure investments in entities that it

controls at fair value through profit and loss inaccordance with IFRS 9 rather than

consolidating such investments


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Investment Entities Exposure Draft August

2011

Criteria:

Nature of investment Activity

Business Purpose

Unit ownership

Pooling of funds

Fair Value Measurement

Provides Financial Information


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Accounting that reflects the

parties rights and obligation

Enhances Verifiability andunderstandability

Enhances consistency

Increases comparability


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Application of the principle

Rights to the assets and

obligations for the liabilities Rights to the net assets


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The new disclosure requirements

The disclosure requirements for jointarrangements in IFRS 12 aim to include

information that helps users of financial

statements to evaluate the nature extent and

financial effects of an entity's interest in jointarrangements, and the nature of the risks

associated with those interests


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Elimination of proportionate

consolidation

IFRS 11 eliminates proportionate

consolidation as a method to account for joint

arrangements.


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Effect Analysis

Joint Arrangement ActivityCurrent Practice

Financial Statement Effect


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The Weakness of IAS 31

The structure of the

arrangement was the onlydriver for the accounting


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BPP BUSINESS SCHOOL



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Global financial crises Valuation uncertainty in

markets no longer active Detailed disclosures about fair

value derived models

IFRS 13 F i V l M


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2005 2006 2007 2008

20112010 20132012

2009

FASB

IASB

S


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Inactive market

Disclosures

aboutmeasurement

uncertainty

IFRS 13 F i V l M


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SFAS 157 Sept 2006 FASB

Nov 2006 discussion paperIASB

2006

IFRS 13 F i V l M t


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Defining Fairvalue as an exit

price Market based

measure not an

entity specificmeasurement

IFRS 13 F i V l M t


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Principal and

most

advantageousmarket


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IFRS 9 Financial Assets


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IFRS 9

2 Categories not 4 No tainting

Business Model

Election at Initial recognition

Proactive Impairment

No bright line 80-125% on Hedging

2013 2015 Exposure Draft


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Exposure Draft Leases


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IAS 17 Leases

Classification between finance &

IAS 17


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Classification between finance &

operating leases Transfers ownership Bargain purchase option

Lease term for major part

of life of asset Present value of minimum

lease payments

substantially all fair value

of leased asset

Specialised assets

Losses on cancellation

borne by lessee

Gains or losses in

residual value fall to

lessee Secondary period at rent

substantially less than

market rent

Finance lease or

operating lease?

Transfer ofsubstantially all the

risks & rewards of

ownership

8 indicators

Could

individuallyindicate a

finance

lease

Other

factors to

consider

UK 90% rebuttable

presumption

The problem


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The problem

Operating lease accounting understates the assets and liabilities of

lessees.

Leasing is an important source of finance for many businesses. It is

therefore important that lease accounting should provide investors with a

complete picture of a companys leasing activities.

Operating leases give rise to assets and liabilities that many investors

believe should be accounted for in the financial statements of lessees.

However, because the assets and liabilities are not recorded in lessees

financial statements, indicators of leverage (debt to equity and asset

to equity ratios) are understated.

Investors routinely adjust the financial statements of lessees for the

effects of operating leases. Such adjustments are either arbitrary or

based on estimates.

The problem


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The problem

Similar transactions can be accounted for differently

Economically similar transactions can be accounted for very differentlybecause of the distinction between operating and finance leases.

This makes it hard for investors to compare different entities and the

implications of different leases.

This also provides opportunities to structure transactions to achieve aparticular accounting outcome.

Project Timeline


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Project Timeline

Lessee Presentation


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Asset

Right of use asset presented in the Statement of

Financial Position within PPE, separately from owned

assets.

Obligation

Obligation to pay rentals is presented as a financial

liability.

Separate presentation from other financial liabilitieswould be required.

Lessee Presentation

Lessee Accounting Lease term


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Lessee Accounting Lease term

Key points No longer would market renewal options be ignored

Significant judgement would be required

Reassessment may require robust policies and system changes

Lease term = longest term

Reassessment of lease term= may change liability and

asset

Example
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Entity A enters into a non-cancellable 10 year lease with two 5 year options

to renew. Based on contractual an non-contractual factors, the entity

assigned the following probabilities to each of the potential lease terms:

40% probability of 10 year term



RequiredWhat length for the lease term should be used?

Example

Tentative decisions

Lease term = non cancellable period for which the lessee has contracted with the

lessor to lease the underlying asset, together with any options to extend or terminate

the lease when there is a significant economic incentive for an entity to exercise an

option to terminate the lease.

Exposure draft Revenue recognition


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The IASB and US FASB have published a joint re-exposure draft on

Revenue from Contracts with Customers

The ED is the next step in developing an entirely new revenue recognition

standard

The Boards objectives are to develop a common, comprehensive,

principles-based revenue standard that can be applied consistently to

complex transactions across a wide range of industries

Similar to the existing IFRS guidance, the ED proposes a model

based on a contract with a customer, with revenue being recognised

when goods and/or services are transferred to the customer

A contract is defined as an agreement between two or more partiesthat creates enforceable rights and obligations.

Exposure draft - Revenue recognition


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Exposure Draft Revenue

Recognition

Applying the model


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Applying the model

Step 3

Step 4

Step 5

Step 2

Step 1

Determine the transaction price

Identify the separate performance

obligations in the contract

Allocate the transaction price to the

separate performance obligations

Identify the contract with the customer

Recognise revenue when each separate

performance obligation is satisfied


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ifrs update lincoln miles

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