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1 Implementing IFRS October 2013 Presented by: David Potts FCA On behalf of BKR International.

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Presentation on theme: "1 Implementing IFRS October 2013 Presented by: David Potts FCA On behalf of BKR International."— Presentation transcript:

1 1 Implementing IFRS October 2013 Presented by: David Potts FCA On behalf of BKR International

2 2 Programme 1. Overview of all recent developments and update on project plans 2. Employee benefits – IAS 19 revised 3. Business combinations – emerging issues 4. Financial instruments – current state of play (and IFRS 9) 5. Fair values 6. Update on leasing and revenue recognition projects

3 3 Key points USGAAP/ IFRS have five main projects USGAAP/ IFRS have five main projects –Financial instruments – IFRS 9 –Leases –Revenue recognition –Insurance –Rate regulated activities US have no current plans to adopt IFRS US have no current plans to adopt IFRS

4 4 Overview of all recent developments

5 5 New Standards/ issues IAS 19 Revised – takes effect for accounting periods starting on or after 1 January 2013 IAS 19 Revised – takes effect for accounting periods starting on or after 1 January 2013 Consolidations (IFRS 10-12) Consolidations (IFRS 10-12) –Minor amendments in June 2012 –Effective from 1 January 2013 but not until 2014 in the EU –Application is retrospective IFRS 13 – fair values IFRS 13 – fair values –EU endorsed and effective for year ends commencing on or after 1 January 2013

6 6 IFRS Interpretations IFRIC 20 Stripping costs IFRIC 20 Stripping costs –Of a surface mine –Effective from 1 January 2013 SIC 12 – special purpose entities SIC 12 – special purpose entities –Now superseded by IFRS 10 IFRIC 21 – levies IFRIC 21 – levies –Timing of recognition of obligations arising from government levies HGV Road User HGV Road User Community Infrastructure Community Infrastructure –Obligating event = entity action resulting in levy

7 7 IFRS projects Financial instruments Financial instruments –Presentation addressed within IFRS 9 –Measurement and hedging guidance to follow in 2013 –Macro hedging concessions

8 8 IFRS Projects - 2 Leasing – still on agenda – see later Leasing – still on agenda – see later Revenue recognition Revenue recognition –Final deliberations before revised IFRS (replacing IAS 11 and 18) by 31 December 2013 Insurance contracts Insurance contracts –Comments on latest proposals by 25 October 2013

9 9 IFRS application in the USA SEC allow foreign issuers as defined to use IFRS for SEC filings SEC allow foreign issuers as defined to use IFRS for SEC filings SEC conducted impact assessment (cost assessment) of wider IFRS use in the USA in spring 2012 SEC conducted impact assessment (cost assessment) of wider IFRS use in the USA in spring 2012 SEC no plans to change current position SEC no plans to change current position

10 10 IFRS and the EU IFRS issues must be adopted by EU Accounting Regulatory Committee (ARC) before being required by law in EU IFRS issues must be adopted by EU Accounting Regulatory Committee (ARC) before being required by law in EU IFRS 9 and IFRS for SMEs remain unadopted IFRS 9 and IFRS for SMEs remain unadopted

11 11 Employee benefits IAS 19 Revised

12 12 IAS 19 revised Applies to accounting periods starting on or after 1 January 2013 Applies to accounting periods starting on or after 1 January 2013 Will apply to interim reports if issued Will apply to interim reports if issued Major changes to Defined Benefit pension scheme accounting? Major changes to Defined Benefit pension scheme accounting? Revised disclosure requirements Revised disclosure requirements Other clarifications may require estimation Other clarifications may require estimation

13 13 IAS 19 revised – main changes DB schemes – gains and losses must all now be charged immediately to OCI (the corridor option has been withdrawn). DB schemes – gains and losses must all now be charged immediately to OCI (the corridor option has been withdrawn). Past service cost amendments and curtailments Past service cost amendments and curtailments –Treatment of all such costs now aligned –Option to defer over remaining service lives has now been withdrawn

14 14 IAS 19 revised – further changes Elements of profit and loss charge simplified Elements of profit and loss charge simplified –Interest cost to include effect of all discounting Re-measurements through OCI now defined Re-measurements through OCI now defined –Actuarial gains and losses –Difference between return on assets and interest calculation for DCF –Changes in asset ceiling

15 15 IAS 19 revised - amendments Actuarial assumptions now more clearly defined Actuarial assumptions now more clearly defined –What mortality rates to use for example Disclosures to concentrate on the pension scheme risks and impact on the financial statements Disclosures to concentrate on the pension scheme risks and impact on the financial statements Termination benefits – clear date for recognition established (when rest of restructuring charge recognised); and Termination benefits – clear date for recognition established (when rest of restructuring charge recognised); and New definition of a short term employee benefits New definition of a short term employee benefits

16 16 IAS 19 (R) - examples 1. How should a multi-employer DB scheme be accounted for under IAS 19 (R)? 2. When should holiday days accruing to a staff member on maternity leave be accrued for? 3. What is the accounting difference between a short term employee benefit and other employee benefits? 4. Employees have been offered redundancy terms; £20,000 to leave immediately, £60,000 to work a further 18 months to final shutdown date. When to provide and how much?

17 17 Business combinations IFRS 10 – 12 and refresher

18 18 IFRS framework at May 2012 IAS 27 – Separate financial statements of investor IAS 27 – Separate financial statements of investor –Consolidation details now covered in IFRS 10 –Revised from 1 Jan 2013 (early adoption) IAS 28 – Associates and Joint Ventures IAS 28 – Associates and Joint Ventures –Revised for IFRS 11 from 1 Jan 2013 IAS 36 – Impairment IAS 36 – Impairment –Long standing with no real changes IAS 38 – Intangible assets – recognition and measurement IAS 38 – Intangible assets – recognition and measurement –As IAS 36

19 19 IFRS framework at May 2012 (continued) IFRS 3 – Business combinations IFRS 3 – Business combinations –To be applied prospectively for acquisitions on or after date of first year end starting after 1 July 2009 IFRS 10 – Consolidated financial statements IFRS 10 – Consolidated financial statements –From 1 Jan 2013, early adoption is permitted IFRS 11 – Joint arrangements IFRS 11 – Joint arrangements –From 1 January 2013, early adoption is permitted IFRS 12 – Disclosure of interests in other entities IFRS 12 – Disclosure of interests in other entities –From 1 January 2013, early adoption is permitted IFRS 9 – Financial instruments IFRS 9 – Financial instruments –From 1 January 2015, early adoption is not permitted in the EU

20 20 Investments in other entities - overview Interest = control = subsidiary Interest = control = subsidiary –= consolidate Interest = shared control = joint arrangement Interest = shared control = joint arrangement –= report under IFRS 11 Interest = significant influence = associate Interest = significant influence = associate –= equity method Interest = any other = investment Interest = any other = investment –= report under IAS 39/ IFRS 9

21 21 IFRS 10 - overview Pre IFRS 10 regime Pre IFRS 10 regime –Apply control tests in IAS 27 –SIC 12 provided guidance on Special Purpose Entities IFRS 10 IFRS 10 –Single, universal test of control –Apply from 1 Jan 2013 or earlier –Retrospective adjustment required if entities to be consolidated for first time

22 22 Control test under IFRS 10 Defined as exposure to or rights to variable returns and ability to affect those returns Defined as exposure to or rights to variable returns and ability to affect those returns –Voting powers and potential powers –Ignore powers/ votes that are administrative –Look at agency arrangements –Control linked to specific assets not the entity

23 23 Associates Ability to exercise significant influence Ability to exercise significant influence Apply equity method accounting under IAS 28 (unchanged) Apply equity method accounting under IAS 28 (unchanged) One line consolidation of assets and liabilities One line consolidation of assets and liabilities

24 24 Joint ventures – the issue

25 25 IFRS 11 – Joint arrangements Provides guidance for all types of joint arrangement (JA) consistent with IFRS Provides guidance for all types of joint arrangement (JA) consistent with IFRS Proportional consolidation option for joint ventures is withdrawn Proportional consolidation option for joint ventures is withdrawn JA = contractual agreed sharing of control JA = contractual agreed sharing of control –Key decisions require unanimous agreement

26 26 IFRS 11 Joint arrangements Joint operations Joint operations Venturers have rights and obligations over specific assets and liabilities Venturers have rights and obligations over specific assets and liabilities Venturers reports those rights and obligations using the IFRS for the assets and liabilities involved Venturers reports those rights and obligations using the IFRS for the assets and liabilities involved Joint ventures Joint ventures Venturers have rights to the net assets Venturers have rights to the net assets Apply IAS 28 Apply IAS 28

27 27 IFRS 12 - Disclosures Applies to subsidiaries, associates, joint arrangements and other unconsolidated structured entities Applies to subsidiaries, associates, joint arrangements and other unconsolidated structured entities Users to understand Users to understand –Assumptions and judgements in reaching decisions on types of arrangement Users to evaluate Users to evaluate –Restrictions on ability to use assets/ settle liabilities –Risks associated with consolidated and unconsolidated structured entities, joint arrangements, changes in owners interests and consequences of loss of control

28 28 Financial instruments

29 29 Financial instruments – summary of guidance Presentation – IAS 32 or IFRS 9 (compulsory from 1 January 2015 – but not permitted within EU) Presentation – IAS 32 or IFRS 9 (compulsory from 1 January 2015 – but not permitted within EU) Recognition and measurement – IAS 39 or IFRS 9 Recognition and measurement – IAS 39 or IFRS 9 Disclosures – IFRS 7 Disclosures – IFRS 7

30 30 Categories of financial instrument – assets (IAS 39) 1. At fair value through profit and loss 1.Trading 2.Derivative 2. Held-to-maturity 3. Loans and receivables 4. Available for sale

31 31 Categories of financial instrument - liabilities 1. At fair value through profit and loss 1.Trading 2.Derivatives 2. Held at amortised cost

32 32 Criticisms of IAS 32/ 39 framework Based on USGAAP system – prescriptive and rule based Based on USGAAP system – prescriptive and rule based Choice of categories too rigid Choice of categories too rigid Fair value option and treatment of gains and losses did not reflect the business model Fair value option and treatment of gains and losses did not reflect the business model

33 33 IFRS 9 – Financial instruments

34 34 IFRS 9 – Financial assets Amortised cost Amortised cost Fair value through profit and loss (FVTPL) Fair value through profit and loss (FVTPL) –Designated –Classified Fair value through other comprehensive income (FVTOCI) Fair value through other comprehensive income (FVTOCI) –Designated

35 35 IFRS 9 – contract types Asset type IFRS 9 category Debt Amortised cost; or FVTPL Equity FVTPL; or FVTOCI (designated) DerivativeFVTPL

36 36 Asset category selection 100% equity 100% equity –Held for trading = FVTPL –Classified = FVTPL –Designate at original recognition = FVTOCI (irrevocable) Derivative Derivative –FVTPL All other assets All other assets –Objective to collect contract cash flow? No = FVTPL –Cash flows solely payments of capital and interest? No = FVTPL –Evoke option to reduce accounting mismatch? Yes = FVTPL –None of the above = amortised cost

37 37 Embedded derivatives IAS 39 IAS 39 –Separate from host contract if economic characteristics are different IFRS 9 – treatment depends on nature of host contract IFRS 9 – treatment depends on nature of host contract –Host = financial instrument Apply IFRS 9 to entire contract Apply IFRS 9 to entire contract –Host = outside scope of IFRS 9 Apply IAS 39 rules Apply IAS 39 rules

38 38 Business model tests Apply at entity or portfolio level – not at individual contract level Apply at entity or portfolio level – not at individual contract level Asset sales before maturity are not a problem as long as consistent with business model Asset sales before maturity are not a problem as long as consistent with business model Category changes are also acceptable on the same grounds Category changes are also acceptable on the same grounds

39 39 Unquoted equity valuation under IFRS 9 Must be at fair value Must be at fair value Can use cost as a reasonable estimate of fair value; if Can use cost as a reasonable estimate of fair value; if –Insufficient recent evidence of fair value –Range of fair values and cost is a reasonable estimate Check for evidence cost not approximation of fv Check for evidence cost not approximation of fv

40 40 IFRS 9 – financial liabilities Amortised cost; or Amortised cost; or FVTPL FVTPL –Classified –Designated (at original recognition) Reduce accounting mismatch; or Reduce accounting mismatch; or Group of liabilities or liabilities and assets where performance assessed on a FV basis Group of liabilities or liabilities and assets where performance assessed on a FV basis Financial liabilities may not be reclassified Financial liabilities may not be reclassified

41 41 Fair values – IFRS 13

42 42 Fair value – key elements Arms length transaction Arms length transaction Willing buyer Willing buyer Willing seller Willing seller Exit value Exit value –Asset = cost realised from sale not price to buy –Liability = cost to discharge not that received for taking on the debt

43 43 Fair value evidenced from an active market Prices readily and regularly available Prices readily and regularly available Represent actual regular market transaction Represent actual regular market transaction Transactions on an arms length basis Transactions on an arms length basis Observable inputs Observable inputs

44 44 Forward planning Leasing and revenue recognition

45 45 Lease project timescale Re-deliberations on earlier plans Re-deliberations on earlier plans No planned date for final IFRS or implementation No planned date for final IFRS or implementation IASB remain adamant that change is necessary: IASB remain adamant that change is necessary: –Off balance sheet opportunities of current structure –Diversity in existing accounting treatments –Bright line tests which encourage structured solutions

46 46 Right of use assets A lease is a contract which allows one party (the lessee) the right of use of another partys (the lessor) asset A lease is a contract which allows one party (the lessee) the right of use of another partys (the lessor) asset All leases should be covered by the same accounting framework All leases should be covered by the same accounting framework

47 47 Lessee accounting for right of use assets Step 1 Step 1 –Capitalise the asset; and –Report a lease obligation Step 2 Step 2 –Determine whether the lease consumes significant proportion of asset economic benefit –If so – account as currently for a finance lease –If not – charge the lease rental to profit on a straight line basis

48 48 Lessor accounting for right of use assets Step 1 – does the lease consume a not insignificant proportion of the asset? Step 1 – does the lease consume a not insignificant proportion of the asset? If yes If yes –Part of the asset has been sold Account for disposal and the gain or loss compared with proceeds Account for disposal and the gain or loss compared with proceeds Still report any residual asset Still report any residual asset Report the sales proceeds (the PV of lease payments) as a receivable Report the sales proceeds (the PV of lease payments) as a receivable –As lease rentals collected Reduce receivable and reflect interest income Reduce receivable and reflect interest income

49 49 Lessor accounting continued If lease consumes insignificant proportion of asset If lease consumes insignificant proportion of asset –Current operating lease accounting for lessors –Show receivable and deferred income IASB provide examples of when a ROU lease consumes significant proportion IASB provide examples of when a ROU lease consumes significant proportion –Planes, trains and automobiles for example And when it does not And when it does not –Most property leases

50 50 Revenue recognition – the proposals IAS 11 and 18 viewed as lacking in two main aspects IAS 11 and 18 viewed as lacking in two main aspects –Multiple deliverables – lack of guidance –Provision of services over time – over emphasis on straight line basis Equivalent USGAAP guidance is considerable but based on the USGAAP framework Equivalent USGAAP guidance is considerable but based on the USGAAP framework New IFRS is therefore required New IFRS is therefore required

51 51 Revenue recognition – project proposals 1. Identify the contract with the customer 1.Aggregate or segment 2. Identify separate performance obligations 1.Is or could be sold separately – GP% or function 3. Determine the price – probability weighted 4. Allocate transaction price to performance obligations 5. Recognise revenue when performance obligation is satisfied

52 52 Financial Reporting review Panel Comments and issues raised

53 53 FRRP – Annual report 2012 Published September 2012 Published September 2012 Summarised actions on pro-active monitoring of IFRS prepared accounts Summarised actions on pro-active monitoring of IFRS prepared accounts Lists FRRP challenges made and corrective actions Lists FRRP challenges made and corrective actions –>300 accounts reviewed –> 50% of boards had to be contacted for clarification

54 54 FRRP – proactive monitoring - 1 Disclosure of judgements missing or vague Disclosure of judgements missing or vague Details of estimation uncertainty and sensitivity missing Details of estimation uncertainty and sensitivity missing OCI used wrongly for OCI used wrongly for –Share based payments; and –Transactions with non-controlling interests Aggregation of deferred or accrued income with other accruals and prepayments Aggregation of deferred or accrued income with other accruals and prepayments Netting of fair value adjustments on agricultural assets with balance sheet value Netting of fair value adjustments on agricultural assets with balance sheet value

55 55 FRRP – proactive monitoring - 2 Cash flows Cash flows –Purchase of own shares –Lease rentals Taxation Taxation –use of enacted tax rates only –Deferred tax assets on carried forward losses Leases – disclosure total future obligation Leases – disclosure total future obligation Foreign exchange – gains and losses on consolidation = separate element of equity Foreign exchange – gains and losses on consolidation = separate element of equity Related parties – all directors are related parties Related parties – all directors are related parties

56 56 FRRP proactive monitoring - 3 Consolidation Consolidation –Why you have / have not consolidated and date of control –How merger accounting used in transactions outside the scope of IFRS 3 Impairment Impairment –Net asset value > market cap = impairment review trigger; explain or consider why –Discount rates used either confused or wrong –More detail on assumptions for growth rates and discounts

57 57 FRRP proactive monitoring - 4 Provisions treated as accruals and so no disclosure Provisions treated as accruals and so no disclosure –Onerous leases; and –Restructuring Intangible assets Intangible assets –Recognised when internally developed with no evidence of control (candidate database) –Wrongly subsumed within goodwill on an acquisition Investment properties Investment properties –How identified from other assets; and –How valued – cant just refer to valuation by RICS

58 58 Many thanks and any questions?


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