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Implementing IFRS October 2013 Presented by: David Potts FCA

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Presentation on theme: "Implementing IFRS October 2013 Presented by: David Potts FCA"— Presentation transcript:

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

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

3 Key points 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

4 Overview of all recent developments

5 New Standards/ issues IAS 19 Revised – takes effect for accounting periods starting on or after 1 January 2013 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 EU endorsed and effective for year ends commencing on or after 1 January 2013

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Of a surface mine Effective from 1 January 2013 SIC 12 – special purpose entities Now superseded by IFRS 10 IFRIC 21 – levies Timing of recognition of obligations arising from government levies HGV Road User Community Infrastructure Obligating event =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

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

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

9 IFRS application in the USA
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 no plans to change current position

10 IFRS and the 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

11 Employee benefits IAS 19 Revised

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

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). 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 IAS 19 revised – further changes
Elements of profit and loss charge simplified Interest cost to include effect of all discounting 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 IAS 19 revised - amendments
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 Termination benefits – clear date for recognition established (when rest of restructuring charge recognised); and New definition of a short term employee benefits

16 IAS 19 (R) - examples How should a multi-employer DB scheme be accounted for under IAS 19 (R)? When should holiday days accruing to a staff member on maternity leave be accrued for? What is the accounting difference between a ‘short term employee benefit’ and other employee benefits? 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 Business combinations
IFRS 10 – 12 and refresher

18 IFRS framework at May 2012 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 Revised for IFRS 11 from 1 Jan 2013 IAS 36 – Impairment Long standing with no real changes IAS 38 – Intangible assets – recognition and measurement As IAS 36

19 IFRS framework at May 2012 (continued)
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 From 1 Jan 2013, early adoption is permitted IFRS 11 – Joint arrangements From 1 January 2013, early adoption is permitted IFRS 12 – Disclosure of interests in other entities IFRS 9 – Financial instruments From 1 January 2015, early adoption is not permitted in the EU

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

21 IFRS 10 - overview Pre IFRS 10 regime IFRS 10
Apply ‘control’ tests in IAS 27 SIC 12 provided guidance on Special Purpose Entities 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 Control test under IFRS 10
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 Associates Ability to exercise significant influence
Apply equity method accounting under IAS 28 (unchanged) One line consolidation of assets and liabilities

24 Joint ventures – the issue

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

26 IFRS 11 Joint arrangements
Joint operations 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 Joint ventures Venturers have rights to the net assets Apply IAS 28

27 IFRS 12 - Disclosures Applies to subsidiaries, associates, joint arrangements and other unconsolidated structured entities Users to understand Assumptions and judgements in reaching decisions on types of arrangement 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 Financial instruments

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

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

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

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

33 IFRS 9 – Financial instruments

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

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

36 Asset category selection
100% equity Held for trading = FVTPL Classified = FVTPL Designate at original recognition = FVTOCI (irrevocable) Derivative FVTPL 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 Embedded derivatives IAS 39
Separate from host contract if economic characteristics are different IFRS 9 – treatment depends on nature of host contract Host = financial instrument Apply IFRS 9 to entire contract Host = outside scope of IFRS 9 Apply IAS 39 rules

38 Business model tests 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 Category changes are also acceptable on the same grounds

39 Unquoted equity valuation under IFRS 9
Must be at fair value 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

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

41 Fair values – IFRS 13

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

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

44 Leasing and revenue recognition
Forward planning Leasing and revenue recognition

45 Lease project timescale
Re-deliberations on earlier plans No planned date for final IFRS or implementation 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 Right of use assets A lease is a contract which allows one party (the lessee) the right of use of another party’s (the lessor) asset All leases should be covered by the same accounting framework

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

49 Lessor accounting continued
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 Planes, trains and automobiles for example And when it does not Most property leases

50 Revenue recognition – the proposals
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 New IFRS is therefore required

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

52 Financial Reporting review Panel
Comments and issues raised

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

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

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

56 FRRP proactive monitoring - 3
Consolidation Why you have / have not consolidated and date of control How merger accounting used in transactions outside the scope of IFRS 3 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 FRRP proactive monitoring - 4
Provisions treated as accruals and so no disclosure Onerous leases; and Restructuring Intangible assets Recognised when internally developed with no evidence of control (candidate database) Wrongly subsumed within goodwill on an acquisition Investment properties How identified from other assets; and How valued – can’t just refer to valuation by RICS

58 Many thanks and any questions?


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