IFRS update 2012 by Deloitte Netherlands

IFRS Update 2012 Highlighting the key issues

29 November 2012

Agenda

15.00

IFRS Update – Part I

16.30

17.00

IFRS Update – Part II

18.30

IFRS Update 2012

Agenda

Introduction Projects • Financial instruments • Insurance contracts • Revenue recognition • Leases

Ralph ter Hoeven

Dingeman Manschot

Major platform changes 2013-2014 Ralph ter Hoeven

Conclusions

IFRS Update 2012

Testvraag

‘Een IFRS Update moet op een toegankelijke wijze de IFRSontwikkelingen schetsen. Voor diepgaande vaktechnische uiteenzettingen heb ik andere bronnen.’ Bent u eens met deze stelling? a) Eens b) Oneens

IFRS Update 2012

Introduction

IASB – FASB: ‘It started with the best intentions in 2002’

IFRS Update 2012

IASB – FASB: ‘The rock bottom reached in July 2012’

IFRS Update 2012

Recap convergence 2009 – 2012 Fair value measurement



Classification and measurement of financial instruments Offsetting financial assets and financial liabilities Impairment financial assets

   ?

Derecognition



Investment entities Insurance

Revenue recognition Lease accounting

IFRS Update 2012

‘At last SEC releases Staff Report on IFRS Work Plan’

IFRS Update 2012

Response to SEC Staff Report on IFRS Work Plan

15 July 2012 â&#x20AC;&#x153;We are at a pivotal moment for our organisation. The IASB has started working on a new agenda. The era of convergence is coming to an end. We are revamping our institutional infrastructure to provide for a more inclusive approach to international standard setting. This is the right timing to come on board and participate in shaping the future of global accounting." 10

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IASB – FASB: How do they move on?

25 October 2012

“In the early days of our relationship, we had what I would call a ‘best efforts’ approach and we accomplished a lot.” “It seems to me that going forward we can continue to achieve a lot even if the nature and structure of our relationship changes.” 11

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IASB – FASB: How do they move on?

CASC

National standard-setters Regional bodies

IFRS Update 2012

Vraag

‘Een land kan alleen aan tafel met de IASB zitten als IFRS in dat land wordt toegepast.’ Bent u eens met deze stelling? a) Eens b) Oneens

IFRS Update 2012

What about convergence in the future?

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Vraag

‘Iedere onderneming die publiekelijk geld ophaalt moet IFRS toepassen.’ Bent u eens met deze stelling?

a) Eens b) Oneens

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Projects

Timing of projects

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IASB work plan – Current status

Financial Crisis related projects 2012 Q4

2013 H1

IFRS 9: Financial instruments (replacement of IAS 39) • Classification & measurement (review)

Target ED Target ED

• Impairment • Hedge accounting • General hedge accounting • Macro hedge accounting

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Target IFRS Target DP

IASB work plan – Current status Memorandum of Understanding projects 2012 H2

2013 H1 Target ED (Re-expose)

Leases Consider comments received

Revenue recognition

Target IFRS

Target ED

Insurance contracts Consolidation – Investment entities

IFRS published

Other projects 20

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Future agenda of the IASB?

“Other Comprehensive Income has become a very crowded parking spot for sensitive accounting problems. The fact is that nobody knows what OCI really means.”

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Financial instruments project

Limited amendments to IFRS 9

Certain modifications of the relationship between principal and interest are permissible

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New

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Impairment The three bucket approach • When there is a more than insignificant deterioration in credit quality since initial recognition and • It is at least reasonably possible, that the contractual cash flows may not be recoverable then transfer to Bucket 2 or 3. Allocation depends on the level of recognition.

Bucket 1 All instruments in Bucket 1 on initial recognition unless purchased/originated with an incurred loss Transfer between buckets

Bucket 2

Bucket 3

Level of recognition

Individual asset or portfolio basis

Portfolio basis

Individual asset basis

Methodology

Present value of expected losses from loss events expected within the next 12 months

Present value of full remaining lifetime expected losses

Interest rate (discounting)

Risk-free interest rate

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≤

Interest rate

≤

Effective interest rate (IFRS 9)

General hedge accounting model

A better fit?

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Hedging instruments

Hedged items

Designation

General hedge accounting model

Closer alignment with the entity’s risk management

Current requirement that retrospective effectiveness shall be between 80% and 125% abandoned

Financial instruments with contractual cash flow characteristics

Nominal components/ risk components

Cash instruments measured at fair value through profit or loss

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Derivatives

In general a qualitative analysis is sufficient to test effectiveness

Equity investments measured at fair value through OCI

No voluntary discontinuation of hedge accounting



Macro hedge accounting

Portions

Freestanding derivatives

Non-separated embedded derivatives

Internal group transactions

Hedged items – Aggregated exposures

Aggregated exposure – combination of: (a) another exposure and (b) a derivative

First level relationship Second level relationship

(non-derivative) exposure

Derivative

Hedged item

Hedging instrument

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Vraag

Verwacht u dat de nieuwe bepalingen inzake hedge accounting zullen leiden tot een bredere toepassing ervan?

a) Ja b) Nee c) Weet ik niet

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Insurance contracts project

Insurance contracts â&#x20AC;&#x201C; Measurement of the contract

Risk adjustment

Residual margin

Building blocks

Cash flows

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Time value of money

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Insurance contracts â&#x20AC;&#x201C; Presentation model Statement of comprehensive income

Premiums

Change in insurance liability

Claims and expenses

(X)

Underwriting result

Investment income

Interest on insurance liability, based on locked in discount rate

Net interest and investment income

Profit or loss

Effect of discount rate changes in insurance contract liability

Total comprehensive income

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Revenue recognition project

Understanding the core approach Core principle:

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

Steps to apply the core principle: 1. Identify the contract(s) with the customer

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2. Identify the separate performance obligations

3. Determine the transaction price

4. Allocate the transaction price

5. Recognise revenue when (or as) a performance obligation is satisfied

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Understanding the core approach 1. Identify the contract(s)

Contract with customer

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2. Identify the separate performance obligations

3. Determine the transaction price 4. Allocate the transaction price

5. Recognise revenue when (or as) a performance obligation is satisfied

Deliver equipment

€ 100

When delivered

Provide training services

€5

When performed

Provide ongoing services

€4

When provided

Provide warranty

€2

How will companies be affected?

Increased disclosure requirements

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Possible changes to timing and measurement of revenue

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Watch out for the following â&#x20AC;Ś New or more detailed rules/guidance on the following areas

Contract modifications

Unbundling multiple elements

Treatment of credit risk

Allocating revenue between elements

Recognising revenue at a point in time (goods) or over time (services)

Uncertain revenue/contingent consideration

Capitalising costs of obtaining a contract 36

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Disclosures To enable users of financial statements to understand

the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers Information about contracts with customers

Disaggregation of revenue

Disclosures Information about judgements used

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Reconciliation of contract balances

Some disclosures required for interim reporting

Information about long-term contracts

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Vraag

Verwacht u dat de voorgestelde wijzigingen inzake het verantwoorden van opbrengsten daadwerkelijk impact zullen hebben op de timing van de verantwoording van opbrengsten?

a) Ja b) Nee c) Weet ik niet

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Leases project

25 April 2008

“One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.”

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6 November 2012

“If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”

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New approach

Operational lease

Financial lease

Lessee recognises an asset and a liability for all lease contracts (other than short-term leases) Lessor accounting will also change 42

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Right-of-use model

Lessee accounting

Statement of financial position

Right-of-use asset

Lease liability

Statement of comprehensive income

Amortisation of the right-of-use asset during lease term

Interest expense during lease term

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Vraag

Leidt het op de balans zetten van leases tot een beter inzicht in de financiĂŤle positie van een lessee?

a) Ja b) Nee

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How to allocate cost of a lease over the lease term? Does the lessee acquire and consume a morethan-insignificant portion of the underlying asset? Y E S

N O

I&A approach

SLE approach

Decreasing total expense

Always straight-line total expense

Financial leases? 45

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Operational leases? ÂŠ 2012 Deloitte Accountants B.V.

I&A approach or SLE approach? Is the leased asset ‘property’? Y E S

N O

Is the lease term a major portion of the asset’s economic life or does the PV of the fixed lease payments account for substantially all of the asset’s fair value? Y E S

I&A approach

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Nature of the underlying asset as a practical expedient

Is the lease term insignificant to the asset’s economic life or is the PV of the fixed lease payments insignificant relative to the asset’s fair value? Y E S

N O

SLE approach

N O

I&A approach

I&A approach or SLE approach? Is the leased asset ‘property’? N O

Is the lease term a major portion of the asset’s economic life or does the PV of the fixed lease payments account for substantially all of the asset’s fair value?

Example car lease (lease term: 4 years)

Is the lease term insignificant to the asset’s economic life or is the PV of the fixed lease payments insignificant relative to the asset’s fair value? N O

I&A approach

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SLE approach

I&A approach

I&A approach or SLE approach? Is the leased asset ‘property’? Y E S

Is the lease term a major portion of the asset’s economic life or does the PV of the fixed lease payments account for substantially all of the asset’s fair value?

Example property lease (lease term: 10 years)

Is the lease term insignificant to the asset’s economic life or is the PV of the fixed lease payments insignificant relative to the asset’s fair value?

N O

I&A approach

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SLE approach

I&A approach

Lessor accounting

R&R Model

Statement of financial position

Right to receive lease payments Residual asset

Receivable Residual

Statement of comprehensive income

Lease income (present value of the lease payments at the date of commencement of the lease)

Lease expense (cost of the underlying asset that is derecognised at the date of commencement of the lease)

Interest income (on the right to receive lease payments during lease term and as a result of accretion of residual asset) 49

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Lessor accounting

Operational lease model

Statement of financial position

Leased asset

Statement of comprehensive income

Lease income (by using a straight-line approach)

Depreciation expense for the leased asset (by using an appropriate method of depreciation)

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Vraag

Bent u eens met het voorstel van de IASB om de verwerking van de kosten van een lease in de winst-enverliesrekening te laten verschillen afhankelijk van de aard van het gehuurde actief?

a) Ja b) Nee

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Major platform changes 2013-2014

Major platform changes 2012 IASB

EU?

Deferred tax: Recovery of Underlying Assets (Amendments to IAS 12)

2012

2013?

Amendments to IAS 1 Presentation of Items of Other Comprehensive Income

1 July 2012

Amendments to IFRS 7 Financial Instruments: Disclosures â&#x20AC;&#x201C; Transfers of Financial Assets

1 July 2011

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Major platform changes 2013-2014 IASB

EU?

IFRS 10 Consolidated Financial Statements

2013

2014

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

2014

IFRS 11 Joint Arrangements

2013

2014

IFRS 12 Disclosures of Interests in Other Entities

2013

2014

IFRS 13 Fair Value Measurement

2013

Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)

2013

Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)

2014

IAS 19 Revised (Amendments to IAS 19 Employee Benefits)

2013

Annual Improvements 2009 – 2011 Cycle

2013

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Control under IFRS 10

IFRS 10.7

Link between power and variable returns

Power Variable returns

Consider all facts and circumstances 55

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Power arises from existing rights

      56

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Consider only substantive rights

Investment entities â&#x20AC;&#x201C; Background Joint convergence project with the FASB to provide comprehensive guidance for assessing whether an entity is an investment entity Formal definition of an investment entity

Additional disclosure requirements

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Exception to the general consolidation model

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Investment entities – Definition

IFRS 10.28

An investment entity is an entity that… Invest funds for returns for either capital appreciation or a combination of capital appreciation and investment income Manage and evaluate its investments on a fair value basis

Obtain funds from one or more investors

Investment Entity

Additional characteristics 58

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Multiple investments

Multiple investors

Unrelated investors

Investment entities â&#x20AC;&#x201C; Measurement guidance

IFRS 10.B85L

An investment entity would be required to account for its investments as follows:

Equity investments

Debt securities

Real Estate

Fair value

>50%

20%-50%

<20%

Fair value

(exception to IFRS 10)

(exception to IAS 28)

(IFRS 9 / IAS 39)

(IAS 40)

Accounting by a non-investment entity parent company: If a non-investment entity parent has subsidiary that is an investment entity, it is not permitted to retain the specialised accounting guidance of the subsidiary in its consolidated financial statements 59

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IFRS 11 ‘Joint arrangements’ – Classification

IFRS 11.B

Structure of the joint arrangement

Not structured through a separate vehicle

Structured through a separate vehicle

 Legal form  Contractual terms  Other facts and circumstances

Joint operation 60

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IFRS 11 â&#x20AC;&#x201C; Joint operation

IFRS 11.15

A joint arrangement whereby the parties that have joint control of the arrangement have rights

to the assets, and obligations for the liabilities, relating to the arrangement Joint operator A

Joint operator B

Joint operation (assets & liabilities) 61

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IFRS 11 â&#x20AC;&#x201C; Joint venture

IFRS 11.16

A joint arrangement whereby the parties that have joint control of the arrangement have rights the arrangement

to the net assets of

Joint venturer A

Joint venturer B

Joint venture (assets & liabilities) 62

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Vraag

Bent u reeds gestart met de analyse van de impact van IFRS 10 en IFRS 11?

a) Ja b) Nee

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IFRS 13 ‘Fair value measurement’ – Objectives

IFRS 13.1

• Defines fair value • Sets out a framework for measuring fair value • Requires disclosures about fair value measurements

How? Not when! 64

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IFRS 13 â&#x20AC;&#x201C; Fair value hierarchy

IFRS 13.72

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3 Unobservable inputs for the asset or liability 65

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IFRS 13 â&#x20AC;&#x201C; Disclosures

IFRS 13.93

Recurring Fair value measurements

Those that other IFRSs require or permit in B/S

at the end of each reporting period

Non-recurring Fair value measurements

Those that other IFRSs require or permit in B/S

in particular circumstances 66

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Offsetting financial assets and financial liabilities

IFRS 7 Disclosures 2013

IAS 32 Offsetting 2014

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Offsetting – Additional disclosures in IFRS 7 Information about the effect or potential effect of netting arrangements on an entity’s financial position

These disclosures will also provide comparable information between: • F/Ss prepared in accordance with IFRS; and • F/Ss prepared in accordance with US

GAAP

The disclosures apply to:

All financial instruments set off in the statement of financial position in accordance with IAS 32, and financial instruments subject to a master netting arrangement or similar agreement even if not set off in the statement of financial position 68

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Offsetting – Application guidance in IAS 32

Clarification of:

the meaning of ‘currently has a legally enforceable right of set-off’ that some gross settlement systems would be considered equivalent to net settlement if they eliminate or result in insignificant credit and liquidity risk and process receivables and payables in a single settlement process or cycle

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IAS 19R – Presentation Categories

Components •

Service cost

Net interest

• • •

Time value of money on the net defined benefit liability (asset)

• Remeasurements

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Current service cost net of employee contributions Non-routine settlement gain/loss Curtailment loss/gain All past service cost

• • •

Actual return net of time value of money on plan assets Routine settlement gain/loss Gain/loss on DBO Effect of asset ceiling

Comprehensive income

Service cost in P&L (under operating)

Net interest cost in P&L (under operating or finance)

In Other comprehensive income (OCI)

IAS 19R – Disclosures defined benefit plans

IAS 19.139

Plan characteristics Regulatory framework of the plan

Description of risks to which the plan exposes to the entity

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Nature of the benefits provided by the plan

Any other entity’s responsibility for plan governance

Description of amendments, curtailments and settlements

Conclusions

Areas of focus AFM/ESMA in 2013 (FY 2012) Reporting on credit risks arising from investments and receivables Cash flow statement Provisions within the scope of IAS 37 Integrated reporting Measurement of post-employment benefit obligations Impairment of non-financial assets 73

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IFRS & NL GAAP videocasts

www.deloitte.nl/ifrs-nlgaap

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