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Headline Verdana Bold
Savoy Hotel, Limerick20 November 2019
WelcomeCathal Treacy, Partner, Audit and Assurance
Brexit and the implications for business
Deloitte Financial Reporting Plus 4© 2019 Deloitte. All rights reserved Deloitte Financial Reporting Plus 4© 2019 Deloitte. All rights reserved
Brexit is a business risk
Deloitte Financial Reporting Plus 5© 2019 Deloitte. All rights reserved Deloitte Financial Reporting Plus 5© 2019 Deloitte. All rights reserved
1
2
3
5
4
Supply chain
People
Financial environment
Regulatory, legal and data
Market access and trade
Deloitte Financial Reporting Plus 7© 2019 Deloitte. All rights reserved Deloitte Financial Reporting Plus 7© 2019 Deloitte. All rights reserved
Brexit Lead
David Carson
Supply Chain
David Hearn
People
Daryl Hanberry
Financial Environment
Brian Fennelly
Regulatory legal data
Sean Smith
Market access and trade
Pascal Brennan
Clients & Industries
Karen Frawley
Deloitte Private
Anya Cummins
Brexit go to market partner team
Thinking about last year and the 2019 impactsNiamh Keating, Deirdre Geaney and Oliver Holt
Deloitte Financial Reporting Plus 9© 2018 Deloitte. All rights reserved
Headline Verdana BoldIFRS 15 Revenue from contracts with customers
Deloitte Financial Reporting Plus 10© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 10© 2019 Deloitte. All rights reserved
IFRS 15 – Thinking about last year As a recap
Replaces all existing standards and interpretations (IAS 18, IAS 11, IFRIC 13, IFRIC 15, IFRIC 18
and SIC 31)
Effective for periods commencing on or after 1 January 2018
IFRS 15 is largely consistent with US GAAP ASC 606
FRC has confirmed that there will be no major changes introduced
to FRS 102 as a result of the introduction of IFRS 15 until 1 January 2022 at the earliest
Deloitte Financial Reporting Plus 11© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 11© 2019 Deloitte. All rights reserved
The Five Step Model Framework
IFRS 15 – Thinking about last year
Step 1:Identify the contract with the customer
Step 2:Identify performance obligations
Step 3:Determine the transaction price (including discounts)
Step 4:Allocate the transaction price based on the fair value of the performance
obligations
Step 5:Recognize revenue as performance obligation transferred
High impact – More judgement required
Some impact/change expected
Low or no impact expected
Deloitte Financial Reporting Plus 12© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 12© 2019 Deloitte. All rights reserved
Areas where judgements are necessary…
IFRS 15 – Thinking about last year
Topic IFRS 15 requirement General impact
Sales
commissionsContract costs Decrease in expenses due to their capitalisation and amortisation
RoyaltiesVariable consideration / Performance obligations
Revenue recognition may be accelerated due to requirement to estimate royalties each month end/year end rather than wait until royalty report is received
Upfront feesPerformance obligation / Recognition
Usually at or near inception and non-refundable. The key question is whether the fee relates to a transfer of promised goods or services or not?
Warranties Performance obligation
The IFRS 15 v IAS 37 dilemma!
Is there a separate performance obligation, i.e. where the customer has option to acquire separately or if deemed an additional service?
SoftwarePerformance obligation / Transaction price / Recognition
Generally lead to increase in upfront revenue, once the fair value of the license was determined
TaxationImpact of prior year adjustment (re change in accounting policy) generally spread over 5 years for tax purposes
Deloitte Financial Reporting Plus 13© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 13© 2019 Deloitte. All rights reserved
Corporation Tax perspective IFRS 15 – Thinking about last year
Deloitte Financial Reporting Plus 14© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 14© 2019 Deloitte. All rights reserved
DisclosuresIFRS 15 – 2019 Impacts
Disaggregation of revenue
Information about contract balances
Information about performance obligations
Remaining performance obligations
Disclosures About Contracts with Customers
Contract costs
Policy decisions –time value of money & costs to obtain a
contract
Other Required DisclosuresDisclosures about Significant Judgments and Estimates
Description of significant judgments
Transaction price,
allocation methods and assumptions
Deloitte Financial Reporting Plus 15© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 15© 2019 Deloitte. All rights reserved
Disclosures
IFRS 15 – 2019 Impacts
Continual reassessment of
contracts
Best disclosures give information over and above
required by Standard
Deloitte Financial Reporting Plus 16© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 16© 2019 Deloitte. All rights reserved
Assess if there is a change to Revenue Recognition under new standard
Allowable under Section 23 FRS 102?
Section 10 requires retrospective application
FRS 102 Considerations
IFRS 15
Deloitte Financial Reporting Plus 17© 2018 Deloitte. All rights reserved Deloitte Financial Reporting Plus 17© 2019 Deloitte. All rights reserved
Resources
Our IAS Plus page dedicated to all matters IFRS 15: https://www.iasplus.com/en-gb/collections/revenue
Model Financial statements with illustrative IFRS 15 disclosures
Good disclosure examples – Deloitte’s annual report surveyAnnual report insights 2019 — Surveying FTSE reporting
IFRS 15 eLearnDeloitte’s e-learning on IFRS 15
© 2018 Deloitte Ireland LLP. All rights reserved.
IFRS 9 Financial Instruments
18
Deloitte Financial Reporting Plus 19© 2019 Deloitte. All rights reserved
Scope
IFRS 9 Impairment Model
AC FVTOCI
FVTPL/FVTOCI Option for certain equity instruments
Within the scope of the impairment model
Outside the scope of
the impairment model
Financial assets in the scope of IFRS 9
Written loan
commit-ments (unless
@ FVTPL)
Financial guarantees
within scope of IFRS 9
(unless @ FVTPL)
Lease receivables
Contract assets (IFRS 15)
Subsequent measurement…
Deloitte Financial Reporting Plus 20© 2019 Deloitte. All rights reserved
Expected credit loss (ECL) model
IFRS 9 Impairment Model (cont’d)
Loss allowance:
Apply effective interest rate to:
Initial recognition
Stage 2
Lifetime expected credit
losses
Gross carrying amount
Stage 3
Lifetime expected credit
losses
Net carrying amount
Stage 1
12-month expected credit
loss
Gross carrying amount
Objective evidence of impairment?
Significant increase in credit risk?
Change in credit risk since initial recognition
Deloitte Financial Reporting Plus 21© 2019 Deloitte. All rights reserved
Expected credit loss (ECL) model
IFRS 9 Impairment Model (cont’d)
Probability
of Default
(“PD”)
X%
Loss Given
Default
(“LGD”)
X%
Exposure
at Default
(“EAD”)
€X
the likelihood that the borrower would not be able to repay
the percentage loss that occurs if the
borrower is unable to repay
the outstanding balance at the point
of default
Deloitte Financial Reporting Plus 22© 2019 Deloitte. All rights reserved
IFRS 9 includes some operational simplifications available for certain common financial instruments, such as:
Operational simplifications
Impairment
Simplified model
Stage 2 Stage 3
Accounting Policy Choice
Stage 1
Trade receivables/Contract assets
(without a significant financing component)Lease receivables
Low credit risk asset
© 2018 Deloitte Ireland LLP. All rights reserved.
Practical Experience
23
Deloitte Financial Reporting Plus 23© 2019 Deloitte. All rights reserved
Deloitte Financial Reporting Plus 24© 2019 Deloitte. All rights reserved
Provision matrix example
IFRS 9 Simplified impairment model
A Closer Look — Applying the expected credit loss model to trade receivables using a provision matrix
The following steps are a suggested process for developing a provision matrix:
1. Determination of appropriate groupings
2. Determine the period over which observed historical loss rates are appropriate
3. Determine the historical loss rates
4. Consider forward looking macro-economic factors and conclude on appropriate loss rate
5. Calculate the expected credit losses
Deloitte Financial Reporting Plus 25© 2019 Deloitte. All rights reserved
Expected Credit LossIFRS 9 Intercompany Loans
Nature
of the
transaction
Accounted
for as
Investment
in Subsidiary
in scope of
IAS 27
Accounted for
as
Intercompany
Loan under
IFRS 9
Contractual
Cash Flows
Test (SPPI)
and Business
Model Test
Held at Amortised
Cost/FVTOCI and therefore
in scope of IFRS 9 general
impairment model
Capital Contribution
Intercompany Loan
Cash
Transferred
Deloitte Financial Reporting Plus 26© 2019 Deloitte. All rights reserved
Expected Credit Loss example
IFRS 9 Intercompany LoansProbability
of Default
(“PD”)
Loss Given
Default
(“LGD”)
Exposure at
Default
(“EAD”)
Intercompany
Loan
Does the borrower
have enough
unrestricted cash
to repay the loan?
Does the lender
expect to recover
the loan in full?
The ECL is
immaterial, no
further
consideration
The ECL is
immaterial, no
further
consideration
Calculate the
expected cash
shortfall
No stated terms (on-demand)
Yes
Yes
No
No
Follow the full general
impairment model for
either 12 month/lifetime
PD and consider LGD and
EAD
If the loan is interest-
free discount rate should
be prevailing market
interest rate for a similar
interest with a similar
credit rating
Calculate the
expected cash
shortfall
discounted to PV
at EIR
Documented Fixed Maturity
Date
Deloitte Financial Reporting Plus 27© 2019 Deloitte. All rights reserved
Expected Credit Loss example
IFRS 9 Intercompany Loans Probability
of Default
(“PD”)
Loss Given
Default
(“LGD”)
Exposure at
Default
(“EAD”)
Intercompany Loan
No stated terms
(on-demand)
Does the borrower
have enough
unrestricted cash to
repay the loan?
Does the lender expect
to recover the loan in
full?
The ECL is
immaterial, no
further
consideration
The ECL is
immaterial, no
further
consideration
Calculate the
expected cash
shortfall
Yes
YesNo
No
Deloitte Financial Reporting Plus 28© 2019 Deloitte. All rights reserved
Expected Credit Loss exampleIFRS 9 Intercompany Loans Probability
of Default
(“PD”)
Loss Given
Default
(“LGD”)
Exposure at
Default
(“EAD”)
Intercompany
Loan
Documented Fixed
Maturity Date
Follow the full
general impairment
model for either 12
month/lifetime PD
and consider LGD
and EAD
If the loan is
interest-free
discount rate
should be prevailing
market interest rate
for a similar
interest with a
similar credit rating
Calculate the
expected cash
shortfall
discounted to
PV at EIR
Deloitte Financial Reporting Plus 29© 2019 Deloitte. All rights reserved
Useful Links
• IAS Plus IFRS 9 resources page (https://www.iasplus.com/en-gb/standards/ifrs-en-gb/ifrs9 )
• A Closer Look – Measurement of expected credit losses for intercompany loan assets with no documented contractual term (https://www.iasplus.com/en-gb/publications/global/a-closer-look/intercompany-loan-assets?id=en-gb%3Atwitter%3Adlvr_it%3Apersonal )
• A Closer Look — Applying the expected credit loss model to trade receivables using a provision matrix (https://www.iasplus.com/en-gb/publications/global/a-closer-look/provision-matrix?id=en-gb:email:cm )
IFRS 9 Practical Links
Deloitte Financial Reporting Plus 30© 2019 Deloitte. All rights reserved
Accounting Enforcers have all recently set out their expectations as to how IFRS reporters will improve on their IFRS 9 accounting and disclosures:
• IASSA observations – 2019 https://www.iaasa.ie/Publications/Financial-Reporting-Supervision/Annual-Observation-Documents/Observations-2019
• FRC Thematic Review IFRS 9:
• Press release https://www.frc.org.uk/news/october-2019/frc-reviews-of-disclosures-relating-to-revenue-rec
• IFRS 9 thematic review https://www.frc.org.uk/getattachment/4998f20e-30e1-47a8-a9e7-f15654fa0e03/IFRS-9-thematic-final.pdf
• In connection with IFRS 9 the FRC found that there was still room for companies to improve disclosures by analysing the credit quality of trade receivables by non-banking companies; and providing details of the indicators of a significant increase in credit risk particularly by the smaller banks.
IFRS 9 Links
Deloitte Financial Reporting Plus 31© 2019 Deloitte. All rights reserved
Accounting Enforcers have all recently set out their expectations as to how IFRS reporters will improve on their IFRS 9 accounting and disclosures:
• The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2018/2019, which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team https://www.iasplus.com/en-gb/news/2019/10/frc-corporate-reporting-review-2018-19
• The European Securities and Markets Authority (ESMA) has announced the priority issues that the assessment of listed companies' 2019 financial statements will focus on https://www.iasplus.com/en-gb/news/2019/10/esma-enforcement
• The IFRS model financial statements illustrate the presentation and disclosure requirements of IFRSs for the year ended 31 December 2019 by an entity that is not a first-time adopter of IFRSs. https://www.iasplus.com/en/publications/global/models-checklists/2019/mfs-2019?id=en:email:cm
IFRS 9 Links
Headline Verdana Bold
IFRS 16 refresher and interaction with other standards
Deloitte Financial Reporting Plus 33© 2019 Deloitte. All rights reserved
Key Points
6
• Effective for periods beginning on or after 1 January 2019
• Supersedes IAS 17
• IFRS 16 can either be applied fully retrospectively or alternatively comparative information can be left unadjusted with any cumulative effect of initial application recognised as an adjustment to opening retained earnings.
• A contract is, or contains, a lease if it conveys the right to control an identified asset for a period of time in exchange for consideration.
Deloitte Financial Reporting Plus 34© 2019 Deloitte. All rights reserved
Key Points
6
• For lessees the distinction between operating and finance leases is replaced by a single model.
• A right-of-use asset is recognised on lease commencement at the amount of the liability for future lease payments, plus initial direct costs. The right-of-use asset is subsequently accounted for by applying IAS 16 Property, plant and equipment, at cost less depreciation and impairment.
• The liability is measured at the present value of the future lease payments, using a lease term that includes periods covered by extension options if exercise is reasonably certain. Variable lease payments are only included in the liability if based on an index or rate.
• The discount rate is the rate implicit in the lease if readily determinable, or if not the incremental borrowing rate.
Deloitte Financial Reporting Plus 35© 2019 Deloitte. All rights reserved
Key Points
6
A lessee can elect to keep the following leases off-balance sheet and typically straight line the expense:
• leases with a lease term of 12 months or less and containing no purchase option – this election is made by class of underlying asset; and
• leases where the underlying asset has a low value when new, such as personal computers or small office furniture – this election is made on a lease-by-lease basis.
Deloitte Financial Reporting Plus 36© 2019 Deloitte. All rights reserved
Impact
Majority of operating leases on balance sheet
Significant impact on income statement & KPIs
Assets: Right-of-Use Asset
Liabilities: Financing
Finance costs
Operating costs
EBITDA
Example KPIs Impacted:
Gearing Ratio
Asset turnover
Current ratio
6
Deloitte Financial Reporting Plus 37© 2019 Deloitte. All rights reserved
The interaction of IFRS 16 with other standards
IAS 36?
IFRIC 21?
IFRS 3?
IAS 12?
Deloitte Financial Reporting Plus 38© 2019 Deloitte. All rights reserved
IAS 36 Impairment
Right of use (“RoU”) Assets
Are they impaired?
Is there an indicator of impairment?
Deloitte Financial Reporting Plus 39© 2019 Deloitte. All rights reserved
IAS 36Cash Generating Units
RoU assets grouped within a CGU for impairment testing
Goodwill?Indefinite-life intangible assets?Intangible assets not ready for use?
Deloitte Financial Reporting Plus 40© 2019 Deloitte. All rights reserved
IAS 36
Value in use calculations
VIU –
Financing cash flows excluded from VIU calculations
RoU asset is included and the lease liability is excluded
Fair value less costs to sell –
Include the lease liability if that’s what market participants would do.
Deloitte Financial Reporting Plus 41© 2019 Deloitte. All rights reserved
IAS 12Deferred tax and leases
• Temporary difference on initial recognition
• Initial Recognition Exemption• No DT over the lives of the asset
and liability
Accounting policy choice
1. Separately 2. Single transaction
Two approaches seen in practice to the deferred tax accounting for lessees
• No net temporary difference at inception
• Differences may emerge over time resulting in DT
Deloitte Financial Reporting Plus 42© 2019 Deloitte. All rights reserved
IFRS 3 – Business combinationsLeases as an exception to the fair value principle
Lease liability assumed:• PV of the lease payments at the acquisition
date• Lease term and discount rate will likely be
different to the acquiree• Accounting for the lease will be different in the
separate FS of the acquiree
RoU asset acquired:• Recognised in line with the lease liability• Adjusted for favourable or unfavourable market
terms• Low value and short term exceptions
Deloitte Financial Reporting Plus 43© 2019 Deloitte. All rights reserved
IFRIC 21
VAT on leases
Impact regardless of VAT status:
• IFRIC 21 says you only account for levies when you are obliged to pay them.
• The lease liability calculation excludes VAT
Deloitte Financial Reporting Plus 44© 2019 Deloitte. All rights reserved
Reminder: IFRS 16 – Deloitte materialLease modifications extending the lease term
1. What constitutes a lease modification? 2. When should a lease modification be
accounted for? 3. What is the impact of a lease
modification on the lease term? 4. How do the modification requirements
interact with transition reliefs?
Deloitte Financial Reporting Plus 44© 2019 Deloitte. All rights reserved
Deloitte Financial Reporting Plus 45© 2019 Deloitte. All rights reserved
Reminder: IFRS 16 – Deloitte materialA guide to the incremental borrowing rate
1. Three step approach, determining:i. Reference rateii. Financing spread adjustmentiii. Lease specific adjustment
2. Timing considerations3. Transition considerations4. Financial reporting and disclosure
considerations
Deloitte Financial Reporting Plus 45© 2019 Deloitte. All rights reserved
Deloitte Financial Reporting Plus 46© 2019 Deloitte. All rights reserved
Guides/latest developments
IAS Plus IFRS 16 page https://www.iasplus.com/en-gb/collections/ifrs-16-resources-1
2019 IFRS Model Financial Statements – find here
The IFRS model financial statements illustrate the presentation and disclosure requirements of IFRSs for the year ended 31 December 2019 by an entity that is not a first-time adopter of IFRSs. They illustrate the impact of the application of IFRSs that are mandatorily effective for the annual period beginning on 1 January 2019 – including the new Leases Standard, IFRS 16
FRC publishes the results of its IFRS 16 thematic review 06 Nov 2019
The Financial Reporting Council (FRC) has published the results of its thematic review looking at the interim disclosures made by companies in the first year of application of IFRS 16 “Leases”.
FRC publishes findings on the quality of corporate reporting in 2018/2019 30 Oct 2019
The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2018/2019, which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team.
ESMA announces enforcement priorities for 2019 financial statements 22 Oct 2019
The European Securities and Markets Authority (ESMA) has announced the priority issues that the assessment of listed companies' 2019 financial statements will focus on.
The Governance UpdateJimmy Crowley, Senior Manager, Risk Advisory
Deloitte Financial Reporting Plus 48© 2019 Deloitte. All rights reserved
The Charities Governance Code
High profile failings in sector
60% of charities not disclosing sufficient information in annual reports
Specified role of charities trustees
2019 - learning and preparation
2020 - comply
2021 - report compliance
‘Comply or explain’ Reasons for Charities non-compliance:
In the process of winding up; Newly established and need
additional time to comply.
Principles 1.Advance charitable
purpose2.Behave with integrity3.Lead people 4.Exercise control 5.Work effectively 6.Be accountable and
transparent
Deloitte Financial Reporting Plus 49© 2019 Deloitte. All rights reserved
The 2018 UK Corporate Governance CodeSome far-reaching measures reflecting the UK social reform agenda
A new-style, shorter and sharper version of the UK
Corporate Governance Code
Revised Guidance on Board Effectiveness
Applies for periods commencing on or after 1 January 2019.
Purpose,
values, culture
& s172
Board
composition &
independence
Remuneration
Workforce
policies &
practices
Emerging risks
& internal
assurance
Headlines….
Deloitte Financial Reporting Plus 50© 2019 Deloitte. All rights reserved
The 2018 UK Corporate Governance CodePurpose, values, culture & s172
Board to establish and
align company purpose,
strategy, values and
culture
PRINCIPLE A
A successful company is led by an effective and
entrepreneurial board, whose role is to promote the
long-term sustainable success of the company,
generating value for shareholders and contributing to
wider society.
All directors must act with
integrity, lead by example
and promote the desired
culture
Board should assess and
monitor culture and
ensure management take
corrective action
Describe how the interests
of key stakeholders and
other matters in s172
impacted board decisionsThink about
your sources of
culture
insights – not
just employee
related
Deloitte Financial Reporting Plus 51© 2019 Deloitte. All rights reserved
The 2018 UK Corporate Governance CodeWorkforce policies & practices
Explain the approach to
investing in and
rewarding the workforce
PRINCIPLE E
The board should ensure that workforce policies and
practices are consistent with the company’s values and
support its long-term sustainable success.
Workforce should be able
to raise ANY matters of
concern
One, or a combination, of the following methods to be
used for engagement with the workforce:
• a director appointed from the workforce;
• a formal workforce advisory panel;
• a designated non-executive director.
If not one of these methods, explain what arrangements
are in place and why effective.
Think about
link to long-
term
sustainable
successWhistleblowing
elevated to
board agenda
Be careful…
Mechanism(s) must
be meaningful AND
effective
They will be quickly
exposed if not
Deloitte Financial Reporting Plus 52© 2019 Deloitte. All rights reserved
The 2018 UK Corporate Governance CodeBoard composition & independence
Chairman
independent on appointment
BUT a nine year maximum
tenure is imposed (from
date of joining the board)
PRINCIPLE H - Non-executive directors should have sufficient time
to meet their board responsibilities.
PRINCIPLE K – Consideration should be given to the length of
service of the board as a whole and membership regularly refreshed
Independence of non-
executives reverts to being a
matter for board judgement
BUT clearer explanations
called for where
independence may appear
impaired
Greater emphasis on the
quality of the external board
evaluation including clarity of
outcomes and level of
interaction with the board
Strengthening
consideration
of ‘over-
boarding’
This period
can be
extended for
a “limited
time” to help
succession
planning
Appointments and succession
plans should promote
diversity of gender, social
and ethnic backgrounds,
cognitive and personal
strengths
Deloitte Financial Reporting Plus 53© 2019 Deloitte. All rights reserved
The 2018 UK Corporate Governance CodeEmerging risks & internal assurance
Internal audit
Where there is no internal audit
function, an explanation for the
absence, how internal
assurance is achieved, and
how this affects the work of
external audit
Emerging risks
The board should carry out a
robust assessment of the
company’s emerging and
principal risks. The board should
confirm in the annual report that
it has completed this
assessment, including a
description of its principal risks,
what procedures are in place
to identify emerging risks,
and an explanation of how these
are being managed or mitigated.
Deloitte Financial Reporting Plus 54© 2019 Deloitte. All rights reserved
The 2018 UK Corporate Governance CodeRemuneration
PRINCIPLE P
Remuneration policies and practices should be designed to support strategy
and promote long-term sustainable success. Executive remuneration should
be aligned to company purpose and values, and be clearly linked to the
successful delivery of the company’s long-term strategy.
Share awards to be subject to a
total vesting and holding period of
five years or more
Remuneration schemes should
promote long-term shareholdings
Schemes to enable the use of
discretion to override formulaic
outcomes
Alignment of pension arrangements
with those for the workforce as a
whole
Deloitte Financial Reporting Plus 55© 2019 Deloitte. All rights reserved
What can we offer to help you?
Governance in brief
FRC issues new UK Corporate Governance Code
Updated supplementary material for audit committee report templates
Need to know on the new reporting requirements
Cyber Risk – back to basicsPaul Hare, Director, Risk Advisory
Deloitte Financial Reporting Plus 57© 2019 Deloitte. All rights reserved
Change will never be this slow again
• Office computing
• Mini-computers
• Word processing
• Spreadsheets
T E C H N O L O G Y C O R E
T E C H N O L O G Y E N A B L E M E N T
T E C H N O L O G Y C O L L A B O R A T I O N
T E C H N O L O G Y E N G A G E M E N T
D I G I T A L
E X P O N E N T I A L
• Mainframes
• Core computing
• PC revolution
• Network computing
• Relational databases
• Client-server applications
• Internet revolution
• Customer engagement
• Intranet applications
• Broadband
• Mobile connectivity
• Cloud computing
• Big data –analytics
• Social media
• Sensing
• Home automation
• Digital cars
• Digital money
• 3D printing / manufacturing
19701980
19902000
2010
2020
Deloitte Financial Reporting Plus 58© 2019 Deloitte. All rights reserved
Deloitte Financial Reporting Plus 59© 2019 Deloitte. All rights reserved
Future of risk in the digital era - Transformative Change, Disruptive Risk
Deloitte Financial Reporting Plus 60© 2019 Deloitte. All rights reserved
Why increase the focus on IT controls?
Cybersecurity – Focus on Financial Information
Effective controls in operations, compliance with laws and regulations are fundamental to well-managed entities
Information is relied upon by management to manage the business and key decision-making
Regulators expect enhanced reliability of information, and customers are looking for more specific information and transparency
Cyber security risk is a broad business risk to be managed
Cyber incidents are increasing in frequency and complexity
Automation is becoming increasingly important given the reliance on automated controls
Deloitte Financial Reporting Plus 61© 2019 Deloitte. All rights reserved
IT controls are a critical component of business operations and financial information controls. They provide the foundation for reliance on data, reports, automated controls, and other system functionality underlying business processes.
The security, integrity, and reliability of financial information relies on proper access controls, change management, and operational controls.
Deloitte Financial Reporting Plus 62© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
Application
Databases
Operating Systems/Network
Technology Elements
User Access Administration System Configuration Change Management Physical Security Backup Management Job Management
Deloitte Financial Reporting Plus 63© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
RISK: Users have access privileges beyond those necessary to perform their assigned duties
User Access Administration
Control:
• Access request authorisation
• Timely access revocation
• User access review
• Privileged-level access
• Logging and Monitoring
Application
Databases
Operating Systems/Network
Deloitte Financial Reporting Plus 64© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
RISK: Systems are not adequately configured to restrict system access to properly authorised users.
System Configuration
Control:
• Unique user IDs and password configurations
• Security configuration key attributes
Application
Databases
Operating Systems/Network
Deloitte Financial Reporting Plus 65© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
RISK: Inappropriate changes are made to systems
Change Management
Control:
• Change approval and testing
• Segregation of development and implementation functions
Application
Databases
Operating Systems/Network
Deloitte Financial Reporting Plus 66© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
RISK: Systems and data may not be available in a timely manner in the event of a disaster.
Backup Management
Control:
• Backup schedule configuration
• Data restoration test
Application
Databases
Operating Systems/Network
Deloitte Financial Reporting Plus 67© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
RISK: Inaccurate, incomplete, or unauthorised processing of data.
Job Management
Control:
• Access restriction to manage batch jobs
• Monitoring of batch job processes and error resolution process
Application
Databases
Operating Systems/Network
Deloitte Financial Reporting Plus 68© 2019 Deloitte. All rights reserved
General IT Risks and Controls – The Basics
RISK: Individuals gain inappropriate access to datacenters and buildings.
Control:
• Restrict access, via controlled and monitored swipe cards, pin access, biometrics.
Application
Databases
Operating Systems/Network
Physical Security
Deloitte Financial Reporting Plus 69© 2019 Deloitte. All rights reserved
Privileged Misuse
• A privileged identity has the ability to exploit the system with out being noticed
• These Identities can perform multiple anonymous actions
• Impact the confidentiality, integrity and availability of systems
If a threat actor gets into the environment and enumerates the privilege identities, which is easy to do,
they can make a lot of damage very quickly with low chance of discovery.
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Control Activities – IT Environment
IT
Third Party
Management
IT Policies
Data Management
and Protection
Security
Awareness
and Trainings
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Tone from the top Risk Management People
Control Activities – IT Governance
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• Diverse range of non-executive directors
• Understanding of digital technologies
• Ability to ask the right questions
• Bring insights and constructive challenge on cyber agenda
Control Activities – IT Governance
Tone from the Top
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• The Board and Senior Management are responsible for setting and overseeing the firm’s business strategy
• IT risk management framework facilitates an effective assessment of the IT risks
• Board and Senior Management are sufficiently informed on IT operations and cyber risks
Control Activities – IT Governance
Risk Management
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• Adequate level of IT Security Awareness training of staff
• Awareness of company security policies
• Adequate processes in place to monitor user activity
Control Activities – IT Governance
People
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Benefits of Effective IT Controls
• Fewer vulnerabilities to be exploited as part of a cyber breach
• Greater chance of discovering issues early, before they can become a big problem
• Increased reliability of information used for reporting, and the achievement of business objectives
• Easier compliance with laws and regulations
• Improved management decision making through high quality information
Headline Verdana BoldSavoy Hotel, Limerick20 November 2019
Headline Verdana BoldNon-financial reportingEileen Healy, Partner, Risk Advisory
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Sustainability as a hot topic
Agenda
Emerging legislation and reporting frameworks
Directive 2014/95/EU
Global Reporting Initiative (GRI)
Taskforce on climate related financial disclosures
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Hot topics
• Significant spotlight is being put on organisations in relation to their holistic impact.
• Management, boards, and wider stakeholders are broadening their awareness and placing increasing focus on sustainability, environmental impact and social impact of organisations.
• The immediacy of social media is heightening public awareness of events as soon as they occur
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Why the focus on Non Financial Reporting?
In today’s turbulent business environment, the impact of environmental or social controversies along with a lack of a company’s focus on sustainability, can become ahuge issue for any company.
The focus on social and environmental impacts coupled with the greater need for transparency have caused companies to be even more environmentally and socially aware.
Companies have to remain vigilant with their social and environmental impact as a negative non-financial incidentcould, with the new-age speed of communication, become a global issue in a matter of minutes.
The public are becoming increasingly concerned with businesses’ impact on the environment, on stakeholders (e.g. employees & customers)and on society.
Impact Awareness
Vigilance Public concern
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Emerging legislation and reporting frameworks
In recent years, a number of new non-financial reporting frameworks and standards have been released.
Non-Financial Reporting Regulations
The Government has enacted Regulations implementing the EU Non-Financial Reporting Directive (EU NFR Directive). The Regulations apply to financial years beginning on or after 1 August 2017 and are relevant to all public interest entities (PIEs) that have over 500 employees, on average, in the financial year.
A non-financial statement is required on environmental matters, employees, social matters, respect for human rights, and anti-corruption and anti-bribery matters.
Gender pay gap reporting
The UK Government has introduced legislation requiring employers with 250 or more employees to publish statutory calculations every year showing how large the pay gap is between their male and female employees.
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Emerging legislation and reporting frameworks
Global Reporting Initiative (GRI) Standards – replaced G4 from 1 July 2018.
They include 3 universal Standards applicable to all organisations and topic-specific Standards organised into economic, environmental, and social series.
Task Force on Climate-related Financial Disclosures (TCFD)
Established by the Financial Stability Board (FSB) to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, key stakeholders.
The TCFD has developed four widely adoptable recommendations on such disclosures, covering governance, strategy, risk management and metric and targets.
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Non-Financial reporting regulations – Directive 2014/95/EU
• Adopted by the EU on 22 October 2014 and is part of a wider strategy to promote Corporate Social Responsibility in the EU.
• Transposed into Irish law through S.I. No. 360 of 2017 on 31 July 2017. The S.I. came into operation on 21 August 2017 and will affect financial years commencing on or after 1 August 2017.
• Applies to large public-interest entities.
• Requires:
• a “Non-Financial Statement” to be included in the company’s directors’ report
• Covering at least the following matters:
Environmental
Social and employee
Respect for Human Rights
Bribery and Corruption
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Non-Financial reporting regulations – Directive 2014/95/EU
The Directors of a large traded company shall include in its corporate governance statement a diversity report.
• A description of the diversity policy applied in relation to the board of directors.
• Objective of the diversity policy
• How the policy has been implemented
• The results of the policy in that financial year
Where there is no diversity policy, the directors shall include in the corporate governance statement an explanation why.
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Global reporting Initiative (GRI)
• The Global Reporting Initiative (GRI) is an international not-for-profit organisation, with a network-based structure.
• The main objective of GRI is to enable all companies and organisations to report their economic, environmental, social and governance performance, GRI produces free Sustainability Reporting Guidelines.
• GRI helps businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well-being.
• This enables real action to create social, environmental and economic benefits for everyone.
Diagram: GRI 101 Foundation, 2016
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GRI Reporting Principles
Reporting principles for defining report quality
• Accuracy
• Balance
• Clarity
• Comparability
• Reliability
• Timeliness
Reporting principles for defining report content
• Stakeholder inclusiveness
• Sustainability context
• Materiality
• Completeness
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Taskforce on climate-related financial disclosures (‘TCFD’)
The scale of investor endorsement and adoption of the TCFD by financial institutions has accelerated, with over 500 organisations worldwide expressing their support.
• Applicable to all organisations, aiming to encourage market-led, industry-focused initiatives.
• Responds to systemic risk in the financial system related to climate change.
• Over 250 companies. Including CFOs of British Land, Burberry, M&S, National Grid, Tata Steel, Tesco, Unilever
• This is an area of increasing interest, activity and engagement from active institutional investors.
Context and applicability
Governance:
Risk integration:
Risks:
Reporting and assurance:
Metrics and
TargetsMetrics
and
Targets
Risk Management
Strategy
Governance
Configure robust structures to management climate related risks.
Your organisation’s governance around climate-related risks and opportunities.
Relates to Approach
Identification of physical, transitional and liability climate risk to both identify and quantify risks.
The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
Strategy development and financial risk integration and implementation, including scenario analysis and risk modelling.
How your organisation identifies, assesses, and manages climate-related risks.
Align reporting with international and industryrecognised frameworks in addition to externalassurance.
The metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
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Assurance
• An organisation can use a variety of approaches to enhance the credibility of its report.
• The use of external assurance for sustainability reports is currently not mandatory in Ireland.
• However it can be more impactful to have external confirmation.
• In some jurisdictions external assurance over certain disclosures is mandatory.
• GRI Disclosure 102-56 covers external assurance.
• GRI Requirements:• Independent and therefore able to reach and publish an objective and impartial conclusion• Demonstrably competent• Apply quality control procedures and implement a systematic, documented, and evidenced-based
approach• Assess whether the report provides a reasonable and balanced presentation of performance• Assess the extent to which the GRI Standards have been applied in the preparation of the report• Issue a written report that is publicly available and includes a set of conclusions.
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Summary
Definite move to non-financial reporting
Increased pressures from stakeholders/investors including closer and immediate public scrutiny of actions and their impacts
Basis for decision-making moving away from purely profit-based information
Increasing legislative demand
Future: integrated reporting
FRS 101/FRS 102 Statutory Reporting Niall Gleeson, Audit Director
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What version of FRSs to use?
For accounting periods commencing on or after 1 January 2019 currently must use the FRC’s March 2018 publications
FRS 101 Reduced Disclosure Framework (March 2018)
Only applies to parent’s separate financial statements and the entity
financial statements of subsidiaries. Never consolidated financial
statements!
Incremental Improvements and clarifications
Disclosure reductions for IFRSs 15 & 16
Requirement to notify shareholders has been removed
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FRS 102 Triennial review – mandatory for periods beginning 1 January 2019 – main changes
Financial
instruments – basic
versus other
Investment
property
Cashflows -Net
debt reconciliation
Intangibles
Definition of a
financial institution
Loans from directors to small entities
Intangibles
Prospective change only
Criteria to separately recognise an intangible asset separate to goodwill
as a result of a business combination has been changed
Required to recognise intangible assets separately from goodwill if they
meet the recognition criteria, are separable and arise from contractual or
other legal rights.
If they meet all the criteria and are separable or arose from contractual or other legal rights you have a choice to separately recognise the intangible or not.
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Financial Institution
The definition of a financial institution has been amended to remove
references to ‘generate wealth’ and ‘manage risk’.
The fair value hierarchy disclosure in FRS 102 was aligned to the IFRS 13 –
but this disclosure only applies if the reporting entity is a financial
institution or a pension scheme.
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Investment Property
Section 16 - The undue cost or effort exemption in relation to fair value
measurement of investment property has been removed. All investment
property must be measured at fair value with the exception of investment
property rented to another group company.
If previously at FVTPL investment property rented to another group company may now be accounted under the cost model in Section 17 of FRS 102 with a one-time choice at transition between:- historical cost or- fair value at transition date as deemed cost but with a revaluation
surplus on face of balance sheet; deferred tax on the capital gain, and legally required historical cost disclosures in notes.
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Cashflows
Clarification that any small entity (not just 1A) can take an exemption from preparing statement of cashflows
Entities that prepare a cashflow are required to present a reconciliation
of net debt from the beginning of the financial period to the end of the
financial period showing separately:
• the cash flows of the entity;
• the acquisition and disposal of subsidiaries;
• new finance leases entered into;
• other non-cash changes; and
• the recognition of changes in market value and exchange rate movements.
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Example Cashflow – net debt reconciliation
Example – Deloitte Accounting Research Tool GAAP in UK – B7 Statement of cash flows
Classification of Financial Instruments
A new principle based approach has been implemented so that in addition to those debt instruments that meet the existing conditions set out in Section 11, a debt instrument will be classified as basic:
‘if it gives rise to cash flows on specified dates that constitute repayment of the principal advanced, together with reasonable compensation for the time value of money, credit risk and other basic lending risks and costs’
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Director’s loans to small companies
The directors’ loan amendment allows companies that qualify as small and only small entities to account for certain directors’ loans without having to discount the amount received. This measurement concession is only available where the director or close family member is a shareholder.
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Amendments to Section 1A of FRS 102 will drive the following changes:
Triennial review 2017Section 1A – Small Companies Regime
Requirement UK reporters Irish reporters
Present a statement of compliance with FRS 102
UK companies do not need to present this statement.
Irish small entities are required to comply with the requirements of paragraph 3.3.
Presentation of Profit or Loss & Balance Sheet, references to definitions and legislation
Schedule 1 to the Small Companies Regulations or Schedule 1 to the Small LLP Regulations.
Schedule 3A & 4A to the Companies Act 2014.
Notes to the financial statementsUK companies provide, as a minimum, the note requirements of Part 1A.C.
Irish companies provide, as a minimum, the note requirements of Part 1A.D.
Disclosures in the consolidated financial statements (when prepared) set out in Para 9.23
UK companies are encouraged to provide these disclosures.
Irish companies are required toprovide certain of the disclosures in paragraph 9.23.
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Transition to FRS 102 (March 2018)Triennial Review 2017
Reminder: Changes in accounting policies are retrospectively applied as per Section 10 - Accounting Policies, Estimates and Errors
Disclosure requirements for changes in accounting policies are required to be included in the notes:
• Nature of the change
• Line items affected by the change (current and prior periods)
• Adjustment relating to periods before those presented, to the extent practicable
• If impracticable to determine the line items affected or the adjustment before prior and current year, disclose the fact and the reason.
Exceptions:• Investment Property• Change in accounting policies for intangible assets
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FRC have published a number of factsheets1: Triennial Review 2017 Amendments2: Triennial Review 2017 Transition3: Illustrative Statement of Cash Flows4: Financial Instruments5: Property: Fair Value Measurement6: Business Combinations7: Transition to FRS 102
FRS 101 will continue to be reviewed annually
Subject to “emerging issues”, now intended to review FRS 102 every 4-5 years rather than “triennially”
Need to know publicationhttps://www.iasplus.com/en-gb/publications/uk/need-to-know/2018/ntk-frs-102-triennial-review-2017
FRS 102 Triennial review
Tax UpdateCarmel Marnane, Director, Private Clients & Corporate Tax
Finance Bill 2019 –
Key measures
Extension of Transfer
Pricing Rules
R&D Credit Improvements
Stamp Duty Rate Increase
DWT Increase Employer PRSI
Increase
KEEP
DAC6-Mandatory Disclosure
New Transfer Pricing Rules 2020
Broadens the scope
of TP
Adopts 2017 OECD
guidelines (DEMPE)
Removes pre July
2010 grandfatheringExtends TP to SMEs
Enhanced TP
documentation
Extends to non-
trading income
Extends to capital
transactions > €25m
Master
file
€250m
Local file
€50m
Exceptions
between 2
Irish
resident
companies
Certain
exemptions
New Transfer Pricing Rules 2020
Small = Exempt
Headcount <50
AND
Annual turnover <€10m
Or
Balance sheet <€10m
Transfer Pricing for SMEs
Transfer Pricing for Medium Enterprises1 January 2020
Headcount <250
And turnover <€50m or balance sheet <€43m
Applies to relevant arrangements
Relevant Arrangements?
Schedule D type transactions with a foreign counterparty
Consideration >€1m
Capital transactions with foreign counterparty >€25m
Reduced documentation requirements
Stamp Duty on non-residential property increases from 6% to
7.5%
Dividend Withholding Tax -From 1 January 2020 rate increases from
20% to 25%
PRSI - additional 0.1% employer contribution to the National Training Fund Levy
Budget 2020New Measures
Full income tax relief (40%) to be provided in year investment is made
Annual investment limit increased from €150,000 to €250,000 per annum
Increased to €500,000 per annum for minimum investment period of 10 years
Budget 2020Employment and Investment (“EII”) – Main Changes
Increase in credit from 25% to 30% for small and micro businesses
Enhancements to the method of calculation for small and micro businesses
Pre-trading expenses qualify for R&D credit for small and micro businesses
Outsourcing limit (Universities/Institutes of Higher Education) increasing from 5% to 15%
Grants from State/EU must be deducted from qualifying spend
New notification requirements when outsourcing to third parties
R&D Credit Regime Changes
Gains arising to employees on the exercise of KEEP share options will be liable to Capital Gains Tax on disposal of the shares, in place of the current liability to income tax, USC and PRSI on exercise.
Available for qualifying share options granted between 1 January 2018 and 31 December 2023.
Share-based remuneration incentive for unquoted SME companies to attract key employees.
Key Employee Engagement Programme (“KEEP”)
KEEP - New Measures
Amendments to qualifying companies & holding companies definitions to allow group structures to qualify
Existing shares to qualify?
Amendments to qualifying employee definition to reflect part-time and flexible working arrangements and movement within group structures
Mandatory disclosure of certain information in relation to reportable cross border arrangements where the arrangements contains specific broadly defined criteria (“hallmarks”).
Penalties will be imposed on intermediaries that do not comply with the transparency measures.
If the taxpayer develops the arrangement in-house, or is advised by a non-EU adviser, or if legal professional privilege applies, the taxpayer must notify the tax authorities directly.
Where the first step of the arrangement happens in the period beginning on or after 25 June 2018 and ending on 30 June 2020, the arrangement should be reported by 31 August 2020.
DAC 6
Hot topics for 2019 annual reportsOliver Holt, National Director of Financial Reporting Services
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120
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121
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Climate: Financial statement impact
No industry is immune – we are all on the same one planet!
May need to consider a number of scenarios
Not impossible that changes in public mood/investor demands/technology/tax/regulations on climate could impinge on long term viability/going concern of entities that are not (or are not seen as) aiming to be climate/resource friendly
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Climate: Financial statement impact
Climate could impact on:
Asset impairment/ECL Provisions
Asset useful lives Contingencies
Residual values Onerous contracts
Valuations Pension obligations
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Companies Act 2014 disclosure considerationsClimate change: Narrative reporting
Required in the directors’ report:
Description of the principal risks and uncertainties facing the company (or if group accounts are prepared, the group)
The business review, where appropriate, includes information relating to environmental matters
Non Financial Information Reports supplemented by non-mandatory EU guidelines have more specific requirements
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Advice from the Accounting Enforcer in the UK – annual letterClimate change: Narrative reporting
The organisation’s governance around climate-related risks and opportunities;
The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning;
The processes used by the organisation for identifying, assessing and managing climate-related risks and how they are integrated into the organisation’s overall risk management; and
The metrics and targets used to assess and manage climate-related risks and opportunities in line with its strategy and risk management process.
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Climate change: Narrative reportingAdvice from the Accounting Enforcer in the UK
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Brexit: Companies Act 2014 disclosure considerations –Directors’ Report
Description of the principal risks and uncertainties facing the company (or if group accounts are prepared, the group)
Indication of likely future developments in the business
IASSA:
….disclose entity specific impacts of Brexit on the judgements and sources of estimation uncertainty that reflect the specific facts and circumstances applying and the risks and uncertainties [arising]…
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IAASA expects management, Directors and Audit Committees to ensure that they apply medium and long-term assumptions that reflect changes in the current market expectations for the products, services, markets and countries in which they operate or on which they rely. Issuers’ medium and long-term key assumptions need to reflect on-going market uncertainty and possible future market disruption.
Observations on selected financial reporting issues – years ending on or after 31 December 2019Issued: 17th September 2019
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Brexit: financial reporting considerations are not pretty
May need to consider a number of scenarios with impacts on:
Foreign exchange Derivatives
Asset impairment Provisions
Asset useful lives Contingencies
Residual values Onerous contracts
Valuations Pension obligations
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New standard: IFRS 16 Leases
New Interpretations:
IFRIC 23 Uncertainty over Income Tax Treatments
Annual Improvements 2015-2017 Cycle
IFRS 3 Business Combinations and IFRS 11 Joint Arrangements
IAS 12 Income Taxes
IAS 23 Borrowing Costs
New IFRSs for 2019
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IFRIC 23 Uncertainty over Income Tax Treatments
OutcomeEstimatedadditional amount €
Probability %Estimated
expected value €
1 - 5% -
2 200 5% 10
3 400 20% 80
4 600 20% 120
5 800 30% 240
6 1,000 20% 200
100% €650
Unit of account (separate or together)
Tax authority acceptance
Accounting tax position
Recognizes and measures current tax liability based on taxable profit that includes €650 to reflect effect of uncertainty
€650 additional taxable profit not reported in the reporting entity’s income tax filing
138
First applies using:- Full retrospective approach;
or- Modified retrospective
approach
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New standard: IFRS 16 Leases
New Interpretations:
IFRIC 23 Uncertainty over Income Tax Treatments
Annual Improvements 2015-2017 Cycle
IFRS 3 Business Combinations and IFRS 11 Joint Arrangements
IAS 12 Income Taxes
IAS 23 Borrowing Costs
New IFRSs for 2019
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New Interpretations continued:
• Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
• Prepayment Features with Negative Compensation (Amendments to IFRS 9)
• Amendment, Curtailment or Settlement (Amendments to IAS 19)
New IFRSs for 2019
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Amendments (with 1.1.2020 effective date) waiting endorsement:
• Amendments to References to the Conceptual Framework in IFRS Standards (issued on 29 March 2018)
• Amendment to IFRS 3 Business Combinations (issued on 22 October 2018)
• Amendments to IAS 1 and IAS 8: Definition of Material (issued on 31 October 2018)
IFRSs in the pipeline
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Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)
Amendment published 26th September 2019:
Effective for annual periods beginning on or after 1 January 2020, with earlier application permitted
Accelerated EU Endorsement likely
Current work plan: 32 projects - https://www.ifrs.org/projects/work-plan/
IFRSs in the pipeline continued
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Thank youCathal Treacy, Partner, Audit and Assurance
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