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IFRS Technicalupdate4th Annual Financial Reporting InsightsAthens, 13 December 2017
Page 2
IFRS 16 Leases
Financial Reporting Insights – December 2017
Page 3
Overview of IFRS 16
Lessors
Dual lease accounting model substantially unchanged
Lessees
Single on-balance sheet accounting model for most leases
New presentation and disclosure requirements
New standard is effective for annual periods beginning on or after1 January 2019
Optional exemption for short-term leases and leases of low-value items
Lease classification test based on IAS 17 criteria
Financial Reporting Insights – December 2017
Page 4
Overview of IFRS 16Impact on all business areas
§ EBITDA based incentives§ Debt/equity finance ratios§ Loan Covenants§ Update systems & processes§ Management KPIs
§ The new accounting standard changesfinancial statements presentation but notany of the underlying cash flows and risks
TreasuryIT
systems
Data governanceand management
Commercial,sales andmarketing
Procurement andlegal
Tax
HumanResources
BusinessPerformance
Planning
Internalaudit
Externalreporting
IFRS 16:impacts more
than accounting
Think about:
Financial Reporting Insights – December 2017
Page 5
`
Overview of IFRS 16What are the “big” issues?
Separation of components
§ Separate lease and non-leasecomponents
§ Practical expedient (for lessees) - treatas single lease component
Choose transition method
§ Full or modified retrospective
§ Practical expedients
Apply judgment in calculation inputs
§ Lease term (extension / terminationoptions)
§ Lease payments
§ Discount rates
Identify (embedded) leases
§ Implicit or explicit asset
§ Substitution rights of suppliers
§ Right to control
Financial Reporting Insights – December 2017
Page 6
Identified assetRight to control the use of theasset throughout the period
of useLease
Definition of a lease
WHOBENEFITS ?
Reassess only if the terms andconditions of the contract change
► Right to obtain substantially all the economicbenefits from use
AND
► Right to direct the use of the asset throughoutthe period of use
Financial Reporting Insights – December 2017
Page 7
Definition of a lease (cont)Separating components
Separate lease component if both:
► The lessee can benefit from use of the asseton its own or together with other readilyavailable resources.
► The asset is neither highly dependent on, norhighly interrelated with, the other assets inthe contract.Account for each lease component separately from non-lease
components, unless:
Practical expedient for lessees only:► Elect, by class of underlying asset, not to separate
non-lease components► Each lease component + associated non-lease
components = a single lease component
Building Equipment
CONTRACT
Maintenance services
Financial Reporting Insights – December 2017
Page 8
Lease term
Non-cancellable periods Periods covered by options toextend the lease (*)
Periods covered by optionsto terminate the lease (**)
(*) if the lessee is reasonablycertain to exercise
(**) if the lessee is reasonablycertain not to exercise
Commencementdate
Rent-free period
Financial Reporting Insights – December 2017
Page 9
Lease paymentsVariable lease payments
Financial Reporting Insights – December 2017
Are the lease paymentsgenuinely variable?
Do not include in the leaseliability
Recognise in P&L whenincurred
Is there an amount which isunavoidable for the lessee?
Not genuinely variable
Include in lease liability
Initially measure based onindex or rate at the
commencement date
Do not forecast futurechanges in the index or rate
Re-measure only when thereis a change in cash flows
Page 10
Determination of discount rate
Financial Reporting Insights – December 2017
► Lessors use the interest rate implicit in the lease (IRIL) that causes thefollowing
The presentvalue (PV) of
lease payments
The PV of theunguaranteedresidual value
FV of theunderlying asset
Any initial directcosts of the
lessor+ +=
► Lessees use their incremental borrowing rate (IBR) when IRIL cannot be readilydetermined
► Lessee’s IBR is the rate of interest that a lessee would have to pay to borrowover a similar term, and with a similar security, the funds necessary to obtain anasset of a similar value to the ROU asset in a similar economic environment
Page 11
Determination of discount rate
► Determining the Incremental Borrowing Rate
Financial Reporting Insights – December 2017
Readily observablestarting point
May include:• “Security” – Start from
unsecured rate• Repayment profile• Lessee credit risk• Currency
Consider:• Recent borrowings• Hypothetical loan rates• Property yield (property
leases)
Adjustments
Page 12
Effective date and transition
Financial Reporting Insights – December 2017
q IFRS 16 is effective for annual periods beginning on or after 1 January 2019q Early application permitted if IFRS 15 has been applied or is applied at the
same date
Effectivedate
q Lessees are permitted to choose between two transition approaches appliedconsistently to all leasesq Full retrospectiveq Modified retrospective
q Cumulative effect recognised at the date of initial application in opening equity
Lessees
q Lessors carry forward IAS 17 balances on transitionq Except for intermediate lessors in a sublease
Lessors
Page 13
Full retrospective approach
Transition method impacts data requirements
q Do not restate comparative information
q Adjust opening retained earnings on transition
q Provide additional transition date disclosure
q Optional practical expedients, including:
q Do not transition leases ending within 12months
q Simplified right-of-use asset measurement
In accordance with IAS 8:
q Restate comparatives as if IFRS16 always applied
q Provide line by line comparisondisclosure
Financial Reporting Insights – December 2017
1 Cumulative catch-up approach2
Cumulative catch up
Fully retrospective
Page 14
Status of implementation
Financial Reporting Insights – December 2017
?
Not yet started1
Where is your company / group on the timeline for adoption?
Gaining an understanding of leasing activities and datarequirements2
Gathering complete set of lease data3
Designing and developing IFRS 16 solution4
Deploying solution5
Page 15
Data requirementsdo not stop attransition
More than a transition exercise
Financial Reporting Insights – December 2017
Change ahead
New systems and procedureswill be required to capture:q New leasesq Lease modificationsq Lease disposalsq Asset impairment reviews
Will you be readyon time?
Page 16
IFRS 9 Update for Corporates
Financial Reporting Insights – December 2017
Page 17
Key Topics for our discussion
► IFRS 9: Financial Instruments► Summary: key areas of impact► Classification and Measurement
► Key challenges: Classification and Measurement► IASB developments
► Impairment► Key challenges: Impairment
► Hedge accounting► Key challenges: Hedge accounting► Other matters
Financial Reporting Insights – December 2017
Page 18
IFRS 9: Financial Instruments
Financial Reporting Insights – December 2017
Page 19 Financial Reporting Insights – December 2017
IFRS 9: key areas of impact
Classification &Measurement
q “Common” financial instruments:No significant changesanticipated, but accounting forothers may change
q Some changes to financial assetsthat might have been AFS underIAS 39, both:q DEBT - FVOCI (with
recycling) / FVPLq EQUITY –FVOCI (no
recycling)
q Debt factoring (financing vs sale)
q No embedded derivativebifurcation on assets
q New methodology, but changelimited for many corporates, biggerissue for banks
q Debt securities not recorded atFVPL
q Impact on trade receivables
q Long-term receivables affected,including INTRAGROUP LOANS inseparate financial statements
q Contract assets and finance leasereceivables
Impairmentq Less rules-based, but still complex
q Basic models for hedge accounting(cash flow, fair value, netinvestment) unchanged
q Sophisticated hedge accountingarrangements may change (e.g.commodities, inflation)
Hedge accounting
Page 20
Classification and Measurement
Financial Reporting Insights – December 2017
Page 21 Financial Reporting Insights – December 2017
What does the standard say? Challenges► Prepayment options can change the
timing and/or amounts of cash flows[IFRS 9.B4.11-12]
► Absence of prepayment fees does notbreach the SPPI criterion
► Prepayment options at par:► Pass the test if prepaid amount
substantially represents unpaidprincipal and interest
► May include reasonablecompensation for early termination
► If asset was purchased at apremium or discount, fair value ofprepayment feature must beinsignificant at initial recognition
How to evaluate whetherprepaid amount‘substantially representsunpaid principal andinterest’?
How to assess prepayable financialinstruments acquired at a premiumdue to changes in the interest rateenvironment?
Does non-genuine/deminimise play a role?
?
?Judgement
Challenge
Can a ‘negative compensation’meet the SPPI criterion?
How to interpret the‘reasonable compensation’threshold in the standard?
?
Key challenges: Classification & MeasurementPrepayment features
Page 22 Financial Reporting Insights – December 2017
Does a debt instrument meet theSPPI condition for measurement atamortised cost if the contractualterms of the instrument include asymmetric ‘make whole’prepayment option or a fair valueprepayment option?
► In October 2017, the Board publishedthe narrow scope amendment to IFRS 9which makes a debt instrument withsymmetrical prepayment feature eligibleto be measured at amortised cost or atFVOCI, provided eligibility condition ismet
► There may be circumstances in whichfair value prepayment amount (or the fairvalue cost to terminate an associatedhedging instrument) may be consistentwith the notion of ‘reasonablecompensation for the early termination ofa contract’, but not always the case
► Amendments for negative compensationare effective from 1 January 2019, withearly application permitted
IASB developments:Prepayment features with negative compensation
Page 23
IASB developments:Modification of a financial liability –no derecognition
► IFRS 9.B5.4.6 catch up approach (i.e., AG 8 approach under IAS 39) applies tomodifications of financial liabilities, consistent with modifications of financial assets
► Modification gain or loss is immediately recognised in profit or loss, calculated bydiscounting the change in contractual cash flows at the original effective interest rate
► Clarification only applies to IFRS 9
► On transition to IFRS 9, any change in accounting from IAS 39 would need to bemade retrospectively
Page 24
What does the standard say? Challenges► If a financial instrument represents an
investment in particular assets or cashflows, or
► If the borrower has limited other assetsand/or equity
The SPPI test is failed
How to differentiatebetween returnscompensating primarily forthe ‘credit risk’ and that of‘performance risk of otherassets or variable’?
How to differentiate betweeninstruments that have contractualcash flows determined by the cashflows on specified assets and cashflows of which are just secured byanother assets?
Does the non-recourse loan fail theSPPI test?
?
?
► The lender needs to assess theunderlying assets (e.g., collateral) andcash flows to determine whether thecontractual cash flows are SPPI [IFRS9.B4.1.17]
► If the financial instrument’s returndepends from performance of anunderlying asset or another variable
Judgement
Challenge
Key challenges: Classification & MeasurementsNon-recourse loans
Financial Reporting Insights – December 2017
Page 25
What does the standard say? Challenges
► A debt instrument is normally measured atamortised cost if it is held within a businessmodel whose objective is to hold assets in orderto collect contractual cash flows, provided it alsopasses the SPPI test.
What if sold in legal form but noteconomic substance?
What factors to consider when factoring?
Additional disclosures?
?
?
► Sales, in themselves, do not determine thebusiness model and cannot be considered inisolation
► Past sales and expectations for future salesprovides evidence related to how the entity’sstated objective for managing the financialassets is achieved
Judgement
Challenge
Should receivables berecorded at FVTPL or atamortised cost?
Additional provision or valuationadjustment when factoring?
At what time to reclassifyand derecognise?
Key challenges: Classification & MeasurementsDebt factoring
Financial Reporting Insights – December 2017
Page 26
Impairment
Financial Reporting Insights – December 2017
Page 27
Key challenges: ImpairmentGeneral
► Measurement of expected credit losses include probability weighting of credit losses (even ifunlikely)
► Most probable outcome = collection of probability weighted outcomes► Data (PD and LGD)
► External (agency e.g. Experian or market e.g. Bloomberg ) vs internal► Forward looking adjustments - current and forecast future conditions
► Documentation of new processes and I/C arrangements based on substance► Systems - external vs internal models► Disclosures
► Anticipate more extensive disclosures► Movements in loss allowances► Explanations of methods and estimates, credit risk, etc.
Financial Reporting Insights – December 2017
Page 28
Key challenges: ImpairmentInter-company loans
ECL model applies to inter-company loans for parent company separate financial statements:
► Examples:► Interest free inter-company loan to subsidiary (i.e., off-market)► Capital investment which is unlikely to be repaid or can only be repaid after a number of years
but contractually on demand► Loans between group companies with an implicit guarantee by parent
► Practical challenges► Terms may not be ‘arm’s length’, or terms not documented terms at all► What is the initial fair value? Is there a capital contribution component?
Will it pass SPPI?► How do we assess for significant increase in credit risk?► What PD, LGD, and maturity date should be used to measure the ECL?
Financial Reporting Insights – December 2017
Page 29
Hedge accounting
Financial Reporting Insights – December 2017
Page 30 Financial Reporting Insights – December 2017
Tran
sitio
nMigration of existing hedge accountingDefault approach: prospective application of IFRS 9 model► Continue hedge accounting if meet IFRS 9 requirements► Rebalancing on transition (if applicable) à against profit or lossExceptions to the default approach:► Items: for ‘risk components’ of derivatives excluded from designation as the
hedging instrument under IAS 39► Scope: only for those hedging relationships that existed in earliest balance
sheet presented or designated thereafter
Time value of options:Must applyretrospectively ifonly intrinsic value wasdesignated under IAS 39
Forward element of forwardcontracts:May apply retrospectively ifspot element was designatedunder IAS 39 (election)
Note: May de-designate any hedging relationship on last day of applying IAS 39
FX basis spread:May apply retrospectivelyon a hedge relationship byhedge relationship basis
Key challenges: Hedge accountingTransition
Page 31
Key challenges: Hedge accountingOther matters
► Cost of hedging
► Time value of options –mandatory
► Forward points of forwards –voluntary
► Foreign currency basis spread –voluntary
► Disclosures
► Other matters► Systems
► Hedge documentation (effectiveness testing; cost of hedging)
Financial Reporting Insights – December 2017
Page 32
Risk management strategy
Effects of hedging on amount, timing and uncertaintyof future cash flows
Other disclosures for particular situations (dynamic strategies and creditrisk hedging)
Effects of hedge accounting on the primary financial statements
Key challenges: Hedge accountingOther matters
Financial Reporting Insights – December 2017
Page 33
IFRS - Other Developments
Financial Reporting Insights – December 2017
Page 34
Overview
► Better Communication in Financial Reporting► Recent IFRS Standards► Other projects
– Conceptual Framework– Active Research Programme
Financial Reporting Insights – December 2017
Page 35
Better Communication in Financial Reporting
Financial Reporting Insights – December 2017
Central theme of Board’s work
Content and its organisation Content delivery
PrimaryFinancialStatements
DisclosureInitiative
IFRSTaxonomy™
Page 36 Financial Reporting Insights – December 2017
Primary Financial Statements – scope
Statement(s) offinancial performance
Statement ofcash flows
Statementof financial
position
Statementof changes
in equity
Requiring additional Eliminating options
No planned change –except possible
development of templatefor primary financial
statements and greaterdisaggregation
EBIT subtotal (interest/dividends)
Providing guidance on Aligning the operatingpresentation of section between themanagement operating statements of cash flowsperformance and and financialalternative EPS performanceBetter ways to Requiring a consistentcommunicate OCI starting point for the
reconciliation
Page 37 Financial Reporting Insights – December 2017
Better Communication
Principles of effective communication suggested in the Discussion Paper
Entity-specific Tailoring information to a company’s own circumstances.
Simple and direct Using simple descriptions and sentence structures without omitting usefulinformation.
Better organised Ranking pieces of information to help users of financial statementsunderstand their importance.
Better linked Linking information to help users of financial statements understand therelationships between pieces of information.
Better formatted Selecting a suitable format for the type of information companiesprovide.
Free of duplication Avoiding unnecessary duplication that obscures communication.
Enhanced comparability Disclosing information in a way that enhances comparabilityamongcompanies and across reporting periods without compromising itsusefulness.
Page 38
Major Standards Effective date
IFRS 9 Financial Instruments* 1 January 2018
IFRS 15 Revenue from Contracts withCustomers** 1 January 2018
IFRS 16 Leases 1 January 2019
IFRS 17 Insurance Contracts 1 January 2021
2015 Amendments to theIFRS for SMEs Standard 1 January 2017
* includes Prepayment Features with Negative Compensation, issued October 2017**includes Clarifications to IFRS 15, issued April 2016
Recent IFRS Standards
Financial Reporting Insights – December 2017
Page 39
Narrow-scope amendments—Effective 1 January 2017
Recognition of Deferred Tax Assets for Unrealised Losses(amended IAS 12)Disclosure Initiative (amended IAS 7)Annual Improvements 2014-2016 (amended IFRS 12)
Recent IFRS Standards (cont.)
Financial Reporting Insights – December 2017
Page 40
Narrow-scope amendments—Effective 1 January 2018
IFRIC 22 Foreign Currency Transactions and Advance Consideration
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts(amended IFRS 4)
Classification and Measurement of Share-based Payments(amended IFRS 2)
Transfers of Investment Property (amended IAS 40)
Annual Improvements 2014-2016 (amended IFRS 1, IAS 28)
Recent IFRS Standards (cont.)
Financial Reporting Insights – December 2017
Page 41
Recent IFRS Standards (cont.)
Narrow-scope amendments—Effective 1 January 2019
IFRIC 23 Uncertainty over Income Tax Treatments
Long-term Interests in Associates and Joint Ventures (amends IAS28)
Financial Reporting Insights – December 2017
Page 42
IFRIC 23 Uncertainty over Income Tax Treatments
► Effective for annual periods after 1 January 2019
► Clarifies accounting for uncertain income tax treatments
► Scope:► Current and deferred income taxes► Interest and penalties within the scope of IAS 12► Not applicable to other taxes or levies
► Specifically addresses:► Unit of account► Examination of tax treatments by taxation authorities► Determination of taxable profit (loss), tax bases, etc.► Changes in facts and circumstances
Financial Reporting Insights – December 2017
Page 43 Financial Reporting Insights – December 2017
Exposure Drafts
Open for comment
Accounting Policies and Accounting EstimatesDefinition of Material (would amend IAS 1 and IAS 8)
Others
Availability of a Refund (would amend IFRIC 14)Classification of Liabilities (would amend IAS 1)Definition of a Business (would amend IFRS 3)Improvements to IFRS 8 Operating Segments
Property, Plant and Equipment: Proceeds before Intended Use
Page 44 Financial Reporting Insights – December 2017
Why are we revising the Conceptual Framework?
• For example, providesconcepts onpresentation anddisclosure andmeasurement
• For example, updatesthe definitions ofassets and liabilities
• For example, clarifiesthe roles in financialreporting of:▪ stewardship▪ prudence▪ substance over
form▪ measurement
uncertainty
Existing Conceptual Framework useful but someimprovements needed
► Fill in the gaps Update Clarify
Page 45 Financial Reporting Insights – December 2017
What are the improvements?
Recognition &Derecognition
Measurement Use of OCI
Uncertainliabilities
Role ofprudence andstewardship
Page 46 Financial Reporting Insights – December 2017
Active research projects
Project Target
Financial instruments withcharacteristics of equity DP H1 2018
Goodwill and impairment DP H1 2018
Business combinations under common control DP H2 2018
Dynamic risk management DP H2 2018
Thank you!
4th Annual Financial Reporting Insights
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