Concurrent Session 2A: Accounting Update

Accounting Update

2© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

With you today…Hudson LopezPartner

+1 416 777 3034 [email protected]

Dana ChaputSenior Manager


David WilsonSenior Manager



Forthcoming accounting standardsAppendix A contains a comprehensive list of newly effective and forthcoming accounting standards. Today’s session will focus on the following major accounting standards…

1. Early application of IFRS 16 Leases is permitted only for companies that also apply IFRS 15 Revenue from Contracts with Customers.

2. Life Insurance Capital Adequacy Test is only relevant to life insurers and foreign branches regulated by OSFI

2016 2017 2018 2019 2020 2021IFRS 17 Insurance Contracts

Amendments to IFRS 4– Temporary deferral– Overlay approach

IFRS 9 Financial Instruments

IFRS 15 Revenue fromcontracts with customers

IFRS 16 Leases1

Life Insurance Capital Adequacy Test2


IFRS 17 Insurance Contracts– A new, comprehensive measurement model

– Four building blocks: expected cash flows, discounted for the time value of money, adding a risk adjustment to determine contractual service margin

– A simplified, premium allocation approach available for certain short duration contracts

– A variable fee approach considers the variable fee associated with direct participating contracts

– Transition– Full retrospective application is required, but

practical expedients and a fair value approach is available for determining CSM and discount rates

– Presentation and disclosures– Revenue presentation based on provision of

service pattern– Investment components excluded from

insurance revenue– Accounting policy choice to present the effect

of the discount rate and other market variables in OCI or P&L

IFRS 17 will have an effective date of January 1, 2021

…assuming a final standard is released

in the first half of 2017.

Expected cash

outflows

Risk adjustment

Contractual service margin

Expected premiums

Discounting

zero gain at initial recognition


IFRS 9 Financial Instruments– Measurement bases remain the same, but

criteria for classifying assets considers– Whether an assets’ contractual cash flows

are solely principal and interest; and– The objective of the business model the

asset is being managed under– For assets measured as amortized cost or

FVOCI, an expected credit loss model will be used to measure impairment, either– 12-month expected credit losses or

lifetime expected credit losses;– Certain practical expedients exist for

investment-grade assets – New guidance on hedging retains many

existing concepts, but is more principles-based

IFRS 9 becomes effective in Canada January 1, 2018

(except where OSFI has required early adoption).

Yes No

No

Are the contractual cash flows solely payments of principal and interest?

Is the business model’s objective to hold to collect contractual cash flows?

Is the business model’s objective achieved both by collecting contractual cash

flows and by selling?

Amortised cost

FVOCI (debt instrument)

FVTPL

Yes

Yes

No


Amendments to IFRS 4 Insurance Contracts

– Some entities will be permitted to continue applying IAS 39 Financial Instruments: recognition and measurement

– Eligibility – Entity has not applied IFRS 9 before – Activities are “predominantly connected with

insurance”– Assessment completed for each reporting entity

on the annual reporting date immediately before April 1, 2016

– Disclosures– How an entity qualified for the exemption– Financial information to permit comparison with

insurers that implemented IFRS 9

– For designated financial assets, an entity reclassifies the difference between the amount reported in profit or loss under IFRS 9 and the amount that would have been reported for those assets under IAS 39

– Eligibility – Financial asset is held in respect of an activity

connected with contracts in the scope of IFRS 4; and

– Measured at amortized cost or classified as AFS under IAS 39, but measured under FVTPL under IFRS 9

– Disclosures– How the adjustment is calculated– Effect on the financial statements

Temporary exemption from IFRS 9

2018 2021 or earlier

Insurance standard

IFRS 9FVTPL under IFRS 9

Impact of changes to FVTPL under

IFRS 9

Adjusted P&L

Overlay approach


IFRS 15 Revenue from contracts with customers– The new standard replaces substantially all

of the current revenue recognition guidance in both IFRS and US GAAP, excluding contracts that are out of scope.

– The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized.

– A contract with a customer may be partially in the scope of the new standard and partially in the scope of other accounting guidance.

IFRS 15 becomes effective in Canada January 1, 2018.

Step 1:Identify the contract with the customer

Contract (or combined contracts)

Step 2:Identify the performance obligations in the contract

Performance obligation 1 (PO 1)

Performance obligation 2 (PO 2)

Step 3:Determine the transaction price

Transaction price for the contract

Step 4:Allocate the transaction price to the performance obligations in the contract

Transaction price allocated to

PO 1

Transaction price allocated to

PO 2

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Recognize revenue

Recognize revenue


IFRS 16 Leases– Dual accounting model for lessees, which

distinguishes between on-balance sheet finance leases and off-balance sheet

– IFRS 16 requires organisations to bring most leases on-balance sheet, recognising new assets and liabilities.

– Leases will now be accounted for as if the organization had borrowed funds to purchase an interest in the leased asset

– Assessing whether an arrangement is, or contains, a lease will be one of the biggest practical issues – turning the definition of a lease into the test that will determine whether an arrangement is on- or off-balance sheet for a lessee.

– Practical expedients relating to leases of low value items and short term leases may reduce compliance costs and ease the burden of implementation IFRS 16 becomes effective in Canada

January 1, 2019.

Impact on balance sheet

Impact on income statement


Expanded Auditor Reporting– The expected standard moves away from a

binary pass/fail auditors’ opinion and the revised auditor reporting standards will introduce significant changes to the traditional audit report.

– The most significant change is the requirement for auditors of listed entities to describe in the auditors’ report the key audit matters they focused on and what audit work was performed in those areas.

– Audit committees need to consider whether financial statement or other disclosures need refreshing, so that the auditor is not disclosing more information about an item than the company.

AASB approval expected late 2016/early 2017

Expected deferral until December 2018

Appendix A


Newly effective and forthcoming standards

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© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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Concurrent Session 2A: Accounting Update