ifrs update zim revised - welcome to icaz• ifrs 15 also provides guidance on contract...

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BUSINESS WITH CONFIDENCE icaew.com© ICAEW 2014

Gavin Aspden FCA

Director, Qualifications. ICAEW

IFRS Update


Today’s programme

• General direction

• Leasing project

• Revenue (IFRS 15)

• Financial instruments (IFRS 9)

• Fair values (IFRS 13)

• Group Accounting (IFRSs 10, 11 and 12)

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Convergence with US GAAP

“For issues of primary interest

to stakeholders in U. S. capital

markets, the FASB will set its

own agenda.”Quote from FASB website

Major projects:

Financial instruments

Leases

Revenue

Significant differences exist between some of the FASB and IASB ‘solutions’


Leasing

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Recap...

How to do you determine if a lease is a finance lease or an operating lease under current IFRS (IAS17)?


Lease Accounting –Proposals

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Why a leases project?

Lessee• Most assets and liabilities

are off-balance sheet• Limited information about

operating leases

Lessor• Lack of transparency

about residual values• Consistency with lessee

proposals and revenue proposals

7

$1.25 trillion of off-balance-sheet operating lease commitments for SEC registrants*

* Estimate according to the 2005 SEC report on off-balance-sheet

activities


Lease Accounting – first proposal

Proposal - Single Accounting Model

IAS 17

Operating

lease

A lease other

than a finance

lease

Finance lease

Transfers

substantially all

the risks and

rewards of

ownership to the

lessee

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Lease Accounting – second proposal

Proposal - Dual Accounting Model recognising that all

leases are not the same, type A and type B leases

IAS 17

Operating

lease

A lease other

than a finance

lease

Finance lease

Transfers

substantially all

the risks and

rewards of

ownership to the

lessee


Lease Accounting – third (and final?) proposal

Proposal - Single Accounting Model

IAS 17

Operating

lease

A lease other

than a finance

lease

Finance lease

Transfers

substantially all

the risks and

rewards of

ownership to the

lessee

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Comment letter sent into FASB Lyles & McCarty LLP – industry frustration

Let's cut to the meat of the issue:

1. a lease is a lease is a lease and should be accounted for as such;

2. the 300+ page proposal as written has been a waste of manpower, brainpower and paper. If this proposal cannot be condensed to one double-spaced sheet of paper, it should be thrown out entirely; and,

3. rather than waste more time on such issues, all previous pronouncements, edicts, white papers, regulations, etc. should be reviewed and also reduced to a single page each. If this cannot be done, they should also be thrown out.

Larry L Lyles


Lessee accounting – identifying a lease

Where are we today? Where might we be?

A lease conveys the right to use a specific asset for a period of time.

A lease conveys the right to control the use of a specified asset for a period of time.

Right to control use

• direct use of asset; and

• obtain benefits from that use.

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Lease measurement

• Simplification

– Exclude variable payments

– Exclude most optional payments

– 12-month minimum duration

– Further discussions on going regarding small assets like laptops

and office furniture

Measure lease assets and liabilities at the present value of

future lease payments

(lease assets include costs directly related to entering into the lease)


ICAEW’s Formal Opinion

• Our formal response letter is available here

– (its only 11 pages if you are interested...)

• http://www.icaew.com/~/media/Files/Technical/Financial-reporting/IFRS/icaew-rep-117-13-no-signature.pdf

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What next... From the IASB’s own report


IFRS 15Revenue Recognition

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Revenue recognition

Exposure draft Key concerns Redeliberations Second exposure draft

A single revenue

recognition model,

removing the current

distinction between goods

and services

Focus on when the

customer obtains control of

whatever is being supplied

Lack of clarity about how

and when revenue relating

to some services will be

recognised

Various matters of detail

Basic five step model

unchanged

More guidance on when

revenue can be recognised

over time

Lots of minor tweaks made

Issued November 2011

Final standard issued May

2014

Effective date of new

standard 1 January 2017

IFRS 15 Issued May 2014Effective 1 January 2017


A principles-based standards

IFRS 15 is a new principles-based revenue recognition standard

IFRS 15 is almost completely converged with US GAAP

IFRS 15 supersedes IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31

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Who will be affected and to what extent?

For some entities – timing of revenue and profit recognition may be significantly affected

For most entities – need to consider impact on existing systems and processes

Don’t underestimate implementation / transition and disclosure challenges


The ‘five step’ approach

A company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or

services

Core principle

Steps in applying the core principle

Identify the

contract(s)

with

the customer

Identify the

performance

obligations in

the contract

Determine

the

transaction

price

Allocate the

transaction

price

Recognise

revenue when

or as a

performance

obligation is

satisfied

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Step 1 – Identify the contract(s) withthe customer

• A contract creates enforceable rights and obligations

• It may be written, verbal, or implied by customary business practice

• A contract must have commercial substance

• It must be more likely than not that an entity will collect consideration from the customer

• It may be necessary to combine two or more contracts entered into at or near the same time with the same customer and account for them as a single contract

• As a practical expedient, an entity may apply the standard to a portfolio of contracts with similar characteristics

• IFRS 15 also provides guidance on contract modifications

Identify the

contract(s)

with

the customer

Identify the

performance

obligations in

the contract

Determine

the

transaction

price

Allocate the

transaction

price

Recognise

revenue when

or as a

performance

obligation is

satisfied


Step 2 – Identify the performance obligations in the contract

• A contract may contain one or more performance obligations ie, promises to transfer what are known as ‘distinct’ goods or services to a customer

• It is often necessary to break individual contracts down into a series of ‘distinct’ goods and services

• Goods and services are ‘distinct’ if:

– the customer can benefit from the good or service on its own or together with other resources

that are readily available to the customer ie, the goods or services are capable of being distinct;

and

– the entity’s promise to transfer the goods or services to the customer is separately identifiable

from other promises in the contract ie, the goods or services are distinct in the context of the

contract

Identify the

contract(s)

with

the customer

Identify the

performance

obligations in

the contract

Determine

the

transaction

price

Allocate the

transaction

price

Recognise

revenue when

or as a

performance

obligation is

satisfied

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Step 3 – Determine the transaction price

• An entity must consider the terms of the contract and its customary business practices to determine the transaction price

• In many cases it will simply be the price specified by the contract, excluding any amounts collected on behalf of third parties such as sales taxes

• While the transaction price will usually be easy to determine when it is a fixed amount at the time of sale, it will be more complicated in other cases, for example when the amount could vary in the future based on contract terms or if consideration is in forms other than cash

• The transaction price is adjusted for the time value of money when a contract contains a significant financing component

• The transaction price is not otherwise adjusted for collectability

Identify the

contract(s)

with

the customer

Identify the

performance

obligations in

the contract

Determine

the

transaction

price

Allocate the

transaction

price

Recognise

revenue when

or as a

performance

obligation is

satisfied


Step 4 – Allocate the transaction price

• When a contract contains more than one performance obligation, it will be necessary to allocate the transaction price to each of these

• This is usually done in proportion to the stand-alone selling price of the goods or services underlying each performance obligation

• If a stand-alone selling price is not directly observable, it should be estimated by considering all information that is reasonably available

• The standard specifies that an entity should allocate a discount to all promised goods or services in the contract unless the entity has observable evidence that the discount relates to one or more, but not all, performance obligations in the contract

• The standard also contains guidance on whether variable consideration should be allocated to the entire contract or to specific parts thereof

Identify the

contract(s)

with

the customer

Identify the

performance

obligations in

the contract

Determine

the

transaction

price

Allocate the

transaction

price

Recognise

revenue when

or as a

performance

obligation is

satisfied

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Example

• An entity offers a 'free' phone with a standalone selling price of £200 to a customer who signs a two-year contract paying £30 a month or £720 in total over the life of the contract for telecoms services

• The standalone selling price of the telecoms services is estimated as £25 a month or £600 in total over the life of the contract

• Under its current practice the entity recognises no revenue upfront and simply recognises £30 a month over the life of the contract

• Under the new standard the entity would have to allocate the total revenue to the phone and the telecoms services in proportion to their stand-alone selling prices

Current practice IFRS 15

Phone £0 recognised upfront £180 recognised upfront ie, (200/(600+200))*£720

Telecoms services Recognise £30 a month over the life of the

contract

The remaining £540 is allocated to the telecoms services & recognised at £22.50 a month over the

life of the contract


Step 5 – Recognise revenue when or as a performance obligation is satisfied

• Performance obligations are settled by transferring the goods or services to the customer

• This occurs when the customer obtains control of the goods or services ie, when the customer has the ability to direct the use of and obtain the benefits from the goods or services

• At the inception of the contract an entity will need to determine whether control is transferred – and revenue recognised – over time or at a point in time

Identify the

contract(s)

with

the customer

Identify the

performance

obligations in

the contract

Determine

the

transaction

price

Allocate the

transaction

price

Recognise

revenue when

or as a

performance

obligation is

satisfied

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Over time or at a point in time?

An entity recognises revenue over time if one or more of the following criteria is met

The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs

The entity’s performance creates or enhances an asset that the customer

controls as the asset is created or enhanced

The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to

payment for the performance completed to date

Otherwise revenue is recognised at the point in

time when control is transferred to the customer

The entity has a present right to payment for the asset

The customer has legal title to the asset

The entity has transferred physical possession of the asset

The customer has the significant risks and rewards of ownership of the asset

The customer has accepted the asset


Also provided

• Application Guidance (within the standard – appendix B)

– 17 pages

• Illustrative examples

– 83 pages (!)

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IFRS 9Financial Instruments: recognition and measurement


Financial instruments

Project phase Exposure draft Status / next steps

1a. Classification & measurement of financial assets

Jul 2009 IFRS 9 published in Nov 2009

Redeliberations on-going

1b. Classification &measurement of financial liabilities

May 2010 Added to IFRS 9 in Oct 2010

2. Impairment Original ED in Nov 2009

Supplement in Jan 2011

Second ED in Mar 2013

Finalised deliberations in Feb 2014

Added to IFRS 9 in July 2014

3a. General hedge accounting

Dec 2010 Added to IFRS 9 in Nov 2013

3b. Macro hedge accounting

De-coupled from IFRS 9 project in May 2012

Discussion paper issued in April 2014 (Comments by Oct 2014)

X

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Introduction

IAS 32

Presentation (1995)

Accounting for financial instruments

IAS 39

Recognition

and

measurement

(1998)

IFRS 7

Disclosures

(2005)

IFRS 9

Recognition

and

measurement

(2009-2018)


Transition

• When does IFRS 9 become mandatory?

– Annual periods beginning on or after 1 January 2018

– Early adoption permitted but

– Cannot early adopt earlier editions of IFRS 9 after 1 February 2015

– After 1 February 2015 then all provisions of the standard must be adopted

– Full retrospective application on adoption but

– Restatement of comparatives is not required but is permitted if it can be done without the benefit of hindsight

– If comparatives are not restated the opening balance of its retained earnings should be adjusted

– Operational simplifications exist to ease retrospective application

– Applied at the date of initial application which must be the beginning of a reporting period after the standard is issued

– Due to phased implementation, this could result in more than one date of initial application

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Transition

• Entities that have applied IFRS 9 (2009), IFRS 9 (2010) or IFRS 9 (2013) early

– Apply transition rules at relevant date of initial application

– However the transitional provisions can only be applied once

– Ability to review designations of financial assets and liabilities to

FVTPL


Held to maturity

Long-term

Fixed maturity

Positive intent & ability

At FV through P/L

Short-term

Held for trading

Available for sale

Medium to long-term

Sell as and when

Initial measurement

Subsequent measurement

Fair value

Include transaction costs

Fair value

Exclude transaction costs

Amortised cost

Fair value with gains & losses to OCI

Fair value with gains & losses to profit or loss

Loans & receivables

Fixed or determinable payments

Not quoted in an active market

IAS 39

Financial assets – a quick reminder

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Financial assets – new model summary

All other instrumentsEquities, derivatives & some hybrid contracts

+

No bifurcation

Reclassification required where business model changes

Fair value through P&L

Fair value option

Accounting mismatches only

Option to take gains & losses to OCI for equities

No recycling

Contractual cash flow characteristics

Business model test

+

Hold to

collect

Hold to

collect

and sell

Amortised

cost

Fair value

through

OCI

IFRS 9


• Factors to consider:

– The way assets are managed

– How performance is reported

– How management are compensated

– Frequency, timing and volume of

sales in prior periods

– Expectations of future sales activity

– Why past and future sales have or

will be made

• Sales in ‘stress case’ scenarios do not disqualify hold to collect

• Entity forced by regulator to routinely sell significant volumes to demonstrate liquidity of assets will fail hold to collect business model

Contractual cash flow

characteristics

Business model test

+

IFRS 9

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• Principal

• Interest in principal outstanding

• Time value of money

• Credit risk

• Leverage / multiples

• Non-financial variables

• Conversion features

Contractual cash flow

characteristics

Business model test

+

Do contractual cash

flows represent solely

payments of principal

and interest (SPPI)?

4

44

45555

5555

5555

IFRS 9


Equity instruments

All other instruments

Equities, derivatives & some hybrid contracts


Option to take gains

& losses to OCI for equities

No recycling

Is the instrument held for trading?

Does the instrument meet the definition of equity in its entirety under IAS 32?

Has the entity

elected fair value through OCI

No

No

NoYes

Yes

Yes

• Election made at initial recognition

• Election is irrevocable

IFRS 9

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Financial liabilities

Retain IAS 39 measurement requirements

Held for trading

Vanilla liabilities

Hybrid instruments


Amortised cost

Bifurcation

Maintain fair value option – but with one amendment regarding ‘own credit risk’

IFRS 9


Impairment

Incurred loss model

• Currently used by IAS 39

• Credit losses are recognised only if an event has occurred that has a negative effect on future cash flows & that effect can be reliably estimated

• An entity is not permitted to consider the effects of future expected losses

The challenge

• ‘Financial meltdown’

• ‘Too big to fail’

• ‘Cliff effect’• ‘Risk taking’

• ‘Unrealised v realised profits’

• ‘Complex disclosures’

• ‘G20, Governments and politics’

• ‘Bonus culture’

Expected loss model

• Proposed way forwards

• Requires an entity to make an ongoing assessment of expected credit losses

• Will require earlier recognition of credit losses in many cases

IFRS 9

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Concerns from philosophy and psychology (!)

• Optimism/pessimism paradigm

– How do we feel v supportable estimation modelling

– Use of judgement

– Media impact - an understand (ability) problem

• Game theory

– Jump before they jump to market lead?


IASB’s approach v FASB’s approach

• Fundamental difference in views

• ‘Complexity v ‘Simplicity’

• ‘Prudence’ v ‘Reality’

• IASB fieldwork in 2013

– Portfolios excluding mortgages

– IAS 39 to IFRS 9 predicts increase in loss allowance of 25-60%

– IAS 39 to FASB model predicts increase in loss allowance of 50-140%

– Mortgage portfolios

– IAS 39 to IFRS 9 predicts increase in loss allowance of 30-250%

– IAS 39 to FASB model predicts increase in loss allowance of 130-730%

– Caveat – only 15 companies took part in the survey

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How will impairment provisions change?


Expected loss model…

• On initial recognition • Interest revenue

calculated on gross carrying amount

• Lifetime losses from default inside 12 months weighted by probability of default in 12 months

Stage 1

• If more than insignificant deterioration in credit quality & likelihood of loss event reasonably possible

• Interest revenue calculated on gross carrying amount

• Lifetime expected loss allowance

Stage 2

• If deteriorate to credit-impaired

• Interest revenue calculated on net carrying amount

• Lifetime expected loss allowance

Stage 3

IFRS 9

Performing Underperforming Non-performing

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Scope exclusions

• Includes both originated and purchased credit-impaired assets

• Outside of scope of the above model

• Use credit adjusted effective interest rate

• No day 1 allowance balance

• No day 1 impairment loss recognised

• Allowance balance represents changes in lifetime loss expectations

• Consistent with IAS 39 (AG5)

Financial assets credit impaired on initial recognition

• Practical expedient to enable entities to calculate losses using certain current practices eg, group receivables by age and applying historical loss rates

• Implied application to non-financial services entities

• Recognition of full lifetime expected loss on a matrix model basis

Trade receivables without a significant financing

component

IFRS 9


Low credit risk

• If the credit risk is determined to be low at the reporting date

– Impairment can be measured using 12-month ECL

– Presumption that no significant increase in credit risk has occurred

There is a low risk of default

Borrower has strong capacity to meet obligations in

the short term

Adverse changes in economic or

business conditions

in the longer term wont necessarily reduce ability to fulfil obligations

• Risk is evaluated without consideration of collateral

• Not considered low risk just through comparison to entity’s other instruments or the jurisdiction in which the entity operates

• Internal ratings are permitted providing consistent with a global rating

definition of ‘investment grade’

• If no longer ‘low risk’ it does not automatically move to Stage 2

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Stage 1 – clarity

• An entity calculates ‘12 month expected credit losses’ by multiplying the probability of a default occurring in the next 12 months by the total lifetime credit losses that would result from that default

• They are NOT the expected cash shortfalls over the next twelve months

• They are NOT the credit losses on instruments that are forecast to default in the next twelve months.

– If they are identified as such then they would either be stage 2 or 3

or would have been credit impaired on initial recognition

IFRS 9


Stages 2 and 3 - clarity

• Stages 2 and 3 require lifetime expected credit losses to be recognised

• Stage 2 – no objective evidence of impairment and with interest revenue based on gross amount

– Viewed as underperforming

• Stage 3 – objective evidence of impairment and with interest revenue based on the net amount

– Viewed as non-performing

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Moving between stages - clarity

• Moving from stage 1 to stage 2 or 3

– Significant deterioration in the credit quality since initial recognition

considering the term of the asset and the original credit quality

– If above ‘investment grade’, credit risk determination is not

required

– ‘Simplification’ of initial approach but judgement still required

• Moving from stage 2 or 3 back to 1

– Permitted

– Originated and purchased non-credit-impaired would be moved

back up when the downward transfer notion is no longer satisfied


Significant increase in credit risk

• Change in the risk of a default occurring over the expected life

• Compare risk of default at reporting date to risk of default at initial

recognition date

• If a probability of default method is used then it should be lifetime PD but a 12-month PD can be used if not expected to give a different result

– Consider payment obligation profile, payment holidays, credit related factors which only impact beyond 12 months

• Ignore impact of collateral when

making assessment of increasing risk

– However, include for calculation of loss

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• Using reasonable and supportable information available without undue cost or effort

• A ‘principles based’ approach

– Multifactor and holistic approach

– Relevance and weight of any factor will be determined by:

– Product type

– Instrument characteristics

– Geographical region

• IASB confirmed throughout the development process that the information needed should include:

– Probabilities of default

– Pricing information

– Credit ratings and other qualitative inputs

IFRS 9


Source of information for credit risk

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• The following indicators were identified:

– Change in internal price indicators of credit risk

– Change in credit spread, rates, terms, collateral, guarantees or covenants if issued now

– Changes in market indicators of credit risk

– Change in credit spread, credit default swap price, fair values below amortised cost value, changes in the prices of borrowers other instruments

– Change in externally or internally derived credit rating of borrower

– Change in general economic or market conditions, regulatory or technology environment of the borrower

– Change in actual or expected performance of the borrower

– Values of underlying collateral

– Changes in guarantee quality

– Change in the loan documentation

– Change in credit risk management

Rebuttable PresumptionCredit risk has increased

significantly when contractual payments are more than 30

days past due


Measurement of expected credit losses

Expected credit losses are a probability weighted estimate of the present value of all cash shortfalls

discounted at the original effective interest rate over

the expected life of the financial instrument

• An entity should measure in a way that reflects:

– An unbiased and probability weighted

amount that is determined by evaluating

a range of possible outcomes;

– The time value of money; and

– Reasonable and supportable information

that is available without undue cost or

effort at the reporting date about past

events, current conditions and forecasts

of future economic conditions

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Disclosures relating to ECL

• Qualitative

– Inputs, assumptions and

estimation techniques

used

– For estimating ECL

– To determine significant

increases in credit risk and

default

– To determine credit

impaired assets

– Write off policies, modification policies and collateral

• Quantitative

– Reconciliation of

opening to closing

amounts showing key

drivers of change

– Loss allowance

– Gross amounts

– Gross amounts by credit risk grade

– Write offs, recoveries and modifications


Challenges

Strategic

• Impact on Capital

• Impact on earnings stability and other KPIs

• Managing stakeholders’ and market expectations

Tactical

• Define indicators and thresholds for stage migration, especially between stages 1 and 2

• Define and identify key information to bridge current models to multi-year EL requirements

• Align with peer group

Operational

• Data availability

• Data quality

• Financial reporting

• Management reporting

• Regulatory reporting

• Impact on IT systems (model on model)

• Disclosure information

IFRS 9

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Hedging

Not linked to common risk management practices

Detailed rules make achieving hedge accounting impossible or very costly

IAS 39 Aligns hedge

accounting more closely with risk management

More principles-based

IFRS 9

��

IFRS 9


Achieving, continuing & discontinuing hedge accounting

Achieving hedge accounting

Continuing hedge accounting

Discontinuing hedge accounting

• Quantitative hedge effectiveness assessment

• Must expect to be 80-125% effective

• Qualitative, forward-looking hedge effectiveness assessment

• No arbitrary ‘bright line’

• Retrospective effectiveness test

• Must be 80-125% effective

• No retrospective test• Hedging relationship may

need to be ‘rebalanced’

• Must discontinue if cease to meet qualifying criteria

• Voluntary termination allowed

• Must discontinue if cease to meet qualifying criteria

• Voluntary termination prohibited

IFRS 9

IAS 39 IFRS 9

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Hedging

Hedging instrument

Designated derivative or other financial asset or liability whose fair value or cash flows are expected to offset changes in the fair value of the designated hedged item

Most often a derivative

Hedged item

An asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that exposes the entity to risks of changes in fair value or future cash flows and is designated as being hedged

Gains and losses on hedged items and hedged instruments can be accounted for under hedge accounting rules provided the hedging relationship is formally designated & documented and expected to be highly effective.

IAS 39 \ IFRS 9


Fair Value Hedge Hedge of fair value of a recognised asset or liability

Hedging types

Cash Flow Hedge Hedge of cash flow volatility associated with a recognised asset or liability

IAS 39 \ IFRS 9

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Fair Value Hedge Hedge of fair value of a recognised asset or liability or unrecognised firm commitment

Hedging types

Cash Flow Hedge Hedge of cash flow volatility associated with a recognised asset or liability or highly probable forecast transaction

IAS 39 \ IFRS 9


Fair Value Hedge Hedge of fair value of a recognised asset or liability or unrecognised firm commitment

Hedged item & hedging instrument re-measured to fair value via profit or loss

Outcome is that gains & losses on hedged item and hedged instrument matched in P/L in same period

Hedging types

Cash Flow Hedge Hedge of cash flow volatility associated with a recognised asset or liability or highly probable forecast transaction

Effective gain or loss on hedging instrument to equity until hedged item affects profit or loss

IAS 39 \ IFRS 9

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XYZ plc owns stocks of 28,000 gallons of oil which cost £500,000 on 1.12.20X3. In order to hedge the fluctuation in the market value of the oil the company signs a futures contract to deliver 28,000 gallons of oil on 31.3.20X4 at the futures price of £20 per gallon.The market price of oil on 31.12.20X3 is £21 per gallon and the futures price for 31.3.20X4 delivery is £23 per gallon.How would this be accounted for if the derivative did notqualify for hedge accounting?What if it did qualify for hedge accounting?

Hedging a recognised asset – fair value hedge

IAS 39 \ IFRS 9


31.12.X3

Inventory – no hedge accounting

Derivative

Re-measure to fair value

Loss of 28,000 * (23-20) = £84,000

Measure at cost

Gain recognised when sold

Loss

Gain

Mismatch


IAS 39 \ IFRS 9

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31.12.X3

Inventory – hedge accounting

Derivative


Loss of 28,000 * (23-20) = £84,000


Gain of (28,000 * 21) – 500,000 = £88,000

Loss

Net profit or loss impact is £4,000.

Gain


IAS 39 \ IFRS 9


An entity expects to have to undertake repairs to a ship next year due to changing regulations. It is uncommitted to this transaction but it is highly probable that the work will be undertaken.The repair work will be undertaken in Singapore at a cost of S$60 million and therefore the entity is exposed to movements in the exchange rate. It therefore enters into a futures contract, buying forward S$60 million at a rate of £1 = S$3.

The futures price on 31.12.X3 (the company’s year end) is $3.25.

How would this be accounted for if the derivative did not qualify for hedge accounting?What if it did qualify for hedge accounting?

Hedging a highly probable forecast transaction – cash

flow hedge

IAS 39 \ IFRS 9

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31.12.X3

Highly probable forecast transaction

Derivative


Loss of S$60m/3.00 - S$60m/3.25 = £1,538,462

Not on statement of financial position

Gain recognised when paid

Loss

Gain

Mismatch


flow hedge

IAS 39 \ IFRS 9


31.12.X3

Highly probable forecast transaction

Derivative – hedge accounting

Re-measure to fair value but gain or loss deferred in equity

Loss of S$60m/3.00 - S$60m/3.25 = £1,538,462

Not on balance sheet

Gain recognised when paid

Loss

Gain

Gain and loss

recognised in the same accounting period.


flow hedge

IAS 39 \ IFRS 9

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IFRS 7


Financial instruments – disclosures

IFRS 7

• Detailed statement of financial position disclosures including

– For each category of financial asset & financial liability

– Carrying amount

– Related fair value

– Amount & reason for any reclassification

– Additional detailed risk disclosures if any loans & receivables or financial liabilities are measured at fair value through profit or loss

– Methods & assumptions used to determine fair values for different classes of financial asset & financial liability

– Derecognition

– Collateral

– Allowances for credit losses

– Compound instruments with multiple embedded derivatives

– Defaults and breaches

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IFRS 7

• Detailed profit or loss and equity disclosures including

– For each category of financial asset & financial liability

– Income, expenses, gains and losses

– Net gains and losses

– Amount of impairment loss

– Total interest income

– Fee income and expenditure

– Financial assets and liabilities not through profit or loss

– Trust and other fiduciary activities

– Interest income on impaired financial assets



IFRS 7

• Detailed other disclosures including

– Details of accounting policies

– Hedge accounting

– Qualitative & quantitative risk disclosures (HSBC discloses 53 pages on this alone!)

– Credit risk

– Liquidity risk

– Market risk

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IFRS 13 Fair value measurement


A new definition of fair value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Based on exit price rather than entry price, regardless of whether the entity plans to hold or sell the asset

Principal or most advantageous marketHighest and best use

IFRS 13

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A fair value hierarchy

The hierarchy categorises the inputs used in valuation techniques into

three levels

1. Quoted market prices for identical assets or liabilities in

active market

eg, unadjusted quoted market prices for traded securities

2. Directly or indirectly observable inputs other than market

prices within level 1

eg, quoted prices for similar assets or liabilities in active markets

3. Unobservable inputs

eg, use the best information available in the circumstances

Fair value measurement is categorised in its entirety in the level of the

lowest level input that is significant to the entire measurement

IFRS 13


Determining fair value

• Consistent with unit of account

Identify asset or liability being

measured

• No adjustment for transaction costs

• Based on current market conditionsUse exit price

• Principal market is market with greatest volume and level of activity

• If no principal market use price in most advantageous market

Principal or most advantageous

market

IFRS 13

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Valuation techniques

Maximise the use of relevant observable inputs and minimising the use

of unobservable inputs

market approach

cost approach

income approach

uses prices and other relevant information generated by market transactions involving identical or similar assets, liabilities or a group of assets and liabilities

reflects the amount that would be required currently to replace the service capacity of an asset i.e., current replacement cost

converts future amounts (eg, cash flows or income and expenses) to a single current amount reflecting current market expectations about those future amounts.

IFRS 13


The package of “five” standards

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The IASB ‘consolidations’ project

All five standards must be adopted at the same time

IAS 27 Consolidated and separate financial statementsSIC 12 Consolidation – special purpose entities

IAS 28 Investments in associatesSIC 13 Jointly controlled entities –non-monetary contributions by venturers

IAS 31 Interests in joint ventures

IFRS 10 Consolidated financial statements

IAS 28 Investments in associates and joint ventures

IFRS 11 Joint arrangements

IAS 27 Separate financial statements

IFRS 12 Disclosure of interests in other entities

Before After


IFRS 10 Consolidated Financial Statements

Out with the old…

IAS 27

SIC 12

Focus on control =Power to govern the financial and

operating policies+

Obtain benefits

Focus on risks and rewards =Majority of benefits or

majority of residual risks

IFRS 10

Focus on control =

1. Power from existing rights+

2. Exposure to variable returns+

3. Link between power and returns

Single basis applies to voting interests and SPEs

�� more judgement

…and in with the new

IFRS 10

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Guidance on identifying ‘power’

• Activities that affect returns• Examples: operating/financing policies and

appointment/remuneration of key managementRelevant activities

• Practical ability to exercise rights• Distinguish substantive from protective rightsSubstantive rights

• Majority – as before• Minority – consider ‘de facto’ control

Existing rights from votes

• Practical ability to act unilaterally• Existence of special relationship

• Exposure to risk/reward

Existing rights from other than votes

IFRS 10


Classification of joint arrangements

IFRS 11 focuses on economic rights and obligations…

Joint ventureJoint operation

A joint operation is 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.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Assets xLiabilities x

Net assets x

Revenue xExpenses x

Net income x

IFRS 11

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Accounting for joint ventures & joint operations

Not structured through a separate vehicle

Structured through a separate vehicle

Accounting for assets, liabilities, revenues and expenses in

accordance with the contractual arrangement

Equity method

Joint operation

No option

Joint venture

Consider the legal form, the terms of the contractual arrangement and, if

relevant, other facts and circumstances

IFRS 11


Disclosure – IFRS 12

• Subsidiaries• Joint arrangements

• Associates• Unconsolidated structured entities

Scope

• How is ‘control’ decision based on evidence?

• Consolidated, but interest < 50%

• Not consolidated, but interest > 50%

More explanation of judgements

• Include if ‘sponsored’

• Extensive qualitative and quantitative disclosures

Unconsolidated structured

entities

IFRS 12

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Any questions

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