ifrs update 2016 - kpmg international uae... · 2 agenda ifrs training introduction ifrs 16 leases...

15 & 18 December 2016Yusuf Hassan

IFRS Update 2016

2

Agenda IFRS training

Introduction

IFRS 16 Leases

IFRS 15 Revenue from Contracts with Customers

Amendments in 2016

3© 2016 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All

rights reserved. Printed in the United Arab Emirates. The KPMG name, logo and are registered trademarks or trademarks of KPMG International.

IFRS 16 Leases



The $3 trillion standard

4

“One of my great

ambitions before I die is

to fly in an aircraft that

is on an airline’s

balance sheet…”

Sir David Tweedie

April 2008

“Listed companies are

estimated to have

US$3.3 trillion of lease

commitments, over 85%

of which do not appear

on their balance

sheets…”

Hans Hoogervorst

January 2016





Most companies lease assets

Why is this important?

Under IFRS 16, lessees will bring leases on balance sheet.

New lease definition becomes the new on/off-balance sheet test.

Changes many financial ratios.

Your stakeholders/investors will want to understand the

impact on your business.





1. Overview and impact

2. The critical definition

3. Lessee accounting

4. Lessor accounting

5. Other topics

5.1 Sale and Leaseback transactions

5.2 Subleases

5.3 Investment Property

5.4 Lease modifications

6. Disclosures

7. Effective date and transition

8. Your next steps

9. Tax and restructuring impacts

AgendaKPMG

Insights



Overview and Impact



Objectives:

Require lessees to recognise all significant leases on-balance sheet

Eliminate arbitrary accounting distinctions for transactions that are

economically similar

Reduce complexity in lease accounting

Develop converged lease accounting requirements

Overview – Project timeline

JANUARY

2019

JULY 2006

Discussion Paper

Issued

Second Exposure

Draft IssuedProject added to Boards’

agendas

Final standard

issued

Q1 2016MARCH 2009 MAY 2013AUGUST 2010

First Exposure Draft

IssuedEffective

date

31 DECEMBER

2019

First annual financial

statements under

IFRS 16

…but

Why ?



Lessees face major changes

Balance sheet

Asset

Liability

= ‘Right-of-use’ of underlying asset

= Obligation to make lease payments

Leases ‘On Balance Sheet’

P&L

Depreciation

+ Interest

= Front-loaded total lease expense

Lease expense



Sir David Tweedie’s aircraft

10

Five year lease of an aircraft

CU1,000,000 per annum due at 31 Dec

No renewal no purchase option

Discount rate: 7%

Aircraft useful life: 20 years



Journal entries

11

1 January 20X1 Debit (CU) Credit (CU)

ROU asset (present value of 5 x CU1,000,000 @ 7%) 4,100,000

Lease liability 4,100,000

31 December 20X1

Depreciation expense (CU4,100,000/5) 820,000

ROU asset 820,000

Interest expense (CU4,100,000 * 7%) 287,000

Lease liability 713,000

Cash 1,000,000

Total P&L expense 1,107,000



70,236 70,236 70,236 70,236 70,236 70,236 70,236 70,236 70,236 70,236

49,165 45,607 41,799 37,725 33,366 28,701 23,710 18,370 12,656 6,542

119,401 115,842

112,035 107,961

103,602 98,937 93,946

88,606 82,892

76,778

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1 2 3 4 5 6 7 8 9 10

CO

MP

AN

Y’S

E

XP

EN

SE

IN

$

YEAR

LEASE ACCOUNTING P&L IMPACT

Depreciation expense under new standard

Interest expense under new standard

RENTAL

EXPENSE

UNDER

CURRENT

STANDARD

ASSUMPTIONS:

1. 10 YEAR LEASE

2. RENT OF $100,000 PER

ANNUM

3. DISCOUNT RATE OF 7%

Impact on P&L – IFRS 16 vs IAS 17



Computation – LiabilityBalance at beginning

of the yearInterest

Payment

(deduction)

Balance at end of

the year

T0 $702,358 $0 $0 $702,358

T1 $702,358 $49,165 -$100,000 $651,523

T2 $651,523 $45,607 -$100,000 $597,130

T3 $597,130 $41,799 -$100,000 $538,929

T4 $538,929 $37,725 -$100,000 $476,654

T5 $476,654 $33,366 -$100,000 $410,020

T6 $410,020 $28,701 -$100,000 $338,721

T7 $338,721 $23,710 -$100,000 $262,432

T8 $262,432 $18,370 -$100,000 $180,802

T9 $180,802 $12,656 -$100,000 $93,458

T10 $93,458 $6,542 -$100,000 ($0)



Balance sheet under current

IAS 17Inception Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Assets - - - - - - - - - -

Liabilities - - - - - - - - - -

Balance sheet under IFRS 16

Right of use asset $702,358 $632,122 $561,887 $491,651 $421,415 $351,179 $280,943 $210,707 $140,472 $70,236 $0

Lease liability ($702,358) ($651,523) ($597,130) ($538,929) ($476,654) ($410,020) ($338,721) ($262,432) ($180,802) ($93,458) $0

Net equity $0 ($19,401) ($35,243) ($47,278) ($55,239) ($58,841) ($57,778) ($51,724) ($40,330) ($23,222) $0

Presentation Balance Sheet



Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Income statement under IAS 17

Operating lease expense 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

Income statement under IFRS 16

Amortization expense $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236

Interest expense $49,165 $45,607 $41,799 $37,725 $33,366 $28,701 $23,710 $18,370 $12,656 $6,542

Total expense $119,401 $115,842 $112,035 $107,961 $103,602 $98,937 $93,946 $88,606 $82,892 $76,778

Presentation – Income statement




Cash flows as per IAS 17

Operating cash flows(100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)

Cash flows under IFRS 16

Cash flow from financing activities(50,835) (54,393) (58,201) (62,275) (66,634) (71,299) (76,290) (81,630) (87,344) (93,458)

Cash flow from financing/operating(49,165) (45,607) (41,799) (37,725) (33,366) (28,701) (23,710) (18,370) (12,656) (6,542)

Total cash outflow(100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)

Presentation – Cash flow statement



Balance sheet under current IAS 17 Inception Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Assets - - - - - - - - - -

Liabilities - - - - - - - - - -

Balance sheet under IFRS 16

Right of use asset $702,358 $632,122 $561,887 $491,651 $421,415 $351,179 $280,943 $210,707 $140,472 $70,236 $0

Lease liability ($702,358) ($651,523) ($597,130) ($538,929) ($476,654) ($410,020) ($338,721) ($262,432) ($180,802) ($93,458) $0

Net equity $0 ($19,401) ($35,243) ($47,278) ($55,239) ($58,841) ($57,778) ($51,724) ($40,330) ($23,222) $0


Income statement under IAS 17

Operating lease expense 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000

Income statement under IFRS 16

Amortization expense $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236 $70,236

Interest expense $49,165 $45,607 $41,799 $37,725 $33,366 $28,701 $23,710 $18,370 $12,656 $6,542

Total expense $119,401 $115,842 $112,035 $107,961 $103,602 $98,937 $93,946 $88,606 $82,892 $76,778

Difference (19,401) (15,842) (12,035) (7,961) (3,602) 1,063 6,054 11,394 17,108 23,222

Presentation Summary



Impact on balance sheet

Companies with operating

leases will appear to be more

asset-rich, but also more

heavily indebted

Asset Liability



Total lease expense will be

front-loaded even when cash

rentals are constant

Impact on profit/loss

Depreciation Interest

Cash rental payments



Impact on financial ratios

GearingEBITDA

EPS

(in early years) Net assets

Interest cover

Asset turnover

Total assets

RatiosProfit/loss Balance sheet



Key impacts

New estimates

and judgments

Balance sheet

volatility

Changes in contract

terms and business

practices

New systems and

processes

Some impacts cannot

yet be quantified

Transition

considerations

Communication with

stakeholders will require

careful consideration

Identifying all lease

agreements and

extracting lease data

Changes in financial

metrics



Industry impacts in the UAE

Schools

BanksAirlines

Power and Utilities Shipping & logistics

Retail

All industries, but especially:



The critical definition



OFF

Lease definition [1/2]

Current standard

New standard

Operating

lease

Service

Finance

lease

Lease

The new on/off-balance sheet test for lessees – a key judgement area

ON

Lease

classification

test



A contract is, or contains, a

lease if the contract conveys

the right to control the use of

an identified asset

Lease definition [2/2]

Identified assets?

Lessee obtains the economic

benefits?

Lessee directs the use?

Contract is or contains a lease

Contract does

not contain

a lease

Yes

Yes

Yes

No

No

No



The new definition increases

focus on who controls the

asset and may change which

contracts are leases

Lease definition – Control

?Lease

Not a lease

Expect

changes in

definition

from current

practice



Example: Supply contract

27

Manufacturer S5-year contract

Contract specifies using plant P to supply components. Plant P

S will operate the plant and charge a cost plus price to B.

There is no prohibition to sell to other customers and it is remote that other customers will take any of the production.

Company B



Example: Supply contract solution

28

IFRIC 4 ContractSpecific

assetRight to

useLease+ + =

IFRS 16 ContractIdentified

asset

Substantially all of the economic benefits

Directing right to

useLease+ + + =



Comparing IFRS 16 and IFRIC 4

29

IFRIC 4

IFRS 16

Contract Asset

Operating asset or controlling access & > insignificant amount of output

orsubstantially all of the output and specific pricing

Substantially all of the economic benefits &directing the right of use



Capacity portions

30

Physically distinctNot physically distinct:

Substantially all of total capacity?

Can be identified asset No identified asset

Yes No



Lease definition – Identified assets

Identified assets?

Explicitly specified

Implicitly specified

Lessor has practical

ability to substitute the

asset

Lessor benefits

economically from

substituting the asset

and

or

However…



Example

Kiosk space in a Mall

Leasing of fiber optic cable

Reservation of bus seat

Key tenant



Example - Substantive substitution rightsCompany L, a lessee enters into a five year contract with a freight carrier (Lessor M)

to transport a specified quantity of goods.

M uses rail cars of a particular specification, and has a large pool of similar rail cars that can be used to fulfil the

requirements of the contract.

The rail cars and engines are stored at M’s premises when they are not being used to transport goods. Costs

associated with substituting the rail cars are minimal for M.

In this case because the rail cars are stored at M’s premises, it has a large pool of similar rail cars and

substitution costs are minimal, the benefits to M of substituting the rail car would exceed the costs of

substituting the cars. Therefore, M’s substitution rights are substantive and the arrangement does not contain a

lease.

Is there a specific asset?

Are the substitution rights substantive?

How could this transaction be a lease?



Lease definition – Economic benefits

A company assesses whether it has the rights to:

obtain substantially all of the

economic benefits from use of the

identified asset throughout the

period of use

direct the use of the

identified asset

and

‘economic benefits’ = Primary output, by products and other economic benefits that could be realized

commercially

Identified assets?

Lessee obtains the

economic benefits?


Contract is or contains a

lease

Economic benefits

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 35

+

=

25-year contract for

customised solar

panel output.

Supplier receives

renewable energy

credits.

2-years jet charter.

Share access and

use with another

party.

Car hire contract.

Limited to 20,000

miles per year and

inside country X.

Retail store

contract.

Rental = fixed

amount + 20% of

revenue.

Office contract.

Tenant sublets

25% of space.

Primary output

Other benefits

Substantially all

economic benefits

n/a n/a n/a



Lease definition – Right to direct the use

Who takes the ‘how and what purpose’ decisions?

Customer Predetermined Supplier

Further analysis is

required

Contract is or contains

a lease

Contract does not

contain a lease

customer has a right to

operate the asset –

without the lessor’s

intervention

customer designed the

asset in a way that

predetermines how and

for what purpose

or

Identified assets?

Lessee obtains the

economic benefits?


Contract is or contains a

lease



Example - Right to direct the use• Customer (C) enters into a contract with a manufacturer (M) to purchase a particular type, quality and quantity of

shirts for a three-year period. The type, quality and quantity of shirts are specified in the contract.

• M has only one factory that can meet the needs of C. M is unable to supply the shirts from another factory or

source the shirts from a third party supplier. The capacity of the factory exceeds the output for which C has

contracted (ie C has not contracted for substantially all of the capacity of the factory).

• M makes all decisions about the operations of the factory, including the production level at which to run the

factory and which customer contracts to fulfil with the output of the factory that is not used to fulfil C’s contract.

Is there an identified asset?

Is there a right of control of the use of the factory?



Example - Right to direct the use (cont’d) The contract does not contain a lease.

The factory is an identified asset. The factory is implicitly specified because M can fulfil the contract only

through the use of this asset.

C does not control the use of the factory because it does not have the right to obtain substantially all of the

economic benefits from use of the factory.

C also does not control the use of the factory because it does not have the right to direct the use of the factory.

C does not have the right to direct how and for what purpose the factory is used during the three-year period of

use. C’s rights are limited to specifying output from the factory in the contract with M. C has the same rights

regarding the use of the factory as other customers purchasing shirts from the factory. M has the right to direct

the use of the factory because M can decide how and for what purpose the factory is used (ie M has the right

to decide the production level at which to run the factory and which customer contracts to fulfil with the output

produced).

Either the fact that C does not have the right to obtain substantially all of the economic benefits from use of the

factory, or that C does not have the right to direct the use of the factory, would be sufficient in isolation to

conclude that C does not control the use of the factory.



Example - Right to direct the use• R contracts with S, a ship owner, for the transport of cargo from Dubai to Jeddah on an identified ship.

• The contract details the cargo to be transported on the ship and the dates of pick-up and delivery.

• The cargo will occupy substantially all of the capacity of the ship.

• S operates and maintains the ship and is responsible for the safe passage of the cargo on board the ship.

• R is prohibited from hiring another operator for the ship during the term of the contract or operating the ship

itself.

R does not have the right to control the use of the ship because it does not have the right to direct its use.

How and for what purpose the ship is used – i.e. the journey from Dubai to Jeddah transporting specified cargo

– is predetermined in the contract.

R does not have the right to operate the ship and did not design the ship in a way that predetermined how and

for what purpose it would be used.

R has the same rights regarding the use of the ship as if it were only one of many customers.

Therefore, the contract does not contain a lease.

Does R direct the right to use the asset?



• Customer T enters into a five-year contract with Company U, a ship owner, for the use of an identified ship.

• T decides whether and what cargo will be transported, and when and to which ports the ship will sail throughout

the period of use, subject to restrictions specified in the contract.

• These restrictions prevent T from sailing the ship into waters at a high risk of piracy or carrying explosive

materials as cargo.

• U operates and maintains the ship, and is responsible for safe passage.

T has the right to direct the use of the ship.

The contractual restrictions are protective rights that protect U’s investment in the ship and its personnel.

In the scope of its right of use, T determines how and for what purpose the ship is used throughout the five-

year period because it decides whether, where and when the ship sails, as well as the cargo that it will

transport.

T has the right to change these decisions throughout the period of use.

Therefore, the contract contains a lease.

Does T direct the right to use the asset?

Example - Right to direct the use



Right of use – Some insights

Some IAS 17 leases will not qualify as leases under IFRS 16

Under IAS 17, an arrangement could be a lease when the customer obtains substantially all of the output or other utility

even if the customer does not control the asset.

Under IFRS 16, a lease can only exist if the customer has BOTH the right to control the use of the identified asset and

obtain substantially all of the economic benefits from use of the asset.

When the ‘how and what’ decisions are predetermined, the ability to control the minor day-to-day operations may result

in a lease.

Protective rights usually define the rights but do not in isolation prevent the lessee’s control.



Example - Protective rights

• Lessee L enters into a two-year contract with Lessor M, an aircraft owner, for the use of an identified aircraft.

• The contract details the interior and exterior specifications for the aircraft. There are contractual and legal

restrictions in the contract on where the aircraft can fly.

• Subject to these restrictions, L determines where and when the aircraft will fly, and which passengers and

cargo will be transported on the aircraft. M is responsible for operating the aircraft, using its own crew.

The restrictions on where the aircraft can fly define the scope of L’s right to use the aircraft. In the scope of its

right of use, L determines how and for what purpose the aircraft is used throughout the two-year period of use

because it decides whether, where and when the aircraft travels, as well as the passengers and cargo that it

will transport.

L has the right to change these decisions throughout the period of use.

The contractual and legal restrictions on where the aircraft can fly are protective rights and do not prevent L

from having the right to direct the use of the asset.

Does L direct the right to use the asset?



Lease definition – Exemptions

Two major optional exemptions make the standard easier to apply

Leases of low

value items

Short term

leases

≤ 12 months ≤ USD 5,000 (suggested)

Election by class

of assets

Election on lease by lease basis

When exemption is applied, recognize the expense on a straight line basis over the lease term.



Example – Exemption• Lessee L enters into a 10-year lease of a machine to be used in manufacturing parts for a plane that it expects to

remain popular with consumers until it completes development and testing of an improved model.

• The cost to install the machine in L’s manufacturing facility is not significant. L and Lessor M each have the right

to terminate the lease without a penalty on each anniversary of the lease commencement date.

The lease term consists of a one-year non-cancellable period because both L and M have a substantive

termination right – both can terminate the lease without penalty – and the cost to install the machine in L’s

manufacturing facility is not significant.

As a result, the lease qualifies for the short-term lease exemption.

Short-term lease exemption applicable?



Example – ExemptionLessee B is in the pharmaceutical manufacturing and distribution industry and has the following leases:

leases of real estate: both office building and warehouse;

leases of office furniture;

leases of company cars, both for sales personnel and for senior management and of varying quality,

specification and value;

leases of trucks and vans used for delivery; and

leases of IT equipment such as laptops.

B determines that the leases of office furniture and laptops qualify for the recognition exemption on the basis

that the underlying assets, when they are new, are individually of low value.

B elects to apply the exemption to these leases. As a result, it applies the recognition and measurement

requirements in IFRS 16 to its leases of real estate, company cars, trucks and vans.

Is low value lease exemption applicable?



Lease and non-lease components [1/3]

If a contract is, or contains, a lease, then the company accounts for each separate lease

component, separately from non-lease components.

Step1: Identify the

components

Step 2: Account for the

components




Separate components Combine components

Can the customer benefit from the

using the underlying asset either on

its own or together with other

resources that are readily available?

Is the asset neither highly dependent

on, nor highly inter-related with, the

other assets in the contract?+

Yes No

A company considers the right to use an underlying asset as a separate lease component if

it meets the following criteria:

Step1: Identify the

components




Step 2: Account for

the components

Lessee Lessor

Observable stand-alone

price for each component

Unless practical expedient

is elected, separate and

allocate based on the

relative stand-alone price

Always separate and

allocate following the IFRS

15 approach

No observable stand-alone

price for some or all

components

Maximize the use of

observable information

Taxes, insurance on the

property and admin costs

Activities that do not transfer a good or service to the

lessee are not components in a contract

Practical expedient Combine lease and any

associated non-lease

components and account

for them as lease

components

N/A



Example - Lease and non lease components• Lessee L enters into a five-year contract with Lessor M to use an operating oil rig.

• The contract includes maintenance service provided by M and M obtains its own insurance for the oil rig.

• Annual payments are 2,000 (300 relate to maintenance services and 50 to insurance costs).

• L is able to determine that similar maintenance services and insurance costs are offered by third parties for 400

and 50 a year, respectively.

• L is unable to find an observable stand-alone rental amount for a similar oil rig because none is leased without

related maintenance services provided by the lessor.

In this case:

the observable stand-alone price for the maintenance services is 400;

there is no observable stand-alone price for the lease; and

the insurance cost does not transfer a good or service to the lessee and therefor is not a separate lease

component.

Therefore, L allocates 1,600 (2,000 – 400) to the lease component.

Can you identify lease and non lease components?



Lessee accounting



Lessee accounting

Balance sheet

Asset

Liability

= ‘Right-of-use’ of

underlying asset

= Obligation to make lease

payments

P&L

Depreciation

+ Interest

= Front-loaded total lease

expense

Lease expense



Measuring the lease liability

Key inputs

52

Present value of

expected

payments at end

of lease

Present value of

lease rentals +=Lease liability

Lease term Lease payments Discount rate



Initial measurement – Lease liability

Discount

rate

PV of lease payments over the lease term – includes:

Purchase options

Fixed payments

Term option penalties

Residual value

guarantees

Some variable lease

payments

Discount rate


The lessee’s incremental

borrowing rate

The rate implicit in the

lease, if readily availableOR

Discount rate Lease liability

(5 year lease @

CU10,000 per annum)

3% CU46,000

5% CU43,000

7% CU41,000

10% CU38,000

“Why is the

discount rate

important?”

Discount rate – rate implicit in the lease


Present value of lease

payments

Present value of

unguaranteed residual value

Fair value underlying asset

Initial direct costs

Lease term – example


Five year

lease of a

machine

CU10,000

annually at 31

Dec (current

market rate)

Option to

terminate after

12 months for

significant

penalty

Lessee uses the

machine to

manufacture car

parts, which it must

supply for 10 years

Significant

installation

cost

Option to renew

for two further

periods of 5

years, each at

market rate

Lease term? Lease liability*

1 year CU9,000

5 years CU41,000

10 years CU70,000

15 years CU91,000

“Why is the

lease term

important?”

* Based on 7% discount rate



Non-cancellable period

Optional renewal periods if lessee reasonably certain to exercise

Periods after optional termination date if lessee reasonably certain not to exercise

Lease term [1/2]

Lease

Term



Level of rentals in any secondary period

compared to market rates

Contingent payments

Renewal and purchase options

Costs relating to the termination of the

lease and the signing of a new

replacement lease

Returning costs of the underlying asset

Nature of item (specialised)

Location

Availability of suitable alternatives

Existence of significant leasehold

improvements

Lease term [2/2]

Contractual / Market Asset

Consider economic factors in estimating lease term



Lease term – example

59

Five year lease of a machine

CU10,000 annually at 31 Dec (current market rate)

Option to terminate after 12 months for significant penalty

Lessee uses the machine to manufacture car parts, which it must supply for 10 years

Significant installation cost

Option to renewfor two further periods of 5 years, each at market rate

Incentive to terminate / renew the lease?



Lease payments – example

60

15 year lease of a wind farm

Usage payments for expected case of CU1,000,000 per annum

Maintenance costs of CU10,000 per annum

Restoration costs of CU100,000 at end of lease

Usage payments for extreme low case of CU700,000 per annum*

*based on 20 years of climate data: wind has never blown at less than 70% of the wind farm’s capacity.




© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which

61

15 year lease of a wind farm

Usage payments for expected case of CU1,000,000 per annum

Maintenance costs of CU10,000 per annum

Restoration costs of CU100,000 at end of lease

Usage payments for extreme low case of CU700,000 per annum*

(But still a liability under IAS 37!)

Include in lease liability?




15 year lease

of a wind

farm

Usage payments

for expected case

of CU1,000,000

per annum

Maintenance

costs of

CU10,000 per

annum

Restoration

costs of

CU100,000 at

end of lease

Usage payments

for extreme low

case of

CU700,000 per

annum*




15 year lease

of a wind

farm

Usage payments

for expected case

of CU1,000,000

per annum

Maintenance

costs of

CU10,000 per

annum

Restoration

costs of

CU100,000 at

end of lease

Usage payments

for extreme low

case of

CU700,000 per

annum*

(But still a liability

under IAS 37!)

Include in

lease

liability?




Variable lease payments

Payments based on an index

or rate

Payments based on turnover

or usage

Which variable lease payments are included in the lease liability?



Example – Fixed payments• Company W leases a product line.

• The lease payments depend on the number of operating hours of the production line – i.e. W has to pay 1000

per hour of use.

• The annual minimum payment is 1,000,000. The expected usage per year is 1,500 hours.

Which payments are to be included in the lease liability?

This lease contains in-substance fixed payments of 1,000,000 per year, which are included in the initial

measurement of the lease liability.

The additional 500,000 that W expects to pay per year are variable payments that do not depend on an index or

rate and, therefore, are not included in the initial measurement of the lease liability but are expected as the ‘over-

use’ occurs.



Example - Variable paymentsCompany X leases a store. The lease payments for the store amount to 1% of the store’s revenues. There is no

minimum rental payment.


Lease contains only variable lease payments that do not depend on an index or rate

Therefore, X measures the lease liability at the commencement of the lease as zero.



Example - Variable payments• Company Y rents an office building.

• The initial annual rental payment is 2,500,000 and the rent will be reviewed every year and increased by the

change in the consumer price index (CPI).


This is an example of a variable lease payment that depends on an index.

The initial measurement of the lease liability is based on the value of CPI on lease commencement - i.e. Y

assumes an annual rental of 2,500,000.

If during the first year of the lease CPI increases by 5%, then at the end of the first year the lease liability is

recalculated assuming future annual rentals of 2,625,000 (i.e. 2,500,000 * 1.05).



Example - Residual value guarantees• Lessee Z has entered into a lease contract with Lessor L to lease a car. The lease term is five years.

• In addition, Z and L agree on a residual value guarantee – if the fair value of the car at the end of the lease term

is below 400, then Z will pay to L an amount equal to the difference between 400 and the fair value of the car.


At the inception of the lease, Z expects that the fair value of the car at the end of the lease term will be 400.

Z therefore includes an amount of zero in the lease payments when calculating its lease liability.



Example - Incentive• Lessee X enters into a non-cancellable lease contract with Lessor L to lease a building. The lease is for four years

initially, and X has the option to extend the lease by another four years at the same rental.

• To determine the lease term, X considers the following factors:

• Market rentals for a comparable building in the same area are expected to increase by 10% over the eight-year

period covered by the lease.

• At the inception of the lease, lease rentals are in accordance with current market rents.

• X intends to stay in business in the same area for at least 10 years.

• The location of the building is ideal for relationships with suppliers and customers.

X concludes that is has a significant economic incentive to extend the lease.

Therefore, for the purpose of accounting for the lease, X uses a lease term of eight years.

Is there a significant economic incentive to renew?



Example - Incentive• Lessee Y enters into a lease of a three-year-old machine and the non-cancellable lease term is 10 years and has

the option to extend the lease after the initial 10-year period for optional periods of 12 months each at market

rent. To determine the lease term, Y considers the following factors:

• The machine is to be used in manufacturing parts for a type of plane that Y expects will remain popular with

customers until development and testing of an improved model are completed in approximately 10 years.

• The cost to install the machine in Y’s manufacturing facility is not significant.

• The non-cancellable term of Y’s manufacturing facility lease ends in 14 years and Y has an option to renew that

lease for another eight years.

• Y does not expect to be able to use the machine in its manufacturing process for the other types of planes

without significant modifications and the total remaining life of the machine is 25 years.

Y notes that the terms for the optional renewal provide no economic incentive and the cost to install is

insignificant. Y has no incentive to make significant modifications to the machine after the initial 10-year period.

Therefore, Y does not expect to have a business purpose for using the machine after the non-cancellable lease

term.

Y therefore concludes that the lease term consists of the 10-year non-cancellable period only.




Subsequent measurement

Lease liability Right of use asset

Amortised cost using

effective interest

method

Remeasure to reflect

changes in lease

payments

Generally, cost less

accumulated

depreciation and

impairment losses

Adjusted for the

remeasurement of

lease liability

Alternative measurement

basis for right of use asset:

Fair value in accordance

with IAS 40

Revaluation model under

IAS 16



Initial measurement – ROU asset

ROU asset is initially measured as the sum of:

Lessee also adjusts the ROU asset for lease incentives

PV of lease

payments

Initial direct

costs

Prepaid lease

payments

IFRS 16 does

not specify

whether the

ROU asset is

tangible or

intangible



Subsequent measurement – ROU asset

Amortise over shorter of lease term or economic life, generally on a straight-line

basis

Results in front loading of total lease expense

(amortisation expense on ROU asset + interest expense on lease liability)

ROU asset is subject to impairment testing under IAS 36 impairment

IAS 40 applied if the leased property is investment property

IAS 16 depreciation

requirements apply

including

componentisation



Impairment – ROU asset

Continue amortising ROU

asset pre-impairment

basis

At a minimum, must recognise expense from unwinding of the discount

ROU asset tested is for impairment in accordance with IAS

36. Amortisation following an impairment as follows:

The impairment

test replaces

the need to test

for an onerous

contract



Example - Impairment• Lessee Y leases a machine for its manufacturing process over a non-cancellable 10-year period.

• The initial carrying amount of the right-of-use asset is 1,000, which is subsequently measured at cost and

depreciated on a straight-line basis over a period of 10 years.

• At the end of year 5, the cash-generating unit that includes the right-of use asset is impaired.

• An impairment charge of 200 is allocated to the right-of-use asset.


What will be the carrying amount of the right of use assets ?

Immediately before the impairment, the carrying amount of the right-of-use asset is 500.

Following the impairment, the carrying amount is reduced to 300 and the future depreciation charges are

reduced to 60 (300/5) per year.



Subsequent measurement

Changes in carrying amount of lease liability due to:

Reassessment of lease

term, purchase option

and residual value

guarantee

Variable lease payments

not depending on an

index or rate

Reassessment of variable lease payments

depending on an index or rate

Relates to future

periods

Relates to current

periods

Adjust right-of-use asset* Recognize in profit or loss

*If the carrying amount of the right-of-use asset is reduced to nil, then any further reductions are recognized in profit or loss



Presentation

Statement of financial position Statement of profit or loss and other

comprehensive income

Statement of cash flows

Right-of-use asset

Separate presentation in the

statement of financial position or

disclosure in the notes to the

financial statements

Lease liability

Separate presentation in the

statement of financial position or

disclosure in the notes

Lease expenses

Separate presentation of interest expense

on the lease liability from depreciation of

the right-of-use asset

Presentation of interest expenses as a

component of finance costs

Operating activities

Variable lease payments not included in the

lease liability

Payments for short-term and low-value leases

(subject to use of recognition exemption)

Financing activities

Cash payments for principal portion of lease

liability

Depending on 'general' allocation

Cash payments for the interest portion are

classified in accordance with other interest paid

Lessees present leases in their financial statements as follows:



Companies with operating

leases will appear to be more

asset-rich, but also more

heavily indebted

Impact on balance sheet

Asset Liability



Total lease expense will be

front-loaded even when cash

rentals are constant

Impact on profit/loss

Depreciation Interest

Cash rental payments



Lessor accounting



Lessor accounting

81

Same as IAS 17 Different to IAS 17

Lease classification test.

Finance lease model.

Operating lease model.

Definition of a lease.

Sale-and-leaseback guidance.

Sub-lease guidance.

Accounting for lease modifications.

Disclosure requirements.

No symmetry between lessee and lessor accounting!



Generally consistent with current IAS 17

Right to use

underlying

asset

Lease payments

Operating

No derecognition

of underlying asset

Finance

Lease Receivable

Residual Asset

Lessor

Finance or Operating

Model

Lessee

Lessor accounting [2/2]



Lessor lease classification test

Ownership transfers at end of lease?

Bargain purchase option?

Operating

lease

Transfer substantially all risk and rewards of

ownership?

No

No

No

Yes

Yes

Yes

Assessment criteria similar to

current IAS 17 classification test

Lease classification test is not

applicable for lessees

Finance

Lease



Example - Lease Classification• Lessor L enters into a non-cancellable lease contract with Company X under which X leases non-specialized

equipment for five years.

• The economic life of the equipment is estimated to be 15 years and legal title will remain with L.

• The lease contract contains no purchase, renewal or early termination options.

• The fair value of the equipment is 100,000 and the present value of the lease payments amounts to 50,000.

In assessing the classification of the lease, L notes that:

the lease does not transfer ownership of the equipment to X;

X has no option to purchase the equipment and the lease term is for one-third of the economic life of the

equipment, which is less than the major part of the economic life;

the present value of the lease payments amounts to 50% of the fair value of the equipment, which is less than

substantially all of the fair value; and the equipment is not specialized.

L notes that there are no indicators that the lease is a finance lease that, based on an overall evaluation of the

arrangement, the lease does not transfer substantially all of the risks and rewards incidental to the ownership of

the equipment to X.

Therefore, L classifies the lease as an operating lease.

How will be the lease classified?



Balance sheet

Derecognize the underlying asset

Recognize a finance lease receivable

Finance lease

P&L

Recognize finance income

In addition, manufacturer or dealer lessors

recognize for finance leases:

revenue based on the lower of the fair

value of the underlying asset and the

present value of the lease payments

cost of sales based on cost or carrying

amount of the underlying asset, less

the present value of any unguaranteed

residual value

costs incurred in connection with

obtaining the lease as an expense




Balance sheet

Continue to present the underlying

asset

Add any initial direct costs incurred in

connection with obtaining the lease to

the carrying amount of the underlying

asset

Operating lease

P&L

Recognize lease income over the lease

term, typically on a straight-line basis

Expense costs related to the underlying

asset - e.g. depreciation




Other topics



IFRS 16

essentially gets

rid of sale-and-

leaseback as an

off-balance sheet

financing

structure

Sale and leaseback [1/3]

Is there a sale?

On-balance sheet lease at

cost

On-balance sheet

financing, potentially at

fair value

Yes No



Lessee (seller) Lessor (buyer)

Derecognize the underlying asset

and apply the lessee accounting

model to the leaseback*

Measure the ROU asset at the

retained portion of the previous

carrying amount (i.e. at cost)*

Recognize a gain or loss related

to the rights transferred to the

lessor*

Recognize the underlying asset

and apply the lessor accounting

model to the leaseback*

* Adjustments are required if the sale is not at fair value or lease payments are off-market.

Transfer to buyer-lessor is a sale




Lessee (seller) Lessor (buyer)

Continue to recognize the

underlying asset

Recognize a financial liability under

IFRS 9 for any amount received

from the buyer-lessor

Do not recognize the underlying

asset

Recognize a financial asset under

IFRS 9 for any amount paid to the

seller-lessee

* Adjustments are required if the sale is not at fair value or lease payments are off-market.

Transfer to buyer-lessor is not a sale




Example - Sale and lease back [1/2]Sale-and-leaseback transaction when transfer is a sale: Lessee perspective

Company C sells an office building to Company D for cash of 2,000,000.

Immediately before the transaction, the building is carried at a cost of 1,000,000.

At the same time, C enter into a contract with D for the right to use the building for 18 years with the annual

payment of 120,000 payable at the end of each year.

The transfer of the office building qualifies as a sale under IFRS 15.

The fair value of the office building on the date of the sale is 1,800,000.

Because the consideration for the sale of the office building is not at fair value, C and D make adjustments to

recognize the transaction at fair value.

The amount of the excess sale price of 200,000 (2,000,000 – 1,800,000) is recognized as additional financing

provided to D to C.

The incremental borrowing rate of the lessee is 4.5% per annum.

The present values of annual payments is 1,459,200 of which 200,000 relates to the additional financing and

1,259,200 relates to lease.



Example - Sale and lease back [2/2]C recognizes the transaction as follows.

- C measures the right-of-use asset retained through the leaseback of the office building as a proportion of its

previous carrying amount, which is 699,556 (1,259,200/1,800,000 x 1,000,000).

- C recognizes only the portion of the gain on sale that relates to the rights transferred to D, which is 240,356. The

total gain on sale of the building amounts to 800,000 (1,800,000 – 1,000,000) of which:

- 559,644 (1,256,200/1,800,000 * 800,000) relates to the right to use the office building retained by C; and

- 240,356 ((1,800,000 – 1,259,200)/ 1,800,000 * 800,000) relates to the rights transferred to D.

- At the commencement date, C makes the following entries.

Debit Credit

CashROU assetBuildingFinance liabilityGain on sale-and leaseback

To derecognize the building and recognize ROU asset and finance liability

2,000,000699,556

1,000,0001,459,200

240,356



Sub-leases

The intermediate lessor accounts for the head lease and the sub-lease as two different contracts

Head Lessor

Original lessee / Intermediate lessor

Sub-lessee

The intermediate lessor treats

the right-of-use asset as the

underlying asset in the sub-

lease, not the item of property,

plant or equipment that it

leases from the head lessor



Sub-lease

Intermediate lessor:

Accounts for head lease and sublease as two separate contracts.

Classifies the sublease based on the ROU asset arising from the head lease.

Recognises lease assets and lease liabilities gross – unless offset criteria met.

Recognises lease income and lease expense gross – unless acting as agent.

94

Head lessor

Original lessee / intermediate lessor

Sub-lessee



Sub-lease – example

Head lease:

50-year lease of investment property, commenced 1 January 1996.

As at 1 January 2016:

Fair value of ROU asset CU30 million.

Lease liability of CU15 million.

95

Government (head lessor)

Prop Co (intermediate lessor)

Fast Retail Co (sub-lessee)

Sub lease:

30-year sub-lease, commenced 1 January 2016.

Initial direct costs of CU1 million.

Present value of fixed lease payments CU20 million.

Present value of expected turnover rents CU10 million.



Example – Sub-lease• Head lease: Intermediate lessor L enters into a 5-year lease for office space with Company M

• Sub lease: At the beginning of year 3, L sub-leases the office space for the remaining term to sub-lessee N

• L classifies the sub-lease with reference to the ROU asset arising from head lease

Because the sub-lease is for the whole of the remaining term of head lease – i.e. sub-lease is for the major part

of the useful life of ROU asset – L classifies it as a finance lease

At the commencement date of the sub-lease, L:

• derecognizes the ROU asset that it transfers to N and recognizes the net investment in the sub-lease

• recognizes any difference between the carrying amounts of the ROU asset and the net investment in the

sub-lease in profit or loss; and

• continues to recognize the lease liability relating to the head lease, which represents the lease payments

owed to the head lessor

How will the lease be classified?



A company applies IAS 40

Investment property to

account for a right-of-use

asset if the underlying asset

would otherwise meet the

definition of investment

property

Investment property

Two key differences in treatment of

investment property between IFRS

16 and IAS 17

The election

becomes a

requirement

There is a choice of

valuation basis



Disclosures



Disclosures for lessees [1/2]

Quantitative information

Relating to the statement of financial position

Additions to right-of-use assets

Year-end carrying amount of right-of-use assets by class of underlying asset and (if they are not presented separately) the corresponding line items in

the statement of financial position

Lease liabilities and the corresponding line items in the statement of financial position if lease liabilities are not presented separately

Maturity analysis for lease liabilities

Relating to the statement of profit or loss and other comprehensive income (including amounts capitalized as part of the cost of another

asset)

Depreciation charge for right-of-use assets by class of underlying asset

Interest expense on lease liabilities

Expense relating to short-term leases for which the recognition exemption is applied (leases with a lease term of up to one month can be excluded)

Expense relating to leases of low-value items for which the recognition exemption is applied

Expense relating to variable lease payments not included in lease liabilities

Income from sub-leasing right-of-use assets

Gains or losses arising from sale-and-leaseback transactions

Normally, a lessee discloses at least the following information.



Disclosures for lessees [2/2]

Qualitative information

Description of how liquidity risk related to lease liabilities is managed

Use of exemption for short-term and/or low-value item leases

Additional Disclosure

Disclosures required by IAS 40 for right-of-use assets qualifying as investment property

If the revaluation model of IAS 16 is applied for right-of-use assets, then:

- Effective date of revaluation

- Whether an independent valuer was involved

- Carrying amount that would have been recognized under the cost model

- Revaluation surplus, change for the period and any distribution restrictions

Quantitative information (cont’d)

Relating to the statement of cash flows

Total cash outflow for leases

Other

- Amount of short-term lease commitments if current short-term lease expense is not representative for the following year



Disclosures for lessors

Finance lease Operating lease

Quantitative information

Selling profit or loss

Finance income on the net investment in the lease

Lease income relating to variable lease payments not included in the net

investment in the lease

Significant changes in the carrying amount of the net investment in the

lease

Detailed maturity analysis of the lease payments receivable

Lease income relating to variable lease payments that do not depend

on an index or rate

Other lease income

Detailed maturity analysis of the lease payments receivable

If applicable, disclosures in accordance with IAS 16 (separately from

other assets), IAS 36, IAS 38, IAS 40 and IAS 41 Agriculture

Qualitative information

Significant changes in the carrying amount of the net investment in the

lease

N/A

Normally, a lessor discloses at least the following information.



Multiple transition options



Applying the new lease definition

Companies can choose whether to:

Apply the new definition to all contracts

Apply a practical expedient to ‘grandfather’

or

ComparabilityCost ComparabilityCost



A lessee is permitted to:

- adopt the standard

retrospectively; or

- follow a modified

retrospective approach

Applying the new standard [1/2]

Modified retrospective approach

Operating lease

ROU asset As if IFRS 16 had always

been appliedOR

Lease liability

Finance lease

Lease liability

Present value of remaining

lease payments

ROU asset Previous carrying

amount of finance lease

asset

ROU asset Previous carrying

amount of finance lease

liability



Applying the new standard [2/2]

A lessee can choose to apply the standard…

Retrospectively to all

accounting periods

ComparabilityCost

As a ‘big bang’ at the date

of initial application

OR



Sub-leases on transition

Intermediate lessor to reassess ongoing sub-leases

Whether sub-lease

classified as

operating lease

under IAS 17 is

finance lease as per

IFRS 16?

Account as a

new finance

lease

Continue to

show as

operating

lease

Yes No



Effective date

Early adoption permitted

if IFRS 15 is adopted

2016 2017 2018 2019 Mar Sep Dec

Effective date

1 January 2019

June

Interim reports

Annual report

31 December 2019



IFRS ≠ US GAAP



IFRS vs US GAAP

A joint project but not a joint standard

Lease

definition

Lessee

accounting

model

Leases on balance sheet

for lessees

Lessor

accounting

Detailed measurement

and transition

requirements

Exemption

for low value

items

IFRS and US GAAP standards converged?



Next steps



Are you ready for the new standard?

What do you need to do to get ready for 2019? Here are the key questions to help you prepare

for implementation:

Lease definition

Do you know which of your transactions are, or contain, leases?

Will you elect to grandfather the lease definition for existing contracts on transition?

Lease data

Do you have a database of all of your assets?

Do you have the systems and processes necessary to calculate lease assets and liabilities?

Are your current disclosures of operating lease commitments complete and accurate?

Debt covenants Will application of the new standard impact your debt and other covenants?

Sale-and-leaseback

transactions

Do you understand the impact of the new standard on your sale-and-leaseback transactions?

Financial ratios

Do you understand the impact of the new standard on your financial ratios, KPIs, etc?

Will optional exemptions, such as those for short-term leases and leases of low-value items, have a

material impact on your financial statements?

Transition options Have you thought about how to transition to the new standard?



Communications with audit committees

Initial discussion points

Discuss initial thoughts on the expected impact of IFRS 16.

Highlight non-accounting areas potentially affected.

Planned communications with external stakeholders.

Next steps

Start impact

assessment

Early

adoption?

Transition

approach?



Disclosure prior to effective date

IAS 8.30 disclosure ― known/reasonably estimable possible impact of IFRSs issued but not yet

effective.

Considerations

Pre-adoption disclosures progressing in level of detail as your application date approaches?

Pre-adoption disclosures meeting external stakeholder expectations?



Next steps – ResourcesReading

First Impressions

Transition options

Sector-specific publications

Go to:

http://www.kpmg.com/ifrs

http://www.kpmg.com/ae/en/kba/pages/default.aspx

http://www.kpmg.com/ae/en/pages/default.aspx



Key points to remember





New leases

standard will

impact most

companies.

Key points to remember

Process of

assessing

impact should

start now.



Other impacts

Restructuring

Resetting or recalculation of financial covenants in order to not be exposed to an event of default under a loan agreement

Important to clearly define Accounting Standards in loan agreements (for instance “frozen IFRS”)

Financing arrangements to achieve off-balance treatment needs to be revisited form a cost/benefit perspective

Tax

In most cases, operating leases may be tax deductible

Deferred tax impact may arise similar to any other finance leases

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International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the United Arab Emirates.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate

and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

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IFRS 15 Revenue

Agenda1. Overview and scope

2. The five step model

3. Cost guidance

4. Other application guidance

5. Transition

6. Presentation and disclosure

7. Key points to remember!

122© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Overview and scope

Overview


Early adoption permitted Interim report

2014 2016 2017 2018 Mar Jun Sep Dec

Effective date

1 January 2018

Annual report

31 December 2018IFRS 15

issued

Clarifications to

IFRS 15

Amendments to IFRS 15 and Topic 606FASB

ASU

2015-14• One year deferral of the effective date

ASU

2016-08• Principal vs agent

ASU

2016-10

• Licences

• Sales- and Usage based royalties

• Performance obligations

• Shipping and handling services

ASU

2016-12

• Sales tax presentation

• Measurement of non-cash consideration

• Collectibility

• Transition practical expedients

• Definition of completed contract

ED #5• Disclosure relief

• Technical corrections and improvements

IASB

Amendment #1

(Sept 2015)• One year deferral of the effective date

Amendment #2

(April 2016)

• Licences

• Sales- and Usage based royalties

• Performance obligations

• Transition practical expedients

• Principal vs agent

125

The five step model overview


STEP

1Identify the contract with a customer

STEP

2Identify the performance obligation

STEP

3Determine the transaction price

STEP

4Allocate the transaction price

STEP

5Recognise revenue

What’s changed


IFRIC 15 type requirements removed and replaced by new over time criteria.

More guidance on separating goods and services bundled in a contract.

More guidance on measuring transaction price.

No IAS 11 equivalent to guide accounting when revenue is recognised over time.

Pre IFRS 15 IFRS 15

IAS 18, IFRIC 13, 15

IAS 11

Consolidation

guidance

Sale of goods or services

IAS 16 IAS 40Consolidation

guidance

Gains and losses Sales to non-customers

Sales to customers

IFRS 15Consolidation

guidance

IAS 16 IAS 40Consolidation

guidance

Some key sectors impacted

128© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

SoftwareReal estate and

construction

Licensors – pharma,

film and entertainment

franchisors

Telecommunication

and cable

Aerospace and

defenceAsset managers Contract

manufacturers

Scope

129

Other

IFRSIFRS 15

Part of a contract Portfolio of contracts

Contract 1Contract 2Contract 3Contract 4

De-recognition of

non-financial assets

Lease contract

Insurance contractContractual rights

and obligations in the

scope of another

IFRSs

Certain types of non-

monetary exchanges

© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Applying IFRS 15 to part of a contract


Contract for a loan and safety deposit box

IFRS 9 IFRS 15

Apply IFRS 15 to residual after transaction price has been allocated to loan in

accordance with IFRS 9.

The five step model



STEP


STEP


STEP


STEP


STEP

5Recognise revenue

Identify the contract


STEP

1

... collection of consideration is

considered probable.

... rights to goods or services

and payment terms can be

identified.

... it has commercial substance.

... it is approved and the parties

are committed to their

obligations.

A contract

exists if...

Enforceable rights and obligations

Form of the contract

Combining contracts

134

Contracts may be combined and accounted for as a single contract.

Contracts are combined if entered into at or near the same time with the

same customer and one or more of the following criteria are met.

Contract 1 Contract 2

IFRS 15

Negotiated as

package with a single

commercial objective.

Consideration in one

contract depends on

the other contract.

Goods and services

are a single

performance

obligation.


STEP

1

Example: Contract term


Contract terms Contract term

• 3 year contract that can be terminated by either party at

one months notice.

• There is no penalty on termination.

• 3 year contract that can be terminated in the period up to

the end of year 1 by either party at no cost.

• After the end of year one a substantive termination

payment is payable to terminate the contract.

• 3 year contract that can be terminated by the customer

only at the end of each year for no cost.

STEP

1

1 month contract

1 year contract or 3 year contract.

3 year contract or 1 year contract plus

material right for additional periods.

Example: Assess collectibility at portfolio level Manufacturer X’s business involves sales of high volume homogeneous products Y and Z.

For product Y, based on historical data, X collects 60 percent of amounts billed to customers.

For Product Z, based on historical data, X collects 90 percent of amounts billed to customers.

X does not have a practice of offering formal price concessions to customers.

Question: Manufacturer X makes a sale of product X and Y to a customer, is the collectibility

threshold met?


Product Y Product Z

• 60 percent collectability rate

strong indicator that

collectability is not probable

• 90 percent collectability rate

indicates collectability is

probable

• Consider if 10 percent

reduction is an implicit price

concession.

STEP

1



STEP


STEP


STEP


STEP


STEP

5Recognise revenue

Identify performance obligations


Distinct performance obligationNot distinct – combined with other

goods and services

Yes No

+

Performance obligation (PO) = promise to deliver good or service that is

Criterion 1:

Capable of being distinct

Can the customer benefit from the good

or service either on its own or together

with readily available resources?

Criterion 2:

Distinct within context of the contract

Promise to transfer the good or service is

separately identifiable from other

promises in the contract?

STEP

2

Identify performance obligations - series exception


STEP

2

Distinct goods or

services are

substantially the same

Same pattern of

transfer

Single performance

obligation

+ =+Each distinct good or

service is satisfied

over time

A series of distinct goods or services is treated as a single performance obligation if the

criteria below are met.

Single performance obligation?


Do the goods and

services individually

meet the criteria?

Criterion 1 – Benefit on its

own or with other resources

Each material could be used with

another readily available item.

Criterion 2 – Good or service

is separately identifiable

Entity is providing a significant

integration service.

Contract to

build a house

Bricks Windows Fittings Construction

service

= + + +

STEP

2

Multiple performance obligations?


Installation services are also

offered by third party providers.

Standard installationMachine

+

Contract

Does the machine

meet the performance

obligation criteria?

Criterion 1 – Benefit on its

own or with other resources

Machine can be used with other

available inputs (such as third

party installation).

Criterion 2 – Good or service

separately identifiable

No significant integration service;

installation is a standard service.

STEP

2

Potential separate performance obligation

Analysis required Unlikely to beLikely to be

Carpark Common areas

Land entitlement

Property management

services

Golf club membership Contractor activities

and materials


STEP

2



STEP


STEP


STEP


STEP


STEP

5Recognise revenue

Determine the transaction price

144

Non-cash consideration

Consideration payable to a

customerVariable consideration and the

constraint

Significant financing

component

Transaction

Price

Exception: Variable consideration is not estimated for sales- or usage-based royalties

on licences of intellectual property.

…measured at fair value unless it

cannot be reliably measured.

…reduction to the transaction price

unless it’s a payment for a distinct

good or service.


STEP

3

Variable consideration

145

Credits IncentivesDiscountsPerformance

bonuses

Many

more...

Variable consideration can be

Variable consideration is estimated using most appropriate method of either:

Expected value Most likely amount


STEP

3

Estimating variable consideration

146

How would the

entity estimate

variable

consideration?

Rental Guarantee

Expected

value


Land with approval

to develop a retail

centre

Transaction price

Fixed amount:

CU100Completion bonus:

CU100

Rental guarantee (not

in the scope of IAS

39/IFRS 9)

Completion

bonus

Most likely

amount

Fixed

amount

Not variable

STEP

3

Constraint on variable consideration

147

The risk of a reversal arising from an uncertain future event.

The magnitude of the reversal if the uncertain event occurs.

Qualitative

Assessment


STEP

3

CU100

Estimate of variable

consideration

CU75

Amount that is ‘highly probable will

not result in significant reversal’…

…included in

transaction price

Applying the constraint indicators

148

At contract inception, how much variable consideration is included in the transaction price?

Likely nil because…

Use of jet is

outside entity’s

control.

No experience with

similar contracts.

Significant period

before uncertainty

will be resolved.

Large range of

possible amounts.


STEP

3

Contract to

build a jet

Estimate variable consideration

Completion bonus

CU100

Performance bonus

CU80

First model of this jet type

constructed and put into

service.

Expected delivery of first jet:

five years from inception.

Example: expected value is not a possible outcome


X enters into contracts with similar terms with several customers. The terms of the contract include a

performance bonus related to the timing of completing the contract.

Based on historical experience the bonus amounts and the probabilities of achieving the bonus are:

Can the estimated transaction price under the expected value method be an amount that is not a

possible outcome of an individual contract?

Bonus Amount Probability of occurrence Accumulated probability

$0 15% 15%

$50,000 40% 55%

$100,000 45% 100%

Estimated outcome Expected value = $65,000 Highly probable amount =$50,000

Yes, an amount not possible for an individual contract can be used as the estimate.

Same concept can be applied when estimating sales returns.

STEP

3

Significant financing component


Discount

rate

STEP

3

Interest incomeInterest expensePractical expedient available

– no adjustment required

t0

Performance

t -12

monthst +12

months

Payment in arrearsPayment in advance

To make the assessment all relevant factors are considered – in particular the:

Difference between the transaction price and the cash selling price of the goods or services;

Combined effect of the length of time between payment and performance and the prevailing interest rates;

Other reasons for the payment terms.

Rate that would be used in a separate financing transaction between the entity

and customer.

Yes because…


151

Does the

transaction

price include a

significant

financing

component?

Significant period

between delivery

and payment.

Cash price is

different from

transaction price.

No indicators

advance is for

another reason.


STEP

3

Contract to

construct

equipment

Contract price:

CU80 paid on

contract inception

Expected delivery date:

2 years from contract

inception

Cash price: CU100 if

payment on delivery.



How should entities determine if the practical expedient can be applied in scenarios in which

there is a single payment stream for multiple performance obligations?

Monthly installments of $100 for 24 months

Device

($500)

Received from customers

Goods and services

(allocated transaction price) Services for 24 months ($79 per month)

View A: FIFO approach. Allocate all payments initially to the device. Therefore, practical

expedient applies to the device.

View B: Proportionally allocate the consideration between the device and the services.

Therefore, the practical expedient does not apply to the device.

STEP

3



STEP


STEP


STEP


STEP


STEP

5Recognise revenue

Allocate transaction price to performance obligations


STEP

4

Fair value measurement

Allocate based on relative

stand-alone selling prices

Performance obligation 1



Determine stand-alone selling prices

Best evidence

Observable price Estimate price

If not available

Expected cost plus

a margin approach

Residual approach only if

selling price is highly variable or

uncertain

Adjusted market

assessment

approach

Example: Estimating the selling price

155

Methods for

estimating

stand alone

selling price

Cost plus Observable

priceResidual

Transaction price allocated to phone = CU650 x (CU350/CU710) = CU320

Transaction price allocated to plan = CU650 x (CU360/CU710) = CU330


STEP

4

Two year contract – CU650

Phone Data, calls and

texts plan

Entity sells phone and plan separately

CU350 12 month plan for CU15 per

month – CU360 (24XCU15)

Adjusted

market

Example: Allocating discount


Entity X regularly sells Products A, B and C individually by the following stand-alone selling

price: Product A = $ 40, Product B = $ 55 and Product C = $ 45

X enters into a contract with a customer to sell Products A, B and C for $ 100, which includes

a discount of $ 40 on the overall transaction

X regularly sells Products B and C together for $ 60 and A for $ 40

How is the discount allocated?

Product Allocated transaction price $

A 40 (there is evidence related to only B and C)

B 33 (55 / 100 stand-alone selling price x 60)

C 27 (45 / 100 stand-alone selling price x 60)

STEP

4

Example: Using stated contract prices


Medical Company X sells a medical imaging device bundled together with one year of post

customer support and 10 days of training to a customer for a fee of 560,000.

Can Medical Company X use the stated contract prices as each items allocation of the

transaction price?

Performance obligation Contract prices Range of prices X sells each

good or service for

Medical imaging device 505,000 500,000 to 525,000

Post customer support 45,750 45,000 to 47,500

Training 9,250 900 to 950 per day

Yes, because each items stated price is within the narrow range set for its stand alone

selling price.

If any item was outside the range then an allocation calculation is required.

STEP

4



STEP


STEP


STEP


STEP


STEP

5Recognise revenue

Performance obligations satisfied over time


Customer simultaneously receives and

consumes the benefits as the entity

performs.

The customers controls the asset as the

entity creates or enhances it.

The entity’s performance does not create an

asset with an alternate use and there is a

right to payment for performance to date.

An performance obligation is satisfied over time if either:

2

3

Routine or recurring

services.

Asset built on

customer’s site.

Asset built to order.

1

STEP

5

Example: Partial construction at the entity’s siteEntity X agrees to build a specialised asset for Customer C. The contract includes a timeline

that indicates 35% of the work is undertaken at X’s premises and that work is 70% of the total

expected contract duration. The asset will then be transferred to the C’s site.

1 January – X begins to build asset at its premises

1 February – The partially built asset no longer has an alternative use

1 March – The partially built asset is delivered to C’s site

30 June – Construction is completed

Question: When should X start recognising revenue?


STEP

1

1 Jan 1 Feb 1 March 30 June

? ?

• Recognise revenue over

time

• Cumulative catch-up

adjustment

Criteria 3 requirements

No alternative

use

Right to compensation

for performance to date

Substantive contractual

restriction

Limited practically from

redirecting the asset

OR

Reasonable profit margin

Right is enforceable if

contract is terminated for

reasons other than a

failure to perform

AND


STEP

5

STEP

5

Example 1 – Over Time Criterion 3

Right to paymentNo alternate use

Assess if rights are enforceable by considering:

Laws and legal precedent.

Any customary business practices that may have voided the entity’s rights.

Question: Do the terms meet the no alternate use and right to payment criteria?

Contract only

terminates if terms

are breached

Courts have upheld

developer’s right to full

payment on default

LAW

Customer default;

developer right to full

payment


STEP

5

STEP

5

Example 2 – Over Time Criterion 3

Right to paymentNo alternate use

Assess if rights are enforceable by considering:

Laws and legal precedent.

Any customary business practices that may have voided the entity’s rights.

Question : Do the terms meet the no alternate use and right to payment criteria?

Contract only

terminates if terms

are breached

LAW

Customer default;

developer right to full

payment


Entity has a practice of

taking properties back at

no penalty

Past

practice

?

STEP

5

STEP

5

Measuring performance over time


For each performance obligation an entity chooses a method that depicts its performance.

Units delivered and similar methods not appropriate if work in progress is material.

Adjustments required for wastage and uninstalled materials when cost method used.

STEP

5

Output method

Surveys

Milestones reached

Units delivered

Input method

Costs incurred

Labour hours

Machine hours

Performance obligations satisfied at a point in time


Exception: Separate requirements for distinct licences of intellectual property.

Recognise revenue when customer obtains control of the promised asset.

Indicators that control has transferred include the customer has…

Accepted the

asset

A present

obligation to

pay

Legal titlePhysical

possession

Risks and

rewards of

ownership

STEP

5

Cost guidance

Contract costs


Costs to obtain a contract

Capitalise incremental costs if:

Incurred only as result

of obtaining the contract

(e.g. sales commission)

Recovery is expected

Costs to fulfil a contract

Capitalise as fulfilment costs if:

Directly related

Generate or enhance

resources

Recovery is expected

Amortisation period < 1 year?

Expense costs as incurredPractical

expedient

Not in the scope of

another standard

Costs to fulfil a contract

Direct labour (e.g. employee wages)

Cost that are explicitly chargeable to the

customer under the contract

Direct materials (e.g. supplies)

General and administrative costs –

unless explicitly chargeable under

the contract

Allocation of costs that relate directly to

the contract (e.g. depreciation and

amortisation)

Other costs that were incurred only

because the entity entered into the

contract (e.g., subcontractor costs)

Costs that relate to satisfied performance

obligations

Costs of wasted materials, labour, or

other contract costs

Direct costs that are eligible for

capitalisation if other criteria are metCosts to be expensed when incurred

Costs that do not clearly relate to

unsatisfied performance obligations


Example: Capitalising costsA cable services company enters into a two year service contract with a customer. The

company incurs the following costs:

On average, CU300 in advertising for each new customer.

Sales commission costs of CU200 paid upon contract signing.

Costs of CU100 for installation at the customer’s site. Installation is not a separate

performance obligation.

What costs does the entity capitalise?


Sales commission InstallationAdvertising

Cost to obtain Cost to fulfil

Amortisation and impairment


Amortisation period

Systematic basis consistent with the pattern of transfer.

Considers anticipated contracts (e.g. renewal options).

Impairment

Carrying

amount

Remaining

consideration

amount expected to

be received

−Costs directly

related to providing

goods or services

If conditions improve, impairment can be reversed

Can IAS 11 accounting continue?IAS 11

Acceptable to measure revenues and

costs applying POC with balance

sheet ‘true up’.

IFRS 15

No automatic link between revenue

and cost.

Costs incurred that relate to satisfied

or partially satisfied performance

obligation are expensed as incurred.


Contract costs recognitionRevenue recognition Cost recognition

Point in time Costs capitalised when they represent:

− Costs to fulfil a contract;

− Costs to obtain a contract; or

− Capitalised in accordance with another standard e.g. IAS 2.

Costs expensed when control of the goods or services are transferred to the customer.

Over Time Costs capitalised prior to the existence of the contract are expensed to the

extent they relate to past performance.

Costs incurred after commencement of performance are generally expensed as incurred.


Application guidance

Contract modificationsIs the contract modification

approved?

Do not account for contract

modification until approved

Does it add distinct goods or

services that are priced

commensurate with their stand-

alone selling prices?

Account for as

termination of existing

contract and creation

of new contract

Yes

Yes

Yes

No

No Are the remaining goods or

services distinct from those already

transferred?

Account for as part of

the original contract

No


Account for as

separate contract

Licences of intellectual propertyIs the licence distinct from other goods or services in the contract?

Revenue recognition depends on items in the

bundle

Provides right to access

Assess nature of licenceApply revenue

recognition criteria to the combined bundle

Provides right to use

YesNo

Over time Point in time


STEP

2

STEP

5

Right to access to intellectual property (IP)A customer has a right to access to IP (i.e. over time) if all of the following criteria are met:


1. Entity expects to undertake activities that significantly affect the IP.

2. Customer is directly exposed to positive or negative effects of the entity’s activities that affect the IP.

3. The activities do not transfer a good or a service to the customer.

If all the criteria are not met, the licence provides a right to use the entity’s IP that is

satisfied at a point in time.

Assessing the nature of a software licence Company X licenses software on a non-exclusive basis to Customer Y for 3 years for a fixed fee of

CU50,000.

Post-contract support (PCS) service X will provide is identified as a separate performance obligation.


What is the nature of the software licence and when should X recognise revenue?

Provides a right to use the IP, recognise revenue at the point in time the software is provided to Y

because…

X will not undertake any further actions that significantly affect Y’s ability to use

the licence.

Licences with sales- or usage-based royalties

P recognises revenue as movie tickets are sold by C.

Consideration for sales- or usage-based royalties on licences of intellectual property

is recognised at the later of:

Subsequent sale or usage; and

Satisfaction (or partial satisfaction) of the performance obligation to which the

royalties relate.Exception


P (movie distributor) licenses the right to show Movie XYZ in cinemas for 6 weeks to C (movie theatre).

In exchange for the licence, P is entitled to 20% of the ticket sales by C. Under the contract, P is

responsible for advertising and promotion of Movie XYZ.

The exception also applies when a licence of intellectual property is the predominant

item to which the royalty relates.

Sales with a right of returnRevenue entity

expects to be

entitled to

A refund liabilityAn asset – right to

returned products

Recognise

initially:

Revenue is reassessed

Refund liability is remeasured

Asset is remeasured

With the

following

subsequent

effects:

An entity applies the variable consideration guidance when determining the amount it expects to

be entitled to.


Sales with a right of return


Company B sells 50 tablet devices @ CU200 each to a customer, total CU10,000.

Customer can return undamaged devices within 30 days for a full cash refund.

Cost of each device is CU150.

Based on its past experience, B estimates that 3 tablets will be returned (most likely approach).

Debit Credit

Cash (or receivable)

Refund liability (CU200 x 3 tablets to be returned)

Revenue

10,000

600

9,400

Asset (CU150 x 3 tablets to be returned)

Cost of sales

Inventory

450

7,050

7,500

Warranties

Factors to consider when making the assessment:

Is it required by law? Length of the warranty? What tasks are performed?

Does the customer have the option to purchase the warranty separately?

Performance obligation

(i.e. service warranty)Are services in addition to assurance that the product complies with agreed specifications

provided as part of warranty?

Not a separate performance obligation

(i.e. assurance warranty)

No

No

Yes

Yes

Apply

IAS 37


STEP

2

STEP

4

Warranties – example


Car Standard warranty:

3 years or 36,000 miles Extended warranty:

extra 3 years or up to

70,000 miles for CU5,000

Car manufacturer N sells to Customer A

How many performance obligations are there in the contract?

Warranties – example solution

The customer has the option to

purchase the extended warranty

separately.

The extended warranty provides

additional services to the customer.

Car and standard warranty Extended warranty

Standard warranty is an

assurance type warranty

AND

Apply

IAS 37


Performance obligations

Principal versus agent


An entity is principal in a transaction if it controls the specified goods or services in advance of

transferring them to the customer.

Indicators that an entity is principal in the transaction include:

Discretion to

establish prices

for specified

goods or servicesCredit risk

Inventory risk

Primary

responsibility to

provide specified

goods or services

Transition

Transition approaches

Cumulative effect approach: entity also needs to disclose revenue amounts that would have been

presented under legacy GAAP.

Full retrospective – no

practical expedients

Full retrospective –

practical expedients

Cumulative effect

IAS 11/18

IAS 11/18

IAS 11/18

IFRS 15

Mixed

requirements

IFRS 15

IFRS 15

1 January 2017

1 January 2017

1 January 2018

Approach 2016 2017 2018Date of equity

Adjustment*

IFRS 15IAS 11/18


* - assumes one year of comparative information.

Presentation and disclosures

PresentationContract asset or contract liability is recognised when the:

Entity performs by transferring goods or services; or

Customer performs by paying consideration to entity.


(net) contract asset

if rights > obligations

(net) contract liability

if obligations > rightsRights and obligations

Receivable

Unconditional

right to

consideration

Distinguished

from contract

assets

Capitalised contract costs

Presented

according to

nature or function

Separate

presentation from

contract assets

DisclosureObjective: help users understand the nature, amount, timing and uncertainty of

revenue and cash flows arising from contracts with customers.

Disaggregation of revenue

Performance obligations

Determining the transaction price

Determining amounts allocated to

performance obligations

Changes in contract assets, liabilities

and costs

Determining the timing of satisfaction of

performance obligations

Contracts with customersSignificant judgements and changes

in judgements

Assets recognised from the costs to obtain or fulfil a contract


Disclosure prior to effective date


Pre-adoption disclosures (IAS 8.30) considerations:

Focus area for regulators.

More detailed as the entity’s application date approaches.

Meeting external stakeholder expectations.

Key points to remember!

Key points to remember! New revenue standard will impact all entities, in

different ways.

Additional guidance for:

– Separating goods and services in a contract

– Significant financing components.

Many new concepts. For example:

– Estimating variable consideration & application of the constraint

– Allocating the transaction price

– Recognising revenue over time

– Capitalising costs of obtaining a contract.

Extensive disclosure requirements.

Process of assessing impact and transition options should start now.


Questions© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 193

IFRS amendments effective for 2016

kpmg

Agenda

Agenda

1. Introduction2. Annual Improvements to IFRSs 2012-14 Cycle

3. Consolidation suite of standards

4. Disclosure Initiative

5. Other

196© 2016 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Introduction – why are we discussing this topic? Provide overview of amendments to IFRSs

that will become effective in 2016

Provide insight into the impact of how the

amendments will change the way the

affected standards are applied

Agenda

Agenda

1. Introduction

2. Annual Improvements to IFRSs 2012-14 Cycle3. Consolidation suite of standards


5. Other


Amendments finalised in the AIP 2012-14 Cycle

Relevant IFRSs Issues

IFRS 5 Non-current Assets Held for Sale and

Discontinued OperationsChanges in method of disposal

IAS 19 Employee BenefitsDiscount rate in a regional market sharing the

same currency – e.g. the eurozone

IAS 34 Interim Financial ReportingDisclosure of information ‘elsewhere in the interim

financial report’

IFRS 7 Financial Instruments: Disclosures

‘Continuing involvement’ for servicing contracts

Offsetting disclosures in condensed interim



IFRS 5 – Changes in method of disposalScenario 1 – Change from one method of disposal to another

*Or disposal group

No time lagAsset* classified as

held for sale

Asset* classified as

held for distribution

No time lag Asset* classified as

held for sale



OR

Continue held-for-sale or

held-for-distribution accounting


Scenario 2 – No longer available for immediate distribution or distribution is no longer

highly probable



Asset* reclassified

as held for use

Criteria no longer met

Cease held-for-distribution

accounting and follow guidance for

‘changes to a plan of sale’

*Or disposal group

Transition provisions

■ Effective for annual periods beginning on or after

1 January 2016

■ Prospective application to changes in method of

disposal that occur on or after 1 January 2016

■ Early adoption permitted

IFRS 5 – Changes in method of disposal


‘Changes to a plan of sale’ – par 26-29

If IFRS 5 accounting is stopped:

• Non current assets are measured at lower of recoverable amount and carrying amount as if

the asset was not classified as held for sale (I.e. compute depreciation)

• Reversal may create rare instance where goodwill impairment is reversed.

• Adjustments affect P&L

However, if the disposal group was a subsidiary, joint operation, joint venture, associate then the

prior period financial statements are amended.

• IOV – the amendment is made in the year of reclassification as an adjustment to opening

retained earnings


IFRS 7 – ‘Continuing involvement’ for servicing contracts

IFRS 7: Transfers of

financial assets –

disclosures

Amendments clarify

when servicing

contracts constitute

continuing

involvement

■ IFRS 7 par 42E requires disclosures on financial assets that have been

derecognised in their entirety but the entity has continuing involvement* in

them

■ Lack of clarity when servicing rights constitute continuing involvement – IAS

39 and IFRS 9 definitions were not consistent

■ Clarification provided

■ Examples given of servicing contracts that represent continuing

involvement:

– Servicing fee is dependent on the amount or timing of cash flows from

the transferred asset

– Servicing fee would not be paid in full if the asset defaults


■ Effective for annual periods beginning on or after 1 January 2016

■ Retrospective application

– Need not be applied for any period presented that begins before the annual period in which the amendments are first applied



IFRS 7 – Offsetting disclosures in condensed interim financial statements

IFRS 7: Offsetting

disclosures

Amendments clarify

when offsetting

disclosures are

required in

condensed interim


■ IFRS 7 requires disclosures on offsetting financial assets and liabilities

■ Lack of clarity whether these disclosures are always required in the

condensed interim financial statements under IAS 34

■ The wording was: “these amendments shall apply …for annual periods…

and interim periods within those annual periods.”

■ Offsetting disclosures only required if general principles of IAS 34 require

their inclusion

■ Consider if significant to understanding changes in financial position and

performance of the entity since the end of the last annual reporting period






IAS 19 – Discount rate in a regional market sharing the same currency – e.g. the Eurozone

YesNo

Discount rate is determined using

bonds denominated in the currency in

which the benefits will be paid

Is there a deep market for high-quality corporate bonds denominated in that

currency?

Use government

bonds

Use high-quality corporate

bonds


IAS 19 – Discount rate in a regional market sharing the same currency –e.g. the Eurozone

Fact pattern

■ Entity B operates in country X, which is part of

the eurozone

■ Benefits are payable in euro

■ There is no deep market for high-quality

corporate bonds in country X

■ However, there is a deep market for high-

quality corporate bonds denominated in euro

in other eurozone countries

Outcome

■ The discount rate used by Entity B for its

defined benefit pension plan should be based

on high-quality corporate bonds issued in euro

in other eurozone countries

Example – Determining the discount rate in the eurozone


■ Effective for annual periods beginning on or after 1

January 2016

■ Applied from beginning of the earliest comparative

period presented in the first financial statements in

which the amendment is applied

– Any initial adjustment is recognised in retrained

earnings at the beginning of that period



IAS 34 – Disclosure of information ‘elsewhere in the interim financial report’

Cross reference

Interim financial statements Other document forming part

of interim financial report

Interim Financial Report


IAS 34 – Disclosure of information ‘elsewhere in the interim financial report’

Information in par 15 – 15C (significant events and transactions)

• Must be disclosed in the interim financial statements

Information in par 16 (Other disclosures)

• Can be cross referenced to other parts of the interim report, that is available to users on the

same terms and at the same time as the interim financial statements





Agenda

Agenda

1. Introduction

2. Annual Improvements to IFRSs 2012-14 Cycle

3. Consolidation suite of standards4. Disclosure Initiative

5. Other


Amendments finalised related to consolidation suite of standards


IFRS 10 Consolidated Financial Statements

IFRS 12 Disclosure of Interests in Other Entities

IAS 28 Investments in Associates and Joint

Ventures

Investment entities: applying the consolidation

exception

IAS 27 Separate Financial Statements

IFRS 11 Joint ArrangementsAccounting for acquisitions of interests in a joint

operation that constitutes a business

Equity method in separate financial statements


IFRS 10, 12, IAS 28 – Investment entities: applying the consolidation exception

Investors

Investment

portfolio

Fund F (IE)

Fund S

(IE)

Investment-

related services

100%

100%

Issue 1 – Accounting for a dual-purpose subsidiary

Question

How should Fund F (IE) account for Fund

S (IE) which also provides investment-

related services?

■ Consolidate; or

■ Fair value

Conclusion

Before amendment:

■ IFRS 10 unclear

■ Accounting policy choice

After amendment:

■ Fair value

IE – Investment entity


Amendments:

■ Clarify that all IE’s subsidiaries that are IEs themselves should be measured at FV,

regardless of whether they provide investment-related services

■ Exception for consolidation only for those subsidiaries that act as extension of operations of

IE parent

Summary:

Subsidiary does not provide

investment-related service

Subsidiary provides investment-

related service

Non-IE subsidiary Fair value Consolidated

IE subsidiary Fair value Fair value

Issue 1 – Accounting for a dual-purpose subsidiary (cont.)

If an entity followed the consolidation approach for a dual-purpose subsidiary prior to

amendments, it retroactively adjusts its financial statements to reflect as fair value

through profit or loss




Issue 2 – Equity accounting of an investment entity by a non-investment entity investor

Question

Should an investor (non-IE) retain or

unwind the fair value accounting applied

by Fund A (IE) in equity accounting?

Conclusion

Before amendment:

■ IAS 28 unclear

After amendment:

■ Accounting policy choice, regardless

of whether A is associate or joint

venture Investment

portfolio

Investor

(non-IE)

Fund A (IE)

Equity

accounting 30%

100%


FVTPL



Issue 3 – Exception from preparing consolidated financial statements

Question

Can an intermediate parent (holding, non-

IE) in an IE group be exempt from

preparing consolidated financial

statements?

Conclusion

Before amendment:

■ IFRS 10 unclear

After amendment:

■ Exemption in IFRS 10.4 also available

for IE’s non-IE subsidiary, which is a

parent itself, if IE parent’s financial

statements are available for public use

and other criteria are met


Investment

portfolio

Intermediate

parent (non-IE)

Ultimate parent

(IE)

FVTPL 100%

100%FVTPL






– An entity need only present quantitative information for the following, as required by IAS 8,

for the annual period immediately preceding the date of initial application:

■ each financial statement line item affected; and

■ EPS (basic and diluted)



IFRS 11 – Accounting for acquisitions of interests in a joint operation that constitutes a business

Apply new requirements in IFRS 11*

Formation of a joint operation when an existing business is

contributed

Acquisition of an additional interest in a

joint operation by a joint controller

Acquisition of an interest in a joint

operation by an entity that does not

participate in joint control

*New requirements clarify that IFRS 3 (acquisition accounting) should be applied when accounting for an acquired interest in a

joint operation in which the activity of the joint operation constitutes a business.

Acquisition of an initial interest in a

joint operation by a joint controller



Example 1 – Initial acquisition

Fact pattern

■ Entity P acquires a 50% interest in an

existing joint operation (JO) for cash of

1,100, and incurs transaction costs of

20

■ JO operates a producing oil field and

is considered by P to be a business

■ The fair value of JO’s identifiable net

assets is 2,000, which includes a fair

value uplift of 500 on the assets. The

tax base of the net assets in JO’s

financial statements is equal to their

carrying amount at the acquisition

date – i.e. 1,500. The tax rate is 20%

Outcome

■ P records the entries shown

DEBIT CREDIT

Identifiable assets acquired(2,000 x 50%)

1,000

Goodwill(1,100 - (1,000 - 50))

150

Deferred tax ((500 x 20%) x 50%)

50

Cash 1,100

To record acquisition

Profit or loss 20

Cash 20

To record acquisition costs



DEBIT CREDIT

Identifiable assets acquired(2,500 x 10%)

250

Goodwill(300 - (250 - 20))

70

Deferred tax ((1,000 x 20%) x 10%)

20

Cash 300

To record acquisition

Profit or loss 10

Cash 10

To record acquisition costs

Example 2 – Acquisition of additional interest

Fact pattern

■ Five years later, P acquires an

additional interest of 10% in a JO

while still retaining joint control for

cash of 300, and incurs transaction

costs of 10

■ The fair value of JO’s identifiable net

assets is 2,500, which includes a fair

value uplift of 1,000 on the assets.

The tax base of the net assets in JO’s

financial statements is equal to their

carrying amount at the acquisition

date – i.e. 1,500. The tax rate is 20%

Outcome

■ P records the entries shown





■ Prospective application

– An entity’s financial statements are not restated for transactions that occur before the start

of its annual reporting period on or after 1 January 2016



IAS 27 – Equity method in separate financial statements

IFRS 9/

IAS 39

Cost

Equity

method

Investments

in

subsidiaries,

associates,

JVs


IAS 27 – Equity method in separate financial statementsTransition provisions




Agenda

Agenda

1. Introduction



4. Disclosure Initiative5. Other


IAS 1 – Disclosure Initiative

Clarifications

to IAS 1

Specific criteria

for presenting

subtotals in SFP

and SPLOCI

Not to

obscure material

information with

immaterial

information

Specific

requirements

for Items of OCI

of associates/

JVs

Not required

to present specific

disclosures, if

not material

May aggregate

line items on

SFP if IAS 1

line items are

immaterial

Disaggregate

lines on SFP

and SPLOCI if

helpful to

users

Notes may be

combined, and

order not

prescribed


IAS 1 – Disclosure InitiativeNotes may be combined and order is not prescribed: Practical example – Unilever Plc

Source: 2014 annual report

Accounting policy

Note 12 Inventories

Disclosure to support item presented in

primary financial statements



Subtotals in the statement of financial position and statement of profit or loss and OCI should be:

—comprised of line items made up of amounts recognised and measured in accordance with IFRS

—presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable

—consistent from period to period, and

—displayed with no more prominence than the subtotals and totals presented in these statements

In addition, subtotals in the statement of profit or loss and OCI should be reconciled in the statement of profit or loss

and OCI with the subtotals and totals required in IFRS

Specific criteria for presenting subtotals


IAS 1 – Disclosure InitiativeSpecific criteria for presenting subtotals: Practical example – ITV Plc

Excerpt from Consolidated Income Statement

Reconciliation in the notes of

‘EBITA before exceptional

items’ to ‘Profit before tax’




Excerpt from note 2.1 Profit before tax

Additional reconciliation requirements: Practical example – ITV Plc





—Effective for annual periods beginning on or after 1 January 2016

—Prospective application

If the order of notes or information presented/disclosed is altered compared to the previous year,

comparative information is adjusted to align to current year presentation/disclosure

—Early adoption permitted

Agenda

Agenda

1. Introduction




5. Other


Amendments related to other standards


IAS 16 Property, Plant and Equipment

IAS 38 Intangible AssetsAcceptable methods of depreciation/amortisation

IAS 16 Property, Plant and Equipment

IAS 41 AgricultureBearer Plants


IAS 16, 38 – Acceptable methods of depreciation/amortisation

Revenue-based

depreciation/

amortisation

Permitted (for

intangible assets

only) if…

Expressed as

measure of revenue

Revenue and

consumption of

economic benefits

‘highly correlated’

Asset is property,

plant and equipment

Intangible asset not

meeting one of

above criteria

Not permitted if…


Results

IAS 16, 38 – Acceptable methods of depreciation/amortisationExample – revenue not highly correlated to consumption of economic benefits

Fact pattern

■ An entity obtains a programme right to run

the programme six times in four years

■ Based on historical trends, the entity

forecasts that total revenue of 800 will be

received within four years

■ The programme will be shown twice in the

first two years, and then once a year over its

remaining useful life

■ The generation of revenue from each run is

not highly correlated to the consumption of

the economic benefits

■ Actual revenue and runs are shown in the

table below

Outcome

■ Units-of-production amortisation method

Ye

ar

Reve

nu

e

Ru

ns

Amortisation method

Revenue-based

Units-of-production

Straight-line

1 500 2 250 133 100

2 200 2 100 133 100

3 75 1 38 67 100

4 25 1 12 67 100

800 6 400 400 400


IAS 16, 38 – Acceptable methods of depreciation/amortisation


—Prospective application



Essentially sets a high hurdle to have depreciation based on revenue:

• The revenue and consumption of benefits must be ‘highly correlated’; or

• The intangible asset is expressed as a measure of revenue (for example, right to operate

a toll until revenue reached $10m)

Amendment may be relevant to media sector and service concession operators


IAS 16, 41 – Bearer Plants

Current accounting for

Bearer Plants

Fair value model

IAS 41

Amended accounting for

Bearer Plants

Revaluation model

IAS 16

Cost model

IAS 16



Includes those plants:

—used in the production or supply of agricultural

produce;

—expected to bear produce for more than one period;

and

— that have a remote likelihood of being sold as

agricultural produce, except for scrap sales

Excludes:

—plants cultivated to be harvested as agricultural

produce – e.g. trees grown for use as lumber;

—plants cultivated to produce agricultural produce when

there is more than a remote likelihood that the entity

will also harvest and sell the plant as agricultural

produce, other than as incidental scrap sales – e.g.

trees cultivated both for their fruit and their lumber

—annual crops – e.g. maize and wheat; and

—produce growing on a bearer plant – e.g. grapes

growing on a vine

How the amendments apply

Biological

assets

Consumable

biological assets

Bearer

biological assets

OthersPlants

IAS 41

continues to

apply

IAS 16 applies,

except for

produce

growing thereon

Produce


IAS 16, 41 – Bearer PlantsExample – applying the cost model to bearer plants

Fact pattern

■ Entity P owns vineyards

■ The vine plants and grapes on the vines together

have a fair value of 2,000

■ The historical cost of the vine plants, net of

depreciation, is 700

■ The fair value of the grapes on the vine plants is 100

Outcome

Existing requirements

■ P measures the vine plants and the grapes growing

on them at their combined fair value of 2,000

After amendments

■ P accounts for the vine plants and the grapes

growing on them separately. In this example, P elects

to measure the vine plants at their cost of 700, and

the grapes are measured at their fair value of 100





—Election in method of adoption:

- Apply amendments retrospectively in accordance with IAS 8; or

- Use a bearer plant’s fair value at the beginning of the earliest period presented as its deemed

cost at that date

—Entities are exempt from quantifying the effects of the change in accounting policy for the current

period



Questions?

Thank youYusuf [email protected]

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