IFRS update Israel

December 2013

www.pwc.com

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Agenda

1. What’s new ?

2. Developments at the IASB

- Leases

- Revenue

- Financial instruments

- Conceptual framework

- Rate regulation

3. Future improvements to IFRSs

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2013

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1. What’s new?

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Timeline – new standards and amendments

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2013 2014 2015

• IFRS 1 amendment – Government grants

• IFRS 7 amendment – Assets and liabilities offsetting

• IFRS 10 – Consolidated financial statements

• IFRS 11 – Joint arrangements

• IFRS 12 – Disclosure of interests in other entities

• IFRS 13 – Fair value measurement

• Amendments to IFRSs 10, 11, and 12 – Transitional guidance

• IAS 1 amendment – Presentation of items of OCI

• IAS 19 amendment – Employee benefits

• IAS 27 (revised 2011) – Separate financial statements

• IAS 28 (revised 2011) – Associates and joint ventures

• IFRIC 20 – Stripping costs

• Annual improvement 2011

• IAS 32 amendment – Assets and liabilities offsetting

• Amendment to IFRS 10, 11 and IAS 27 – Exception from consolidation for investment entities

• IAS 36 amendment – Recoverable amount disclosures for non-financial assets

• IAS 39 amendment –Novation of derivatives and continuation of hedge accounting

• IFRIC 21 – Levies

• IAS 19R amendment – employee contributions

2013

No mandatory date

• IFRS 9 – Financial instruments

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IFRIC 21 - levies

Scope

• Levies in the scope of IAS 37

• Timing and amount to pay is certain

Key provisions

• What is the obligating event that gives rise to a liability?

- Event identified by the legislation triggering obligation to pay

• When is a liability to pay a levy recognised?

- When the obligating event occurs

o At a point of time or over time

o Triggered by reaching minimum threshold

Transition

• Effective 2014

• Retrospectively applied, early adoption permitted

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IFRS 9 – general hedge accounting

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2013

• Issued in November 2013

• No mandatory effective date for now. Possible alternatives:

• Keep applying IAS 39 until macro hedging project is completed

• Adopt IFRS 9 hedge accounting chapter immediately

• Retain three types of hedges

• Relax the requirements for hedge effectiveness

• Documentation and designation

• Greater alignment with risk strategy

• Risk components in non-financial items

• Derivatives as hedged items

• Net exposures

• Accounting for time value of options, forwards and currency basis spread

• Removal of effectiveness bright lines

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2. Developments at the IASB

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IASB work plan

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Major project Q1 2014 Q2 2014

IFRS 9: impairment IFRS

IFRS 9: classification and measurement IFRS

Macro hedging DP

Insurance contracts Redeliberations

Leases Redeliberations

Revenue IFRS

Conceptual framework Redeliberations

Rate regulation DP

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2.1 Leases

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Lease accounting

Key proposals

• Lessee accounting

- Recognise an asset (right to use the leased item)

- Recognise a liability (obligation to pay rentals)

• Income statement accounting depends on type of lease

- Similar to finance lease if most of the value is consumed

- Otherwise similar to an operating lease

- Rebuttable presumption for property

- What is property?

• Lessor accounting

- Similar to today, based on similar criteria

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Lease accounting

Key proposals

• Lease term

- Include optional extension periods only when there is significant economic incentive to extend

• Contingent rents

- Excluded

• What distinguishes a lease from a service?

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Lease accounting

• Over 600 comment letters (and increasing)

• Varied messages

- Lessee

o Limited support for ‘dual approach’

o Dividing line for lease classification

o Costly and complex

- Lessor – no mandate for change?

• Improvement in accounting?

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2.2 Revenue

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Revenue from contracts with customers

Long standing project expected to finish shortly

• Discussion paper and two exposure drafts

• Consistent model across all geographies, industries and capital markets

• Replace limited existing GAAP

• Re-deliberations continued through October

• Final standard expected first quarter 2014

• Expected to be effective 2017

• Joint implementation group with FASB announced

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Revenue from contracts with customers Recognition

XXX

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Step 1: Identify the contract with the customer

Step 2: Identify the separate performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognise revenue when (or as) a performance obligation is satisfied

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Revenue from contracts with customers Final decisions

Collectibility

• ‘Probable’ threshold to determine whether revenue guidance is applied

• ‘Probable’ under both IFRS and US GAAP, so convergence not achieved, but both consistent with existing practice

Variable consideration

• Variable consideration included if it is highly probable that a subsequent change in the estimate would not result in a significant revenue reversal

• Exception for sales based royalties – revenue when uncertainty resolved

Licences

• Two types of licences: (1) Right transferred at point in time (2) Service of providing access over time

• Criteria to distinguish different types

• Identify separate performance obligations first

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2.3 Financial instruments

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Impairment – proposed credit deterioration model

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Effective interest on gross carrying amount

Lifetime expected credit losses

12 month expected credit losses

Recognition of expected credit losses

Interest revenue

Change in credit quality since initial recognition

Stage 1 Stage 2 Stage 3

Initial recognition* Assets with significant increase in credit risk

since initial recognition*

Credit impaired assets

*except for purchased or originated credit impaired assets

Lifetime expected credit losses

Effective interest on gross carrying amount

Effective interest on amortised cost carrying

amount (i.e. net of credit allowance)

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Class Upon origination Expected credit loss

Trade receivables without significant financing

• Simplified approach • Measure receivable at

invoice amount

• Lifetime expected credit losses

• Provision matrix can be used

Trade receivables with significant financing

Accounting policy choice: • General model; or • Simplified approach

• Depends on the accounting policy choice decision made.

Lease receivables As trade receivables with significant financing

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Impairment – proposed credit deterioration model Simplified approach

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Convergence?

IASB/FASB

• No joint decisions. Convergence seems unlikely

• Responses to IASB suggest support for the credit deterioration model

• IASB tentatively decided:

– Not to provide a definition of default, but to require entities to use the definition used for credit risk management. Rebuttable presumption of default at 90 days past due

– Clarify application of low credit risk exception

– Clarify that the discount rate is effective interest rate (EIR) or an approximation thereof

• Final standard expected in first half of 2014. Expected effective date no earlier than 2017

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IFRS 9 - classification and measurement Limited amendments Original objectives to change IFRS 9

• Address IFRS 9 application issues

• Consider its interaction with the insurance project

• Address differences between IFRS 9 and FASB model

Summary of proposed changes

• Introduction of the fair value – OCI category with recycling for debt instruments

• Clarify “solely payments of principal and interest”

• Revised business model guidance to clarify the scope of the amortised cost category

• Transition guidance requires that all phases of IFRS 9 are adopted together once the final standard is issued

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Convergence? IFRS 9 - Classification & measurement (limited amendments)

• Joint meetings with FASB on-going

• In the November both boards tentatively agreed:

– To retain the fair value categories – FVOCI and FVPL

– Sales should not drive business model in the hold to collect measurement category

• Final standard expected in the first half of 2014

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2.4 Conceptual framework

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Conceptual framework

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2013

Disclosure forum (Jan)

Discussion paper (July)

Final publication date

Comment period ends (Jan)

Exposure draft expected

2014

2015?

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Conceptual framework Key questions

Debt/equity

• Strict obligation approach or narrow equity

Conditional liabilities

• Three possible views for conditional and constructive liabilities

Other comprehensive income (OCI)

• A principle?

• Proposed formats: sub-total of profit or loss with bridging/mismatch/recycling items in OCI?

Prudence

• Removed from Framework in 2010 and not considered in the DP

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2.5 Rate regulation

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Rate regulation Discussion paper

Accounting for rate regulation

• Interim standard

• Discussion paper expected early 2014

• Consultative working group formed

• Background research:

- IASB should explore rate regulation based on rights and obligations rather than ‘types’ of regulation

- Consider of interactions with IFRIC 12

- Description of rate regulation in several different territories

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3. Future improvements to IFRSs IASB / IC agenda items

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3. IASB / IC agenda items

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IAS 12 • Recognition of deferred tax assets for

unrealized losses

IAS 16/ IAS 38

• Clarification of acceptable methods of depreciation and amortization

IAS 19R

• Employee contributions

• Discount rates

IAS 32

• Puts on non-controlling interests

• Debt/equity

IFRS 2

• Dual pricing

• Measurement of cash settled awards

• Contingent settled features

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IAS 27 / IAS 28 / IFRS 10 / IFRS 11

• Equity method in separate financial statements

• Equity method – share of other net assets changes

• IFRS 11 implementation issues

• IFRs 10 implementation issues

3. IASB / IC agenda items

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IFRS 13

• Fair value measurement – unit of account for financial assets that are investments in subsidiaries, JV and associates measured at FV

Exposure draft of IAS 41

• Bearer plants in the scope of IAS 16 instead of IAS 41

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3. IASB / IC agenda items

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Disclosure initiative

Short term project

• Disclosure initiative, including

- materiality

- disaggregation

- order of notes

- net-debt reconciliation

• Going concern

• Current and non-current classification of liabilities

Medium term project

• Single standard replacing IAS 1, IAS 7 and IAS 8?

• General review of disclosure in existing standards

Thank you

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