programme - pwc · stay smart – financial reporting updates june 2015 10 derecognition of...

14.00 Snack

14.15 Introduction

14.20 Financial Instruments hot topics

15.10 IASB update

16.00 Break

16.30 Equity accounting

17.20 Statutory session

18.15 Aperitif

Financial Reporting Updates Spring 2015 June 2015 2

Programme

PwC Events and Community Switzerland

Stay Smart - Financial Reporting Updates June 2015 3

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June 2015 4

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June 2015 5

100 offers for a weekly magazine subscription were taken up as follows:

a) Digital only US$ 59 – 16%

b) Print only US$ 125 – 0%

c) Digital and print US$ 125 – 84%

What happens if the print only offer is removed?

1) No change as no one chose this option

2) 5% more chose c) over a)

3) 11% more chose a) over c)



Test poll – Behavioural Economics



Stay Smart – Financial Reporting Updates June 2015 7

Agenda

Supplier financing

Effective interest rate

1

2

Supplier Financing

1


Supplier finance Derecognition of financial liabilities

Welcome to the Supplier Finance (or Reverse Factoring) section


Derecognition of financial liabilities

Extinguishment

Exchange or modification with substantially different terms: • 10% quantitative test • Qualitative assessment

Payment of amount owed

Legally released from primary responsibility

‘Novation’ typically results in the borrower being legally released from its obligations under the existing liability, while an ‘assignment’ does not. However, legal interpretation may not be the same in all countries.

A financial liability is derecognised when it is ‘extinguished’.


Derecognition of financial liabilities Supplier finance basic structure

GOODS

PAYABLE

1) Buyer confirms payables

Supplier

Buyer

Bank



GOODS

PAYABLE

2) The receivables are transferred to the bank

Bank borrowings?

Trade payables?

Buyer

Supplier



GOODS

PAYABLE

3) Supplier receives cash

CASH Bank

Buyer

Supplier

Fee

CASH



GOODS

4) Buyer pays cash back to bank

CASH

Fee Bank

Buyer

Supplier



Better relationship

Early payment discount

Cheaper short term financing

Improve working capital

Benefit from credit rating

Bank

Buyer

Supplier


What are the accounting ISSUES?

Should the BUYER de-recognise its trade payables and recognise a borrowing instead?

What are the implications for presentation in the B/S?

What are the implications for presentation in the CFS?

DEPENDS ON FACTS AND CIRCUMSTANCES


Derecognition of financial liabilities Has substance of liability changed to bank finance?

Extinguishment (e.g. novation)

• Derecognition of trade payables

• Recognition of bank borrowings

Examples of indicators of extinguishment*:

Who benefits? Buyer, by improving working capital.

Who negotiated? Buyer selects suppliers and negotiates terms.

Who pays fees?

• Buyer pays fees on amounts that suppliers factor. • Buyer receives early payment discount. • Buyer pays interest cost.

Guarantee from parent? Typically indicates bank borrowing (not trade payable).

Impact on timing cash flows? If payment patterns before and after supplier finance are significantly different, generally indicate bank financing.

* If no extinguishment based on above, the substantial modification test must be applied.

Effective interest rate

2

• EIR will not change under IFRS 9

• Creative ways to change interest in low-interest rate environments

• Changes in cash flows may impact EIR or profit or loss

• Negative interest rates are more common


Effective interest rate (EIR)


Effective interest rate The basics

End of year 1 End of year 2 End of year 3

Borrower

Lender

How does the effective interest rate work?

1,000 -100

900 1,000 5% 5% 5%

50 50 50

First, the cash flows . . .




Borrower

Lender


1,000 -100

900

1,000

5% 5% 5%

50 50 50


Effective interest rate What is included in the EIR?

Are premiums and discounts included in the EIR?

Yes No

Premiums and discounts

No OR Yes



Are loan origination fees included in the EIR?

Yes No

Loan origination fees

No OR Yes



Are indirect overhead costs included in the EIR?

Yes No

Indirect overhead costs

No OR Yes





Day 0

Maturity

FV –transaction costs = 900 (1,000 -100) Effective interest rate is a method of

allocating the interest income or interest expense over the relevant period

900

910 920 930 940 950 960 970 980 990 1,000

Lender 5% 5% 5%

900

1,000

9% 9% 9%

The borrower’s view. . .


Effective interest rate (1/2) The basics



Day 0

Maturity

FV –transaction costs = 900 (1,000 -100)

900

910 920 930 940 950 960 970 980 990 1,000

Lender 5% 5% 5% 900 1,000


Effective interest rate (2/2) The basics



Day 0

FV –transaction costs = 900 (1,000 -100)

Effective interest rate is a method of allocating the interest income or interest

expense over the relevant period 900

931 1,000

Lender 900 1,000 9% 9% 9%

964

So what are the double entries in year 1?



Dr Interest expense 50

Dr Borrowings 31

Cr Cash 81


Cr Cash 50


Cr Borrowings 31

Cr Cash 50

a)

b)

c)


Effective interest rate Changes in estimated cash flows

• Actual cash flows rarely occur in line with expectations

• Variation in the amount of cash flows, timing or both

Changes in market rates

of interest (IAS 39.AG7)

Changes in estimates of payments/

receipts (IAS 39.AG8)

Examples: • Benchmark rates • Link to inflation • Closely related indices

(e.g. CMS)

Examples: • Prepayments • Extensions • EBITDA


Effective interest rate (1/3) IAS 39. AG7 requirements


Borrower

Lender

• Re-estimating cash flows for floating rate instruments normally has no significant impact on carrying value

5% 5%

Discounting these cash flows at 5% will lead to a carrying value of 1,000

1,000 1,000

5%

50 50 50




Borrower

Lender


6% 6%

1,000 1,000

5%

The market rate of interest changes to 6%

50 60 60




Borrower

Lender


6% 6%

1,000 1,000

5%

CV = 1,000

50 60 60

Discounting the new cash flows at 6% will still lead to a carrying value of 1,000


Effective interest rate (1/3) Example IAS 39.AG8 – Fixed rate instrument


Borrower

Lender

5% 5% 5%

1,000 1,000

At inception repayment expected at maturity

-100

900

50 50 50




Borrower

Lender


5% 5% 5%

1,000

At end of year 2 borrower repays 50% (500)

-100

900

500 50 50 500 25




Borrower

Lender


5% 5% 5%

1,000

At inception repayment expected at maturity

At end of year 2 borrower repays 50% (500)

Amortised cost immediately after repayment 464 [after early repayment of CU500]

New discounted cash flows 482 [expected payments in 1 year's time (repayment CU500 + coupon CU25 discounted at original EIR of 9%)]

Catch-up adjustment 18

-100

900

500 50 50 500 25

Background

• 10-year loan.

• Issued at par.

• Right to repay at par at any time.

• At inception no expectations for early repayment.

• In year 5, borrower decides to repay 50% of the principal of the loan.


Example – Scenario 1 Early repayment

Assess whether IAS 39.AG7, IAS39.AG8, both or none apply.

a) IAS 39.AG7 applies

b) IAS 39.AG8 applies

c) IAS 39.AG7 or IAS 39.AG8 apply

d) Neither IAS 39.AG7 nor IAS 39.AG8 applies


Example – Scenario 1 Early repayment

Background

• Inflation linked bonds (variable component based on a consumer price index).

• Bonds pay fixed rate of interest of 2% plus change in CPI during the year.

• The CPI has changed from the initial expectations.


Example – Scenario 2 Inflation linked bond







Example – Scenario 2 Inflation linked bond

Background

• Fixed rate debt investment originally purchased for CHF 100.

• Investment’s expected cash flows declined substantially (due to decline in the counterparty’s creditworthiness) to CHF 50 and impairment loss was recorded.

• At the next year-end the recoverability of cash flows has increased to CHF 60.


Example – Scenario 3 Bond







Example – Scenario 3 Bond

Background

• 5-year bond.

• Coupon payments are based on a multiple of EBITDA at the end of each year.

• At year-end EBITDA is lower (CU1,200) than expected (CU1,500) at origination.


Example – Scenario 4 Bond with coupon based on EBITDA







Example – Scenario 4 Bond with coupon based on EBITDA

Actual cash flows rarely occur in line with expectations.


Recap Effective interest rate

Impact on P&L

Update EIR

Changes in market rate of interest (IAS 39.AG7) No Yes

Changes in estimates of payments/receipts (IAS 39.AG8)

Yes No


Negative interest rates Effective interest rate

Can interest rates be

negative?

• Negative interest cannot be revenue, but some flexibility in presentation

• Disclose policies if material

How should negative

interest be presented?

• Apply “appropriate expense classification”.

• Presentation as interest expense or as a separate line item within net interest margin (i.e., interest revenue, interest expense, negative interest expense on assets to come to a total of net interest margin) or as some other expense.

• After IFRS IC debate including negative interest in interest revenue if material is not appropriate.

• As the negative interest results from an interest-bearing financial instrument, classification of interest expense is appropriate.


Negative interest rates Presentation of negative interest after IFRS IC decision

On 30 June 2011 XYZ Co enters into

• a loan of a CHF 10m, variable-interest bond

paying LIBOR, with semi-annual payments and semi-annual variable rate reset dates,

and a 10-year term

and

• an interest rate swap, CHF 10m notional principal, 10-year term, and semi-annual variable rate reset

to pay 4.5% fixed

and receive LIBOR.


Negative interest rates Cash-flow hedge using an interest rate swap



Debt Instrument CHF 10m at LIBOR

SWAP

Pay LIBOR Pay fixed at

4.5%

Receive LIBOR

XYZ Co



Issued bond Interest rate swap

Pay LIBOR Receive LIBOR 0%

Pay fix 4.5% 4.5%

Fixed cash flows – fixed interest payment 4.5%

31 December 2011:

Assume LIBOR is 4.5%

The hedge relationship is highly effective.




Receive LIBOR Pay LIBOR 0%

Pay fix 4.5% 4.5%

Fixed cash flows – fixed interest payment 4.5%

31 December 2014 and after:

Assume LIBOR is negative –1%




LIBOR is zero due to floor Pay LIBOR 1% 1.0%

Pay fixed 4.5% 4.5%

Fixed interest payment 5.5%

31 December 2014 and after:

Assume LIBOR is negative –1%

and the bank had a floor included in the loan contract

but no floor is included in the interest rate swap

2011 2012 2013



2014

What might be the impact on hedge effectiveness?

Floor included in the loan and the

bank is not paying negative interest

No floor included in the IRS, instead of

receiving LIBOR, negative interest payable

LIBOR

receive

pay



What might be the impact on hedge effectiveness?

Discontinue hedge accounting

Supplier financing:

• Whether a trade payable might be derecognised depends on facts and circumstances.

• If payment patterns before and after supplier finance are significantly different, generally indicate bank financing.

Effective interest rate:

• Loan origination fees are included in the EIR.

• Changes in estimated cash flow for floating rate instruments do not normally affect P/L, however for fixed instruments there might be a catch-up adjustment through P/L.

• Negative interest should not be offset with interest revenue.

• Hedge relationships might become ineffective due to negative interests.


Summary FI hot topics

Any questions?


http://ch.knowledgecurve.com/KCurve/kcurve.nsf/Documents/88B7FDC69BD55285C12579D5004A313B

#1 IASB update

Session agenda

• New IFRSs for 2015

• IASB work plan

– Recently completed projects

– Major items on the IASB’s work plan

• SIX focus areas for 2015

IASB update


Amendments applicable from 1 July 2014 (1 January 2015):

New guidance applicable in 2015

IAS 19 – Risk sharing Option: “cash accounting” or spread over employees’ working life

Annual improvements: 2010-12 and 2011-13 cycles

Noteworthy amendments: • IFRS 8 – Disclosure of judgement

made in aggregating segment • IAS 24 – Required disclosure of

amounts paid to entity providing key management remuneration


A practical guide to new IFRSs for 2015

This publication explains the amendments to standards coming into effect for 2015 and 2016 year-ends

Publication available in the event app


Session agenda


• IASB work plan




IASB update


New standards

1 January 2018 1 January 2017 ? 1 January 2016


• Interim standard

• Only applicable for first time adopters

• Further information:

– MoA 2.185, 2.186

IFRS 14 – Regulatory Deferral Accounts


• Some differences from current practice

• More guidance in complex areas

• Different judgements

• Disclosures – even if the accounting is the same

• Implementation developments?

IFRS 15 – Revenue from Contracts with Customers

Step 1 Identify the contract

Step 2 Separate performance obligations

Step 3 Determine transaction price

Step 4 Allocate transaction price

Step 5 Recognise revenue


Licences for intellectual property – pattern of revenue recognition

IFRS 15: Latest developments Transition Resource Group (TRG)

Overtime Point in time

IFRS 15 Right to access IP which is significantly affected by entity’s activities

Right to use the IP as it exists when licence is granted

Q? Which attribute of the IP (form, functionality, value) should be assessed to determine ‘significantly affected by the entity’s activities’?

Approach A Clarify: consider activities that significantly affect the utility of the IP

Approach B ‘Symbolic IP’ (e.g. brand name) ‘Functional IP’ if form and functionality of IP expected to change as result of activities performed by the entity

‘Functional IP’ (e.g. software)

FASB

IASB


Identifying performance obligations

More promised goods or services to be identified under new standard compared to number of ‘deliverables’ under current guidance?

FASB proposed to amend standard to state that an entity is not required to identify promised goods or services that are immaterial in the context of the contract.

IASB – no action required, not seen as a concern for IFRS preparer

Distinct in the context of the contract

FASB – clarify the guidance

IASB – develop examples to illustrate application of principle



Principal or agent - Same indicators but different model.

Similar indicators to IAS 18 even though model has changed

– another party is primarily responsible for fulfilling the contract;

– entity does not have inventory risk

– entity does not have discretion in establishing prices

– entity’s consideration is in the form of a commission; and

– entity is not exposed to credit risk

Challenges in assessing services and ‘intangible’ goods

Application to sales and excise taxes



Effective date: 1 January 2018

Classification and measurement

• New categories for financial assets

• New impairment model – expected credit losses

Hedge accounting

• More flexibility in applying hedge accounting

IFRS 9 – Financial Instruments


IAS 39 categories

Measured at fair value Measured at amortised cost

Fair value P&L Available For Sale Held to

Maturity Loans and

Receivables equity debt

Fair value P&L Fair value OCI

no recycling P&L

Fair value OCI recycling P&L

Amortised cost

Measured at fair value Measured at amortised cost

IFRS 9 categories

IFRS 9 vs. IAS 39 categories Categories of financial assets – simplified

IFRS 9: Classification depends on business model and characteristics of cash flows


Expected credit losses General model

Effective interest on gross carrying amount

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

Performing (initial recognition*)

Underperforming (assets with significant

increase in credit risk since initial recognition*)

Non-performing (credit impaired assets)

Effective interest on gross carrying amount

Lifetime expected credit losses

Effective interest on amortised cost carrying

amount (i.e. net of credit allowance)

Lifetime expected credit losses

* Except for purchased or originated credit impaired assets


Impairment Expected vs. incurred losses

Loan granted

Financial crisis

Unemployment increases

Borrower loses job

Borrower can no longer pay

interest

Incurred losses Expected losses


Acquisition of interests in joint operations Amendment to IFRS 11 (1 January 2016)

– Apply IFRS 3 principles for acquisition of a joint operation (JO) that constitutes a ‘business’ – applicable for initial interest and additional interest in the same JO.

Sales between investor and its associates or joint ventures (JVs) Amendment to IFRS 10 and IAS 28 (1 January 2016)

– Sale or contribution of assets between an investor and its associates or JVs resulting in full gain/loss being recognised only if constitutes a “business”.

Bearer plants Amendment to IAS 41 and IAS 16 (1 January 2016)

– Bearer plants (e.g. grape vines and oil palms) now included within scope of IAS 16 where use of cost or revaluation model is permitted.

Amendments applicable for 1 January 2016


Equity method for separate financial statements Amendment to IAS 27 (1 January 2016)

• Entities can now account for investments in subsidiaries, JVs and associates at cost in accordance with IFRS 9, or using the equity method as described in IAS 28 in their separate financial statements.

Acceptable methods of depreciation and amortisation Amendment to IAS 16 and IAS 36 (1 January 2016)

• PP&E – depreciation based on revenue generated by the asset is not appropriate

• Intangible assets – rebuttable presumption that amortisation based on revenue generated by the asset is not appropriate



Investment entities – applying the consolidation exception Amendment to IFRS 10 and IAS 28 (1 January 2016)


Investment Entity A

Sub-Holding

Investment X

Investment Y

Investment Z

Service Entity

Service entities

Subsidiaries acting as an extension of an investment entity

Consolidate if main purpose is to provide services in support of investment entity’s investment activities


Investment entities – applying the consolidation exception Amendment to IFRS 10 and IAS 28 (1 January 2016)


Investment Entity A

Sub-Holding

Investment X

Investment Y

Investment Z

Service Entity

Subsidiary is also an investment entity

Subsidiary which is itself an investment entity to be measured at fair value by investment entity parent

Measurement at fair value required, even if subsidiary provides investment-related services


Disclosure initiative Amendment to IAS 1 (1 January 2016)


Materiality and disaggregation

Do not obscure useful information – disaggregate where relevant for understanding

Subtotals - Made up of items recognised and measured in accordance with IFRS

- Make components understandable - Consistent from period to period - Not more prominent than required subtotals - Reconcile to required subtotals

Notes Flexibility in order of notes

Accounting policies Significant accounting policies to be disclosed – unhelpful examples in IAS 1 removed

OCI from equity method

2 line items (with/without subsequent recycling to P&L)


Standard Amendment

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations

Reclassification from ‘held for sale’ to ‘held for distribution’ or vice versa

IFRS 7 – Financial instruments: Disclosures

• Servicing contracts – guidance on additional disclosures

• Offsetting disclosures in interim reports not specifically required

IAS 19 – Employee Benefits Discount rate based on currency in which liabilities are denominated, not based on country where they arise

IAS 34 – Interim Financial Reporting Information disclosed elsewhere in the interim financial report – cross reference to be included


Annual improvements 2012-2014


Session agenda


• IASB work plan




IASB update


Project Q2 2015 Q4 2015

Insurance Contracts Redeliberations

Leases Target IFRS

IASB work plan

Work plan status: 5 May 2015


19 Mar 2009

Discussion paper issued

17 Aug 2010

ED published

15 Dec 2010

Comment period closed

Jan 2011 Re-

deliberations began

16 May 2013 RED

published

13 Sep 2013

Comment period closed

Mar 2014 Re-

deliberations began

Leases – timeline

• Final standard: Q4 2015?

• Effective date: TBD


• Lessee accounting:

• All leases will be on balance sheet

– Exemptions: short-term leases, small ticket leases or contracts not qualifying as leases

• A lessee recognises fixed assets and financial liabilities and corresponding amounts of amortisation and interest.

• A single income statement approach (i.e. amortisation and interest) resulting in front loaded expenses for all leases.

• Lessor accounting

• No change to current model

Leases – what can we expect?


IASB model Balance sheet Income statement

Single lease model Right of use (ROU) asset

Lease liability

Amortisation expense

Interest expense

Lessee accounting

FASB model – lease classification to be consistent with existing IAS 17

FASB model Balance sheet Income statement

Finance (Type A)

Right of use (ROU) asset

Lease liability

Amortisation expense Interest expense

Operating (Type B)

Lease expense

IASB model – a single approach where all leases would be accounted for as ‘finance leases’


Leases The big question

How is the distinction made?

Lease Customer controls the use

of an item

Service Supplier controls the use

of an item


What is a lease?

A contract that conveys the customer the right to use an asset for a period of time in exchange for consideration.

A lease exists when a customer controls the right to use an identified item, which is when the customer:

has exclusive use of the item for a period of time and

can decide how to use it

Definition of a lease


Retail rental contract

• Retailer has exclusive use of a specific shop in a commercial centre for a five-year period.

• The real estate company provides cleaning and security services, as well as advertising services, as part of the contract.

Who controls the item?

The customer

Conclusion

Contract contains a lease (shop) and services (cleaning, security, advertising)

Leases: Definition of a lease IASB paper February 2015


Coffee shop at the airport

• Coffee company to use a space in the airport to sell its products for a three year period

• Airport operator can change the location of the space allocated


The supplier

Conclusion

Customer does not have exclusive use of a particular piece of the airport space. No identified asset.

Not in scope of the leasing standard.



Oil tanker contract

• Oil company enters into a contract with a shipowner for the charter of a particular oil tanker for a 20-year period. Oil company decides when and to which ports the oil tanker sails.

• The shipowner’s crew operate and maintain the tanker throughout the contractual term.


The customer

Conclusion

Contract contains a lease and services.



Session agenda


• IASB work plan




IASB update


Statement of Cash Flows (IAS 7) • Gross presentation of cash flows • Cash flows in foreign exchange –

translation at average rate appropriate?

• Cash flows from discontinued ops

Fair Value Measurement (IFRS 13) • Plausibility of allocation to fair-value levels

• Disclosures in interim reports

Earnings per Share (IAS 33) • Examine basic and diluted EPS • EPS in connection with

discontinued operations • Disclosure of additional EPS

SIX focus areas for 2015


June 2015 89

Any questions?



Equity Accounting

• Scope and definitions

• Share to account for

• Application of equity method

• Initial measurement

• Subsequent measurement

– Equity accounting adjustments

– Impairment


Contents

Equity Accounting Scope and definitions

All entities that are investors with joint control of, or significant influence over, an investee

Significant influence

The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies

Associate

An entity over which the investor has significant influence

Equity method

Method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets

Joint venture

Joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

IAS 27 Amendment


Equity Accounting Classification

Indicators of significant influence

Investor owns 15% of the company and has representation on the board of directors.

Investor holds 10% of shares and has provided a patent that is critical to the company’s production process.

Investor holds 18% of shares and purchases 25% of total output (in monetary terms) under a long-term contract.

Investor seconded top finance personnel to the company.

Investor owns 15% of shares and holds a call option for 15% that is substantive at the reporting date.

Fund manager has 15% in the investment fund. Under IFRS 10 a Fund manager is an agent and does not control the fund.


• Answer 1: 40%

• Answer 2: 32% [80% x 40%]

Stay Smart – Financial Reporting Updates

Equity Accounting Poll - What is a share?


A

B

80%

C

40%

Aggregate of the holdings by the parent and its subsidiaries.

– What is the share of C’s net profit in A’s consolidated financial statements?

June 2015 94


Equity Accounting Poll - What is a share?


Aggregate of the holdings by the parent and its subsidiaries.

– What is the share of C’s net profit in A’s consolidated financial statements?

• Answer 1: 25%

• Answer 2: 26.25%

25%

25%

5%

C

B

A

If associate has subsidiaries with non-controlling interest (NCI)

• Investor’s share in consolidated profit and loss (P/L) and OCI of associate is after tax and NCI

A

B

25%

D

75%

C

80%

Equity Accounting What is a share?


Potential voting rights

• Investor’s share is determined

on the basis of present ownership interest

• Does not reflect possible exercise or conversion of potential voting rights

Different classes of equity shares

• Analyse rights attached to each

class of shares

• Preference shares classified as liabilities not part of investment in associate





Step 1 • Investment is stated as one line item, initially recognised at cost.

• Assess and recognise impairment, if any. Step 6

• Carrying amount of the investment is adjusted to recognise distributions received from the investee. Step 5

• Carrying amount of the investment is adjusted to recognise investor’s share of P/L and OCI of investee after acquisition. Step 4

• Profit or loss of investee is adjusted for the effects of transactions with investee. Step 3

• Profit or loss of investee is adjusted for the effect of fair value adjustments recognised upon initial recognition. Step 2

June 2015 98

Equity Accounting Initial recognition at cost

Included in cost of investment

Included in cost of investment at acquisition date.

Subsequently: cost based approach or analogy to IFRS 3

IAS 28 does not define cost.

Cost


Step 1

• Compare consideration with share of fair value (FV) of net assets acquired:

• Consideration > Fair value – Goodwill: include in carrying amount

• Consideration < Fair value – Negative goodwill: take to Income Statement

• Purchase price allocation – same principles as under IFRS 3

– Recognise all identifiable assets and liabilities, including those previously not recognised by investee

– Deferred taxes

– Contingent liabilities

Equity Accounting Initial recognition at cost

Step 1

Goodwill from previous

acquisitions – not an identifiable asset


Instructions:

– Read exercise 1

– Calculate the amount at which the investment in X should be recognised at the acquisition date and the goodwill, if any

– Use the table provided

Worked example Initial recognition at cost

Step 1

Calculate the amount at which the investment should be initially recognised (including goodwill).


Equity Accounting Equity accounting adjustments

Dealing with fair value adjustments arising on

acquisition

• Additional depreciation for FV adjustments – PPE / Intangible assets (IA)

• Amortisation for previously unrecognised IA

• Reversal of impairment of ‘old’ goodwill

• Adjustments for impairments recognised by associate

Achieving consistent accounting policies

• Adjust for difference in policies

• New standards adopted in different

periods

Step 2



IAS 28 does not provide guidance on how to eliminate

Investor’s share of associate’s profit or losses eliminated

Step 3

No elimination

Trading balances and loans between investor and associate are not eliminated

Profit/loss on transactions with associates


Unrealised – included in assets Realised

June 2015 103


Step 3

Upstream transactions Eliminate against carrying value of

associate Dr. P/L Cr. Associate

Eliminate against carrying value of asset

transferred Dr. P/L Cr. Asset


Investee

Investor

$

June 2015 104

Investor

Investee


$

Step 3

Downstream transactions Eliminate against carrying value of associate

Unrealised gain > carrying value of associate:

• CV not reduced below zero

• Gain recognised in profit or loss

• Associate reports profits in subsequent

periods policy choice


Investee

Investor


$

Step 3

Long-term loans to associates

Classified as financial asset on balance sheet

Presented separately from investment in associate

Part of investor’s total interest in an associate but not part of the investor’s equity investment

Loans with stated maturity are assessed for impairment under IAS 39

Share of associate’s losses exceeds investment in the associate: • Losses are attributed to long-term loans for which

settlement is not planned or likely to occur in the foreseeable future.

$ $



• Adjust carrying value of the investment to recognise investor’s share of P/L and OCI of investee after acquisition

• Loss-making associates Investment is written down to zero Subsequent losses are not recognised Losses may be attributed to investor’s other interests in the associate such as

long-term loans If profits are made in future – investor recognises profits only after all

unrecognised losses have been offset.

Step 4


Equity Accounting Other net assets changes

IAS 28.3 – All post-acquisition changes in net assets of an investee to be recognised by investor

IAS 28.10 – Guidance for P/L and OCI of associates only

Other net asset changes – changes in share capital, share-based payments reserves, transactions with NCI

IASB’s proposal to recognise in equity with recycling to P/L upon disposal of associate – abandoned

PwC view – dilution gains/losses to be recognised in P/L


• Reduce carrying amount of the investment

• Dividends paid by associate > carrying amount of the investment

Carrying amount reduced to nil but does not become negative

Gain recognised in P/L if no obligation to make payments on behalf of associate

Associate makes profits in subsequent years – policy choice

Equity Accounting Distributions from associates

Step 5


Instructions

• Read exercise 2

• Calculate the equity accounting adjustments investor Y should record

• Calculate carrying amount of the investment in X as at 31 December 20X1

• Use table provided

Worked Example Subsequent measurement

xxx xxx

Calculate investor’s share of profit and loss and carrying value of the investment at the end of period


Equity Accounting Impairment

Impairment

Expected future dividends

IAS 36 – impairment testing

IAS 39 – impairment triggers

No allocation of impairment loss

Tested as a single asset

Step 6

Share of associate’s CFs

Impairment can be reversed

IAS 28 once IFRS 9

effective


Equity accounting Key messages

Fair values of assets/liabilities provide the basis for subsequent equity accounting adjustments. 1 Consider all investor’s interests when determining share to be accounted for. 2 Application of equity accounting may require a number of adjustments to investee’s profit or loss and OCI. 3

Apply IAS 39 for impairment indicators and IAS 36 for actual test. 4 Stay Smart – Financial Reporting Updates June 2015

112

Any questions?



1

News from statutory accounting

New Financial Market Infrastructure Act (FMIA)

News from statutory accounting Agenda


New Auditor Reporting

New accounting law – update on tax impacts

1

2

3

New Financial Market

Infrastructure Act (FMIA)

1


1

FMIA – Background

G 20 summit

US: Dodd-Frank Act

EU: EMIR

CH: FMIA

Financial Crisis 2008


http://www.google.ch/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://otlmedia.co.za/tag/financial-crisis/&ei=CWNZVY-rMMrbUdSIgcAP&bvm=bv.93564037,d.d24&psig=AFQjCNHzP-m4IYfw_t4W8YhZayH2HswIsw&ust=1432007813807569

FMIA – Objectives

Objectives

enhance

reduce

Transparency

Risk: Counterparty/ Operational

To strengthen the stability and competitive position of the Swiss financial market

Financial Markets Infrastructure Act (FMIA) Finanzmarktinfrastrukturgesetz (FinfraG) Loi sur l’infrastructure des marchés financiers (LIMF)


FMIA – Affected entities (Counterparties)

(Small) Financial Counterparties

• Banks

• Insurance and reinsurance companies

• Securities broker

• Fund management and fund manager of collective investment schemes

• Investment schemes according Collective Investment Schemes Act

• Pension funds and investment foundations

(Small) Non Financial Counterparties

• The „others“

„Small“

• Average gross derivative position below threshold (tbd by Fed Council)

• Hedging positions can be excluded from measuring against the threshold


FMIA – Core requirements


Central clearing

• OTC derivatives • FX swaps and forwards excluded

Trade repository

• All derivatives to be reported to a central trade repository • This also applies for intra-group derivatives

Risk mitigation

• For uncleared OTC derivatives • FX swaps and forwards excluded • Partly applicable for intra-group derivatives

Platform trading

• For certain OTC derivatives between certain market participants • Does not apply if a small counterparty is involved • Only effective when it is effective on international markets

Financial counterparty

Small Financial counterparty

Non-financial counterparty

Small Non-financial

counterparty

Central clearing X X

Reporting

Risk mitigation

Operational risks

Daily valuation of open positions X X

Exchange of collateral X

Platform trading X X

Requirements per class of counterparties


How does FMIA affect you?

Derivatives?

No impact

Hedging?

Above threshold? no

yes

yes

Trade repository

Portfolio compression

Portfolio reconciliation

Timely confirmation

Dispute Resolution

Clearing (TR implied)

Portfolio compression

Portfolio reconciliation

Timely confirmation

Dispute Resolution

Valuation (M2M)

Platform Trading

yes

no


Audit requirements


• Compliance with FMIA requirements is subject to audit • Statutory auditor will perform audit procedures and report to

a) FINMA (for FINMA regulated entities) b) BoD (for not FINMA regulated entities)

• The statutory auditor is required to report to the Swiss Department of Finances in case of breaches of law and inactivity of the BoD

New auditor reporting

2


2

• Financial crises triggered changes

• New ISA reporting standards published in January /April 2015

• Applicable for all ISA audits of financial statements for periods ending on or after 15 December 2016

• Switzerland: Ordinary audits / audit reports to the AGM

New auditor reporting – background


http://www.google.ch/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://otlmedia.co.za/tag/financial-crisis/&ei=CWNZVY-rMMrbUdSIgcAP&bvm=bv.93564037,d.d24&psig=AFQjCNHzP-m4IYfw_t4W8YhZayH2HswIsw&ust=1432007813807569

New auditor reporting – amended guidance

New standard: ISA 701 “Communicating key audit matters in the independent auditor’s report”

Revised standards: Conforming amendments:

- ISA 260 “Communication with those charged with governance”

- ISA 570 “Going concern” - ISA 700 “Forming an opinion and reporting

on financial statements” - ISA 705 “Modification to the opinion in the

independent auditor’s report” - ISA 706 “Emphasis of matter paragraphs

and other matter paragraphs in the independent auditor’s report”

- ISA 720 “The auditors responsibilities

relating to other information and related conforming amendments”

- ISA 210 “Agreeing the terms of audit engagements” - ISA 220 “Quality control for an audit of financial

statements” - ISA 230 “Audit documentation” - ISA 450 “Evaluation of misstatements identified during the

audit” - ISA 500 “Audit evidence” - ISA 510 “Initial audit engagement opening balance” - ISA 540 “Auditing accounting estimates, including fair value

accounting estimates and related disclosures” - ISA 560 “Subsequent events” - ISA 580 “Written representations” - ISA 600 “Special considerations – audits of group financial

statements (including the work of component audits)” - ISA 710 “Comparative information corresponding figures

and comparative financial statements” - ISA 810 “Engagements to report on summary financial

statements”


New auditor reporting – report structure

Elements required by ISA 700R

Additional requirements by jurisdiction

Auditor’s Opinion

Basis for Opinion

Audit approach (materiality and audit scope)

Going Concern

Key Audit Matters - KAM 1 - KAM 2 - etc.

Responsibilities for the Financial Statements

- Auditors responsibilities - Other reporting

responsibilities

Other required reporting Other required statutory reporting


New auditor reporting – KAM

Matters that were communicated with those charged with governance

Matters that required significant auditor attention

Matters of most significance in the audit

= KAM

Audit Report


New auditor reporting – KAM elements


Why? • Description of why the matter was considered as a KAM

How? • Description of how the matter was addressed in the audit

Where? • References to related disclosures, if any

New auditor reporting – practical example


New auditor reporting – summary

Most significant changes to audit reports since decades • New structure • KAM for listed entities • Clarification on (auditor’s and the entity’s) responsibilities • Reporting on other information

Swiss perspective

• No early adoption by the Swiss profession • All ISA and ordinary audit reports will change as from 2016 • Reports on limited statutory examination remain unchanged


New accounting law – update on

tax impacts

3


3

New accounting law – update on tax impacts

Conference of Swiss tax authorities updated their analysis of the new accounting law (26 November 2014) • Tax treatment of treasury shares • Foreign currencies and taxation • Individual versus group

measurement • …


Tax?

New accounting law – update on tax impacts Treasury Shares

Accounting treatment Tax treatment

• Initial recognition at cost and deducted from equity

• No re-measurement • Accounting policy choice for gains/

losses from transactions including cancellations (P&L or equity)

• Tax regime unchanged: treasury shares are treated as an asset

• Taxable equity is not reduced • Re-measurement losses are tax

deductible; gains (up to the historic cost) are taxable

• Realised gains/losses resulting from transaction or cancellations are taxed regardless the accounting treatment


New accounting law – update on tax impacts FX treatment

Tax treatment

• Income tax charge is determined by using the closing rate

• Capital tax charge is determined by using the closing rate except for share capital and capital contribution reserves (as accepted by the Swiss tax authorities), which are translated at historic rate

• Translation adjustments (unrealised gains or losses from translation) are not subject to taxation


New accounting law – update on tax impacts FX treatment

Functional currency

Presentation currency

Additio-nal CHF values

Translation difference

CHF CHF - -

FX

CHF - Imparity principle

FX CHF Accounting

policy choice

Gain: deferred Loss: recognised

CTA in equity

X

X


New accounting law – update on tax impacts Individual versus group measurement

• New Accounting Law

SCO 960.1 : “Assets and liabilities are normally valued individually…”

• Tax Treatment

The updated analysis of the Swiss tax authorities now states that “Investments and real estate property are normally valued individually…”

The wording follows the guidance provided by the Swiss profession.

Key question: What is the appropriate unit of account?



What is the appropriate unit of account … … for the portfolio of investments at holding level?

Holding

Investment property

Manufacturing Distribution

Carrying value 6500 1500 2000

Fair value 6000 1000 3000



Holding

Investment property

Manufacturing Distribution

Carrying value 6500 1500 2000

Fair value 6000 1000 3000

500 -500


What is the appropriate unit of account … … for the portfolio of investments at holding level?

June 2015 150

Any questions?



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