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IFRS Insights from the revolution
22 November 2012 © 2012 Deloitte LLP. Private and confidential.
Your speakers today
Veronica Poole Global Managing Director, IFRS Technical UK National Head of Financial Reporting
Andrew Spooner Lead Technical Partner, Financial Instruments
Tom Hopkins Global IFRS Technical Director
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
On the agenda… •
2012 in retrospect ‒ Politics and procedure
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Priorities for the 2012 reporting season ‒ Living in turbulent times
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Looking forward: just round the corner ‒ Completed IFRSs effective for 2013 financial statements
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Looking forward: work in progress ‒ The IASB’s current agenda
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
2012 in retrospect: Politics and procedure
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Presentation title
© 2012 Deloitte LLP. Private and confidential.
2012 in retrospect One set of global standards – one step forward, two steps back?
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US non-decision
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The end of convergence?
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Formalising new working arrangements
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Enhanced due process
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Setting the agenda for the future ‒ Dealing with concepts
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UK politics ‒ Are IFRS delivering true and fair?
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
2012 in retrospect Corporate reporting – not just about getting the numbers right
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ESMA on materiality
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BIS consultation on narrative reporting
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FRC – Thinking about disclosures in a broader context
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New UK Corporate Governance Code “The board should state that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable”
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Defra Consultation for Business on Environmental Key Performance Indicators
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Deloitte Annual Reports Survey – Joined Up Writing ‒ Available at www.deloitte.co.uk/auditpublications
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Priorities for the 2012 reporting season: Living in turbulent times
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Presentation title
© 2012 Deloitte LLP. Private and confidential.
Priorities for the 2012 reporting season We live in turbulent times
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Current global economic climate Continuing Eurozone crisis
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Multiple financial reporting implications Impairment – financial and non-financial assets
Going concern
Sovereign debt
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IFRS – Insights from the revolution
Pension assets and obligations
Management commentary
© 2012 Deloitte LLP. Private and confidential.
Priorities for the 2012 reporting season Enhanced risk disclosures for banks
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Enhanced Disclosure Task Force report to the Financial Stability Board • Seven fundamental principles for enhanced risk disclosures Covering all key activities and risks
Clear, balanced and understandable
Consistent over time
Comparable among banks
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Presenting relevant information Reflecting how the bank manages risk
Provided on a timely basis
Recommendations could influence 2012 financial statements IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Priorities for the 2012 reporting season Regulatory areas of focus – FRRP
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2012 priority sectors not yet announced
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Most common issues raised per FRRP 2012 annual report •
Reporting of risk (including principal risks and uncertainties and FI risk)
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Business review – fair, balanced and comprehensive?
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Explanations for departures from the Code
• Disclosure of judgements, key assumptions underpinning estimates and related sensitivities • Explanation of accounting policies – particularly on revenue •
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Impairment testing of goodwill – disclosures, sensitivities , discount rates, identification of CGUs…
IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
FRRP – What makes a good annual report
A single story
Consistency
Summarise
How the money is made
Cut the clutter
Explain change
What worries the Board
Clarity
True and fair
FRRP Annual Report 2009/10, repeated in its 2011 and 2012 reports © 2012 Deloitte LLP. Private and confidential. IFRS – Insights from the revolution
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Priorities for the 2012 reporting season Regulatory areas of focus - ESMA
• Greek Sovereign Debt •
Accounting and disclosure issues
• Areas of frequent challenge: • • • • • • • •
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Assets held for sale Business combinations under common control Consolidation Financial instruments disclosure (especially FV hierarchy) Going concern Impairment of financial and non-financial assets Interaction of IAS 27 and IFRIC 17 Segment disclosure (especially aggregation)
IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Priorities for the 2012 reporting season Regulatory areas of focus - SEC
• Likely areas of focus for Foreign Private Issuers • Business combinations, including reverse acquisitions
• Consolidation and variable interest entities • European sovereign debt exposures • Financial instruments (including impairment)
• Impairment of non-financial items • Internal controls over financial reporting • Revenue recognition
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Looking forward: Just around the corner
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Presentation title
© 2012 Deloitte LLP. Private and confidential.
Just round the corner Completed IFRSs effective for 2013 financial statements •
IFRS 10 Consolidated Financial Statements
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IFRS 11 Joint Arrangements
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IFRS 12 Disclosure of Interests in Other Entities
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IFRS 13 Fair Value Measurement
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
IFRS 10 – Consolidated Financial Statements The rules
Going out… IAS 27 Focus on control = Power to govern the financial and operating policies + Obtain benefits
SIC-12
Focus on risks and rewards = Majority of benefits or Majority of residual risks 16
IFRS – Insights from the revolution
Coming in… IFRS 10
Focus on control = 1. Power from existing rights + 2. Exposure to variable returns + 3. Link between power and returns
Single basis applies to voting interests and SPEs
© 2012 Deloitte LLP. Private and confidential.
IFRS 10 – Consolidated Financial Statements The impact More likely to consolidate: •
Investors with <50% stakes, but ‘de facto’ control
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Fund managers with significant minority holdings
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Investors with potential voting rights
Less likely to consolidate:
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Investors in SPEs with risks and rewards, but no power
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Fund managers with majority holdings but no substantive power
Additional disclosures
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Judgements on whether to consolidate
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Details of subsidiaries with significant NCI
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Details of unconsolidated structured entities IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
IFRS 11 – Joint Arrangements Joint venture: •
A joint arrangement providing rights to net assets
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Must be accounted for using the equity method
Joint operation: •
A joint arrangement providing rights to assets and obligations for liabilities
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Must be accounted for through recognition of share of assets, liabilities, income and expenses
Additional disclosures
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Judgements on classification as joint venture or joint operation
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Risks and commitments associates with joint arrangements IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
IFRS 13 – Fair Value Measurement The rules
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Specifies how to use fair value, not when
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Applies to all fair value measurements except share-based payments
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Unified definition of fair value: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”
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Definition assumes sale or transfer in the principal or most advantageous market to a buyer that would make highest and best use of an asset or would retain non-performance risk of a liability
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May change practice in valuation of ‘own credit risk’
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Disclosures are extensive – similar to disclosures already done for financial instruments
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Looking ahead: work in progress
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Presentation title
© 2012 Deloitte LLP. Private and confidential.
Work in progress
The IASB’s current agenda •
Financial instruments
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Insurance
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Revenue from contracts with customers
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Leasing
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
IFRS 9 timeline Where are we? 2007 to Q3 2010
Phase I: Classification & Measurement of Financial Assets
Phase I: Classification & Measurement of Financial Liabilities
Q4 2010
2011
Q1 2012
Q2 2012
Q3 2012
Final Standard Phase I Assets
Q4 2012
2013
2014
2015
Exposure Draft Final Standard Phase I Liabilities
Exposure Draft
Effective Date Jan 1st 2015
IFRS 9 Phase II: Impairment
Supplementary Document
Exposure Draft
Phase III: General Hedge Accounting
Exposure Draft
Exposure Draft Expected
Review draft
Phase III: Macro Hedge Accounting
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IFRS – Insights from the revolution
Final Standard Expected Q1/13
Discussion Paper
Today
?
© 2012 Deloitte LLP. Private and confidential.
Classification and measurement of financial assets Proposed amendments to IFRS 9
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Impairment reforms Different theories
Incurred losses solely
Expected losses but reflecting only information at the balance sheet date
IASB’s IFRS9 impairment ED
“3 buckets” approach
FASB proposals (1)
IAS 39 Current US GAAP: incurred plus a buffer
FASB proposals (2)
Expected losses including all future events
Focus on profit and loss
Focus on balance sheet 24
IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Impairment of financial assets Scope • Impairment reforms would apply to: ‒ Financial assets measured at amortised cost (i.e. loans, debt securities) ‒ Financial assets that meet the contractual cash flows test of the amortised cost criteria BUT are classified at FVTOCI (i.e. loans, debt securities) [based on anticipated proposals] ‒ Loan commitments not measured at FVTPL [based on anticipated proposals] • Impairment reforms would NOT apply to: ‒ Financial assets measured at FVTPL (including loan commitments measured at FVTPL) ‒ Equity securities designated at initial recognition at FVTOCI
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Impairment of financial assets ‘The three bucket approach’ Bucket 1 • For assets not in bucket 2 or 3 • All financial assets start in bucket 1 at initial recognition • Loan loss provision represents expected losses for the next 12 months from the balance sheet date (i.e., 12-month PD x LGD x EAD) • Calculation on a portfolio basis
Provide for 12-month expected losses
Bucket 2
Bucket 3
• Move from bucket 1 to bucket 2 when there “is a more than insignificant deterioration in credit quality since initial recognition and the likelihood of default is such that it is at least reasonably possible that the contractual cash flows may not be recoverable” • The full lifetime expected credit losses would be recognized, calculated on a portfolio basis
• For individual assets where information is available that specifically identifies that credit losses have occurred or are expected to occur for individual assets • No default need have occurred to become part of Bucket 3 • The full lifetime expected credit losses would be recognized, calculated on an individual asset basis
Provide for full lifetime expected losses
Transfer out of bucket 1 IF • More than insignificant deterioration in credit quality • + reasonably possible likelihood that some CFs may not be collected 26
IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
General hedge accounting model Closer alignment with risk management
Key areas of change: • Increased eligibility of hedged items • Increased eligibility of hedging instruments • New qualification effectiveness requirements • Increased disclosures
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Draft IFRS issued September 2012, final standard expected Q1/13 IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Project update: Insurance Contracts Core Principle: • One accounting model for all types of insurance • Current fulfilment value
• Viewing the contract as a bundle of rights and obligations and accounting for it as a whole
No convergence but agreement on key principles • Results of Deloitte Insurance Survey and feedback from IWG – many wanted one standard
Timeline: IASB • ED first half 2013
• Effective date at least 3 years after publication date (2017?)
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Building Blocks Approach (BBA) Unbiased Probability Weighted Estimates of Future Cash Flows
• Estimate changes go to residual margin, experience to P+L
Time Value of Money
• Liability specific, no credit risk • ‘Top down’ or ‘Bottom up’ • Changes to OCI
Explicit Risk Adjustment
Unlocked Residual Margin
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IFRS – Insights from the revolution
• Insurer’s view of risk • Reflects variability of central estimate • Released to P+L over the life based on pattern of release from risk (up/down) • Eliminates day 1 gain • Released to P+L over coverage period based on the pattern of transfer of services
© 2012 Deloitte LLP. Private and confidential.
Revenue from contracts with customers The proposals
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A single model for revenue recognition based upon transfer of ‘control’ to the customer
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No distinction between ‘goods and services’ but concept of ‘transfer of control over a period’ retained
The effect •
Significant changes in revenue profiles for certain industries (telcos, software, construction…)
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More consistency on treatment of contract costs and modifications
The timing
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Re-exposure draft open for comment until 13 March
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Final IFRS scheduled for 2012/13, will not be effective before 2015 IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Leasing – the current tentative proposals For lessees...
…and lessors
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IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Stay up to date…
www.iasplus.com 32
IFRS – Insights from the revolution
© 2012 Deloitte LLP. Private and confidential.
Joined up writing – surveying annual reports
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Good practice examples
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Regulatory overview, current hotspots and latest news on corporate reporting initiatives
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Interactive pdf with enhanced functionality, including links to hotspots, discussion papers and published Deloitte guidance
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Highlights app available – iPad-friendly with key findings, examples and common areas for improvement
www.deloitte.co.uk/auditpublications 33
Essential Professional Update – November 2012
© 2012 Deloitte LLP. Private and confidential.
Three Minutes, 19.757 seconds. Track Cycling World Cup gold for Sarah Storey, Deloitte’s London 2012 Ambassador, and one step closer to making history as the first GB athlete to compete in both the Olympic and Paralympic Games. Deloitte. Supporting moments that matter
© 2012 Deloitte LLP. Private and confidential.
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Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. © 2012 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Member of Deloitte Touche Tohmatsu Limited
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