IFRS Insights from the revolution

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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

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Essential Professional Update – November 2012

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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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