ifrs 16 seminar - assets.kpmg · ifrs 16 seminar your next stop to accelerate your ifrs 16...

IFRS 16 Seminar

Your next stop to accelerate your IFRS 16 implementation

__________

6 October 2017

2© 2017 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a member firm of the KPMG network of independent member firms affiliated with KPMG

International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.

Introduction

One year ahead

Project Management

Project accelerator

Coffee Break

Tooling going forward

Transition Challenges

Tax perspective

Drinks

Agenda for today



Today’s presenters (1/2)

IFRS 16 – One

year ahead

Niels Ebbinkhuijsen

Project Accelerators

Janpiter NijpRuben Rog

Project

Management



Today’s presenters (2/2)

Tax perspective

Johan Swagers

Transition

challenges

Robert de Boer

Tooling Landscape

Gerben de Roest

Polling statements and questions



A few polling statements and questions to start…

— Please get your mobile phone

— Go to: www.menti.com

— Fill in the code: 42 60 89

— And lets get started!

One year ahead -what has happened so far?



PROJECT STATUS

― Early stages/impact assessment

― Few companies have made decision on

transition approach

― Not early adopting (generally)

― Limited disclosure in FY15 reporting cycle

ACCOUNTING JUDGEMENTS

— Revisiting assessment of “embedded leases”

— Inclusion of service related items in lease liability:

EBITDA boost!

— Challenges of determination of discount rate –

not seen any developed methodologies

— Use of Parent discount rate for subsidiaries

— Move to lease payments based on “usage”,

especially for internal leases usage

PRACTICAL CHALLENGES

— Data collection - who holds the info?

— Manual versus automated?

— Resourcing (needs sponsorship)

— System selection/database – early stages

— Project leadership & sponsorship is key – CFO

by-in ideal!

EXTERNAL

― Limited comment from the taxation authorities

― IASB - no current intention to permit a “lighter” approach

enabling restatement of comparatives!

IFRS 16: One year on … some observations from KPMG

COMMUNICATIONS

― Need to determine plan to communicate with investors

― Limited interest from analysts to date!

― Will there be any information content from adoption of

IFRS 16 – as no change in cash!

- How close will IFRS16 liabilities be to the disclosure in

the operating lease note?

- Improve note to avoid surprises?

TRANSITION

— Most companies would ideally go “fully retrospective”

— But frustrated at complexity of this approach

— Presentation of Non-GAAP measure for prior year + adopt

“modified retrospective”?

— Impact on distributable reserves important

Observations



Disclosure on IFRS 16 so far – a survey

59% of the companies expect IFRS 16 will

have a significant impact

In 38% of the financial statements no explicit

statement is made whether the impact will be

significant or not

The vast majority of the companies seems to

be still in progress of the impact assessment.



Disclosure on IFRS 16 so far – a survey

The amount of operational lease commitment

disclosure has increased on average with

8%.

We expect the operating lease commitment

to become more precise upcoming years in

order to prevent to explain a ‘gap’ in the year

of transition

Most companies report in their financial

statements; Just a few comments on the

impact in the Director’s report / risk

paragraph



— In 2016, ESMA issued guidance on their expected IFRS 15 impact disclosure in 2016

financial statements

— We expect similar guidance will be issued in the near future on IFRS 16

— This means Companies will need to quantify more clearly the expected impact of

IFRS 16

Disclosure prior to effective date & Our expectation

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

effective.

Considerations

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

approaches?

— Pre-adoption disclosures meeting external stakeholder expectations?

Project Management



Illustrative time line

2017 2019

Effective date

1 January 2019

and

Go live date

2016

IFRS 16 issuedAnnual report

31 December 2019

Expected

Endorsement EU

2018

Complete data

collection

Lease tool

selection

Tool

implementation

Q1 Report

First results based

on IFRS 16



PMO

Scope and

assess

phase

Tool selection process

Lease accounting solution strategy

Dashboard from data to insight

Data extraction plan

Application of your decisions

Key accounting choices

Insight provided through the tools

Impact assessment

Lease accounting – impact assessment milestones



Supported by D&A capability

Compelling IFRS 16 tooling suite

TRUSTED ANALYTICS FOR LEASING

IMPACT

ASSESSMENT

DATA

REVIEW

DATA

EXTRACTION

ENABLING TOOLS

— Tools readily available

— Live demos in the

presentation

KLT

IMPLEMENTATION

INTEGRATION



IFRS 16 project considerations

IFRS 16

project

considerations

Systems

Leasing database

System solution

Finance

Transition options

Data collection

Tax

KPIs

Investor relations

Analyst queries

KPI’s (e.g. Operating profit)

Credit rating

Employee benefits

Management remuneration

KPI’s

Strategy

Real Estate

Lease vs buy

Lease structuring

Treasury

Covenants

Credit rating

Regulatory capital (banks)

Other

Procurement

Legal

…



Project Governance

Steering Committee – Decision making and

progress monitoring

Project Management – Day-to-day monitoring

of the project

Opco leads – Project management role and

team at Opco

Topic leads (design authority) – Ensure high

and consistent quality across all topics.

Involved as required

Project accelerators



Demo: Contract Validation Tool

• Validation of data obtained through the

automated text recognition process• Extraction of data points from contracts in PDF

• Full audit trail of the review process• Cloud based review solution accessible for users

around the world



Demo: Impact assessment on Sofy

• Impact assessment for the entire

lease portfolio and individual

leases

• Supports IAS 17, and IFRS 16 -

Full retrospective, modified

retrospective option 1 and 2

• Interactive scenario analysis for

lease term and discount rates

• Cloud based solution accessible

for users around the world

Tooling in operations going forward



Supported by D&A capability

Compelling IFRS 16 tooling suite

TRUSTED ANALYTICS FOR LEASING

IMPACT

ASSESSMENT

DATA

REVIEW

DATA

EXTRACTION

ENABLING TOOLS

— Tools readily available

— Live demos in the

presentation

KLT

IMPLEMENTATION

INTEGRATION



Why tooling?

IFRS16 requires complex calculations

Tooling is available for both project

acceleration, as well as ongoing operations.

Ongoing operations require support on lease

management and lease accounting

As 1/1/2019 is rapidly approaching, we see

organizations tilting towards temporary

IFRS16-compliancy solutions



Considerations for your IFRS 16 solution

Considerations for IFRS 16 solutions

Data input/extraction

Data validation/identification

Contract management

Dual reporting (IFRS / USGAAP)

Audit trail

Internal controls

Data output/automated postings

Lessee / sub-lease / lessor accounting

Deployment (Cloud/SaaS vs. on premise)

Integration with existing systems

Support

Fit for the Future

Implementation effort

Cost (implementation and going forward)

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Possible lease accounting solution roadmapA possible lease accounting solution roadmap is to (1) ensure IFRS16 compliancy in time, and (2) embed an end state solution that is in line with IT strategy. With this

approach: state 1 and 2 solutions are temporary, where state 3 is the end state solution. This can be achieved by a roadmap with 3 states as depicted below.

STATE 2: COMPLIANCE OVER TIMESTATE 1: INITIAL COMPLIANCE STATE 3: INTEGRATED SOLUTION

Legend: Flat file data transfer Integrated data transfer

— IFRS16-compliant reporting over time

— Flat file interfacing including manual upload of

journal entries, payment files, new contracts,

vendor MD

— IFRS16 compliant reporting based on the initial

data load

— Static reporting

— Key for change management

— End state solution in line with IT strategy

— Automated synchronization using APIs

General

ledger

Lease

accounting

ERP / Lease

administration

General

ledger

Lease

reporting

ERP / Lease

administration

Lease

accounting

ERP / Lease

administration

ERP system(s) ERP system(s) ERP system(s)

Interim

SaaS

solution

Interim

SaaS

solution

End state

embedded

solution



IFRS16 intermediate solution: integration is key

KLT / Lease Admin Integration

Process KLT Lease Changes

Reconcile Lease Admin and

KLT Leases

Reconcile Lease against Hash

Batch Validations

Pull Active Leases

Pull All KLT Leases

Notifications

Audit Reports

INP

UT

OU

TP

UT

KLT / Master Data Integration

Pull Master DataReconcile with KLT

Process KLT Master Data

Changes

Payment Reconciliation

Pull Payment Data

Reconcile with KLT

Process KLT Payment Changes

Lease Admin

system

IFRS GAAP

Dual reporting

STATE1

SFTP

Payment Integration

Push to AP Generate AP FileGenerate Audit

Report

Approve Audit Report

Journal Entry Integration

Push to GL Generate GL FileGenerate Audit

Report

Approve Audit Report

SFTP

SFTP

Dual reporting

STATE2

BI / Cons.

solution

AP

GLMaster

Data

ERP

systems

Transition challenges



Purpose of this session

— Highlight the 5 key accounting decisions every company must take on transition

to IFRS 16

— For each key decision, assess the pros and cons for:

– Financial reporting

– Data requirements

– Implementation

— Compare notes on the decisions you have already taken



Key transition questions – will you…?

#4 & #5 – modified retrospective approach only

Early adopt? 11

Grandfather the assessment of which contracts are leases? 22

Use a retrospective or modified retrospective approach?33

Measure ROU assets equal to the lease liability? 44

Use any of the practical expedients?55



Retrospective vs modified retrospective

Full

retrospective

Approach 2018 2019 Date of equity adjustment

IFRS 1611 January

2018IFRS 16

IAS 172

Modified

retrospective

1 January

20193IFRS 16IAS 17

(1) Comparatives in 2019 annual report will reflect balances under IFRS 16

(2) The 2018 Annual Report will reflect balances under IAS 17

(3) The 2019 annual report will include an explanation of the differences between the balances recognised on transition to IFRS 16 and previously disclosed operating lease commitments



Modified retrospective – lease liability

Present value of

payments at end of

lease

Present value of

remaining rentals +=Lease liability

Discount at lessee’s incremental

borrowing rate at date of initial

application



Modified retrospective – ROU asset

Measurement

options for ROU

asset

Measure retrospectively using

transition discount rate

Lease liability

+/- prepaid/accrued payments

Apply this option on a lease-by-lease basis

No historical information needed

Key benefit for high volume, low

value leases

‘Correct’ P&L

Key benefit for individually

significant leases

Option 1 Option 2



Key transition questions – will you…?

#4 & #5 – modified retrospective approach only

Early adopt? 11

Grandfather the assessment of which contracts are leases? 22

Use a retrospective or modified retrospective approach?33

Measure ROU assets equal to the lease liability? 44

Use any of the practical expedients?55



PE#3

Optional practical expedients

Lease liability

Account for leases expiring within 12 months as

short term leases.

PE#2Apply single discount rate to

similar leases.

Use of hindsight e.g. determining

lease term.

PE#4Exclude initial direct costs from

ROU asset.

PE#5Onerous contracts – adjust

ROU asset.

ROU asset

PE#1

*Modified retrospective approach only



Choosing a transition method

Significance of

change in accounting

Availability of

historical information

Comparability of

information and

investor perceptions

Systems and

processes

Disclosure

requirements

Contract structure

and volume of

contracts

Costs Future profit trends

Tax perspective



Generally European countries are using local GAAP accounts as the starting point for the computation

of taxable income and will continue to do so – but exceptions may exist!

Local GAAP remains leading for tax

Tax rules

(if unchanged)

Local GAAP

(if unchanged)Tax Return

Qualification of lease for tax purposes is based on commercial accounting concepts

Public consultation - HMRC to consult further in autumn 2017 earliest

Changes being made to US GAAP

Potential impact on federal and state tax positions

No changes expected or announced

“Leasebesluit” continues to be in place



Deferred tax

Tax

(if unchanged)

Local GAAP

(if unchanged)

IFRS 16

(new)

No impact

expected

Temporary

differences

Front loaded effect =

net deferred tax asset

during the lease



Tax accounting take awaysIFRS 16 – Potential Tax impacts

make sure that your tax department / tax accounting is involved in your

IFRS 16 implementation project

jurisdiction by jurisdiction review to determine any local changes to tax

rules and/or local GAAPs

1.

2.



Other potential tax impacts IFRS 16 – Potential Tax impacts

Non-deductibility and / or withholding tax on interest component in the lease payment

Existing (tax) lease structures to be tested for continued working as intended

Transfer pricing and valuation models relying on EBITDA should be revisited. Benchmarking more

complex

Wage tax impact for incentive plans based on EBITDA metrics

Country by Country reporting: differences between IFRS and Tax books may raise questions

1.

2.

3.

4.

5.



Some relevant tax terms….

2019

European Anti Tax Avoidance Directive

ATAD

Interest

limitation

GAARExit tax

CFC

Hybrids

2022

!



Impact on interest deductions

— IFRS 16 impact: more assets but also more debt; what is impact on escape #1? Positive impact when tax

payer’s equity:assets ratio increases compared to the same ratio of the group to which it belongs.

— IFRS 16 impact: group EBITDA increases, but also the net interest expense, net impact for escape #2?

— Unclear whether interest element in an operational lease payment is included in the tax definition of interest

— Similar interest limitation rules already exist in Germany, Spain, Italy, Finland.

European Anti Tax Avoidance Directive – Interest Limitation Rule

Main rule: Net interest expenses will be deductible only up to 30% of the tax payer’s EBITDA (based on tax

books).

Escapes: Excess interest may still be deductible on the basis of one of two group escapes:

1. Compare tax payer’s equity : assets ratio with the same ratio of the group; or

2. If the group’s net interest expense : group EBITDA is higher than 30%, otherwise main rule is more

favourable.

Escapes rules are based on IFRS books!



What Questions Do You Have?



Resources

First Impressions Transition Options

IFRS 16 Webinar

(Podcast)

Lease Definition Discount Rates

IFRS 16 Leases

website

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

we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or

that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough

examination of the particular situation.

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© 2017 KPMG Advisory N.V., registered with the trade register in the Netherlands under number 33263682, is a member firm of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.

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

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