iiroc 2017 financial administrators section conference · © 2016 kpmg llp, a canadian limited...

IIROC 2017 Financial Administrators Section Conference September 9, 2017

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kpmg.ca

2 © 2016 KPMG LLP, a Canadian limited liability partnership and 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 or trademarks o f KPMG International.

Presenters

Steven Sharma KPMG Partner, Financial Services

Chris Cornell KPMG Partner, Financial Services



Agenda IIROC 2017 Financial Administrators Section Conference

Page

Current Audit Trends

– IFRS 15: Revenue from contracts with customers 5

– IFRS 16: Leases 10

Global Areas of Audit Focus

– Auditor Reporting Model 15

– Auditing Accounting Estimates and Related Disclosures 17

– Data and Analytics in Audit 18

Agenda Current Audit Trends Global Areas of Audit Focus



IFRS 15 – Revenue from contracts with customers • A new way of thinking about revenue

– The new revenue standard introduces a new framework that will change the way

companies account for revenue. Published jointly by the IASB and FASB in May 2014

and amended in April 2016, it replaces all existing IFRS and US GAAP guidance on

revenue and introduces a 5-step model for recognizing revenue from contracts with

customers. Although there are some differences between the IFRS version of the

standard (IFRS 15) and the US GAAP version (Topic 606), the wording largely is

converged. Consequently, companies across the globe will be applying the same

principles and guidance to revenue transactions.

– The new requirements will affect different companies in different ways. For some, the

new standard will have a significant impact on how and when they recognize revenue.

For others, there may be little change in the timing and amount of revenue recognized.

Nevertheless, arriving at this conclusion will require an understanding of the new

model and an analysis of its application to particular transactions.

– IFRS 15 is effective for entities with annual periods commencing on or after January 1,

2018.



IFRS 15 – Revenue from contracts with customers (continued) • The 5-step model in the standard requires companies to:

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract

5. Recognize revenue when or as the entity satisfies a performance obligation

The new standard will require analysis of all sales contracts to ensure the promises to the

customer are identified and accounted for appropriately. Implementation efforts and costs may

be significant for companies that earn the majority of their revenues under long-term contracts,

particularly when those contracts include multiple goods and services.

Importantly, all companies will be subject to extensive new disclosure requirements. The

standard also provides guidance on accounting for costs to obtain and costs to fulfill contracts

with customers, which may change the timing of recognition for those costs.



IFRS 15 – Revenue from contracts with customers (continued) • Disclosure requirements:

– IFRS 15 contains both quantitative and qualitative disclosure requirements. Under the

new standard, an entity discloses more information about its contracts with customers

than is currently required under IAS 18 Revenue and IAS 11 Construction Contracts,

including more disaggregated information about revenue and more information about

its performance obligations at the reporting date

– The objective of the disclosure requirements is to provide sufficient information to

enable users of financial statements to understand the nature, amount, timing, and

uncertainty of revenue and cash flows arising from contracts with customers

– An entity is required to disclose, separately from other sources of revenue, revenue

recognized from contracts with customers, and any impairment losses recognized in

accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments:

Recognition and Measurement if applicable) on receivables or contract assets arising

from contracts with customers.



IFRS 15 – Revenue from contracts with customers (continued) • Disclosure requirements (continued):

– IFRS 15 includes disclosure requirements on the disaggregation of revenue, contract

balances, performance obligations, assets recognized to obtain or fulfill a contract, as

well as significant judgments in the application of the standard

– Entities will need to assess whether their current systems and processes are capable

of capturing, tracking, aggregating and reporting information to meet the disclosure

requirements of the new standard. For many entities, this may require significant

changes to existing data-gathering processes, IT systems, and internal controls.



IFRS 15 – Revenue from contracts with customers (continued) • The impacts may be felt across the organization:

– Revenue recognition may be accelerated or deferred

– Sales and contracting content and processes may be reconsidered

– IT systems may need to be updated or new modules added to calculate revenue

– Accounting processes and internal controls will need to be changed and documented

– Extensive new disclosures will be required, including the expected timing and amounts

of future revenues

– Revisions may be needed to tax planning, covenant compliance and sales incentive

plans

– Expected impacts leading up to adoption and changes reported upon transition will

need to be explained to internal and external



IFRS 16 - Leases • New leases standard will require companies to bring leases on-

balance sheet

– In January 2016, the IASB issued IFRS 16 Leases, realizing its long-standing goal of

bring leases on-balance sheet for lessees. All companies that lease major assets for

use in their business will see an increase in reported assets and liabilities. This will

affect a wide variety of sectors – the larger the lease portfolio, the greater the impact

on key reporting metrics

– Companies are currently required to disclose details of their off-balance sheet leases

and users of the financial statements use this information to adjust published financial

statements. The key change will be the increase in transparency and comparability. For

the first time, users will be able to see a company‘s own assessment of its lease

liabilities, calculated using a prescribed methodology that all companies reporting

under IFRS will be required to follow

– IFRS 16 is effective for entities with annual periods commencing on or after January 1,

2019.



IFRS 16 – Leases (continued) • The lessee model

– From 2019, operating leases will be accounted for as if the lessee had borrowed funds

to purchase an interest in the leased asset, recognizing a ‗right of use‘ asset that will be

depreciated over the term of the lease and a lease liability related to obligation to make

lease payments

– As a result of measuring the liability at amortized cost using the effective interest rate,

lessees will recognize a front-loaded pattern of expense, even when annual rental

payments are constant. Importantly, rental expense will be replaced by a combination

of depreciation expense from the right-of-use asset and interest expense on the lease

liability

• Impact on key metrics

– Increase in total assets and total debt

– Increase in finance expense and depreciation expense

– Decrease in net earnings (early years) & increase in net earnings (later years)



IFRS 16 – Leases (continued) • Does the contract contain a lease?

– Given that contracts that are determined to be leases will now be on-balance sheets for

lessees, one of the most important early considerations will be around the scope of the

standard. Companies will need to understand whether contracts are, or contain, a

lease

– A service contract that does not meet the definition of a lease will continue to be

accounted for as an executory contract. IFRS 16 defines a lease as a ―contract that

conveys the right to control the use of an identified asset for a period of time in

exchange for consideration‖

– In some instances, companies had not historically identified all lease contracts

embedded in service arrangements because the accounting for service contracts and

operating leases was similar. The new standard will require additional diligence in this

analysis



IFRS 16 – Leases (continued) • Practical expedients

– A lessee can elect not to apply the lessee accounting model to leases with a lease term

of 12 months or less (i.e. short term leases) and to leases for which the underlying

asset is of low value (even if the effect is material in aggregate).

– Companies should consider whether the practical expedients will be used to deal with

leases of ‗small‘ items such as computers, furniture, mobile phones, etc.

• Lessee Transition

– A lessee is permitted to: adopt the standard retrospectively or follow a modified

retrospective approach. A lessee applies the election consistently to all of its leases

– If a lessee elects to apply IFRS 16 using the modified retrospective approach, then it

does not restate comparative information. Instead, the lessee recognizes the

cumulative effect of initially applying the standard as an adjustment to equity at the

date of initial application.

Agenda Current Audit Trends Global Areas of Audit Focus



Auditor Reporting Model • Global Standard Setters are continuing to focus on new Audit

Reporting Requirements

– International Auditing and Assurance Standards Board (IAASB) has approved their

standard and in April 2017 the Canadian Auditing and Assurance standards Board

(AASB) approved the new and revised auditor reporting standards as Canadian

Auditing Standards (CASs) effective for periods ending on or after December 15, 2018.

• Highlights of new auditors’ report in Canada include:

– Re-ordering of the auditors report, including moving the opinion to the first section

– Expanded descriptions of management‘s, those charged with governance and auditors‘

responsibilities

– Disclosure of the engagement partner‘s name (listed entities); and

– Description of the key audit matters (applicable only when required by law or regulation

or when the auditor is engaged to do so).



Auditor Reporting Model Continued US Developments:

• In June 2017, the Public Company Accounting Oversight Board (PCAOB) adopted their

enhanced auditor reporting standards which includes, discussion of critical audit matters

(CAMs) and tenure of the auditor.

• Highlights and effective dares are as follows:

• New auditors‘ report format, tenure and other information for fiscal years ending on or

after December 15, 2017;

• Communication of CAMs for audits of large accelerated filers: audits for fiscal years

ending on or after June 30, 2019; and

• Communication of CAMs for audits of all other companies: audits for fiscal years ending

on or after December 15, 2020



Auditing Accounting Estimates and Related Disclosures IAASB Exposure Draft ISA 540 (Revised)

• ISA 540: Significant changes in how auditors evaluate accounting estimates and related

disclosures have been proposed. AASB issued an exposure draft that proposes to adopt

ISA 540 with appropriate Canadian amendments if any. Comments were required by

August 1, 2017.

• Proposed Standard includes:

• enhanced requirements for risk assessment procedures to include specific factors

related to accounting estimates, namely complexity, judgment, and estimation

uncertainty.

• setting our a detailed expectation for the auditor's response to identified risks related to

accounting estimates, including augmenting the auditor's application of professional

skepticism; and

• is scalable regardless of the size or sector of the business or audit firm.



Data and Analytics in Audit • The use of Data and Analytics (D&A) in audit continues to accelerate. Some areas of

significant change where D&A are being utilized include:

• Proprietary valuation tools which can value and provide leveling disclosures for entire

security portfolios for audit purposes

• Value to clients

• User friendly valuation discrepancy analysis

• Benchmarking of prices vs. peers and industry competitors

• Higher quality audit

• Proprietary taxation data tools which can analyze transaction based data and ensure

appropriate tax treatment at transaction level

• Value to clients

• Meaningful tax information reporting

• Early issue identification

• More effective and efficient audit support



What Questions Do You Have?

Thank you

kpmg.ca

© 2016 KPMG LLP, a Canadian limited liability partnership and 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 or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

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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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