revenue, financial instruments and ifrs convergence - isca · revenue, financial instruments and...
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Revenue, Financial Instruments and IFRS Convergence
Are you Ready for 2018 ?
Reinhard Klemmer
Chairman of ISCA Revenue Working Group, Partner & Technical Head, KPMG
What is changing and where we are
Overview of the changes and timeline
Where we are – Survey Results
Root causes and the way forward
ISCA Guidance on Transition to IFRS
Revenue – ISCA Guidance on specific Real Estate issues
Financial Instruments
The changing topics
31 Dec 17 31 Dec 18 31 Dec 19
IFRS 16
31 Dec 15 31 Dec 16
First-time adoption of IFRS
Revenue
Financial Instruments
Leases
IFRS 15
IFRS 1
IAS 39 IFRS 9
IAS 17
Today
Disclosure on impact of
standards not yet effective as
part of FY 2017 financial
statements
!
IAS 11, 18, IFRIC 13, 15, 18, SIC 31
All entities
All entities
Listed entities
All entities
What is changing
IFRS 15 comparatives
Complex transition provisions in IFRS 1, IFRS 9 and IFRS 15 require a plan to manage transition
IFRS comparatives First IFRS financial year
First IFRS reporting date for full financial
year
IFRS comparative FS
1 Jan 2017 31 Dec 2017 31 Dec 2018
Date of transition to IFRS / opening IFRS balance sheet
IFRS 15
SFRS 39 comparatives IFRS 9
The timeline for transition
IFRS 15 comparatives
Comparative information needs to be prepared under the new requirements for the first interim Financial Statements !
IFRS comparatives First IFRS financial year
First IFRS reporting date for full financial
year
IFRS comparative FS
1 Jan 2017 31 Dec 2017 31 Dec 2018
Date of transition to IFRS / opening IFRS balance sheet
IFRS 15
SFRS 39 comparatives IFRS 9
The shorter timeline for transition
!
Q1 2018 reporting
Where we are – Survey Results
ISCA conducted a poll for listed companies on their preparedness for the coming change in the accounting framework from Singapore Financial Reporting Standards (SFRS) to the equivalent IFRS framework. For 235 listed companies the results are presented. For the survey the external auditors of the listed companies were asked for their assessment on their clients status of preparedness.
Survey Results – The Questions
The 7 questions were focusing on various stages of preparedness starting with awareness and ending with completion of the process and being ready to comply with IFRS:
Q1: Has work started or is interest being expressed in preparing?
Q2: Are the requirements understood, has knowledge been gained?
Q3: Has an implementation plan been drafted leading to the first publication of IFRS results (interim or
annual results)?
Q4: Has execution of the plan commenced with resources allocated?
Q5: Is the impact assessment substantially complete?
Q6: Is the quantification of the impact substantially complete?
Q7: Is the company ready to go – is the entire conversion plan substantially complete?
9
63%
31%
6%
Yes No Not applicable
0%
10%
20%
30%
40%
50%
60%
70%
% of responses
Q1) Has the listed company commenced preparation work or expressed interest in preparing for IFRS Convergence?
10
69%
22%
9%
Yes No Not applicable
0%
10%
20%
30%
40%
50%
60%
70%
80%
% of responses
Q2) Has the listed company understood what entails IFRS Convergence - e.g. attended training, enquired with auditors, read up on publications relating to IFRS Convergence?
11
34%
56%
10%
Yes No Not applicable
0%
10%
20%
30%
40%
50%
60%
% of responses
Q3) Has the listed company formulated a strategy and an implementation roadmap to prepare the company to be IFRS compliant ready for announcing its interim results in 2018 (quarterly/half-yearly)? For example, set up a task force, engaged external consultants’ help, obtained Board of Directors’ approval on the implementation plan and required resources
12
25%
63%
12%
Yes No Not applicable
0%
10%
20%
30%
40%
50%
60%
70%
% of responses
Q4) Has the listed company executed the implementation roadmap with the required resources and people in place?
13
9%
77%
14%
Yes No Not applicable
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
% of responses
Q5) Has the listed company substantially completed assessing and quantifying the impact of mandatory exceptions and optional exemptions to be applied?
14
4%
83%
12%
Yes No Not applicable
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
% of responses
Q6) Has the listed company completed the assessment and quantification of the transition adjustments to be put through?
15
1%
90%
9%
Yes No Not applicable
0%
20%
40%
60%
80%
100%
% of responses
Q7) Has the listed company completed the due process and able to assert compliance with IFRS? For example, reported to the Board of Directors and Audit Committee on the results of the assessment; obtained Board of Directors’ approval for the transition adjustments put through
16
11%
17%
72%
Large cap (S$1 billion)
Mid cap (S$300 million to S$1 billion))
Small cap (< S$300 million)
Distribution of responses by market capitalization of the company
Myth #1
The switch from SFRS to IFRS is
easy – just replace the S
with I
Myth #2
Transition rules will allow me to
carry over all SFRS balances
Myth #3
I still have time as we only need to be ready at 31
December 2018
Possible Root Causes
IFRS 15 comparatives
Comparative information needs to be prepared under the new requirements for the first interim Financial Statements !
IFRS comparatives First IFRS financial year
First IFRS reporting date for full financial
year
IFRS comparative FS
1 Jan 2017 31 Dec 2017 31 Dec 2018
Date of transition to IFRS / opening IFRS balance sheet
IFRS 15
SFRS 39 comparatives IFRS 9
The shorter timeline for transition
!
Q1 2018 reporting
IFRS 15 comparatives
Comparative information needs to be prepared under the new requirements for the first interim Financial Statements !
IFRS comparatives First IFRS financial year
First IFRS reporting date for full financial
year
IFRS comparative FS
1 Jan 2017 31 Dec 2017 31 Dec 2018
Date of transition to IFRS / opening IFRS balance sheet
IFRS 15
SFRS 39 comparatives IFRS 9
The shorter timeline for transition
!
Q1 2018 reporting
Timeline + Readiness = Plan B needed
1
2
3
Gather SWAT-team (internal + external), sponsorship from Board and C-level; Fast deployment through workshops involving all information-bearers of the company (sales, legal, business, engineering and finance)
Establish clusters of most significant impact based on business knowledge and available information; In a team effort prioritize clusters for detailed analysis using specialists for efficiency
Quantification of impact using sample contracts for prioritized clusters and significant individual contracts; prepare disclosure for 2017 year end and first interim FS; agree materiality levels with stakeholders including external auditors
Fast deployment of a wide range of resources; immediate mobilization
Identification of most impacted areas; creating awareness with stakeholders
Quantification of impact; precision level acceptable to stakeholders and achievable under time and resource constraints
An example Plan B
Real estate investment trusts (“REITs”) must comply with the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore, and will continue to prepare their financial statements in the manner prescribed under Institute of Singapore Chartered Accountant’s (“ISCA”) Statement of Recommended Accounting Practice 7 (“RAP 7”) Reporting Framework for Unit Trusts
Registered business trusts will apply IFRS-identical Financial Reporting Standards as well (same as Singapore listed companies).
Non-listed Singapore-incorporated companies may also voluntarily apply the new framework at the same time.
The ASC has clarified that Singapore-incorporated companies are those that have issued, or are in the process of issuing, equity or debt instruments for trading in a public market in Singapore.
Note: There may be a potential deviation from IFRS for Banks due to MAS 612 requirements for Individual and Collective Impairment Provisions as the notice is currently being amended for IFRS 9. !
Transition to IFRS:
Companies impacted
IFRS 1 contains all transitional recognition, measurement, presentation and disclosure
requirements applicable for a first-time adopter preparing its first annual and interim financial
statements in accordance with IFRS.
The standard represents special rules for first-time application of IFRS - These special rules are
unique to transition to IFRS - normally accounting standards are applied fully retrospectively.
IFRS 1 includes numerous mandatory exceptions and optional exemptions from
retrospective application requirements.
General principle of IFRS 1
“IFRSs effective at the date of an entity’s first IFRS financial statements should be applied
retrospectively in the opening IFRS statement of financial position, the comparative period and
the first IFRS reporting period”. [IFRS 1.7]
IFRS 1 The
Principle
Recognise / de-recognise as
necessary
Re-measure
Reclassify
Estimates
Estimates made under previous GAAP – no change permitted, unless such estimates not relevant under IFRS or contained error
Estimates not required to be made previously – should reflect the conditions at the relevant year-ends
Between captions (e.g., revaluation reserve transferred to retained earnings if deemed cost exemption is elected)
Based on the version of IFRSs at the end of the first reporting period
Selecting appropriate accounting policies for use
Facilitates transition in a cost-effective manner
Can only be applied in the context of IFRS 1
Select IFRS accounting policies
Consider mandatory exceptions and optional exemptions
The application process of IFRS 1
The list of exemptions and exceptions
Mandatory exceptions
1. Estimates
2. Derecognition of financial assets and financial liabilities
3. Government loans
4. Hedge accounting
5. Non-controlling interests
6. Assets and liabilities of subsidiaries, associates and joint ventures (Applies to a parent/investor that adopts IFRS after Group entities)
7. Assets and liabilities of a parent
IFRS 9
8. Assessment of the business model and SPPI criterion
9. The SPPI criterion - a modified time value of money element
10. The SPPI criterion - a prepayment feature
11. Effective interest method
12. Impairment - assessment of a significant increase in credit risk
13. Separation of an embedded derivative
Optional exemptions
1. Business combinations
2. Insurance contracts
3. Arrangements containing a lease*
4. Cumulative translation differences (not relevant for foreign currency transactions)
5. Fair value measurement of financial assets and financial liabilities at initial recognition
6. Borrowing costs
7. Extinguishing financial liabilities with equity instruments
8. Joint arrangements
9. Stripping costs in the production phase of a surface mine
10. Transfer of assets from customers
11. Share-based payments transactions
12. Fair value or revaluation as deemed cost (PPE, intangible assets and IP under cost model)
13. Deemed cost for oil and gas assets (full cost accounting)
14. Deemed cost of property, plant and equipment or intangible assets used in certain rate-regulated activities
15. Compound financial instruments
16. Designation of previously recognised financial instruments
17. Decommissioning liabilities included in the cost of PPE
18. Decommissioning liabilities related to oil and gas assets
19. Service concession arrangements
20. Investments in subsidiaries, associates and joint ventures; separate FS of a parent/investor - cost or deemed cost method
21. Assets and liabilities of subsidiaries, associates and joint ventures (Applies to Group entities that adopt IFRS after the parent/investor)
22. Measurement of assets and liabilities at fair value for entities previously under hyperinflationary economies
23. Election not to restate comparatives (IFRS 9)
24. Designation of previously recognised financial instruments (IFRS 9)
25. Designation of contracts to buy or sell a non-financial item (IFRS 9)
26. Transition to IFRS 15 based on the Retrospective method with practical expedients
*FORTHCOMING REQUIREMENTS (with effect from 1 January 2019) IFRS 16 supersedes IAS 17 and IFRIC 4, and the optional exemption for arrangements containing a lease and the reassessment of lease determination are removed from IFRS 1. An optional exemption for IFRS 16 has been added to IFRS 1
Group alignment required
Preserve SFRS accounting and achieve minimal-impact transition
Optimize transition by evaluating transition options
The key decision
The ISCA “IFRS Convergence 2018 Implementation Roadmap”
ISCA published a Guide to help with the Convergence to IFRS. Some parts are focused on Directors and Management as readers, but all the details necessary to prepare for Convergence are also provided to help companies in their switch to IFRS.
Director oversight of IFRS Conversion Management Actions to implement IFRS Bird’s eye view of IFRS Convergence Step-by-Step Application Guide of SG-IFRS 1 Transitional Provisions in SG-IFRS 1 Various Appendices
Where we are
now
Considerations
Standard residential
DPS EC DBSS Mixed
Ability to deal - sub-sell, mortgage and lodge caveat 1 1
Trust monies in Project Account Progressive instalment payment scheme
Ministerial step-in provisions to complete development
Buyers cannot rescind contract 2 2
Conclusion POC COC COC COC POC
Type
1 Buyer is subject to a 5-year minimum occupation period and therefore cannot sub-sell the uncompleted unit.
2 If the buyer fails to meet the eligibility conditions under the HDB rules.
POC = percentage of completion COC = completion of construction
Where we will
be under SFRS 115
Type Type
Considerations
Standard residential
DPS EC DBSS Mixed
Collection is probable ?
Developer cannot direct sold unit to another buyer (no alternative use)
Right to payment is enforceable
1 1
Progress payments/billings or right to payment approximate the selling price of the WIP transferred to date/contract is non--cancellable
3
1 1 2
Conclusion OT ? PIT PIT OT
Type
1 Progress payment will be refunded to the buyer if buyer fails to meet the eligibility conditions under the HDB rules
on TOP date.
2 If the units are sold under the progressive payment scheme.
3 Depends on the terms of contract
OT = over time PIT = point in time
And don’t forget
Financial Instruments
IFRS 9/ SFRS 109
1
2
3
Classification and Measurement:
No more AfS – watch out for the cookie-jar
All equity instruments at Fair Value – no longer at cost
More instruments at Fair Value
Impairment:
Expected Credit Loss Model – All receivables need to be assessed for Impairment
Modelling with many judments will be necessary
Hedge Accounting:
Close alignment with the risk management strategy
Component hedging and combined exposure hedging will be possible
Documentation will be much easier
Summary
Focus on the material
issues of IFRS 1, IFRS
15 and IFRS 9
The effort required might
be more than what you
had hoped for – it is not
changing the S for an I
Action is required
NOW
Time to first Interim FS
under IFRS is running
out
Make use of the ISCA
Guide and other
available tools
Important disclaimer This Presentation (the Presentation) has been prepared by ISCA for the exclusive use of the recipients to whom it is addressed. Each recipient agrees that it will not permit any third party to, copy, reproduce or distribute to others this Presentation, in whole or in part, at any time without the prior written consent of ISCA, and that it will keep confidential all information contained herein not already in the public domain. The Preparers expressly disclaim any and all liability for representations or warranties, expressed or implied, contained in, or for omissions from, this Presentation or any other written or oral communication transmitted to any interested party in connection with this Presentation so far as is permitted by law. In particular, but without limitation, no representation or warranty is given as to the achievement or reasonableness of, and no reliance should be placed on, any projections, estimates, forecasts, analyses or forward looking statements contained in this Presentation which involve by their nature a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied in this Presentation. In furnishing this Presentation, the Preparers reserve the right to amend or replace this Presentation at any time and undertake no obligation to update any of the information contained in the Presentation or to correct any inaccuracies that may become apparent. This Presentation shall remain the property of ISCA.
To download the guidance, please go to: IFRS Convergence 2018 Implementation Roadmap https://isca.org.sg/media/2238610/ifrs-convergence-2018-implementation-roadmap.pdf Report Findings: Poll on Readiness Level of Listed Companies to issue IFRS compliant interim results in 2018 https://isca.org.sg/media/2238611/ifrs-convergence-poll-report-final.pdf For more information on IFRS Convergence 2018, please visit: https://isca.org.sg/tkc/fr/current-issues/ifrs-convergence/
For any enquiries, please contact ISCA’s Corporate Reporting & Ethics (CoRE) Division @ [email protected].
To download the guidance, please go to: Revenue Recognition on Sale of Uncompleted Residential Properties in Singapore: Application of FRS 115 Revenue from Contracts with Customers https://isca.org.sg/media/2238612/isca_frs-115-revenue-recognition.pdf
For any enquiries, please contact ISCA’s Corporate Reporting & Ethics (CoRE) Division @ [email protected].