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IFRS quarterly technical update

Moving ahead in
an IFRS world

March 23, 2011


Agenda

• Q1 “Final” reminders
• Quarterly “specials”
• Moving ahead – what‟s next?
• Q&A

1 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Important Caveats

Keep in mind: This webcast does not provide official Deloitte & Touche
interpretive accounting guidance. Check with your advisor before taking
any action

2 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Q1 “Final” reminders

3 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Q1 – Final reminders

What if a
What reconciliations business
are required in the combination
first IFRS financial occurs in the year
statements? of transition?
Do I need to worry about to
new standards recently
released by the IASB?

When do I need
to test for
impairment?

Can I change my
IFRS policies and
elections?
Should my first interim
statements under IFRS
contain a complete set
of accounting policies?

Why do I need to
consider financial
What instruments when
exemptions CGAAP standards were
should I use? based on IFRS?

4 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Q1 – “Final” reminders (cont’d)

• First-time adoption
• Defined benefit plans
• Subsidiaries, associates and joint ventures
• Stock-based compensation
• Financial instruments
• Impairment
• Disclosures

5 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
First-time adoption

6 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Did you know...?

• IFRS becomes the basis for the “new” accounting policies of an entity
on IFRS changeover.
• The rules of IFRS 1 require that the same policies are used for all
periods presented and that those policies comply with IFRSs in effect at
the end of the first IFRS annual reporting period.
• The general rule is retrospective application unless one of the
exemptions or exceptions is applied.
• As we have said before, IFRS is not a stable platform which triggers the
need to:
– Consider how to address the impact of new IFRSs issued in 2011
– Disclose the impact of future accounting pronouncements on
the entity

7 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Did you know...? (cont’d)

• A first-time adopter can reconsider its accounting policy choices after


publishing an interim report under IAS 34 but prior to the issuance of the
first annual IFRS financial statements.
– If during the period covered by its first IFRS financial statements an
entity changes its accounting policies or its use of the exemptions
contained in this IFRS, it shall explain the changes between its first
IFRS interim financial report and its first IFRS financial statements,
and it shall update the required reconciliations between previous
GAAP and IFRS. [See IFRS 1.27A].
• Caution! – may create a challenge for analysts and investors in
assessing an entity‟s performance.

8 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Don’t forget!

Elective exemptions
• There are 18 exemptions in IFRS 1 today compared to 10 in 2005.
• Some of these added 8 are “double” or “triple” exemptions – e.g.
deemed cost, leases…
• Some less “publicized” exemptions may be worth a second look:
– Borrowing costs
– Share-based payment transactions
– Cumulative translation differences
– Decommissioning liabilities
– Compound financial instruments

9 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Don’t Forget! (cont’d)

Elective exemptions

Exemption Relates to Relevance


IFRS 2 Available for all awards Equity “geography” matters;
vested pre-transition Measurement
IAS 37/16 Decommissioning liabilities Allocation between cost and
accumulated depreciation
IAS 23 Available for all policy Method of capitalization under
changes Cdn GAAP; General
borrowing costs
IAS 32 Compound instruments Equity “geography”
– liability extinguished
pre-transition
IAS 21 CTA at date of transition If you don‟t take it you have
to prove out your CTA on
transition

10 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Did you know…?

Borrowing costs exemption

• IFRS 1 exemption based on transitional provisions of IAS 23:


“When application of this Standard constitutes a change in accounting
policy, an entity shall apply the Standard to borrowing costs relating to
qualifying assets for which the commencement date for capitalization
is on or after the effective date.”

• Effective date is date of transition or earlier designated date


• IASB discussions; possible amendments to IAS 23 (assets in
construction at transition)
• Exposure of proposals timeline pushed back
• Deloitte guidance in iGAAP: IFRS for Canada (Ch.43, Section 6.10)

11 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Did you know…? (cont’d)

Borrowing costs capitalized under previous GAAP


Case facts:
• Entity A‟s date of transition is January 1, 2010 with its first IFRS financial
statements to be prepared as at December 31, 2011. It has the following assets
in respect of which borrowing costs were capitalized under previous GAAP.
– Asset 1: construction commenced January 1, 2007; construction completed
June 30, 2009.
– Asset 2: construction commenced July 1, 2008; construction not yet
completed.
– Asset 3: construction commenced February 1, 2010; construction completed
March 31, 2011.
– All of these assets meet the definition of “qualifying assets” under IAS 23.
Required:
• How should Entity A account for the borrowing costs associated with each asset
in its first IFRS financial statements?
12 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Did you know…? (cont’d)

Borrowing costs capitalized under previous GAAP (cont’d)


Solution:
• For Entity A, the following accounting would result (assuming no earlier
date is designated for application of IAS 23):

Asset 1 Asset 2 Asset 3


Borrowing costs Borrowing costs Borrowing costs
capitalized in capitalized in capitalized in
accordance with accordance with accordance with
previous GAAP, no previous GAAP, no IAS 23
impact to carrying impact to carrying
value of asset value of asset

Date of transition or
designated date before
transition date
13 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Don’t forget!

Business combinations exemption


• Appendix C of IFRS 1
• Not a “do nothing” exemption. Goodwill impairment test required
• Applies to prior acquisitions of a business as well as joint ventures and
equity investments [C5 of IFRS 1]
• Application draws in IAS 27 into its scope [C1 of IFRS 1]
• Step acquisitions
• Preliminary purchase price allocation
• Restructuring costs
• Contingent consideration

14 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IFRS 1 – Did you know…? (cont’d)

Guidance:
• Unsettled contingent consideration at the date of transition to IFRS and
this is not covered by the IFRS 1 election
• The contingent consideration is required to be measured at fair value at
the date of transition.
• Opening retained earnings and liabilities will impacted upon
measurement at transition
– (NB – The adjustment does not go through goodwill).
• Subsequent to transition contingent consideration continues to be
remeasured with changes in fair value being recognized through profit
or loss.
– [NB – If the consideration was equity, this would not be subject to
remeasurement]

15 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Defined benefit plans

16 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Did you know…?

IFRIC 14 – Minimum Funding Requirement (MFR)


• Applicable to all defined benefit plans
• Addresses
– Valuation allowance on defined benefit assets AND;
– Liability recognition for “Onerous MFRs”
• Interpretation is subject to Interpretation!
• IFRS Discussion Group

17 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Subsidiaries, associates
and joint ventures

18 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget!

Subsidiaries, associates and JV exemption


• Do you have interests in entities that have already adopted IFRSs?
– Example: Associate in France or a Joint Venture in South Africa
• If yes, remember special rules apply
– Subsidiaries(associates, JVs) first-time adoption choices are “frozen”.
No second chances!
– Policy alignment is however appropriate; also impact of acquisition
accounting adjustments
• If you have a parent that already adopted IFRSs; not bound by the
choices of the parent

19 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget! (cont’d)

If you have a subsidiary


• IAS 27, SIC 12
• Consolidate when acquire control
– Changes in % ownership held – control retained
– Changes in % ownership held – loss of control
• New guidance on consolidation expected any day
– One control model for all entities; disclosures to be increased for
“structured” entities
• Business combinations exemption (incl. IAS 27); subsidiaries,
associates and JV exemption

20 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget! (cont’d)

If you have an interest in a joint venture


• IAS 31, SIC 13
• Policy choice on adoption – proportionate consolidation vs. equity
method
• New guidance on JVs expected any day
– Policy choice replaced with venture by venture type assessment
• Business combinations exemption; subsidiaries, associates and JV
exemption

21 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget! (cont’d)

If you have an equity investee


• IAS 28
• Equity-method of accounting required for all “associates”; separate
presentation on the SFP
• Impairment guidance
– Start at IAS 28 – equity pick-up
– Evaluate the investment for indicators (IAS 39)
– Recognize and measure any impairment under IAS 36
– Prior impairment reversals
• Business combinations exemption; subsidiaries, associates and JV
exemption

22 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Stock-based
compensation

23 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Did you know...?

• IFRS 2 applies to share-based payment transactions, including:


– Equity-settled share-based payment transactions,
– Cash-settled share-based payment transactions, and
– Transactions containing a choice of cash settlement or issuance of
equity instruments.

• IFRS 2 shall be applied to:


– All employee share purchase plans.

• IFRS 2 shall not be applied to:


– Transactions that fall within the scope of IAS 32 or IAS 39.

24 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget!

Measurement: Equity-settled
With Non-employees With Employees
How? How?
• Fair value of the goods/services • Fair value of the equity instruments
received granted
– UNLESS fair value cannot be – At grant date only
reliably estimated – No changes to FV after grant
– THEN use fair value of equity date
instruments granted.

Rebuttable presumption:
FV of goods/services can be
estimated reliably
When? When?
• Record expense upon receipt of • Record expense over vesting period
goods/services

25 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget! (cont’d)

Measurement: Cash-settled (Intrinsic vs. Fair Value)

With Non-employees and Employees


How?
– Fair value of the liability (Intrinsic Value for Canadian GAAP)
• Re-measure at each reporting date until settlement.
• Changes in FV recognized in P&L
When?
– Record expense over vesting period (for employees) and service period
(for non-employees)

26 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget! (cont’d)

Measurement: Cash alternatives – Entity’s choice

Does the entity have a present obligation to settle the award in cash?

If yes, then account as cash-settled:


• Record as liability

If no, then account as equity-settled:


• Record as equity

27 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Don’t forget! (cont’d)

Measurement: Graded Vesting

If awards vest in installments, then:


• Each tranche is considered a separate share option grant
– Each installment has a different vesting period
– Fair value of each installment will differ

• Expense is recognized using a graded vesting schedule

Canadian GAAP:
• Recognize as separate arrangements; or
• As a single pool

28 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Financial instruments

29 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Hedging – Don’t forget!

• What is the appropriate transition accounting if hedge accounting is


discontinued upon transition to IFRS?
– If the hedging relationship was “of a type” – no reclassification of
amounts recognized in OCI
– If not “of a type” – reclassify from OCI to opening retained earnings.
• Hedging with purchased options:
– “Intrinsic value” is effectively the hedging item
• Removal of „grace period‟ for forecasted transactions
• Entity and counterparty‟s credit risk must be reflected in assessment of
hedge effectiveness

30 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Convertible debt – Did you know…?

Convertible debt

Feature Comments
Strike price of the conversion option is IAS 32.16(b)(ii) indicates that this will
not in the functional currency of the not comply with the fixed cash for
issuer fixed number of shares criterion
Multiple settlement options: Issuer or IAS 32.26 and .27 settlement options
holder can choose to settle the will prevent equity treatment
conversion option, once exercised, in
cash or shares

31 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Convertible debt – Did you know…? (cont’d)

Step 1: Determine if there are


embedded derivatives in the debt host
which require bifurcation and bifurcate at
fair value Step 2: Fair value the
equity derivative
Step 2: Fair value the (conversion option)
debt host by If conversion option is an
discounting cash flows equity derivative liability
Step 3: Allocate
at a non-convertible OR residual to the debt
instrument discount host contract
rate If conversion option qualifies
for equity classification
Step 3: Allocate
residual gross
proceeds to equity
Step 4: Allocate issuance costs pro-rata
between debt component and equity
component

Step 5: Solve for the effective interest rate and


recognize interest expense using the EIM

32 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Impairment

33 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Impairments – Did you know…?
Impairment overview – PP&E and intangibles that amortize
CGAAP IFRS Similar/different?
Timing of quantitative • When impairment • When impairment • Similar
impairment tests? indicators exist indicators exist
Unit of testing and • Individual asset if • Individual asset if • Often similar but can
grouping assets possible; otherwise possible; otherwise be different – when
together? “asset group” “cash generating unit” small units are tested,
impairment may be
more likely
Mechanics: what is the • First estimate • Estimate fair value • Very different – other
trigger for recording undiscounted cash and/or value in use things being equal,
impairment? flow; if greater than (using discounting); if impairment is more
accounting value both of these are lower likely to be recorded
STOP – no impairment than accounting value, under IFRS
needed record impairment
How is write down • Fair value • Greater of fair value • Similar amount of write
calculated? less selling costs and down (although
value in use mechanics of test may
result in more
instances of write
down)
Reverse impairment? • Never • Yes, if conditions met • Different

34 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Impairments – Did you know…? (cont’d)
Impairment overview – Goodwill
CGAAP IFRS Similar/different?
Timing? • Annual • Annual and at end of year of • Similar
acquisition
Unit of testing and • “Reporting unit” – operating • “Cash generating unit” – level • May be similar but
grouping assets segment for f/s purposes or at which goodwill is often can be
together? one level below monitored for internal different – when
management purposes, not smaller units are
bigger than an operating tested, impairment
segment may be more likely
Mechanics: what is • Compare reporting unit‟s • Compare CGU‟s accounting • May be similar if
the trigger for accounting value and fair value to greater of fair value CGU‟s are similar
recording value, if FV is less than and value in use, if
impairment? accounting value, calculate accounting value is greater,
write down calculate write down
How is write down • Complex calculation whereby • Take the excess of CGU • Different and could
calculated? fair value of reporting unit is value over CGU accounting result in different
allocated to all assets and value and write off goodwill write down amounts
liabilities of RU to derive the first until excess is absorbed; and/or allocation of
fair value of goodwill; if FV of further excess is allocated to write down to
GW is less than accounting other assets of CGU different assets
value, write down

Reverse? • Never • Never • Same

35 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Impairments – Don’t forget!

Impairment and transition – what are the requirements for the


opening balance sheet (e.g., January 1, 2010)?
• Assess whether any indicators of impairment exist related to PP&E and
intangibles, other than goodwill
• Consider
– Indicator assessment under CGAAP
– Has the level of testing changed (e.g., CGUs different from IFRS
asset groups)?
• Test goodwill for impairment when IFRS 1 election is taken for prior
business combinations
• Determine if any prior impairments of non-goodwill assets need to be
reversed in the opening IFRS balance sheet

36 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Disclosures

37 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IAS 1 – Don’t forget!

• IAS 1.122 states that “an entity shall disclose, in the summary of
significant accounting policies or other notes, the judgments, apart from
those involving estimations, that management has made in the process
of applying the entity's accounting policies and that have the most
significant effect on the amounts recognized in the financial statements.”
• Examples
– Accounting policy for investment properties and property, plant and
equipment
– Classification of financial instruments
– Classification of leases
– Determination of control for purpose of consolidation
– Degree of componentization
– Determination of whether particular arrangements are sales or financing
– Determination of development costs eligible for capitalization
– Identification of Cash Generating Units

38 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
IAS 1 – Don’t forget! (cont’d)

• IAS 1.125 states “An entity shall disclose information about the
assumptions it makes about the future, and other major sources of
estimation uncertainty at the end of the reporting period, that have a
significant risk of resulting in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
• Examples
– Determination of allowance for doubtful accounts
– Determination of discount rates, expected return on assets and other
assumptions applicable to employee future benefits
– Determination of useful lives of property, plant and equipment and finite life
intangible assets
– Impairment of goodwill and valuation of intangible assets
– Recoverability of deferred tax assets
– Uncertain tax positions
– Valuation of financial instruments
– Valuation of investment properties, property, plant and equipment
39 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Quarterly “Specials”

40 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Use of estimates – Did you know…?

• Pensions and employee benefits


– Remeasurement during interim periods?
– Consider curtailments, settlements, significant market fluctuations
(IAS 34.B9)
• Inventory cost variances
– No deferral under IAS 34
• Income tax loss carryforwards
• Measurement of balances at fair value
– For example, investment property

http://www.corpgov.deloitte.com/binary/com.epicentric.contentmanagement.servlet
.ContentDeliveryServlet/CanEng/Documents/Financial%20Reporting/IFRS/IAS_34
_EN_071210.pdf

41 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Regulatory – Don’t forget!

• In November 2010, the Ontario Securities Commission (OSC) issued


“Top 10 Tips Guide to Help Companies Prepare First IFRS Filings”
– Sets out „new‟ acceptable accounting principles (NI 52-107)
– Reconfirms level of Auditor involvement with regulatory filings
– Highlights Q1 filing extension for first time IFRS filers
– Provides guidance on IFRS financial statement presentation, key
financial statement notes in the first IFRS interim financial report and
required reconciliations under IFRS 1
– Addresses Management‟s discussion and analysis, CEO/CFO
certification and prospectus and other offering issues

http://www.osc.gov.on.ca/documents/en/Companies/ifrs_20101124_issuer-
guide.pdf

42 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Regulatory – Did you know…?

Focus areas for the SEC regarding IFRS Financial Statements


Health Sciences Technology,
Consumer Energy and Financial
Topic and Media, and
Business Resources Services
Government Communications
Financial instruments
   
Presentation of
Financial Statements   
  
Share Based
Payments
Revenue
  
Provisions
  
Business
Combinations    
Earnings Per Share
 
Income Taxes
   
Intangible Assets
    
Segment Reporting
   
Impairment of Assets
    

43 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Moving ahead

44 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Standards effective 2011

• Refer to Deloitte Closing Out Newsletter


– Improvements to IFRSs
• Effective for annual periods beginning on or after January 1, 2011, with
earlier application permitted

– Deferred tax: recovery of underlying assets


• Amendment to IAS 12 Income Taxes issued in December 2010.

– Severe Hyperinflation and Removal of Fixed Dates for First-time


Adopters
• Amendments to IFRS 1 First-time Adoption of International Financial
Reporting Standards issued in December 2010.
• Effective from July 1, 2011, with earlier application permitted

http://www.iasplus.com/iasplus/1012closingout2010.pdf

45 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Staying up to date – IASB work plan

2011 2011 2011 2011


Q1 Q2 Q3 Q4
Financial Crisis related projects

Financial instruments (IAS 39 replacement)


Impairment [Supplement, comments
due 1 April 2011]
Hedge accounting [ED, comments
IFRS
due 9 March 2011]
Asset and liability offsetting [ED, comments
due 28 April 2011]
Consolidation

Replacement of IAS 27 IFRS

Disclosure of interests in other entities IFRS

Investment companies ED

Fair value measurement IFRS

Projected timetable as of February 1, 2011

46 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Staying up to date – IASB work plan (cont’d)

2011 2011 2011 2011


Q1 Q2 Q3 Q4
Memorandum of Understanding projects
Financial statement presentation (Presentation of
IFRS
OCI)
Leases IFRS

Revenue recognition IFRS

Joint ventures IFRS

Post-employment benefits (incl. pensions) IFRS

Other Projects

Insurance contracts IFRS

Annual improvements 2009-2011 ED

Projected timetable as of February 1, 2011

http://www.ifrs.org/Current+Projects/IASB+Projects/IASB+Work+Plan.htm

47 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Resources – Don’t forget!

• www.iasplus.com
– Presentation and disclosure checklists
– Model financial statements
– IFRS compliance questionnaire
– IFRIC review
– IFRS in Focus Newsletter
– http://www.ifrs.org/Current+Projects/IASB+Projects/IASB+Work+Plan.
htm
• iGAAP: IFRS for Canada (includes examples and interpretations)
• Deloitte's IFRS Global Office is hosting „IFRSs: Important
developments‟ webcast
– Update on global financial reporting being held March 30, 2011

48 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.
Q&A

49 IFRS quarterly technical update – Moving ahead in an IFRS world © Deloitte & Touche LLP and affiliated entities.