Date post: | 30-Dec-2015 |
Category: |
Documents |
Upload: | nathaniel-johns |
View: | 220 times |
Download: | 0 times |
IFRS Update
A discussion on the recent changes to IFRS and the road to convergence with US GAAP
Speakers
• Colm Homan, Partner, PwC
• Anna Burns, Senior Manager, Deloitte & Touche
• James Berry, Director, KPMG
Moderator
• Tom Kelly, Partner, KPMG
Agenda
• What is IFRS
• US Regulatory Developments
• Insurance Contracts
• Financial Instruments
• IFRS 1, First-time Adoption of International Financial Reporting Standards
• IAS 37, Provisions, Contingent Liabilities and Contingent Assets,
What is IFRS
International Financial Reporting Standards (IFRS)
• IFRS is a high-quality, comprehensive, globally-accepted set of accounting standards
• In many instances, IFRS contains similar concepts to U.S. GAAP
• IFRS is a less extensive body of literature than U.S. GAAP, with limited industry-specific guidance and less detailed application guidance
• There are more circumstances where application of IFRS will require exercise of judgment, supported by contemporaneous analysis and documentation
• IFRS requires transparent disclosures in the financial statements of critical accounting policies and estimates, particularly in areas requiring application of judgment
What is IFRS
Joint IASB/FASB efforts
• Convergence continues, with the following key joint projects: revenue recognition; financial statement presentation; lease accounting; financial instruments; derivatives and hedging; de-recognition; consolidation; and fair value measurement
Worldwide
• Over 100 countries either require or allow IFRS (or a national variant) for listed companies
• Other countries have plans to adopt or converge to IFRS by 2011:
– Brazil, Canada, Chile, India, Mexico, Singapore, South Korea
– Japan: optional early adoption for FY 2010 and possible mandatory adoption by 2016
What is IFRS
Bermuda
• IFRS conversion activity is mainly focused in the following areas:– Several large reinsurance companies are assessing the impact of
converting from US GAAP to IFRS due to the SEC roadmap/work plan and Solvency II
– Public interest entities (includes listed companies and local insurers) who currently prepare financial statements under Canadian GAAP have to prepare IFRS financial statements from 2011
RoadmapNov 17, 2008
Comment lettersApr 20
“We need a single set of
global standards”
Regulatory
ReformJune 17
“We need a single set of
global standards”
G20 London SummitApr 2
“We need a single set of
global standards”
G-20 Pittsburgh Summit
Sep 24-25
“We call on international accounting
bodies to develop a single set of standards by June 2011”
Mary Schapiro speech at IOSCO Oct 8
“I am committed to focusing our efforts this fall to following up with a work plan that expands upon
the concepts proposed in the
roadmap”
SEC DraftStrategic
Plan Oct 9
We will promote … a single set of
high-quality global
accounting standards
Statement on Global
Accounting Standards
Feb 24
US Regulatory Developments
US Regulatory Developments
SEC work plan pointing towards IFRS adoption by U.S. issuers
•February 2010: SEC Statement and work plan in support of convergence and global accounting standards
– SEC reaffirmed its support for a single set of high-quality, globally accepted accounting standards and for the convergence of U.S. GAAP and IFRS
– Statement that IFRS is best-positioned to be able to serve the role as the single set of global standards
US Regulatory Developments
Work plan describes 6 specific areas relevant to SEC’s decision on adopting IFRS, including:
•Areas most relevant for SEC’s decision to adopt IFRS: – sufficient development and application of IFRS and– independence of standard setting for the benefit of investors
•Transitional considerations:– investor understanding / education regarding IFRS– examination of how the U.S. regulatory environment would be
affected– Impact on issuers, such as changes to accounting systems,
including evaluation for both large and small issuers and – human capital readiness, such as education and audit capacity
US Regulatory Developments
SEC work plan pointing towards IFRS adoption by U.S. issuers (cont’d)
•Next steps
– Beginning no later than October 2010: SEC staff will provide periodic progress reports on work plan
– 2011: SEC will consider whether, and if so, how to incorporate IFRS into the U.S. financial reporting system
– 2015 or 2016: Estimated first time U.S. issuers would be required to report under IFRS; SEC will further evaluate timeline as a part of the work plan
• Possible that early adoption may be allowed for some issuers once decision on IFRS is made
Insurance Contracts
Phase II of the Insurance Standard
• Background
• Tentative Decisions and Timetable
• Potential Impact
Background to Insurance Contracts Project
• Current situation for accounting for insurance contracts is a mixed model• Resulted in too much diversity, less relevance and reliability,
and inconsistency• The IASB started with a clean slate to develop Phase II
2004 2005 2006 2007 2008 2009 2010 2011 2012
Discussion paper
published
May 2007
Comment period closed
Nov 2007
Phase II Exp Draft
July 2010
Phase II final
standard
June 2011
Phase II IFRS
effective
2012/13+
Phase II work
begun
Jul 2004
We are hereFASB joins project
Insurance Contracts Project
The FASB joined with the IASB for Phase II of the IFRS 4 – Insurance Contracts project• Purpose – comprehensive financial reporting standard for Insurance
contracts (life and non-life) • It is expected that the outcome of Phase 2 will become US GAAP
irrespective of if and when there is overall convergence of US GAAP and IFRS
Current Timetable• IASB and FASB are committed to July 2010 Exposure Draft, with a
comment deadline of 3 months. FASB have not concluded as to whether they issue a DP or ED.
• Final IFRS standard is due by June 2011 (when key IASB membership turns over)
Phase II of the Insurance Standard
•Background
•Tentative Decisions and Timetable
•Potential Impact
Tentative decisions made
Measurement objective and approach
• IASB marginally support a 4 building block approach
- Expected value of cash flows
- Discounting for time value of money
- Explicit risk adjustment
- Residual margin (amount to avoid a day 1 gain)
• FASB in favor of a composite margin
• Both methods likely to be included in exposure draft
IASB and FASB discussions to date
Tentative decisions made
Discounting for time value of money
• IASB and FASB apply discounting, and the discount rate should not be impacted by changes in own credit standing
• IASB- not an asset backed discount rate
• IASB- characteristics of liability
Explicit risk adjustment
• Reflect insurer’s view of uncertainty
• Updated each reporting period
• Additional guidance on measurement tbd
IASB and FASB discussions to date
IASB and FASB discussions to date
Tentative decisions made (con’t)
Residual margins
• At inception, no day 1 gain
• Subsequent treatment of residual margins being discussed
- Amortized in some predetermined manner
- Not updated each period for experience, i.e., not a “shock absorber”
Unearned/Earned premium expedient for short duration contracts
• Definition of a short duration contract under debate
IASB and FASB discussions to date
Tentative decisions made (con’t)
Acquisition costs
• Include “incremental costs at the contract level” as cash flows in building block model
Unbundling (e.g., deposit vs. insurance vs. service)
• Not required for recognition or measurement if components are significantly interdependent (proposal around notion of significant and interdependent being refined)
Performance statement
• Narrowed view to summarized margin vs. expanded margin
• Most recent vote in favor of summarized margin with supplemental disclosure about volume of business
IASB and FASB discussions to date
Tentative decisions made (con’t)
Reinsurance Accounting
• Generally, follow same approach as insurance accounting
Definition of insurance contract
• Compensation for loss (excluding manufacturer/dealer warranties, fixed service fee contracts)
• Must include significant underwriting or timing risk with proviso to examine certain timing delays
Risk transfer
• IASB and FASB: focus on existence of possible outcomes in which the PV of cash flows is negative
Phase II of the Insurance Standard
• Background
• Tentative Decisions and Timetable
• Potential impact
Potential impact
Financial reporting
• Earnings volatility as assumption unlocked
• Revised income statement presentation
• Potential for significant additional disclosure
Finance transformation
• Need appropriate resources
• Manage competing projects such as solvency II
• Ensure proper training
• Implement internal controls
Potential impact
Systems requirements
• Actuarial systems may need to provide cash flow projections
• Enhance systems configurations to meet new demands
• May require new or updated ERP implementation
Business issues
• Impact on new product design
• Changes to agent compensation structure to reduce up front commissions
• Planning, budgeting and forecasting impacted
• Educate users of financial information
Financial Instruments
Financial Instruments
Financial Instruments
• IFRS 9: Financial Instruments– What does it mean?
• Changes to classification and measurement– Effect on impairment
• IAS 39 replacement timeline
• Exposure Draft: Amortized cost and Impairment
Financial InstrumentsIFRS 9
Financial Instruments
• IFRS 9: Financial Instruments– Effective for periods beginning on or after January 1, 2013
with early adoption permitted.– New classification and measurement model for financial
assets.– Financial liabilities currently scoped out.
Financial InstrumentsRevised classification and measurement
Financial InstrumentsSo what will change?
Balance sheet volatility
P&L
vola
tility
More
Same
Same
Less
MoreLess
Unquoted equity previously held at cost (elected to FVTOCI)
� Government/corporate bonds managed on a contractual yield basis
� Quoted equity investments (elected at
FVTOCI)
� Trade receivables / payables
� Derivatives� Held for trading
instruments� Issued debt (generally)
� Quoted equity (not elected at FVTOCI)
� Government/corporate bonds not managed on a
contractual yield basis
� Unquoted equity previously held at cost� Most CDOs and other
asset-backed instruments (unless most senior in
waterfall)
Financial InstrumentsImpact on impairments
• Impact on impairment requirements:
Instrument IAS 39 classifications Impairment testing required?
New classifications Impairment testing required?
Equity investments
Available-for-saleCost less impairmentFVTPL
YesYesNo
FVTOCIFVTPL
NoNo
Debt instruments
Available-for-saleLoan and receivableHeld-to-maturityFVTPL
YesYesYesNo
Amortised costFVTPL
YesNo
Financial InstrumentsIAS 39 replacement project timeline
2013
Hedge accounting DerecognitionClassification and Measurement
Impairment
Q4 2009
H2 2010
H1 2010
Mandatory adoption effective date
Q1-3 2009 Exposure draft Exposure draftRequest for information
IFRS 9 – Financial assets
Exposure draft
Exposure draft
Finalised standard for early adopters
ED Financial Liabilities Re-exposure?
Final standard Impairment
Final standard Hedge Accounting
Final standard Derecognition
Final standard Financial Liabilities
Financial InstrumentsED Amortized cost and Impairment
ED Amortized cost and Impairment
• ED issued 5 November 2009– Comment deadline: 30 June 2010
• Objective: improve information on ‘effective return’ over expected life of a loan
• Introduces ‘expected loss’ model - removes ‘incurred loss’ model
• Only applies to amortised cost assets (e.g. loans & other debt instruments)
IFRS 1, First-time Adoption of International Financial Reporting Standards
IFRS 1: First-time adoption
IFRS 1 sets out transition guidance for adoption of IFRS
• Generally IFRS accounting policies at the first reporting date are retrospectively applied
– Exemptions and exceptions
• Opening balance sheet at beginning of comparative period
• Comparative financial statements and reconciliation to previous GAAP
• Transition rules apply to annual and interim financial statements
Example timeline: 2011 adopter
Jan 1, 2010 Dec 31, 2010 Dec 31, 2011
Restate previous GAAP to IFRS
First IFRSstatements
Current balance sheet date
IFRS opening balance sheet
Equity reconciliations
Profit reconciliation
Opening balance sheet – create at start of earliest period for which entity presents full comparative information under IFRS
Types of exemptions
Retrospective application prohibited
•Hedge accounting•Estimates
Elective exemptions include
•Deemed cost•Employee benefits•Cumulative translation differences•Decommissioning liabilities •Share-based payments
Two types of exemptions from “general rule” of retrospective application
Can pick and choose elective exemptions!
IAS 37, Provisions, Contingent Liabilities and Contingent Assets
IAS 37 (Provisions)
• IAS 37 addresses liabilities of uncertain timing or amount that are not within the scope of another standard.
• IASB aiming to replace IAS 37 with a new IFRS in 2010 (probably not effective before 2012)
– Closer alignment with US GAAP
– Closer alignment with other IFRSs
– More specific measurement requirements
Current IAS 37 requirements
Currently effective requirements
• Legal or constructive obligation
• Probable outflow that can be reliably estimated
• Measurement is at ‘best estimate’
• Discounting if effect is material
Proposed IAS 37 replacement
IASB proposals
• High level measurement objective – lower of:– Present value to fulfill obligation– Amount to be paid to cancel obligation– Amount to be paid to transfer obligation to 3rd party
• Expected present value measurement
• Inclusion of a risk adjustment
• Removal of “probable outflow” criterion
• Removal of reimbursement asset cap
• Insurance contracts excluded from scope