Accounting developments · PDF filequalify for hedge accounting • For new hedges that...

Accountingdevelopments seminar

Building relationships,creating value

www.pwc.co.uk

November 2014

PwC

Agenda

The accountingregulator

3

New UK GAAP

5

Tax debate

6

Slide 2November 2014Accounting developments seminar

IFRS: What’s newfor 2014/15 andbeyond? 4

Telling the story –Corporatereporting 2

What’s happeningin the economy?

1

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What’s happening in theeconomy?


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What’s happening in the economy?


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Telling the story –Corporate reporting


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Summary of 2013 reporting changes

Key areasof change

BIS narrativereporting

regulations

BISremuneration

reportingregulations

FRC UKCorporate

governancecode

FRC auditreports – ISA(UK&I) 700


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BIS narrative reporting regulations – Key themes


Reportingresponse to

changes

Strategy andbusiness models

Non-financialreporting

Some instancesof non-

compliance

Standalonestrategic reports

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BIS narrative reporting regulationsFindings from review of FTSE 100*

Materiality, strategic focus and linkage

*Findings based on 85 FTSE 100 reports released September 2013 to March 2014

22%: Identify whatthey see as theirmaterial issues

22% 25% 53%41%

25%: Use strategyto underpinthe report

53%: Align strategywith KPIs

41%: Businessmodel disclosures

sit in isolation


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BIS narrative reporting regulationsKey themes from final guidance from FRC issued June 2014

Spirit of thelegislation


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FRC UK Corporate Governance CodeMain changes – Years beginning 1 Oct 2014 onwards

Going concern

Risk management and internal control

Remuneration arrangements

• Clawback and deferral

Response to votes against at AGM

• Explain how companies plan to engage


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FRC UK Corporate governance codeStatements relating to going concern, viability and risk

• C.1.3 – Expanded version of going concern confirmation

• C.2.2 – Longer term ‘viability’ statement – ‘reasonable expectation’

• C.2.1 – ‘Robust’ assessment statement for principal risks and how managed/mitigated


FRC focus onformal statementsand related auditorreporting

Compare with fair,balanced andunderstandablestatement

New processesand information

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More transparent tax reporting: Country-by-country reporting

• Fiscal deficits, campaigns from civil society organisations and public interest have ledto increased stakeholder scrutiny over tax

• Governments and regulators have responded by introducing country-by-countryreporting

- A number of different regimes in place

- Banks and extractive industries already affected – Public disclosure

- All MNCs – Private disclosure to tax authorities

- Reporting of profits/turnover/tax/employee information/payments to governments

• Companies have responded by increasing voluntary disclosures e.g. over their taxstrategy and Total Tax Contribution

November 2014Accounting developments seminarSlide 13

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Accounting regulatoractivity


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Spotlight on the accounting regulator – CRRT

Key messages – Quality ofcorporate reporting

• FTSE 350 – Complex or unusualtransactions

• Objective to look at all FTSE 350every 3-4 years

• Smaller listed and AIM quotedcompanies 3-year project

• Making annual reports andaccounts more concise and relevant

Process

• Timetable

• Discussion with auditors

• Liaison with Audit Quality Review

• First letter – Well-reasoned,high quality

• Requests for information

• Changes to CRRT operatingprocedures

• Transparency and panel references


PwC

2014 Annual report – Published 14 October 2014

Panel activity 2014 2013 2012

Accounts reviewed 271 264 326

Companies written to 100 91 130

Complaints and referrals 16 8 9

Review groups - 4 5

Press notices 2 1 –

Committee references 9 10 6


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Priority sectors for March 13 to March 15

Priority sectors2013/2014

Construction

Natural resourcesRetail

Business support

Priority sectors2014/2015

IT (includingsoftware companies)

Support services


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Key areas of questioning – Important disclosureconsiderations

Businessreviews/strategic reports

Clear & concise

Principalrisks anduncertainties

Accountingpolicies(particularlyrevenue)

Significantjudgementsand estimates –includingconsolidation/associates

Classificationof cash flows

Impairmentof assets

Pensions

Tax

Exceptional andother similarterms


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Alternative performance measures

2005

CESR recommendationon alternativeperformance measures

January 2014

FRC statement onnon-GAAP measures

February 2014

ESMA consultation

Key principles

• Even-handed

• Gains and losses should not be netted off

• Consideration of recurring amounts

• Track items across periods

• Explain tax effects

• Material cash amounts clearly explained


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Investor views on APMs


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IFRS: What’s new for2014/15 and beyond?


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‘Pack of 5’ consolidation standards

• IFRS 10 Consolidated financial statements

• IFRS 11 Joint arrangements

• IFRS 12 Disclosure of interests in other entities

• IAS 27 Separate financial statements (revised 2011)

• IAS 28 Investments in associates and joint ventures (revised 2011)

Endorsed for EU entities for annual periodsstarting on, or after, 1 January 2014


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IFRS 10 – Consolidatedfinancial statements


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IFRS 10 – What is control?


PowerVariablereturns

Ability to use power to affect returns

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Potential impact of IFRS 10

New consolidationrequirements?

More or lessconsolidation?

Who will be mostimpacted?


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• Builds on existingcontrol guidance

• Additional contextand applicationguidance

• IFRS 10 will changethe way control isassessed – Focus onall three elementsof control

• Most consolidationdecisions should beunaffected

• May result in moreconsolidation orde-consolidationdepending on brightlines applied underIAS 27/SIC 12

• Entities with minorityvoting rights but withcontrol

• Banks and financialinstitutions withstructured entities

• Entities with potentialvoting rights

• Fund or assetmanagers with agencyrelationships


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IFRS 11 – Jointarrangements


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Accounting implications on transition to IFRS 11

Joint control

• Contractually agreed sharing of control

• Unanimous consent over ‘relevant activities’

Jointly-controlledassets

Jointly-controlledoperations

Own/Share of assets, liabilities,revenue, expenses

• Equity accounting

• Proportionateconsolidation

Joint operations

Own/share of assets,liabilities, revenue,

expenses

Equity accounting(proportionate

consolidation notallowed)

IAS 31

IFRS 11


Jointly-controlledentities

Joint ventures

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IFRS 11 – Transition from proportionateconsolidation to equity accounting

Balance sheet Before

PP&E 10,000

Trade receivablesInventoryBank

2,0001,500

500

4,000

Trade payables (1,000) 3,000

Deferred tax (2,500)

Borrowings (5,000)

Net assets 5,500

Income statement

Revenue 15,000

Cost of sales (10,000)

Gross profit 5,500

Balance sheet After

PP&EInvestment in joint venture

5004,725

Trade receivablesInventoryBank

--

500

500

Trade payables (100) 400

Deferred tax (125)

Borrowings -

Net assets 5,500

Income statement

Revenue -

Cost of sales -

Gross profit -

Share of profit of joint ventures 5,000


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IFRS 12 – Disclosure


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IFRS 12 – Objective and things to consider

Why needed?

• Allow a user to evaluate the risksassociated with and the effect ofan entity’s interests in otherentities on financial position andcash flows

What do reporters need tothink about?

• Is the reporting entity exposed toinvestments that are not on thebalance sheet?

• What unusual arrangements arethere that users might beinterested in?


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IFRS 12 – Practical concerns

Do I need new processes to compile the information?

Needinginformation fromthird parties

Judgementsmade

NCIconsiderations:

• Financialinformation

• Determiningmateriality

Unconsolidatedstructuredentities


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IFRS, new UK GAAP (FRS 102) and currentUK GAAP

IFRS New UK GAAP(FRS 102)

UK GAAP

Power/ability to use/variable returns

Similar to old IAS 27

Retained interestremeasured at FV

No remeasurement

If control is retained – Equity Step up – Goodwilladjustment

Step down – Gain/loss in P&L

Not amortised Amortised

Subsidiaries

Control

Partial disposals(control lost)

Transactionswith NCI

Goodwill


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IFRS, new UK GAAP (FRS 102) and currentUK GAAP

Joint arrangements


IFRS New UK GAAP(FRS 102)

UK GAAP

Joint ventures

Joint operations

Similar to old IAS 31

Equity method ‘Gross equity’method

Much moredetailed disclosurerequirements inIFRS 12

Types

Partial disposals(control lost)

Disclosures

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IFRS 9 – FinancialInstruments


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IFRS 9 – Timeline and effective date

• IFRS 9 replaces IAS 39

• Effective for annual periods beginning onor after 1 January 2018

• Earlier application is permitted

IFRS 9 will apply to all entities butis still subject to EU endorsement

July 2014

Final standard

Oct 2011 – Nov 2013

Various phasesundertaken


2018

Effective date

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IFRS 9 key highlights

IFRS 9

Impairment‘Expectedcredit loss

model’

HedgingClassification

andmeasurement


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IFRS 9 Impairment: Expected Credit Loss (ECL)model

• ‘Three-stage’ model

• For trade and lease receivables, a simplified option: lifetime ECL provision

Start to maintain data to support basis

• For financial institutions and other entities with large portfolios of financial assets,credit information systems will need updating

• Extensive disclosures will be required

Change in credit quality since initial recognition

12-month expectedcredit losses

Lifetime expectedcredit losses

Lifetime expectedcredit losses

1) Performing

Initial recognition*

2) Under-performing

Assets with significantincrease in credit risk since

initial recognition*

3) Non-performing

Credit impaired assets

*Except for purchased or originated credit impaired assets


PwC

IFRS 9 hedging introduces significant benefits

Benefits

• Accommodates typical riskmanagement strategies

• More hedging relationshipswill qualify

• Requires judgement/considerationof qualitative factors rather thanmathematical tests

• Now possible to hedge riskcomponents of non-financial items

• Less P&L volatility when hedgingwith forwards and options

Actions

• Determine whether more of yourrisk management strategies willqualify for hedge accounting

• For new hedges that expire after2018 ensure that both the IAS 39and IFRS 9 hedge accountingrequirements are met


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IFRS 9 Classification and measurement


What has changedunder IFRS 9?

Who/what will beimpacted?

Actions

• New basis forclassification

• Measurement at fairvalue through OCImore limited

• No splitting ofembedded derivatives

• Equities recognised atfair value

• Financial institutions

• Receivables heldas AFS

• Receivablescontaining embeddedderivatives

• Unquoted equitiesheld at cost

• Need to start trackinghistorical information

• Consider howmeasurement maychange – fair valuethrough P&L?

• Begin consideringprocess for obtainingvaluations

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IFRS 15 – Revenue fromcontracts withcustomers


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IFRS 15 – Project objective

Effective for annual periods beginning on or after 1 January 2017

One Model

A single, joint revenue standard to be applied across all industries and capital markets

Clearprinciples

Robustframework

Comparabilityacross

industries

Enhanceddisclosures

Simplifiedguidance


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IFRS 15 – Revenue recognition model

IAS 18/11

Separate models for:

• Construction contracts

• Goods

• Services

Focus on risk and rewards

Limited guidance on:

• Multiple element arrangements

• Variable consideration

• Licences

IFRS 15

Single model for performanceobligations:

• Satisfied over time

• Satisfied at a point in time

Focus on control

More guidance:

Separating elements, allocating thetransaction price, variable consideration,licences, options, repurchasearrangements

and so on…


PwC

IFRS 15 Revenue – The five step approach

Step 1 – Identify the contract with the customer

Step 2 – Identify the performance obligations in the contract

Step 3 – Determine the transaction price

Step 4 – Allocate the transaction price

Step 5 – Recognise revenue when (or as) a performance obligation is satisfied

Core principle

Revenue recognised to depict transfer of goods or services


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IFRS 15 Revenue recognition model

An simple example…

• Contract: Entity sells products X, Y and Z to the customer

• Transaction price: C12m, 50% upfront, 50% when all three delivered

• Stand alone price: Each sold separately for C5m each

• Nature of products:

- Product X: Good, control transferred at a point in time

- Product Y: Good, control transferred at a point in time

- Service Z: Service transferred over one year


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Step 5 – Recognise revenue when (or as) a performance obligation is satisfied

Step 1 – Identify the contract with the customer

IFRS 15 Revenue recognition model – A simpleexample


Step 1 – Signed contract exists

Step 2 – Identify the separate performance obligations in the contract

Step 3 – Determine the transaction price

Step 5 – C4m each = recognise when control of X/Y transfers

C4m = recognise over the period that Z is provided

Step 2 – Customer can benefit from X, Y and Z separately as they are sold separately –three separate performance obligations

Step 3 – The transaction price is fixed at C12m

Step 4 – Allocate the transaction price

Step 4 – 20% discount is allocated evenlyacross X, Y, Z

Total stand alone price = C15m

Total transaction price = C12m

Total discount = 20%

Discount * stand alone = C4m

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IFRS 15 Transition

Option 1 – Full retrospective (Apply IAS 8)

2016 2017 Reliefs

Effective date = 1 Jan 2017

NEW

IFRS 15

NEW

IFRS 15

For completed contracts:

• No adjustment for interims

• Hindsight allowed for variableconsideration

Cumulative effect at 1 Jan 2016

Option 2 – Prospective

OLD GAAPNEW

IFRS 15

No reliefs

Cumulativeeffect at

1 Jan 2017

Disclose OLDGAAP


PwC

IFRS 15 Key areas of difference

• In the US, greatest impact for those that use industry based models

• New guidance on multiple elements – performance obligations

• Transaction price allocated on a relative selling price basis

• Change to model for variable consideration recognition

• New guidance on accounting for costs

• New model for licence revenue recognition

• In general, businesses with any combination of multiple elements, modifications, asignificant number of contracts

• Significant disclosure requirements


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IFRS 15 Practical considerations

• Reassessment of contracts will be time consuming

• Full retrospective application may require running dual systems and gathering ofhistoric data

• Opportunities to change contractual terms

• Impact on data requirements, the required systems and related processes and controls

• Potential impact on compensation arrangements

• Multiple stakeholders (Audit Committee, investor relations, FP&A, HR, IT)

Awareness is essential!


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New UK GAAP


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The frameworkAdoption timetable

1 Jan 2015

Mandatory adoption

(years commencing on or after 1 Jan 2015)

1 Jan 2014

Opening balance sheet31 Dec 2015

New FRS/IFRS

Now


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Your two key decisions: what and when

What GAAP should be adopted?

IFRS? FRS 101?FRS 102?

FRS 103?FRSSE?

Companies Act

When should entities adopt the new framework?

Transition subsidiariessimultaneously?

Stagger transition of subsidiaries?


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Revalued assets

Some key differences between existing UK GAAPand new UK GAAP

FinancialInstruments

Retirement and otheremployee benefits

Taxation

Others


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Financial instruments

Intercompany loans

Many intra group loans to bear no or little interest. Other loans may be repayable ondemand and some may not be documented. It is also common for intra group loans to betransferred between group companies at book value.

• FV at inception

• Repayable on demand

• Interest free/non market rates

• Letters of support

Type of financial instrument FRS 102 section Accounting treatment

Basic Section 11 Amortised cost


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Financial instruments

Further Considerations

• Determining fair values

• Hedging versus fair value through P&L – hedging considerations:

- Economic relationship required

- Effectiveness - no bright line

- Documentation

• Different tax hedging rules to be considered

• Company net investment hedging – no longer possible

Type of financial instrument FRS 102 section Accounting treatment

Complex Section 12 Fair value through P&L


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Retirement and other employee benefits

Defined Benefit Schemes

• Group/multi employer schemes:

- At least one entity has to apply defined benefit accounting in its individual financialstatements

- Consider impact on distributable reserves when deficit is booked within entityaccounts

• Determining DB finance cost

• Pension asset surplus recognition

• Past service cost treatment

Holiday pay


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Revalued assets

• DT recognised on revalued assets v UK GAAP where only recognised on “bindingagreement to sell”

• Investment properties are required to be held at FV when they can be ‘measuredreliably without undue cost or effort’

• Fair value movements go through the P&L rather than through the STRGL/SORIE

• No FRS 102 exemption for investment properties that rented to group companies –PPE under SSAP 19

• Group may now have investment property (fair value) at the entity level (due tointragroup arrangements) but PPE on consolidation


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Other differences

• Business combinations

• Leases

• Foreign exchange

• Policy choices

- R&D

- Grants

- Capitalised borrowing costs

• Other, other differences!


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Taxation

• Tax transition date is 1 January 2015

• GAAP transition adjustments are taxed

• First cash tax payment impacted likely to be 14 July 2015

• Profit changes usually equals change to cash tax

• FRS 102 deferred tax recognition is on a timing + approach:

- Revalued assets

- No discounting of deferred tax

- Unremitted earnings of overseas subsidiaries

• Early adoption may result in positive cash flows (timing benefit and permanent benefitdue to reducing corporate tax rate)

• May result in negative cash flows but possible to restructure before transition date

Consider transitional adjustments early


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FRS 102Wrap up

• Financial Instruments

- Basic v complex

- Intercompany loans need to be reviewed

- Complex include forex forwards, interest rate swaps = fair value on balance sheet

- Hedging v fair value through p&l – hedging requirements to be assessed

• Recognition of pension deficit in at least one entity

• Revalued assets – deferred tax recognition required

• Investment property accounting may be triggered in entity accounts

• Other significant measurement differences include business combinations, foreignexchange, leases, R&D and borrowing costs

• Transition may have an impact on distributable reserves and cash tax


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FRS 101 – Qualification Criteria

Conditions to be met to apply FRS101:

• Member of a group where parent prepares publicly available consolidated financial statements with true and fair view

• FRS 101 can’t be applied in group accounts

• JV’s/associates cannot apply

• Shareholders notified of disclosure exemptions

• Objections from less than 5% of shareholders

• Measurement principles of EU-IFRS (as amended by FRS 101) are adopted


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FRS 101Video – TUI Travel Plc


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FRS 101Identification of exemptions

Available exemptions

• Cash flow statement (IAS 7)

• Disclosure of the effect of futurestandards (IAS 8)

• Some related parties disclosure(IAS 24)

Available if ‘equivalent disclosures’in group accounts

• Some share-based payments(IFRS 2)

• Some business combinations(IFRS 3)

• Financial instruments (IFRS 7)

• Fair value measurement (IFRS 13)

• Disclosure exemptions not all automatic

• Certain exemptions only available if disclosure included in group accounts – considermateriality to entity


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FRS 101Identification of exemptions

Financial instrument disclosures

• Financial institutions

• Non-financial institutions – financial instruments at fair value

Financial institutions

• Eight defined types of institution e.g. a bank

• Also ‘any other entity whose principal activity is to generate wealth ormanage risk through financial instruments’

• A parent entity whose sole activity is to hold investments in other group entitiesis not a financial institution


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What to considerTransition (FRS 101 and FRS 102)

• Underlying principle is retrospective application

• There are some exceptions and exemptions to the full retrospective rule

Mandatory exceptions

• Financial instrumentsderecognised before the date oftransition

• Hedging relationships that nolonger exist at date of transition

• Discontinued operations and NCI

Optional exemptions


• Tangible fixed assets

• Lease incentives for leases thatcommenced before date oftransition


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What to considerFRS 101 vs FRS 102 – Our experience to date

FRS 101

• Listed group subsidiaries or overseasowned IFRS group reporters

• Companies looking to list/exit in theforeseeable future

Consider transition yeartransactions

• Unlawful distributions


• Material new contracts

• Refinancing

Other considerations

• Measurement differences in every area -devil is in the detail.

• Financial instruments proving complex

• Tax teams need to be involved

• Disclosure/accounts presentationsignificantly different


FRS 102

• Everyone else!

• Groups are taking FRS 102 dormantexemption however

• Entities may be “reactivated” throughthe transition process

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What to considerGroup reporting versus entity accounts

• Significant differences/complexity arises in groups transitioning to FRS 101 whereIFRS group reporting in place

• Transactions that are netted out on consolidation need to be considered at entity level:

- Intra-group loans

- Intra-group rentals/trading transactions

- Intra-group contracts

• Consideration of all contracts to ensure appropriate accounting under New UK GAAP

• Taxation will be based on IFRS measurement (FRS 101) not old UK GAAP profitswhich may result in significant tax movements


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Next steps

• Speak to your advisor

• Put an agreed plan in place soon

• Need support?

- PwC has dedicated New UK GAAP team

- Supporting many clients on their transitions

- Speak to your PwC contact/New UK GAAP team or

- Email –[email protected]

Need help andadvice from

PwC


PwC

Tax debate


PwC

In 2012 the tax landscape changed – Tax hit theheadlines…

Large UK Corporates hit the headlines for ‘questionable’ tax practices

Addressing the balance between perceived tax avoidance and ‘Britain is open for business’

‘Starbucks, Amazon &Google accused ofbeing immoral’

(Telegraph)

‘Cameron hits out ataggressive taxavoiders ‘

(Times)

‘Big 4 to appear atPAC’

(Economist)


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Where is the debate now?

• Tax is now in the boardroom

• Morality agenda sits closely with reputational agenda

• EU Reform


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The future of tax

• UK Economy shaped by huge economic and social change

• Significant impact on how businesses operate

• Yet basic structure of tax system remain unaltered for decades

• We need a tax system fit for the future

‘The world has changed and so should our tax system’

Andrew Sentance


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A tax system fit for the future

• A vision of what the UK will look like in several decades’ time and what that means fora tax system for future generations

• The international tax reform process to be multi-lateral to regain public trust whilesupporting – rather than stifling – global trade

• A focus on the wider impact of business-tax policies, not concentrating on corporationtax alone.


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What does this mean for you?

• Do you know what your Total Tax Contribution is as an organisation?

• Do you talk to that in your financial statements?

• Do you have an agreed tax strategy?

• Is your tax accounting robust? Have your tested where your weaknesses are – where isyour tax risk??


PwC

UK tax revenues 2014/15

27.6%

18.6%

18.7%

11.2%

9.2%

7.0%

4.2%3.5%

% of total tax revenue = £592bn

Income Tax NIC VAT Specific Expenditure tax

Local Taxes Corporation Tax Capital / Property Other


PwC

Paying for tomorrow: Future tax

Creating a fit for purpose tax system – A major UK campaign investigating how theUK tax system could change to meet the needs of the modern and future economy.


PwC

Paying for tomorrow: Future tax4 key components

Student competition04

Citizens’ Jury01

Discussion paper – Time of a fresh look at ourtax system02

Business Jury03


PwC

Join the debate – www.pwc.co.uk/futuretax


PwC

Thank you

Contacts for your new UK GAAP teamon the next slide


PwC

Your new UK GAAP contacts


Matthew Walker

Assurance lead

T: 0121 265 6879

E: [email protected]

Andrew Wiggins

Tax lead

T: 0121 232 2065


Paul Carter

T: 07812 345683


Sarah O’Donnell

T: 07738 311222


Ajay Kabra

T: 07718 340387


Lucy Gartside

T: 07841 490455


Richard Kay

T: 07841 567888


Thomas Rees

T: 07960 019301


Helen Ditchfield

T: 07809 552243


This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to theaccuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members,employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining toact, in reliance on the information contained in this publication or for any decision based on it.

© 2014 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and may sometimes refer to the PwCnetwork. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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Accounting developments · PDF filequalify for hedge accounting • For new hedges that...

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