IFRS Update for Financial Services

IFRS Update for Financial Services

4 April 2013

KPMG AG, Zurich

1 © 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Agenda

Overview IFRS developments

The future of corporate reporting: current initiatives

Selected areas of focus

Actions – short-term and long-term

Discussion


Timeline – change ahead

Consolidation – Investment

entities

FI Impairment

FI Hedge

accounting

Foreign currency

translation

Equity method

Non-financial liabilities

Common control

Conceptual framework

FI - equity

Emission trading

Extractive activities/R&D

Intangibles

IFRS 12 Consolidation – Disclosures

Amended IAS 28 Associates

& JV

Amended IAS 27

Sep. FS

IFRIC 20 Stripping

costs

Final published:

ED/DP expected in 2013: *

IFRS 9 – FI C&M assets/

liabilities

Revenue

recognition

IFRS 10 Consolidation

FI Macro-

hedging *

Insurance contracts *

Annual improvements (2009-2011)

IFRS 13 Fair value

measurement

IFRS 11 Joint

arrangements

Revised IAS 19 Employee

benefits

IAS 1 FSP – Items of OCI

Leases

IFRS 7 Offsetting

TBD 2013

2014

IAS 32 Offsetting

Amendments to IFRS 1 (IAS 20)

2015

IFRS 9 – FI C&M

review



IFRS 10,11,12 Transition guidance

?

Discount rates

Standard Inter-

pretation Potential projects

IFRIC Levies

IFRIC NCI

put options IAS 36

Recoverable amount discl.

IAS 39/IFRS 9 Novation and

hedging IAS 16 & 38

Depreciation & amortization

IAS 19 Employee

contributions

IFRS 10/IAS 28 Asset sale or contribution IAS 28 Other

net assets changes

IAS 27 Sep. FS: equity method *

Rate-regulated activities *

IAS 12 DTA recognition for unreal. losses *

IAS 41 Bearer biological assets *

Annual improvements (2012-2014) *

IFRS 11 Interest in joint

operations

Status as of March 2013 Impact for companies with

a calendar year end


Agenda





Discussion


Reporting Does it sometimes feel like this?


Reporting Is this better?


„Accounting rules are too

complicated“

„IFRS reporting is too costly“

„Too many disclosure

requirements“

„Too many changes, not

enough stability in requirements“

„Requirements do not reflect

economic reality“

Isolated cases or a trend in Switzerland Moving away from IFRS?


Some prominent examples Swatch Group

Source: http://www.swatchgroup.com/en/services/archive/2012/swatch_group_changes_from_ifrs_back_to_swiss_gaap_arr


Some prominent examples Commerzbank Annual Report 2011


Reporting What is the problem?

Joint effort to tackle

improvements in reporting

and disclosure

• A disclosure framework is needed.

• All disclosures need to be improved – not just financial information.

• Materiality and principles based disclosure guidance?

• There is a disclosure overload.

• IFRS do not reflect the business model.

• Reports are a central means of communication in building investor trust.

• Accounts are overburdened by information which is not material, obscuring what is important and relevant.

• More forward looking information is needed.

„There is a difference between what standard setters want and the real world.“ Joachim Schindler, KPMG, Global Head of Audit

Standard setters Users

Preparers Auditors


Reporting How to fit the pieces together?


Disclosures Survey and Forum, Memorandum of Understanding with IIRC IASB

Consultation Paper: Considerations of Materiality in Financial Reporting ESMA

Development of an International Integrated Reporting Framework IIRC

Report: Enhancing the Risk Disclosures of Banks FSB, EDTF

Discussion Paper: Disclosure Framework FASB

Discussion Paper: Towards a Disclosure Framework for the Notes EFRAG

Disclosure requirements in Management Report Swiss law

Selected international initiatives on reporting and disclosures


Reporting and Disclosures Example HSBC Annual Report 2012


Swiss initiatives - SIX Exchange Regulation Areas of focus for financial statements 2012 and 2013

Challenged to ensure …

• Logical structure • Coherent presentation of similar

topics

Scrutinised for…

• No generic disclosures • No facts of lesser importance

Review of disclosures with respect to …

• Relevance • Understandability • Timeliness


SIX Exchange Regulation Areas of focus

Transparent reporting

Provisions and

contingent liabilities

Revenue recognition

Content and determination of compensation

and shareholding programmes

Relevance of disclosures Presentation of

statement of comprehensive

income

Impacts of new standards

Loss carryforwards

and disclosures

Impairment tests / disclosure of

key assumptions

Change of control clauses


Agenda



Selected areas of focus • Judgements and estimates • „Big“ risk topics in recent financial reporting • Disclosures on goodwill impairment • Linking information


Discussion


Judgements and estimates


Judgements

Description of significant judgements made by management

Estimates

Disclosures related to estimates and uncertainties that might result in material changes to assets or liabilities in future periods

Entity specific, depending on - industry and region - economic environment - financial position, profit or loss and cash flow position - management‘s assessment - …

How to translate into effective communication?



Approach 2 General description and reference to details in other Notes throughout the financial report

Approach 1 General qualitative description only and mention of areas of judgement (without reference)

Approach 3 General description and details in the same footnote (qualitative and quantitative information)

What do we see in practice?



Source: Annual report UBS Group 2012

Judgements and estimates Example Approach 2


Judgements and estimates Does it sometimes feel like this?

… are charts better?


Which items are affected?

Impact on accounting ?

Business model Main risks and

chances

How could an integrated approach be applied?



Judgements and estimates Example – how could it look like?

Source: Annual report HBSC Holding plc 2012


Agenda





Discussion


Risk disclosures


Financial risk management Principles for effective risk disclosures

Clear, balanced, understandable

Present relevant information

Reflect how risks are managed

Consistent over time

Comprehensive; include all key activities and risks

Comparable among peers

Provided on a timely basis

The FSB‘s Enhanced Disclosure Task Force has published seven principles on how risk disclosures should be:


„Big“ risk topic: credit risk and bad debts

IFRS requirements

• Which disclosures does IFRS 7 require?

Composition of financial assets

• What are financial assets composed of?

• How does management analyse the underlying risks and losses?

Transparency

• Link required disclosures to the business model and manage-

ment‘s judgement

Financial assets


Information on credit risk included in the risk management section (IFRS 7.36 - 7.38)

• Maximum exposure to credit risk, description and financial effect of collateral and credit enhancements and information about the credit quality of financial assets

• An analysis of the age of financial assets past due and an analysis of financial assets impaired

• Information about assets obtained by taking possession of collateral

Credit risk – disclosures

„Big“ risk topic: credit risk and bad debts IFRS – Required credit risk disclosures


Consider knock-on impacts

„Tick the box“ approach vs. meaningful

communication

Consider including information that is given in investor

presentations

Decription of risk management approach


„Big“ risk topic: credit risk and bad debts


Risk disclosures Example HSBC annual report 2012


Further risk disclosures to come Offsetting


Agenda





Discussion


Disclosures on goodwill impairment

Gone are the days ...:


Disclosures on goodwill impairment

Current economic situation

• Economic situation increases likelihood that carrying amounts of assets might be higher than their recoverable amounts

• Market value of quoted companies has fallen below their book value

Judgement

• Economic slowdown leads to considerable judgement when assessing future cash flows

• Cash flow assessment is subject to higher degree of uncertainty

• Assumptions must represent realistic future expectations

Understand approach followed by manage-ment

• CGU determination

• Quantitative disclosures on key assumptions, growth rates, discount rates, consistency of assumptions

• Sensitivity disclosures on changes in key assumptions

• Risks of material adjustment to carrying amounts within the next financial year


Goodwill impairment Past enforcement decisions

Discount rate used in determining value in use Inputs used to estimate the discount rate

• foreign currency cash flows

• market risk premium

• beta factor

• cost of debt

• debt/equity ratio

• discount rate per CGU

Reasonable changes in estimates Disclosures about sensitivity to key assumptions

• changes in discount rates for different CGUs

• reasonably possible changes in cash flows

• combination of reasonable changes might lead to impairment loss

Cash flow projections, use of reasonable and supportable assumptions

• Comparison of actual cash flows vs. forecasted cash flows and their impact on cash flow forecasts for impairment testing purposes

• Justification for cash flow increases

• Consideration of capital expenditures

Disclosures Disclosure of CGUs

• More detailed disclosures when CGUs are smaller than operating segments

• Confidentiality is not a valid reason for non-disclosure

Disclosure for determining fair values • Inputs used in determining fair values

• Descriptions of assumptions to which fair value is most sensitive


Goodwill disclosures Sensitivity analysis

(f) if a reasonably possible change in a key assumption … would cause the unit‘s … carrying amount to exceed its recoverable amount:

(i) the amount by which the unit‘s recoverable amount exceeds its carrying amount;

(ii) the value assigned to the key assumption;

(iii) the amount by which the value assigned to the key assumption must change, … in order for the recoverable amount to be equal to its carrying amount.“

IAS 36.134: „An entity shall disclose the information required … for each cash-generating unit for which the carrying amount of goodwill or intangible assets with indefinite useful lives … is significant …:


Disclosure on impact of changes in key assumptions, e.g. growth rate and discount rate

Source: Annual report UBS Group 2011

Example goodwill disclosures Sensitivity analysis


Agenda





Discussion


What are relevant disclosures? Align disclosures to key business drivers.

How does the business model

justify the goodwill balance?

Linking disclosure requirements to

business rationale is key.


Linking information On goodwill impairment


Example yet to be found…. ?


Linking information On bond issuance

Business reason, for example acquisition

Exposure to interest rate and

fx risks

Impact on capital and liquidity management

Risk management measures, hedging

Terms and conditions of bond issuance


Linking information Disclosure of Interests in Other Entities

IFRS 12.20

IFRS 12.23

IFRS 12.27b

IFRS 12.29c

IFRS 12.31


List of subsidiaries and investments

NCI Structured entities

Acquisitions Disposals


Linking information On Disclosure of Interests in Other Entities


Agenda





Discussion


Reporting How to best present key information?


Reporting Differences between current and Integrated Reporting

Feature Current Reporting Integrated Reporting Trust Narrow disclosures Greater transparency Stewardship Financial All forms of capital Thinking Isolated Integrated Focus Past, financial Past and future;

connected; strategic Time frame Short term Short, medium and long

term Adaptive Rule bound Responsive to individual

circumstances Concise Long and complex Concise and material Technology enabled Paper based Technology enabled


Reporting To the rescue?


Actions

• Critical review of financial statements and management report − understandability („plain english“) − tailor disclosures to entitiy specific

circumstances − no immaterial clutter − holistic review, coherence of topics

• When adopting new IFRSs − consider disclosure objectives − no generic disclosures / copy-paste

• Stay informed about reporting and disclosure initiatives

• Consider independent review of financial report

• Comprehensive rethinking of the report‘s structure and content

• Develop from report as „compliance document“ to a „real story“ about the business model

• Consider use of XBRL

• Application of International Integrated Reporting Framework

Short-term Long-term


Some considerations…

What are the components of line items in the financial statements?

Aggregation/disaggregation of the line item; description of its

main characteristics and contractual terms

Consider linking disclosures, organising and grouping information differently

How is the item accounted for?

How does the item fit into the entity‘s operations and financial structure?

What does the user need? Engage with stakeholders


Agenda





Discussion


Discussion: What do you think?

Moving back to Swiss GAAP FER does not solve the reporting problem

Questions ? Feedback? Comments?

Individual views?

Publications

Recent KPMG Publications on reporting

Focus on Transparency In the sixth edition of our annual

survey of 15 European banks, Focus on Transparency exa-

mines if banks can survive the storm.

The future of corporate reporting: towards a

common vision Driving the debate - The future of

corporate reporting: towards a common vision offers insights from 10 key opinion leaders and makes

the case for systemic change.

Integrated Reporting Issue 2

In this second edition of Integrated Reporting, we start by explaining

how Integrated Reporting can help organizations better explain their

value creation story.

• Goodwill Impairment Survey • Financial Statement: Cutting Clutter

.

For KPMG’s Publications: http://www.kpmg.com/ch/de/library Coming up

Thank you!

Contact details

Patricia Bielmann Partner

IFRS Financial Services

KPMG AG Badenerstrasse 172

8026 Zurich

Phone +41 58 249 41 88 Fax +41 58 249 48 64

[email protected]

Ellen Sevray Senior Manager

IFRS Financial Services

KPMG AG Badenerstrasse 172

8026 Zurich

Phone +41 58 249 34 35 Fax +41 58 249 48 64

[email protected]

mailto:[email protected]�

mailto:[email protected]�

Disclaimer:

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that 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.

© 2013 KPMG AG/SA, a Swiss corporation, is a subsidiary of KPMG Holding AG/SA, which is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

IFRS Update for Financial Services

Economy & Finance

Transcript of IFRS Update for Financial Services