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  • Welcome to Deloitte financial reporting updates our webcast series for issues and developments

  • related to the various accounting frameworks. This presentation is bringing clarity to an

  • IFRS world, IFRS quarterly technical update. I am Jon Kligman, your host for this webcast.

  • I am joined by others from our National office. Before I tell you about our agenda, a couple

  • of housekeeping items. If you would like a copy of the slides for reference, they are

  • available for download on the same webpage that you access the webcast. You can direct

  • colleagues to the webcast link by referring them to Deloitte Canada Center for Financial

  • Reporting, which is accessible at iasplus.com. Simply select Canada English from the dropdown

  • menu at the top right of the webpage. Now let’s get onto our agenda. First youll

  • hear from Kerry Danyluk, wholl provide some year-end reminders and discuss feedback

  • and commentary received from the regulators. After Kerry, Alexia Donoghue will discuss

  • financial reporting implications, various economic developments that we have been experiencing.

  • After Alexia, well turn the presentation back over to Kerry, wholl provide an update

  • on upcoming IASB projects. I would like to remind our viewers that our comments on this

  • webcast represent our own personal views and do not constitute official interpretive accounting

  • guidance from Deloitte. Before taking any action on any of these issues, it’s always

  • a good idea to check with a qualified advisor. Please note that we are not issuing professional

  • development certificates for this webcast. Please check with your institute or order

  • regarding potential continuing professional development credits. I would now like to welcome

  • our first speaker, Kerry Danyluk. Kerry joined Deloitte as a Partner in 2006 with over 20

  • yearsexperience in public practice, standard setting and industry. Kerry is currently a

  • Partner in Deloitte’s National Assurance and Advisory Services and specializes in a

  • variety of areas of IFRS, ASPE and not-for-profit accounting. Over to you Kerry.

  • Thanks Jon. Well if we move into the first slide here on the year end reminders and regulatory

  • feedback, I guess the first bit of good news, hopefully it’s good news, is that for this

  • year end there really are not a whole lot of amendments or at least not large amendments

  • that are effective, that people need to worry about adopting for this year’s financial

  • statements. There are really instead kind of a series of fairly narrow scope amendments.

  • We have a list of them, a summary of them provided in Appendix A to this presentation

  • for your reference and we also went through in some detail related to these amendments

  • in the first quarter webcast and the link is provided there on your screen. So, one

  • of the things that we did want to talk about and again this is a little bit of a repeat

  • from the third quarter webcast, but we did want to just remind people for year end, some

  • of the things that the Canadian securities administrators have gone through in their

  • staff notice that they issued in July. So, this slide just has a series of little summaries

  • of some of the different areas that the regulators focused on.

  • So, first of all the operating segments. So,

  • what the regulators were noting here is that there were some failures to disclose revenue

  • by geographic area and by major customers. So, as you know IFRS 8 includes both of these.

  • So, on top of just the regular disclosure of the operating segments and the reportable

  • segments, there are some requirements to also provide revenue by geography and some disclosures

  • surrounding major customers if there are some and the regulators noted that in some cases

  • filers were being deficient in this regard. So, just a little reminder there. In terms

  • of business combinations, the observation there was it was sometimes unclear whether

  • intangibles have been separately identified in the purchase price allocation and as you

  • know you have to separately identify all the identifiable intangibles separate from goodwill,

  • goodwill does not get amortized, whereas the intangibles would tend to, so that kind of

  • makes bit of a big difference and I guess just another reminder that there is an allocation

  • period that’s allowed under IFRS 3 the Business Combinations standard. So, if you have done

  • a business combination late in the year and you didn’t have a chance to finalize the

  • purchase price allocation, just a reminder that there is a little bit of a time period

  • that you are allowed up to one year to finalize and gather all the information that you need

  • to fair value all the separately identifiable items that were required in the business combination.

  • The next point relates to fair value measurement in IFRS 13. So, IFRS 13 is a reasonably new

  • standard and the regulators are still observing some areas of comment regarding the description

  • of valuation techniques and inputs used especially for the Level 3 fair value measurements and

  • so, youll recall that Level 3 fair value measurements are the ones that have the most

  • subjectivity to them. They are the ones that would have some significant inputs or data

  • points that are not market observable. So, the standard really requires you to go a little

  • bit further in terms of describing those non-market observable inputs and perhaps also providing

  • some sensitivity analysis around that and so the observation there is that may be people

  • were not being fully compliant with all of those requirements or at least those were

  • the questions being raised. And then the last point on the slide is impairment

  • of assets, which has of course been a bit of a theme for the last couple of years now

  • and so the points here are there are disclosure requirements when an impairment loss has been

  • recorded and so just to keep in mind that compliance with all of those situations, the

  • things that gave rise to the impairment and so on, how the impairment was calculated,

  • some of the assumptions there and the significant areas of judgement. And also remember that

  • there is a requirement to, of course you know goodwill will tend to be tested every year

  • for impairment, but for other assets it’s an indicator based test and so just making

  • sure to keep in mind the indicators and making sure that testing is done when indicators

  • are present, which might even be in the quarters as well as year end.

  • So on the next slide, something we haven’t talked about before is some observations coming

  • out of the SEC and these are SEC comment letters out of the US for companies, foreign private

  • issuers who file using IFRS. So, these would include certainly Canadian filers who are

  • SEC registrants and use IFRS. So, the SEC comment letter, Deloitte’s report on that

  • came out in October 2015 and I think in a couple of slides we have a link, to where

  • you can find that report if you are interested in going and looking at it, but just for now

  • a couple of observations regarding some of the commentary that has been raised by these

  • regulators about companies using IFRS. So, the first comment relates to the situation

  • where expenses are presented by function. So, as you could see on the slide, we have

  • got cost of sales, we have got administrative expenses and so on. So, basically kind of

  • a typical example of functional presentation. So, IAS 1 does require that when this functional

  • presentation is used that also some disclosure should be provided in the notes regarding

  • the cost by their nature and so an example of nature would be depreciation, employee

  • benefits expense and so on. So, when you follow this type of presentation you are supposed

  • to be providing information about those costs in the notes to the financial statements and

  • so, just a reminder because the SEC has observed that, that is not always happening. 

  • On the next slide, the point is the use of the line item operating expenses. So, under

  • IAS 1, you are not required to have this line called operating expenses in the income statement,

  • but it is a fairly common presentation and if you do use it, there are some parameters

  • that you can find in IAS 1 in the basis for conclusions, we have quoted the paragraph

  • reference there on the slide. So, the point here is that we should not be excluding things

  • that are of an operating nature from the operating activities part of the statement. So, for

  • example, if we had restructuring expense, it should be up above the operating activities

  • line, inventory write-down. So, there are a couple of examples that are actually given

  • in the standard of things that you would not expect to be excluded from that income from

  • operations line and so, beyond the examples that are given in the standard, there is some

  • judgment involved of course. Oftentimes, for example, we do see finance expenses below.

  • So, it is a matter of judgment about where things appear in the financial statements,

  • but I guess the point is if things are being excluded from the operating activities line,

  • in other words presented below that, it is possible that, that presentation will be queried

  • if the reviewer feels that things of an operating nature have been moved too far down, i.e.

  • below the operating activities line on the income statement.

  • The next area of comment was around consolidation disclosures. So, a couple of points here.

  • So, first of all, the IFRIC, so the interpretations committee of the IASB issued a rejection notice

  • in July 2015, which is noted on the slide and what this means is that they were posed

  • a question and decided not to provide further clarification in the form of a project to

  • develop may be some new standards in this area or clarifications to the standards, but

  • when they did report on this and the reasons for not taking on this issue, the question

  • that was raised by the person submitting the issue was basically to what extent can we

  • summarize our disclosures around joint ventures and associates. So, this is getting at IFRS

  • 12, which again is a reasonably new standard where there are some disclosure requirements

  • regarding material joint ventures and associate. So, basically the investees that you would

  • equity account for and so the question was can we add them together, aggregate them if

  • we have got more than one and really the IFRIC rejection notice makes it clear that the expectation

  • is that if they are material they should not be aggregated and the information should be

  • disclosed separately for each one. So, that’s one point to keep in mind.

  • The other area is towards the bottom of the slide and talking about some examples of judgments

  • that need to be disclosed related to consolidation. So, for example, if you concluded that you

  • had control over an investee even though you held less than 50% of the voting rights that

  • would be an accounting judgment that would trigger some disclosure and similarly if you

  • concluded no control and you hold over 50% of the voting rights that would also be another

  • disclosable accounting judgment. So, just keep in mind that you have paid attention

  • to all the accounting judgment disclosure and make sure that the key judgments are being

  • disclosed in the financial statements, that’s basically the nature of the comments in this

  • area that the SEC has observed and then just finally on this slide, the next slide is just

  • a little wrap up of the summary of some other commentary that they have raised.

  • So, first of all, the first line is about

  • presenting additional line items where such presentation is relevant to the user’s understanding.

  • So, the point here is again from IAS 1 and it is fairly judgmental and not really prescriptive

  • at all, but what it is saying is that if you need to provide or you should be providing

  • some additional information in the income statement or elsewhere in the financial statements

  • in order to help with the understanding, if that’s important information, then those

  • line items should be added and so that was the observation on this point. The next one

  • relates to mining and mineral properties and potentially oil and gas as well where the

  • company is following IFRS 6 and has exploration and evaluation expenses or assets and so,

  • the commentary here from the regulators is requesting some clarification for accounting

  • policies regarding the types of expenditures that are included in that E&E category and

  • then finally just some more points on consolidations and around the judgments and in particular

  • whether joint arrangements qualified as joint ventures rather than joint operations. So,

  • if you have those kinds of investments, joint arrangements, you are probably familiar with

  • the judgments that might get made there and if there are such judgments, they should be

  • recorded and disclosed in the financial statements. So, Jon, with that I’ll turn it back over

  • to you. Okay, thanks Kerry. I would now like to introduce

  • our second speaker, Alexia Donoghue. Alexia is a Senior Manager with the National Assurance

  • and Advisory Services of Deloitte Canada. In this role, she is responsible for monitoring

  • quality standards for Deloitte’s public company client filings. Alexia also provides

  • consultative advice to attest and non-attest clients on general securities filings and

  • financial reporting matters. Over to you Alexia. Thank you Jon. We are now going to spend some

  • time looking at some of the trends in the current economy and how this may affect your

  • financial reporting. So, our first topic is foreign currency and though I am going to

  • discuss the next couple of slides in the context of the Canadian dollar, the comments are applicable

  • to a number of other currencies as well. So, over the last year or the last 12 months,

  • the Canadian dollars declined significantly with an average conversion of 0.797 USD compared

  • to 0.914 USD for the 12 months ended November 2014. This volatility is expected to yield

  • significant foreign exchange movements through the statement of income and/or the statement

  • of other comprehensive income or loss depending on the currencies in which companies operate.

  • It’s not all bad news with regards to the depreciation of the Canadian dollar. For example,

  • there may be some entities with US dollar local currency transactions where when they

  • are converting to Canadian dollars will see an uptick in the carrying value of their net

  • assets. Given the movement in the Canadian dollar and the volatility, it is expected

  • that entities will update their IFRS 7 financial instruments disclosures to address new and/or

  • increased risk associated with foreign currencies and the impact that it has on their financial

  • results. It is also expected that entities will be revising their MD&A disclosure and

  • based on the review of some recent MD&A disclosures, in my opinion some of the most effective communication

  • of the impact of foreign currency changes has been disclosures that have isolated the

  • foreign exchange component when discussing period over period results.

  • In addition, we would just like to remind listeners that functional currency is the

  • currency of the primary economic environment in which an entity operates and it is determined

  • in the context of the primary and secondary indicators that are set out in IAS 21 and

  • is done on an entity by entity basis. So, to the extent that you are a company that

  • may have seen a reduction in their buying power and therefore has made both a strategic

  • and long-term permanent move to a new economy, you need to assess whether this could potentially

  • be triggering a reassessment of functional currency for that entity that you moved over.

  • Next, we are going to look at the presentation

  • implications of the depreciation in the Canadian dollar. So, IAS 21, the effects of changes

  • in foreign exchange rates requires an entity to disclose the amount of exchange differences

  • recognized in profit or loss except for those arising on financial instruments measured

  • at fair value through profit and loss. IAS 21 is, however, silent with regards to the

  • appropriate classification of where those foreign exchange gains and losses should go.

  • The general consensus seems to be that foreign exchange gains and losses should be classified

  • based on the nature of the transactions or events that actually gave rise to those gains

  • and losses. For example, it may be appropriate to record foreign currency gains and losses

  • on operational items, such as trade receivables and payables within income from operations

  • and foreign exchange gains and losses on issue debt as part of finance costs. Ultimately,

  • the classification of your foreign exchange gains and losses and profit and loss is a

  • matter of accounting policy and it must be disclosed as part of your accounting policies

  • and applied consistently year over year. In addition, when the impact of foreign exchange

  • gains and losses is material as dictated by IAS 1, the nature and the amount of gains

  • and losses should be disclosed separately either in the statement of income or loss

  • and/or other comprehensive income or loss or in the notes. Therefore, when you have

  • got an entity that previously classified their foreign exchange gains and losses on operating

  • items, let’s say within selling and administrative expenses and the impact of these gains and

  • losses becomes material in the year, the entity may elect to present those foreign exchange

  • gains and losses as a separate line item within income from operations. So, as Kerry discussed

  • as part of their operating activities, but not necessarily within the selling and administrative

  • expense line item. The only consideration there is that a change in presentation for

  • those gains and losses may actually trigger IAS 1 and IAS 8 disclosures in the current

  • year if the change in presentation also represents a change in accounting policy and with that

  • let’s think about some impairment implications. When a local currency declines relative to

  • an entity’s functional currency, there is a higher likelihood that the impairment assessment

  • will indicate that an impairment charge should be recorded. However, a decline in the local

  • currency alone does not indicate that an asset is impaired. Analysis should be performed

  • to determine whether or not an impairment charge should be recorded. So, when we are

  • determining the recoverable amount for impairment purposes and we are looking at future cash

  • flows that are going to be applied, the future cash flows should be estimated in a currency

  • in which they are going to be generated. So, if your revenue is being generated in USD

  • regardless of what your functional or your presentation currency would be, you would

  • record all those cash flows in USD and then you would discount using a discount rate that

  • is appropriate for that currency. Basically, what the guidance is saying is that you translate

  • the present value of those cash flows using the spot exchange rate at the date of the

  • calculation because the spot rate reflects the market’s best estimate of future events

  • that will affect that currency.  

  • So, let’s put this all into context. We have got an example here on the page and let’s

  • say that we have got a subsidiary A and it’s got an indicator of impairment for the year

  • ended 2015. The subsidiary A operates in Brazil, but it has a USD functional currency and let’s

  • also assume that subsidiary A represents a CGU for impairment purposes. So, in determining

  • the recoverable amount of subsidiary A given the indicator of impairment, we would calculate

  • all of the future cash flows and then we would forecast them in Real and then we would discount

  • it back at a rate that reflects the risk associated with the Brazilian Real. Once we have got

  • this present value in the local Brazilian currency, we are going to convert the present

  • value into US dollars, which is our functional currency at the spot rate at the date of the

  • test. The resulting US dollar denominated value in use calculation or recoverable amount

  • is then compared to the US dollar carrying amount to determine whether or not there is

  • an impairment, but what happens if on top of this subsidiary there is a parent and that

  • parent is using a Canadian presentation currency. Do we have another requirement to test for

  • impairment and in Canadian dollars? The answer is no. The net assets of subsidiary A would

  • be translated from USD into the Canadian presentation currency at the foreign exchange rate as at

  • the date of the statement of financial position and then the impairment that is included in

  • the subsidiary level would also be translated into Canadian dollars using the average rate

  • and that would be reported in the Canadian financials in the P&L. So, basically any translation

  • amount that we have incurred by going from the USD functional into the Canadian reporting

  • amount would just be reflected through OCI or P&L respectively without the need to do

  • a reassessment. So, we are going to talk a little bit more

  • about impairments now that sort of leads us into the when, what and how for financial

  • assets and this is a little bit of a review in terms of what we have previously presented,

  • but just some key reminders again going back to the CSA report and also just some general

  • feedback that we have received in terms of regulators comment letters. So, when to test?

  • When there is an indicator of impairment regardless of an indicator being present at a minimum

  • for goodwill, intangible assets with an indefinite life and intangible assets that are not available

  • for use, there is a need for an annual impairment test and then in certain circumstances as

  • dictated by the IFRS. The most commonly identified would be classification into held for sale.

  • Management should be performing their test at the lowest level first based on where the

  • indicator is present. So, I think most frequently you would have an indicator at the CGU level,

  • so you would test at that CGU level before testing at a larger CGU group level. So, it

  • would be basically assuming your CGU is, I am going to say like a manufacturing plant

  • and if there were indicators with regards to the economic environment you would first

  • test the manufacturing plant and then you would look at the larger group. Let’s say

  • there were some intangible assets associated with sort of the goods that you are producing

  • within that process, you would include that as part of the CGU and sort of move up until

  • you have tested everything and in terms of what you are actually testing or what you

  • are comparing, you are looking at the carrying values and then comparing that to directly

  • attributable assets and assets that are allocated on a reasonable and consistent basis less

  • liabilities used to determine the recoverable amount. So, really it’s the carrying value

  • versus your recoverable amount and that can be done using either the value in use or the

  • fair value less cost of sale method.  

  • So, let’s look at some indicators for impairments and so here listed on our slide we have both

  • got external and internal indicators. We have talked about some significant changes in the

  • economic environment as it relates to currency on the previous slides, but we can also talk

  • about it in the context of commodity prices. So, as many of us know the price of oil has

  • dropped from $100 a barrel to almost $40 a barrel, palladium prices, which is used in

  • catalytic converters and a number of different other industries has dropped from $786 to

  • $552 and also is included on the graph on the right hand side. There has been a lot

  • of volatility in the price of gold over the last year. So, volatile commodity prices have

  • a direct impact on industries producing those commodities, but they also have a significant

  • impact on the range of entities that are dependent on those commodities as a key input for their

  • cost structure. So, basically given the significant fluctuations in the commodity prices, we would

  • also expect that there would be a number of indicators of impairment and that they would

  • be prevalent in terms of people therefore assessing whether or not they need to record

  • an impairment in their financial statements. So, if we go back again to the two graphs

  • we presented on the slide, just the volatility, if we think about that volatility, where and

  • how does it impact some of the calculations from a financial reporting perspective. Those

  • are key inputs that would impact the impairment testing under IAS 38 in terms of determining

  • the recoverable amount to the extent that we were talking about inputs in determining

  • the net realizable amount of inventories under IAS 2, but we also need to think about key

  • inputs related to currency and commodity prices in determining fair value measurements of

  • assets that are acquired in the business combination and also when thinking about the useful life

  • of property, plant and equipment and intangible assets. So, indicators of impairment absolutely,

  • but also have a trickle-down effect in terms of the measurement of some of the key assets

  • found on one’s balance sheet and then the next sort of indicator we are going to talk

  • about is when your net carrying amount. Sorry, if we could just go back to the other side,

  • we are just going to look at some other ones. The net carrying amount when it is in excess

  • of the market capitalization and this is something we talked about in some previous webcast and

  • really what it is, is with the existence of this indicator you don’t necessarily have

  • an impairment. So, there are certainly some questions you need to ask, but it is one of

  • the specific indicators set out in the guidance. From an internal perspective, it’s usually

  • more obvious in terms of what may be some indicators of impairment. So, obsolescence

  • or physical damage to an asset, if you have a fire in a portion of your warehouse, that’s

  • certainly an indicator of potential impairment and then also I would say a shift in consumer

  • consumption with regards to the use of an asset. So, that second point often cannot

  • be predicted and can certainly result in a downturn in terms of results and with that

  • well move over to the assets held for sale. So, I think this is a topic that I’m going

  • to say people kind of struggle with. So, we just thought well cover it here leading

  • into year-end again as we tie it back to some significant fluctuations that have occurred

  • in our economic environment. So, an available-for-sale equity investment is impaired when two criteria

  • are met. The first is that its fair value has declined to below cost and the second

  • is that there is objective evidence of impairment. So, what would be objective evidence of impairment

  • and really what the guidance says is that it most likely would involve a series of loss

  • events that points to the fact that the cost will not be recovered. So, examples that they

  • use would be a significant financial difficulty had by the entity itself or increasing probability

  • of bankruptcy over a period of time tying it back to some of the indicators we saw on

  • the previous slide, significant changes with an adverse effect in the local environment

  • in which the issuer operates may also indicate that the cost may not be recovered and what

  • we are going to actually, the final sort of indicator, if you will and what well talk

  • about in a little more detail is whether or not there is a significant or prolonged decline

  • in the fair value of an investment in an equity instrument below its cost.

  • So, the first thing that we are just going to think about when we are looking at this

  • criteria is the fact that the assessment should always be done relative to the original cost

  • on the date of initial recognition. So, this is actually a point that was considered by

  • IFRIC a number of years ago, because I think what people were struggling with is what the

  • point of comparison was as they were doing this assessment of significant and prolonged

  • decline. The IFRIC also went onto clarify that what constitutes a significant or prolonged

  • decline in fair value is actually a matter of judgment and that an entity could develop

  • some internal guidance to assist with the consistent application of this judgment, but

  • there may be facts and circumstances that would override the policy. So, if we just

  • want to walkthrough a quick example, let’s say an entity has defined their policy such

  • that significant is determined to be a 15%-20% decrease in the fair value and prolonged is

  • deemed to be a period greater than nine months. If we look at the diagram on the screen, so

  • the initial cost is that dashed line that runs through the middle and then the solid

  • line would be the fair value of the equity instruments over the passage of time, you

  • can see at Q1, probably there is no impairment whereby the fair value equals initial cost,

  • at Q2 we have had an increase in the fair value and then at Q3 we can see that there

  • has been a decline in the fair value of our equity instrument.

  • So, our first assessment would be to look back at our internal policy and compare the

  • price as at the reporting date to our initial cost and determine whether or not of significant.

  • You know in determining their internal policy, the entity may have considered that a volatility

  • of 5%-10% is normal for the industry in which this equity exists, but, if it is in excess

  • of that volatility it’s definitely an indicator of impairment, then an impairment would be

  • recorded and then the other thing is to look at time. So, if we look at sort of it’s

  • been nine months since the initial recognition of our equity investment, but it’s only,

  • so determining whether or not that also is a reason to record an impairment.

  • Okay, so next thing we are going to talk about is discount rates. So, the Bank of Canada

  • has not done much in terms of our interest rate or risk free interest rate and so our

  • question to you is which of the following standards requires the use of a discount rate

  • and if you have answered all of those shown on the slide then you are correct. So, this

  • is just really a friendly reminder to let you know that there are a number of standards

  • that require the calculation in the application of discount rates at each reporting period

  • and that just that these amounts need to be revisited. I’ll just touch on some of them

  • quickly. So, as I mentioned the Bank of Canada, the risk free interest rate is sitting at

  • about three quarters of a percent right now, which is down from 1% as of July or I guess

  • June of this year, that is often the starting point for IAS 37 provisions to the extent

  • that entities actually put the risk associated with future cash flows into the cash flows

  • themselves. So, it’s just really that we need to be consciously assessing whether or

  • not the appropriate risk has been embedded into the inputs and the cash flows and also

  • that when we are looking at the different discount rates that we are ensuring compliance

  • with respective IFRSs and then just moving onto and I guess Kerry touched on this briefly

  • before, we are going to talk about some fair value considerations.

  • So, basically fair value is the price that

  • would be received to sell an asset or paid to transfer a liability in an orderly transaction

  • in the principal or in the case of IFRS 13 the most advantageous market at the measurement

  • date under current market conditions. So, really quite a mouthful, but really I think

  • what reporters need to think about or people who are preparing their financial statements

  • is whether or not they have really assessed the completeness of their fair value disclosures

  • and also the completeness of their calculations. So, looking at a number of financial statements,

  • there seem to be some deficiencies, one in terms of whether or not all items that have

  • affected both recurring and non-recurring are reflected in the financial statements.

  • It’s not often clear whether or not there have been adjustments to valuation models.

  • So, just an example there would be if you had debt that was previously issued and you

  • were using one valuation model and then you issued some more debt, but that had different

  • constraints associated with it just whether or not you have modified the valuation methodology

  • in order to reflect the individuality of that second debt tranche that was issued. Also

  • a reminder that the fair value hierarchy applies to both financial and nonfinancial assets

  • and liabilities and often the disclosure included in the financial statements focuses just on

  • financial instruments. So, we just need to ensure completeness and then also just ensuring

  • as I was referring to in the discount rate portion is that any non-performance risk or

  • other risks associated with the fair value of assets and liabilities that is actually

  • flowing through the methodology. So, the next slide we are just going to look

  • at some of the required disclosures in the context of fair value measurements and really

  • this is all in the context or set out in IFRS 13, which basically is asking for entities

  • to disclose information that will help users understand both assets and liabilities that

  • are measured at fair value on a recurring and non-recurring basis after initial recognition.

  • So, just sort of take a step back, if we could just think about or revisit what is meant

  • by recurring and non-recurring. Examples of recurring fair value measurements would include

  • investment properties that use the fair value model under IFRS 40 or financial assets at

  • fair value through profit and loss under IAS 39 and IFRS 9. Really what it is, is assets

  • and liabilities that need to be fair valued at each reporting period as set out under

  • IFRS and then by comparison non-recurring fair value measurements include assets held

  • for sale, which are measured at the lower of fair value less cost to sell and their

  • carrying amount and again comparatively non-recurring fair value measurements are those that are

  • required or permitted by IFRS, but only in particular circumstances.

  • So this slide just shows what the required disclosures are for Level 2 and Level 3 items

  • and if we are going to tie this back to sort of the feedback that we have been receiving

  • via comment letters and from regulators, the first one would be with regards to the description

  • of the valuation techniques, often these descriptions are fairly boilerplate and to be honest they

  • really just reproduce the definitions of both Level 2 and Level 3 as set out in IFRS 13.

  • So, really just you know entities should be revisiting their disclosures and ensuring

  • that they have made them as asset or liability specific as possible in order for readers

  • to understand what is going into these different underlying measurements. Given and as Kerry

  • mentioned sort of the number of variables and potential risk associated with Level 3

  • measurements, I just want to draw your attention that there are a number of additional disclosures

  • that are required including a reconciliation from the opening to the closing balances in

  • order to, for users to understand those changes and also with regards to quantitative information

  • about the significant inputs that are going into the fair value measurements. So, really

  • just a reminder that we need to ensure that the disclosures one are complete and two that

  • they are in sufficient detail and specificity that readers can understand what they are

  • trying to say and just before I turn it back to Jon, I wanted to talk about one more economic

  • consideration and that’s the Canadian political environment. As some of you might know, included

  • in the proposed 2015 Federal budget was the rule to make inter-corporate dividends declared

  • after April 1, 2015 taxable. This is just a reminder that the proposed rule was expected

  • to be reintroduced when the Trudeau government brings up the next budget. So, although not

  • an issue for the current year-end, you may want to consider speaking to your tax advisor

  • in order to start planning for potential implications and potential tax strategies in the event

  • that this rule is in fact passed and could potentially have an impact on your financial

  • results and with that I would like to turn it back over to Jon.

  • Thanks very much Alexia. Lots of challenging issues especially around impairment and fair

  • value measurement. I would now like to turn the presentation back over to Kerry.

  • Thanks Jon. So, I guess another piece of good news about

  • not having too many amendments for year-end to talk about is that it does leave us a little

  • bit of time to look ahead to what might be coming along in the near future and I am going

  • to just touch on, this is basically an abridged version of the current IASB work plan. You

  • can see this work plan at any given time by following the link that’s on the bottom

  • of the screen. They do update it from time to time and this one is as of October 30,

  • the last version. So, as many of you will know, we are expecting the Leases project

  • to result in a final standard within the next three months and I guess the much awaited

  • implementation date has pretty much been decided to be January 1st, effective for period starting

  • on or after January 1, 2019. So, I guess the good news is we don’t have to adopt the

  • Leases standard in the same year that we have to adopt revenue and the new financial instrument

  • standards in IFRS 9, but soon after that in 2019, I have to be looking towards Leases.

  • So, I will say a little bit about some of the stuff that they have released some information

  • about the Leases project. So, I’ll talk about that shortly, but in

  • the meantime, maybe I’ll just mention a couple of other things that they are working

  • on. So, you will see a number of entries on this work plan related to the Disclosure Initiative.

  • So, the first one being we are expecting some final amendments. So, this is going to be

  • a final IFRS to IAS 7, which is the cash flow statement standard and what those amendments

  • are focusing on is getting entities to provide information about liquidity and one of the

  • things proposed in there, which we expect to see in the final standard is actually some

  • disclosure around reconciling, opening to closing balance related to liabilities and

  • in particular debt type financing obligations and basically showing in the financial statement

  • notes, the movements of those in the period. So, that’s something that you might want

  • to watch for. It will be out probably early next year. So, we don’t really know what

  • the implementation day will be. Certainly, probably safe to say it won’t be a 2016

  • implementation day, but may be some point soon after that.

  • So, a couple of other things to mention IFRS 8, we are expecting in next few months, an

  • exposure draft, some clarifications around segment disclosures and these come from the

  • so called post-implementation review that the IASB does. So, when they do a new standard

  • and IFRS 8 is a relatively new standard, a couple of years after the effective date,

  • they will do what they call post-implementation review and they are looking for implementation

  • issues and areas where clarification is needed. So, they have found that there are some areas

  • related to IFRS 8 that they would like to propose some clarifications and so we can

  • watch for an exposure draft on that coming shortly. The next one, I guess another definition

  • of a business in the middle column, that’s another one out of the post-implementation

  • review this time of IFRS 3, the business combination standard. So, this is an important issue and

  • it’s one that we often think about in acquisitions of assets especially in the natural resources

  • and sometimes in the real estate sectors whether the collection of assets that you are buying

  • meets the definition of a business, in which case it’s covered by IFRS 3 in the business

  • combination standard or is it just merely an acquisition of assets and then the question

  • is how do we account for them and there are some differences. You know you wouldn’t

  • have goodwill in an asset acquisition, transaction costs would get expensed in a business combination,

  • they get added to the cost of assets in an acquisition that’s not a business acquisition.

  • So, there are some differences in accounting, which does make the distinction important.

  • Again we have got Disclosure Initiative again mentioned here and the discussion paper and

  • as well over on the right-hand side, there are some more entries there for an exposure

  • draft around changes in accounting policies and estimates out of the Disclosure Initiative

  • and so there that one is getting at the distinction between a change in policy versus a change

  • in estimate and then finally at the bottom, there is a Materiality Practice Statement,

  • that they have issued a paper on that and they are considering comments. So, I guess

  • the one thing also to mention about the Disclosure Initiative project which is not on this work

  • plan and that’s because part of it is already finished, they have made some amendments to

  • IAS 1 around some concepts associated with materiality, the extent to which financial

  • statement line item should be aggregated and whether individual line items need to be presented

  • only based on materiality or do they need to be presented simply because they appear

  • in a list of minimum line items in IAS 1 and so the good news there is they have gone more

  • towards saying only present things if they are material and so that’s good. I think

  • the whole objective behind the Disclosure Initiative project is to perhaps get some

  • streamlining of disclosure happening and just to make sure that really the most important

  • things are being disclosed in a clear way and in a way so that the information is not

  • obscured by having a lot of details present in the notes.

  • So, I think that’s probably good news story anyway. So, that piece of the Disclosure Initiative

  • that’s finished, those amendments to IAS 1, they are effective for January 1, 2016.

  • So, will they cause a lot of changes for next year’s financial statements, maybe not,

  • but they will give some extra food for thought for people in thinking about how and whether

  • to streamline their disclosures and certainly a lot of encouragement there to try and make

  • the disclosures more clear and concise. I guess may be one last thing to mention the

  • Conceptual Framework, which is in the middle column there. They have been working on the

  • Conceptual Framework update, so that is basically the part of IFRS that sets out things like

  • definitions of an asset and liabilities, the elements of financial statements and so on.

  • So, that project they had a discussion paper. They are considering the comments on the discussion

  • paper. So, we will see probably some activity, more proposals perhaps being presented next

  • year. So, the comment period on the current exposure draft that’s out related to that

  • project is actually ending this week, November 25th.

  • So, I mentioned I was going to talk a little bit about some work that they have or some

  • of the stuff that they have released related to the Leases project and so that’s on the

  • next slide and really what they have done here is, you know as I said we are expecting

  • the final standard, but what the IASB has done and they have actually put it out twice

  • now, they did a version in February and then they updated it in October. A lot of discussion

  • and examples surrounding definition of Lease and remember if you have been following this

  • project you know that the whole objective of the project is to get all those leases,

  • for lessees to have their leases for the most part on the balance sheet with a right of

  • use asset and an obligation and so, really distinguishing leases from other kinds of

  • contracts is becoming even more important than it ever was because you could have a

  • big difference. If you got a lease, then you will have the right of use asset and an obligation.

  • Whereas if you don’t, you won’t have those things. So, they have put out this information

  • statement about some of the guidance that they expect to see in the final standard around

  • what actually is the definition of a lease.  

  • So, we can see on the slide it has a few elements. So, first of all it depends on the use of

  • an identified asset. So, this is a uniquely identified asset, there should be no real

  • substitution rights and then it’s for a physically distinct portion of the asset.

  • So, either the asset completely in it of itself that’s what is leased or maybe something

  • that can be distinguished like floors in a building. So, those things would meet the

  • definition potentially of a lease, whereas something like you know capacity in a fiber

  • optics cable would not because others will also be using the same cable and you have

  • just really contracted for some capacity in the cable. So, the other element is that the

  • contract conveys the right to control the use of the asset for a period of time. So,

  • the lessee has the ability to direct the use of the asset and make decisions about it and

  • to receive benefits from its use. So, there could be some critical judgments in here,

  • whether the customer controls the use of the asset over the period of use.

  • So, let’s just look at an example on the next slide and really this is just one of

  • a number of examples that they have included in this little release that they have done,

  • most recently in October. So, in this case, we have got a contract between a customer

  • and a freight carrier, the supplier, to provide use of 10 rail cars of a particular type for

  • five years. The customer determines when, where and which goods to be transported within

  • certain limitations. If a particular car needs to be serviced or repaired, the supplier is

  • required to provide a substitute, but that would be the only case during which they would

  • be able to substitute other cars and then otherwise the supplier as long as the customer

  • is continuing to pay the lease payments or make the payments, the supplier cannot retrieve

  • the cars during the five-year period. Now, it’s also a feature of the contract that

  • the supplier might provide an engine and a driver when requested by the customer as well,

  • so that we can make the cars move from point A to point B. So, is there an identified asset?

  • Yes, it’s the 10 cars. They are explicitly indicated or specified and we can’t do substitution

  • unless there is service needed. The engine and the driver is not an identified asset

  • because it’s neither explicitly specified nor implicitly specified in the contract.

  • So, that’s not part of the lease even though it would be a service that would be provided

  • surrounding the lease. So, if we move onto the next slide, we can

  • see the considerations here and so the question really is does this represent a lease or does

  • the contract contain a lease of the rail cars. So, in this particular case because the customer,

  • they are controlling the right of the use of the asset, the supplier cannot substitute,

  • it’s the customer who decides when and how to use the cars, the driver is a separate

  • service essential to the efficient use of the cars, but the supplier’s decisions related

  • to the engine and the driver do not give it the right to direct how and for what purpose

  • the rail cars are used. So, in this case, yes contains a lease. Now if we change the

  • fact pattern and that’s the interesting thing that they do in this little release

  • they put out as they look at one fact pattern where the thing does constitute a lease and

  • then they alter up the facts a little bit so that you can kind of see the contrast there

  • and so if we changed it so that the supplier for example could retrieve the cars, substitute

  • them, all they really needed to do was kind of provide the capacity of 10 cars, not 10

  • specific cars, then that one likely would not constitute a lease and it would be a service

  • contract instead. So, just interesting you could find that release on the IASB’s website

  • on the project page for the lease project.  

  • So, the next couple of things I am going to talk about are two draft IFRIC interpretations.

  • So, the IFRIC is of course the interpretations committee that deals with relatively narrow

  • focus projects of an interpretive nature related to the IFRS standards. So, the first one potentially

  • an important one, so uncertainty over income tax treatments. So, this is dealing, uncertain

  • tax positions arise when the tax law or the application of the tax law is sometimes unclear

  • in certain cases and so companies will have these uncertain tax positions where they have

  • taken a position it’s not a 100%, that’s the position that would prevail if it was

  • challenged, but nevertheless that’s the position they have taken and so the question

  • there is how do we account for that uncertainty and what do we do about that uncertainty from

  • an accounting perspective. So, of course US GAAP has a standard on this. IFRS never did

  • and so there was, you know existing practice is for people to either look to IAS 12, which

  • is the tax standard to try and figure out how to account for these uncertainties or

  • else look at IAS 37, which is the contingencies and contingent liabilities part of IFRS. So,

  • the exposure draft is kind of trying to answer the question where should we look and so,

  • it is referencing, it is indicating that the reference should be made to the tax standard

  • and so how do we deal with these uncertainties. So, the objective of the standard is for the

  • entity to consider whether it’s probable, what’s the probable outcome on an uncertain

  • tax position and so, it talks about using the most likely amount or an expected value

  • approach and we will look at an example shortly, but, so, really and how do you choose. So,

  • it is driving you to it. It’s not a free choice. It’s suggested in the exposure draft,

  • but you should be selecting the method that best reflects the amounts that you would expect

  • to pay or recover. So, sometimes if there is kind of one really very, the most likely

  • amount and it’s kind of obvious it will be that amount or maybe nothing or there are

  • other amounts that maybe have a much lower probability, may be you will be driven to

  • using the most likely amount versus if there is kind of a range of outcomes then maybe

  • more of an expected value approach would be the way to go. The draft interpretation tells

  • you to assume that a taxation authority will examine the filings and has full knowledge

  • of all the relevant information. So, basically that’s trying to take out sort of the detection

  • risk out of it. So, you know would they even think to ask that question, would they know

  • that you are taking that position, would the question even come up on an audit. It sort

  • of takes that off the table and says like let’s assume that they will examine it and

  • they will do a thorough job and they will be able to see, the tax authorities would

  • be able to see and evaluate these uncertain positions and then it also talks about whether,

  • the proposal talks about whether each uncertain tax position should be considered on its own

  • or together and really the answer there depends on the facts and circumstances and whether

  • the positions would stand independently of each other or not.

  • So, the comments are due on that one in January and again you can find that in the website

  • if you are interested in looking at it and maybe commenting on the draft interpretation.

  • So, if we look at the example and this is an example right from the draft. We have entity

  • B whose tax filing includes a number of deductions related to transfer pricing. It’s not probable

  • that the tax authority will accept all of the tax treatments and decisions on one will

  • affect or be affected by decisions on the other, so they are interrelated potentially.

  • So, entity B concludes that the tax treatments should be considered collectively and the

  • most likely amount was determined to be 800, but having said that if you look in the example

  • youll see that there is a fairly wide range of possible outcomes and really 800 is only

  • considered to have a 30% probability. So, while it is the most likely outcome of all

  • of them, it’s not like it is even hitting the probable threshold in and of itself. So,

  • the entity then concludes because of the dispersion of these outcomes that they should use an

  • expected value approach and as a result they record 650 related to this tax position on

  • that basis.  

  • The other draft interpretation, which is probably a narrow situation, ask the question about

  • foreign currency transactions involving advance consideration. So, an example would be maybe

  • you are paying upfront to buy an asset and so, if it’s in a foreign currency, at which

  • rate should that be translated to the spot rate? So, if we look on the next slide, there

  • is a little bit of an example. The standard is basically saying to use the earlier of

  • the date the prepayment is recorded and the date the asset is recorded. So, basically

  • you are making a prepayment before the asset is received then that would be what you would

  • pick. So, let’s look at this example. So, we are entering into a non-cancellable contract

  • with a supplier on March 1st, we paid a non-refundable fixed purchase price on April 1st and then

  • we take delivery of the machinery on April 15th. So, in this case using the earlier of

  • proposal set out in the draft interpretation, we translate the prepayment on the date it’s

  • made April 1st and we don’t change it when we get the machinery. So, the machinery basically

  • comes onto the books using that same April 1st exchange rate. So, as I mentioned, that

  • is a January comment deadline as well. So, finally I guess the last thing I am going

  • to talk about that’s out for comment is the agenda consultation. So, every few years,

  • the IASB looks at their current agenda and they seek input from stakeholders as to whether

  • it has the right priorities in the work plan and so on and it really basically goes from

  • the very basic, early stage research projects to maybe some other projects that are more

  • advanced. So, we can see on the next slide the basic categories of the projects that

  • they are considering and the areas of interest that they are looking at. So, there is development

  • stage, assessment stage and then there is the inactive projects. So, what they are basically

  • asking for is for people to comment if they would like to on the relative priorities that

  • should be given to these different projects. So, you can see it’s a fairly lengthy list.

  • Some of these projects are, potentially might have some pervasive impacts, they are very

  • topical, others are more narrow. So, I’ll just leave that for your reference. The agenda

  • consultation paper is available on the IASB’s website and it’s open for comment until

  • December 31st. So, the next slides, which I will leave for

  • your reference relate to some resources that we have noted, Deloitte Center for Financial

  • Reporting and so on and then as I mentioned Appendix A goes through those amendments that

  • are effective for 2015 fiscal year end and then Appendix B gets into some of the amendments

  • or the amendments that are effective starting in January 2016. So, certainly probably a

  • topic of future webcast for us to talk about those 2016 amendments that will affect 2016

  • year end. So, Jon, I think I will turn it back to you at this point.

  • Okay thanks Kerry. Safe to say that accounting and financial reporting are not static, they

  • are always changing. Thanks again to our speakers, Kerry Danyluk and Alexia Donoghue. I would

  • also like to thank our behind the scenes team, Kiran Kullar, An Lam, Elise Beckles and Allan

  • Kirkpatrick. We hope that you found this webcast helpful and informative. If you have any questions

  • or feedback, please reach out to your Deloitte partner or other Deloitte contact. If you

  • would like additional information, please visit our website at www.deloitte.ca and to

  • all of you viewing our webcast, thank you for joining us. This concludes our webcast

  • bringing clarity to an IFRS world - IFRS quarterly technical update.

Welcome to Deloitte financial reporting updates our webcast series for issues and developments

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Q4 2015 IFRS四半期テクニカルアップデート - IFRSの世界に明快さをもたらす (Q4 2015 IFRS quarterly technical update - Bringing clarity to an IFRS world)

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