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IFRS 9 Financial Instruments and IFRS 15 Revenue from Customers

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IFRS 9 Financial Instruments and IFRS 15 Revenue from Customers HFMA Break-out Session - IFRS 9 and IFRS 15 Ben Sheriff © Deloitte LLP 2019. All rights reserved. Purpose of this session Discuss requirements of the new standards in 1 an NHS context 2 Share experiences from work done to date Avoid “surprises” from audit of the new 3 standards © Deloitte LLP 2019. All rights reserved. 2 IFRS 9 Financial Instruments © Deloitte LLP 2019. All rights reserved. 3 IFRS 9 – Financial Instruments - Refresher © Deloitte LLP 2019. All rights reserved. 4 IFRS 9 – Financial Instruments - Refresher © Deloitte LLP 2019. All rights reserved. 5 IFRS 9 – Financial Instruments - Refresher • Simplified model – go directly to Stage 3 impairment • For public sector is extended to more assets © Deloitte LLP 2019. All rights reserved. 6 IFRS 9 – Financial Instruments Using a provision matrix approach Step 1 - Determine appropriate groupings Step 2 - Determine the period over which observed historical loss rates are appropriate Step 3 - Determine the historical loss rates Step 4 - Consider forward looking macro-economic factors and conclude on appropriate loss rates Step 5 - Calculate the expected credit losses https://www.iasplus.com/en- gb/publications/global/a-closer- look/provision-matrix © Deloitte LLP 2019. All rights reserved. 7 Financial Reporting Council Thematic Review of IFRS 9 reporting The FRC has reviewed interim disclosures in the first year of adoption by companies, and identified areas for improvement IFRS 9 did not have a material effect on Recommendations Transition points to consider the results of nonbanking entities • Many of the transition disclosure • IFRS 7 has a number of additional • Although the FRC would expect non-banking requirements will not be required. However, transitional disclosures which are required entities generally to have a hold-to-collect the FRC expect companies to explain why on adoption of IFRS 9.. business model, in many cases this was not the impact is not material. • Companies should explain any key clarified. • Take care not to overlook categories of assumptions adopted on implementation of • In one case, IAS 39 terminology (‘available financial instruments or assume too readily IFRS 9. We expect companies to explain for sale’) continued to be used for the that IFRS 9 has no effect. For example IFRS and, where possible, quantify the material interim balance sheet. 9’s impairment provisions have been differences between IAS 39 and IFRS 9. • Only two entities clarified that they had extended to include IFRS 15 contract assets • For example, the requirement to determine adopted the simplified approach, recognising and apply to loans to joint ventures and, for ECL on full lifetime credit losses on initial parent companies, loans to subsidiaries. recognition. The FRC acknowledge that • Under IFRS 9 it is necessary to reconsider there may not be a material difference the accounting for previous modifications of between the three-bucket approach and the debt that did not result in derecognition, simplified approach when trade receivables e.g. a refinancing that did not result in the have short credit terms but it would be loan being derecognised. Whilst the previous helpful if this could be clarified. practice was to adjust the interest rate going forward for the modified terms and costs incurred, under IFRS 9 a gain or loss must be recognised to preserve the original effective interest rate. • Remember that IFRS 7’s disclosure requirements have been expanded by IFRS 9. This should be factored into preparations © Deloitte LLP 2019. All rights reserved. 8 for the annual report and accounts. IFRS 9 – Financial Instruments - Refresher GAM adaptations Within the DHSC group, stage 1 and stage 2 impairment losses should not be recognised, as the DHSC will provide “a guarantee of last resort against the debts of DHSC group bodies (excluding NHS charities)”. The GAM states that stage 3 impairments (recognised on “objective evidence of impairment”) are not normally expected to be required as balances are not expected to be irrecoverable (in line with previous guidance about intra-NHS bad debt). DHSC group bodies must use the IFRS 9 simplified impairment approach, and recognise lifetime expected credit losses. © Deloitte LLP 2019. All rights reserved. 9 IFRS 9 – Financial Instruments - Refresher Public sector implementation changes No restatement on adoption Adoption of simplified impairment approach Balances with Departments and agencies excluded from stage 1 impairments No “own credit risk” on liabilities due to Departments and agencies Guidance on discount rates Removed the option to keep IAS 39 hedge accounting requirements © Deloitte LLP 2019. All rights reserved. 10 Discussion IFRS 9 issues identified to date © Deloitte LLP 2019. All rights reserved. 11 IFRS 9 – Financial Instruments Discussion points Will any issues arise on trusts matching loans Do any trusts have more complex financial with DHSC? instruments that need to consider? As changes go through opening balances rather than full restatement, will there be Will any issues arise on Trust financial metrics? changes that have unexpected impacts on control totals? Are any changes required to how trusts deal with intra-NHS (or other healthcare) debtors? Are these IFRS 9 “credit losses” or IFRS 15 “price concessions”? (discussed further below) © Deloitte LLP 2019. All rights reserved. 12 IFRS 9 – Financial Instruments Interaction with IFRS 15 Are any changes required to how trusts deal with intra-NHS debtors? (or any other debtors) The agreement of billing has been an area we have identified for healthcare providers globally as an area of challenge, with a judgement whether this is a “price concession” under IFRS 15 or “credit loss” under IFRS 9: © Deloitte LLP 2019. All rights reserved. 13 IFRS 9 – Financial Instruments Interaction with IFRS 15 - Definition of a “credit loss” in IFRS 9 IFRS 9: lifetime expected credit losses The expected credit losses that result from all possible default events over the expected life of a financial instrument. expected credit losses The weighted average of credit losses with the respective risks of a default occurring as the weights. credit loss The difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (IE all cash shortfalls), discounted at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). An entity shall estimate cash flows by considering all contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) through the expected life of that financial instrument. The cash flows that are considered shall include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. There is a presumption that the expected life of a financial instrument can be estimated reliably. However, in those rare cases when it is not possible to reliably estimate the expected life of a financial instrument, the entity shall use the remaining contractual term of the financial instrument. The term ‘default’ is not defined in IFRS 9 © Deloitte LLP 2019. All rights reserved. 14 IFRS 9 – Financial Instruments Interaction with IFRS 15 - Definition of a “price concession” IFRS 15: 50 If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. 51 An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items. The promised consideration can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event. For example, an amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone. 52 The variability relating to the consideration promised by a customer may be explicitly stated in the contract. In addition to the terms of the contract, the promised consideration is variable if either of the following circumstances exists: a. the customer has a valid expectation arising from an entity’s customary business practices, published policies or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expected that the entity will offer a price concession. Depending on the jurisdiction, industry or customer this offer may be referred to as a discount, rebate, refund or credit. b. other facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, is to offer a price concession to the customer. © Deloitte LLP 2019. All rights reserved. 15 IFRS 15 Revenue from contracts with customers © Deloitte LLP 2019. All rights reserved. 16 IFRS 15 – Revenue from contracts with customers Status update • The adaptions of IFRS 15 for the public sector are fewer than for IFRS 9. Again mandating some simplifying options: o not restating - any impact of transition will be recognised as a reserves movement in 2018/19. o required to take a practical expedient to contract modifications. o Taxes, fines and penalties kept by bodies should be treated as “under contract”. • It is anticipated that the impact of the standard will be limited for most NHS income for patient care as contracts are aligned to the financial year, though there are some areas that will need consideration. • DHSC has performed a review of the NHS Standard Contract against the requirements of IFRS 15. This highlights a series of areas that require consideration in application of the standard. • The Q3 returns included a standard format for the additional disclosures required on all income. © Deloitte LLP 2019. All rights reserved.
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