IFRS 9, 15, and 16 - a leap forward KPMG’s 2017 Annual report market watch June 2018 2 | IFRS 9, 15, and 16 - a leap forward IFRS 9, 15, and 16 - a leap forward Introduction The review has prompted our thoughts on key items With the introduction of IFRS 15 Revenue from Contracts for reporters to consider for 2018 reporting and beyond. with Customers (effective 1 January 2018), IFRS 9 Financial (refer to “things to consider”). Instruments (effective 1 January 2018), and IFRS 16 Leases (effective 1 January 2019), IFRS reporters currently face a Sample populations tide of change. The IFRS 15 and 16 analysis covers the 2017 annual reports of the top 75 Dutch listed companies2. Ahead of the adoption dates of these new standards, the European Securities and Markets Authority (ESMA)1 The IFRS 9 analysis focuses on corporate entities only. The published its expectations with regards to the level of detail impact on financial institutions is far greater and demands in companies’ transition disclosures as required its own separate review. We have therefore excluded such by IAS 8. entities from this analysis3. This has resulted in a sample size of 55 entities for IFRS 9. In this market watch publication, we have analysed the transition disclosures in the 2017 annual reports of 75 Dutch listed companies and summarised our key The analysis for each standard is presented separately. observations on the disclosure details, expected impact, and transition approach. IFRS 9: hedge accounting options available! The following observations regarding Expected impact IFRS 9 have followed from a review of the 2017 annual reports of 55 Dutch • 50 companies (91%) stated that the listed corporates: impact of IFRS 9 will be immaterial. • The remaining 5 companies (9%) did Stage of transition project not explicitly qualify the significance of the IFRS 9 impact. • 2 companies (4%) indicated they are ready for full implementation of IFRS 9 as at the 2017 year-end. Stage of transition project IFRS 9 Expected impact IFRS 9 • 36 companies (65%) indicated that 0% their initial impact assessment is 4% complete. 9% 22% • A further 5 companies (9%) explained that their IFRS 9 impact assessment is still in progress, and 9% • The remaining 12 companies (22%) 65% did not explicitly comment on the 91% progress of the project. Ready for full implementation Material Completed initial assessment Not material Initial assessment in progress Not disclosed Not disclosed 1 In October 2017 ESMA published its Public Statement on the European common enforcement priorities for 2017 IFRS financial statements that 2017 annual reports would contain specific quantitative and qualitative disclosures regarding the new standards to be adopted in the following period (https://www.esma.europa.eu) 2 Companies included in AEX, AMX and AScX-indices. One company early adopted IFRS 15 and is therefore excluded from the IFRS 15 analysis. 3 For an analysis of IFRS 9 impact on financial institutions, we refer readers to the KPMG Real-time IFRS 9 web page. © 2018 KPMG Advisory N.V. 2 | IFRS 9, 15 and 16 – the countdown continues IFRS 9, 15, and 16 - a leap forward | 3 Type of disclosure • All companies provided qualitative In summary the review shows disclosures on the impact of IFRS 9. that for the vast majority of Dutch • 18 companies (33%) also disclosed listed corporate companies the the expected quantitative impact of impact of IFRS 9 is relatively minor. the transition. This corresponds with Nevertheless, there are still things the fact that for the vast majority of to consider. corporate entities the impact of IFRS 9 is immaterial. •The quantitative impacts that were disclosed related mainly to the impact of the new Expected Credit Loss Type of disclosure IFRS 9 Transition approach IFRS 9 impairment methodology. These disclosed impacts had a negligible impact on equity. This is expected given the stable credit environment 33% we are currently in. 55% 45% Transition approach 67% • 25 companies (45%) have chosen to make use of the available practical 0% expedient to not restate the Qualitative and quantitative Without restatement comparative period. Qualitative only With restatement • The remaining 30 companies (55%) Not disclosed did not comment on the transition approach. Things to consider Hedge accounting disclosures on this topic. Given the benefits IFRS 9 offers additional hedge accounting and new options provided by IFRS 9 in the 1 options for corporates in comparison to IAS area of hedge accounting, this may be a topic 39. Such opportunities include hedging of risk for additional considerations for corporate components of non-financial items and companies. hedging of aggregate exposures. The "cost of hedging" method also reduces P&L volatility Disclosures further. Effectiveness testing under IFRS 9 IFRS 9 expands the disclosure requirements is required only on a prospective basis and 2 for all companies. The additional information includes a qualitative assessment of required will of course depend on the economic relationships instead of the relevance of the different requirements for 80%-125% rule. each individual company. It is important to assess the additional disclosures rules fully. Our review of the annual reports highlighted Changes to data-gathering processes, IT that only 20 companies (36%) have chosen systems and controls are likely to be required. to adopt IFRS 9 for hedge accounting on It is also important to note that the new transition4. The remaining 35 companies hedge accounting disclosures in IFRS 7 may (64%) plan to defer the adoption of hedge not be deferred even if an entity continues to accounting under IFRS 9 or did not provide apply the IAS 39 hedge accounting model. 4 A deferral of applying IFRS 9 hedge accounting is available until the standard resulting from the IASB’s project on accounting for dynamic risk management is completed. © 2018 KPMG Advisory N.V. 4 | IFRS 9, 15, and 16 - a leap forward IFRS 15: we are not yet there! Last year’s 2016 Annual report market 5 watch revealed that the majority of the Stage of transition project IFRS 15 Expected impact IFRS 15 companies listed in the Netherlands 0% were still assessing the impact of 10% 5% 4% IFRS 15 or had not commenced implementation. Studying the 2017 12% annual reports resulted in the following observations: 9% Stage of transition project 78% 91% • Our review found that 58 companies Ready for full implementation Material (78%) indicated that their initial Completed initial assessment Not material impact assessment is complete. Initial assessment in progress Not disclosed •A further 9 companies (12%) Not disclosed indicated that their IFRS 15 impact assessment is still in progress. • The remaining 7 companies (10%) did not disclose the stage of their IFRS 15 transition project. are the revenue streams driving • We understand that a small number these material impacts. of companies are continuing to work Expected impact •A large majority (91% or 67 through the implications of all areas companies) have indicated the new of the standard and consequently • Only 3 companies (4%) disclosed standard will not have a material were unable to include a reasonable that the implementation of IFRS 15 impact on their financial statements. estimate of the financial impact in will have a material impact on the • The remaining 4 companies (5%) their 2017 transition disclosures. financial statements. Software have not disclosed the impact of licensing and telecommunications IFRS 15. 5 KPMG: IFRS 15 Revenue recognition – A (final) call to action © 2018 KPMG Advisory N.V. IFRS 9, 15, and 16 - a leap forward | 5 Type of disclosure • The remaining 26 companies (35%) did not disclose whether they would Type of disclosure IFRS 15 • All companies provided qualitative opt for the cumulative effect method information on the impact of IFRS 15. or the full retrospective method. • 19 companies (26%) included a • The choice of transition option will 26% quantitative disclosure of the depend on each companies’ unique expected financial effect on results set of circumstances. The cumulative and the statement of financial effect method involves no position. restatement of the comparative 9% 74% • The remaining 55 companies (74%) period but does require dual reporting relied solely on the qualitative under both the outgoing standards disclosure to inform readers of the and IFRS 15 in the year of adoption. Qualitative and quantitative expected impact of IFRS 15. The retrospective method does Qualitative only • Often the qualitative disclosure involve restating the comparative explains that the initial effect is period but in turn does not require expected to be immaterial and that dual reporting. Each company Transition approach IFRS 15 IFRS 15 will not have a significant therefore faces a level of trade-off impact on revenue recognition between effort and comparability. compared to the current accounting policy. In summary the review shows that 35% the impact of IFRS 15 is expected to 35% Transition approach be immaterial for the vast majority of Dutch listed companies. Despite this • With regards to the transition there are some items which are worth 30% approach 26 companies (35%) considering no matter how minor the indicated that they have opted for impact. Cumulative effect approach the cumulative effect method. Retrospective (full or modified) •A further 22 companies (30%) Not disclosed have chosen the full retrospective approach. Things to consider New disclosure requirements information to meet the new disclosure IFRS 15 introduces new qualitative and requirements in an efficient manner. This may 1 quantitative disclosure requirements. The aim require significant changes to the existing of the new disclosure is to enable financial data-gathering processes and cause statement users to understand the nature, companies to reassess their IT system amount, timing and uncertainty of revenue capabilities. and cash flows arising from contracts with customers. No matter how minor the impact Embedding new processes of IFRS 15, the requirement to build the new Companies may wish to embed the new disclosures remains.