IFRS Update 2019 Latest trends and experiences within IFRS October 2019 Assurance Offerings Services Proces optimisation – financial processes Disruptive events ERP support – – Exit readiness Microsoft and IPO assistance Accounting Advisory, Pension management IFRS and DK GAAP services Corporate Governance © Deloitte 2019 2 IFRS 16 © Deloitte 2018 3 Trends and experiences © Deloitte 2018 4 Trends and experiences How did it go with the implementation? Impact of IFRS 16 and Disclosures in the Financial statements We have not yet seen a clear trend in how the companies will address IFRS 16 in their financials statements. How and when to address modifications? We experience that many companies struggle a bit with how to handle modifications and when to apply these? Administration burden The trend in the market is that IFRS 16 is handled centrally and handled as a group adjustment to the monthly reporting and not implemented in the daily bookkeeping due to the administrative burden and lack of supporting systems and processes. Complexity of contracts Even though most of our clients’ preliminary Real economic effects assessment indicated that their lease We see clients shifting their focus from portfolio was quite simple and compliance with IFRS 16 to strategic straightforward, it seems that most optimisation of their lease portfolio in an companies are surprised by the complexity IFRS 16 world. However, we also see that of IFRS 16 and they still struggle to find the they are facing problems in terms of dealing right level. with banks and other investors. © Deloitte 2019 5 Modifications and practical complexities © Deloitte 2018 6 Modifications and practical complexities Six key observations – how do you address these? Extending the term of a lease to which Exercising an extension option the § C10(c) practical expedient was What processes have you put into practice applied to make sure that you evaluate on the What processes have you put into practice extension options? And do you address to make sure that modifications of short- them at the right level? 01 term leases are completely identified? 04 Extending a lease; when should the Leases with no end date (rolling additional RoU asset and lease liability contracts) be recognised? What processes have you put into practice Is an extension of lease term identified as to make sure the right end date is set? a modification by your system or other How do you apply the “reasonable certain 02 processes? At what date does your system 05 to exercise” assessment and revisit recognise the additional RoU asset and hereof? And is your system/tool supporting lease liability? this? Extension via a new contract Both parties have an option to How do your existing processes identify terminate the lease – no penalty; new leases that should be accounted for as termination option can be exercised at a modification? any time after one year Have you considered all relevant factors 03 06 such as “§ 61-62 of the Business Rent Act” in Denmark or other local factors throughout the group? © Deloitte 2019 7 Modifications and practical complexities IFRS 16’s lease modification guidance diagram: Changes that are not part of the original terms of the lease Change in Change in scope consideration The legal or contractual Removing Extending Shortening labelling of the Adding assets assets lease term lease term modification is not relevant in the assessment of whether the modification is Not at a separate lease At standalone standalone price price Separate Not a separate lease lease Account for at effective date of modification © Deloitte 2019 8 Accounting and disclosure considerations © Deloitte 2018 9 IFRS 16 general requirements for impairment tests of the RoU Definition “A lessee shall apply IAS 36 Impairment of Assets to determine whether the RoU is impaired and to account for any impairment loss identified” (IFRS 16.33) At which level shall the RoU be tested for impairment? Which consequences of IFRS 16 on the determination of • The carrying amount of the RoU’s CGU? • Value in use (VIU)? • Fair value less costs to sale (FVLCTS)? • The discount rate? What are the practical consequences and common pitfalls? © Deloitte 2019 10 How to determine VIU? “Estimates of future cash flows shall not include cash inflows or outflows from financing activities” (IAS 36.43(b)) Estimated cash outflows over the projection period should exclude lease payments for those reflected in the lease liability but should include those relating to • Variable lease payments • Lease payments related to short-term and low value leases • Lease renewals if the lease term is shorter than the projection period • Projected effects of indexation/future readjustments of RoU based on an index or a rate, as they are not included in the lease liability © Deloitte 2019 11 Wrap-up Pre IFRS 16 implementation impairment tests models are not IFRS compliant anymore The lease liability is a financial liability regardless of where it is presented in the BS or how it is labelled Lease payments excluded from Lease payments are a repayment of the financial liability, and thus shall not be included in the measurement of VIU the lease liability shall always be included in the measurement If the RoU is tested within a CGU and if CF are projected for a period longer than the lease term, cash of the VIU outflows for lease renewals shall be included in the CF projections (capex to maintain the CGU) (e.g. variable payments) As per IAS 36.78, the lessee may choose to include the lease liability carrying amount in the CGU carrying amount Impact on WACC ? If so, in application of the May 2016 IFRS IC agenda decision, the previously determined VIU shall Impact on multiples used for also be adjusted by the lease liability carrying amount determining FV less cost to sell? © Deloitte 2019 12 Accounting considerations IFRIC discussions: Depreciation of leasehold improvements beyond enforceable period Non-cancellable Not reasonably certain to extend Leasehold improvement depreciation period? Expected Non-cancellable Lessor option Leasehold improvement depreciation period? Expected + If positive economic evidence © Deloitte 2019 13 Tax and VAT considerations © Deloitte 2018 14 IFRS 16 – Related tax issues Deferred tax related to assets and liabilities arising from a single transaction IASB Update Jan 2019 – ED to be released Q2 2019 (narrow scope amendment): Recognition of deferred tax when lessee recognises an asset and a liability at initial lease date applying IFRS 16; IRE in IAS 12:15/IAS 12:24 would be narrowed down, i.e. deferred tax would be recognised when equal amounts of taxable and deductible temporary differences arise from initial 01 recognition of asset and liability. Danish tax rules on limited deductions of interest Interest from lease contracts to be included from the perspective of the lessor, i.e. still necessary to consider 02 operating vs finance lease for tax purposes similar to IAS 17. VAT If an amount is collected by lessor on behalf of the tax authorities, the VAT does not 'relate to the right to use the underlying asset'. Therefore, it does not form part of either 'lease payments' or 'variable lease payments' as defined in Appendix A to IFRS 16 (for either lessee A or lessor B) and is not a cost to be included in the consideration for the 03 contract under IFRS 16:B33. This is consistent with the treatment of such taxes under IFRS 15:47. © Deloitte 2019 15 Presentation and Disclosure © Deloitte 2018 16 Presentation and disclosure - Lessee In the notes Financial information • Depreciation by class, interest expense • Low-value or short-term lease expenses (not<1 month) • Variable lease payments • Income from subleases Revalued • Total cash flow Investment RoU • RoU asset: Additions, carrying amount at the end of property assets reporting period leases (IAS 16) • Gain or losses on sale and leasebacks • Fact: Low-value or short-term lease exemption applied Lease Investment property leases liabilities • Some IAS 40 disclosures Revalued RoU asset (IAS 16) • Effective date of revaluation • Whether independent valuation expert involved Lease liabilities • Separate IFRS 7 maturity analysis Qualitative and quantitative disclosures, e.g. • Nature of lease activities • Exposure to possible future cash outflows not reflected in lease liability Single note/ Remember significant • Restrictions or covenants imposed by leases separate judgements as per IAS 1 • Sale and leaseback transactions section © Deloitte 2019 17 Presentation and disclosure - Lessor In the notes Finance lease • Selling profit or loss • Finance income on net investment • Income from variable lease payments not included in net investment • Quantitative and qualitative explanation of significant changes in net investment • Maturity analysis of lease payments receivable showing Operating Investment lease undiscounted lease payments on an annual basis for each of property the first five years and total for the remaining years leases • Reconciliation of undiscounted lease payment to net investment in the lease Lease Operating lease liabilities • Lease income separately disclosing income relating to variable lease payments not depending on an index or a rate • PP&E: Apply disclosure requirements in IAS 16, disaggregating into assets subject to operating lease • Apply IAS 36, IAS 38, IAS 40 and IAS 41 to assets subject to operating lease • Maturity analyses of lease payments, showing undiscounted lease payments to be received on an annual basis for the first five years and total for the remaining years