I ROC 2017 Financial Administrators Section Conference

Transcription

1 I ROC 2017 Financial Administrators Section Conference September 9, 2017 kpmg.ca

2 Presenters Chris Cornell KPMG Partner, Financial Services Steven Sharma KPMG Partner, Financial Services 2

3 IIROC 2017 Financial Administrators Section Conference Agenda Page Current Audit Trends IFRS 15: Revenue from contracts with customers 5 IFRS 16: Leases 10 Global Areas of Audit Focus Auditor Reporting Model 15 Auditing Accounting Estimates and Related Disclosures 17 Data and Analytics in Audit 18 3

4 Agenda Current Audit Trends Global Areas of Audit Focus

5 IFRS 15 Revenue from contracts with customers A new way of thinking about revenue The new revenue standard introduces a new framework that will change the way companies account for revenue. Published jointly by the IASB and FASB in May 2014 and amended in April 2016, it replaces all existing IFRS and US GAAP guidance on revenue and introduces a 5-step model for recognizing revenue from contracts with customers. Although there are some differences between the IFRS version of the standard (IFRS 15) and the US GAAP version (Topic 606), the wording largely is converged. Consequently, companies across the globe will be applying the same principles and guidance to revenue transactions. The new requirements will affect different companies in different ways. For some, the new standard will have a significant impact on how and when they recognize revenue. For others, there may be little change in the timing and amount of revenue recognized. Nevertheless, arriving at this conclusion will require an understanding of the new model and an analysis of its application to particular transactions. IFRS 15 is effective for entities with annual periods commencing on or after January 1,

6 IFRS 15 Revenue from contracts with customers (continued) The 5-step model in the standard requires companies to: 1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when or as the entity satisfies a performance obligation The new standard will require analysis of all sales contracts to ensure the promises to the customer are identified and accounted for appropriately. Implementation efforts and costs may be significant for companies that earn the majority of their revenues under long-term contracts, particularly when those contracts include multiple goods and services. Importantly, all companies will be subject to extensive new disclosure requirements. The standard also provides guidance on accounting for costs to obtain and costs to fulfill contracts with customers, which may change the timing of recognition for those costs. 6

7 IFRS 15 Revenue from contracts with customers (continued) Disclosure requirements: IFRS 15 contains both quantitative and qualitative disclosure requirements. Under the new standard, an entity discloses more information about its contracts with customers than is currently required under IAS 18 Revenue and IAS 11 Construction Contracts, including more disaggregated information about revenue and more information about its performance obligations at the reporting date The objective of the disclosure requirements is to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers An entity is required to disclose, separately from other sources of revenue, revenue recognized from contracts with customers, and any impairment losses recognized in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement if applicable) on receivables or contract assets arising from contracts with customers. 7

8 IFRS 15 Revenue from contracts with customers (continued) Disclosure requirements (continued): IFRS 15 includes disclosure requirements on the disaggregation of revenue, contract balances, performance obligations, assets recognized to obtain or fulfill a contract, as well as significant judgments in the application of the standard Entities will need to assess whether their current systems and processes are capable of capturing, tracking, aggregating and reporting information to meet the disclosure requirements of the new standard. For many entities, this may require significant changes to existing data-gathering processes, IT systems, and internal controls. 8

9 IFRS 15 Revenue from contracts with customers (continued) The impacts may be felt across the organization: Revenue recognition may be accelerated or deferred Sales and contracting content and processes may be reconsidered IT systems may need to be updated or new modules added to calculate revenue Accounting processes and internal controls will need to be changed and documented Extensive new disclosures will be required, including the expected timing and amounts of future revenues Revisions may be needed to tax planning, covenant compliance and sales incentive plans Expected impacts leading up to adoption and changes reported upon transition will need to be explained to internal and external 9

10 IFRS 16 - Leases New leases standard will require companies to bring leases onbalance sheet In January 2016, the IASB issued IFRS 16 Leases, realizing its long-standing goal of bring leases on-balance sheet for lessees. All companies that lease major assets for use in their business will see an increase in reported assets and liabilities. This will affect a wide variety of sectors the larger the lease portfolio, the greater the impact on key reporting metrics Companies are currently required to disclose details of their off-balance sheet leases and users of the financial statements use this information to adjust published financial statements. The key change will be the increase in transparency and comparability. For the first time, users will be able to see a company s own assessment of its lease liabilities, calculated using a prescribed methodology that all companies reporting under IFRS will be required to follow IFRS 16 is effective for entities with annual periods commencing on or after January 1,

11 IFRS 16 Leases (continued) The lessee model From 2019, operating leases will be accounted for as if the lessee had borrowed funds to purchase an interest in the leased asset, recognizing a right of use asset that will be depreciated over the term of the lease and a lease liability related to obligation to make lease payments As a result of measuring the liability at amortized cost using the effective interest rate, lessees will recognize a front-loaded pattern of expense, even when annual rental payments are constant. Importantly, rental expense will be replaced by a combination of depreciation expense from the right-of-use asset and interest expense on the lease liability Impact on key metrics Increase in total assets and total debt Increase in finance expense and depreciation expense Decrease in net earnings (early years) & increase in net earnings (later years) 11

12 IFRS 16 Leases (continued) Does the contract contain a lease? Given that contracts that are determined to be leases will now be on-balance sheets for lessees, one of the most important early considerations will be around the scope of the standard. Companies will need to understand whether contracts are, or contain, a lease A service contract that does not meet the definition of a lease will continue to be accounted for as an executory contract. IFRS 16 defines a lease as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration In some instances, companies had not historically identified all lease contracts embedded in service arrangements because the accounting for service contracts and operating leases was similar. The new standard will require additional diligence in this analysis 12

13 IFRS 16 Leases (continued) Practical expedients A lessee can elect not to apply the lessee accounting model to leases with a lease term of 12 months or less (i.e. short term leases) and to leases for which the underlying asset is of low value (even if the effect is material in aggregate). Companies should consider whether the practical expedients will be used to deal with leases of small items such as computers, furniture, mobile phones, etc. Lessee Transition A lessee is permitted to: adopt the standard retrospectively or follow a modified retrospective approach. A lessee applies the election consistently to all of its leases If a lessee elects to apply IFRS 16 using the modified retrospective approach, then it does not restate comparative information. Instead, the lessee recognizes the cumulative effect of initially applying the standard as an adjustment to equity at the date of initial application. 13

14 Agenda Current Audit Trends Global Areas of Audit Focus

15 Auditor Reporting Model Global Standard Setters are continuing to focus on new Audit Reporting Requirements International Auditing and Assurance Standards Board (IAASB) has approved their standard and in April 2017 the Canadian Auditing and Assurance standards Board (AASB) approved the new and revised auditor reporting standards as Canadian Auditing Standards (CASs) effective for periods ending on or after December 15, Highlights of new auditors report in Canada include: Re-ordering of the auditors report, including moving the opinion to the first section Expanded descriptions of management s, those charged with governance and auditors responsibilities Disclosure of the engagement partner s name (listed entities); and Description of the key audit matters (applicable only when required by law or regulation or when the auditor is engaged to do so). 15

16 Auditor Reporting Model Continued US Developments: In June 2017, the Public Company Accounting Oversight Board (PCAOB) adopted their enhanced auditor reporting standards which includes, discussion of critical audit matters (CAMs) and tenure of the auditor. Highlights and effective dares are as follows: New auditors report format, tenure and other information for fiscal years ending on or after December 15, 2017; Communication of CAMs for audits of large accelerated filers: audits for fiscal years ending on or after June 30, 2019; and Communication of CAMs for audits of all other companies: audits for fiscal years ending on or after December 15,

17 Auditing Accounting Estimates and Related Disclosures IAASB Exposure Draft ISA 540 (Revised) ISA 540: Significant changes in how auditors evaluate accounting estimates and related disclosures have been proposed. AASB issued an exposure draft that proposes to adopt ISA 540 with appropriate Canadian amendments if any. Comments were required by August 1, Proposed Standard includes: enhanced requirements for risk assessment procedures to include specific factors related to accounting estimates, namely complexity, judgment, and estimation uncertainty. setting our a detailed expectation for the auditor's response to identified risks related to accounting estimates, including augmenting the auditor's application of professional skepticism; and is scalable regardless of the size or sector of the business or audit firm. 17

18 Data and Analytics in Audit The use of Data and Analytics (D&A) in audit continues to accelerate. Some areas of significant change where D&A are being utilized include: Proprietary valuation tools which can value and provide leveling disclosures for entire security portfolios for audit purposes Value to clients User friendly valuation discrepancy analysis Benchmarking of prices vs. peers and industry competitors Higher quality audit Proprietary taxation data tools which can analyze transaction based data and ensure appropriate tax treatment at transaction level Value to clients Meaningful tax information reporting Early issue identification More effective and efficient audit support 18

19 What Questions Do You Have? 19

20 Thank you

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