ifrs requirements for provisions and contingent … webcast oct 29...1 ifrs requirements for...

1

IFRS requirements qfor provisions and contingent liabilities

October 29, 2013

Administrative

CPE regulations require online participants take part in online questions. Participants are required to respond to a minimum of four questions in order to be eligible for CPE credit.

Results will be reviewed in aggregate and may be published as a “pulse survey” of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization.

Send questions via the “Ask a Question” button.

Help desk: 1-877-398-1471 or outside the United States at 1-954-969-3342

© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 218807

1

2

Today’s presenters

Jason Anglin

Principal

Accounting Advisory Services

Jonathan Guthart

Partner, KPMG LLP.

President, KPMG USCMG LLP.


2

Overview

Overall Scope of IAS 37

Definition of a Provision

How to recognize an asset, liability, or contingency?

Measurement – Reliability and Differences between U.S. GAAP and IFRS

Relevant Application Examples – Onerous Contracts and Restructuring

Disclosures


3

3

Scope of IAS 37

ASC 410-20(FAS 143)

IAS 37

CON 6

ASC 450 (FAS 5, FIN 14)


4

ASC 840(FTB 79-15)

ASC 420(FAS 146)

ASC 410-30(SOP 96-1)

Definition of a provision

Is there a present obligation as a result of

a past event?

Present obligation

Is an outflow of resources probable?

Possible obligation

Yes No

>50% <50%


5

ProvisionContingent liability,

unless remoteContingent liability,

unless remote

>50% 50%

4

Recognition criteria – Legal or constructive

Legal:

– Contract

or

Constructive:

– Established pattern of past practice or published policies

Creation of a valid expectation on the– Law/legislation

– Creation of a valid expectation on the part of third parties (communication)


6

Recognition criteria – Asset, liability, or contingency?

Asset Virtually certain Recognize

Contingent asset

Probable

Possible

Remote

Disclose

Do not disclose

Do not discloseRemote Do not disclose

LiabilityVirtually certain

Probable

Recognize

Recognize

Contingent liability (unrecognized)

Probable, but not reliable

Possible

Remote

Disclose

Disclose

Do not disclose

But: Contingent liability in a business combination

Can be measured at fair value?

Recognize (IFRS 3.23)


7

5

Question 1

On February 5, 2013, an employee filed a $2,000,000 lawsuit against MFC for damages suffered when one of MFC’s factory-making factories exploded on December 29, 2012.

MFC’s lawyers expect the company will lose the lawsuit and estimate the loss to be between $500,000 and $1,000,000, with no one outcome being assessed as more likely than any other.

The employee has offered to settle the lawsuit out of court for $900,000, but MFC plans to litigate.

What amount should MFC report as a liability from the lawsuit under U.S. GAAP in its December 31, 2012 statement of financial position?


8

Question 1 (continued)

What amount should MFC report as a liability from the lawsuit under U.S. GAAP in its December 31, 2012 statement of financial position?

1. MFC would not recognize any amount because the employee filed the lawsuit on February 5, 2013.

2. MFC would recognize $1,000,000 because that’s the maximum amount what has been estimated by the attorneys.

3. MFC would recognize $500,000 because that’s the lower end of the range of possible outcomes.

4. MFC would recognize $900,000 because that’s the amount the employee offered to settle.


9

6

Question 1 – Debrief: Correct answer is 3

1. Incorrect, MFC would recognize $500,000 because that’s the lower end of the range of possible outcomes with no other outcome more likely than any other.


3. Correct, MFC would recognize $500,000 because that’s the lower end of the range of possible outcomes with no other outcome more likely than any other.



10

Recognition criteria – Judgment

Possible guidelines (illustrative, not in standard except for *):

– Virtually certain: > = 90%

– Probable (more likely than not): >= 50%*

– Possible: <= 50%

– Remote: <= 10%

* In the standard


11

U.S. GAAP difference or potential difference with U.S. GAAP

7

Measurement – A reliability issue

Best estimate, which may be:

– Most likely outcome (e.g., law suit)

– Weighted average (e.g., warranty provisions)

Best estimate under IAS 37 represents the amount an entity would “rationally pay” to settle at the balance sheet date (may be equal to fair value)

Inherent risks and uncertainties to be considered

Discounting required, when effect is material

Expected reimbursements (</= provision) to be recognized as a separate receivable, if virtually certain


12

U.S. GAAP difference or potential difference with U.S. GAAP

Question 2

On February 5, 2013, an employee filed a $2,000,000 lawsuit against MFC for damages suffered when one of MFC’s factory-making factories exploded on December 29, 2012.

MFC’s lawyers expect the company will lose the lawsuit and estimate the loss to be between $500,000 and $1,000,000, with no one outcome being assessed as more likely than any other.

The employee has offered to settle the lawsuit out of court for $900,000, but MFC plans to litigate.

What amount should MFC report as a liability from the lawsuit under IFRS in its December 31, 2012 statement of financial position?


13

8

Question 2 (continued)

What amount should MFC report as a liability from the lawsuit under IFRS in its December 31, 2012 statement of financial position?

1. MFC would not recognize any amount because the employee filed the lawsuit on February 5, 2013.

2. MFC would recognize $1,000,000 because that’s the maximum amount that has been estimated by the attorneys.

3. MFC would recognize $500,000 because that’s the lower end of the range of possible outcomes.

4. MFC would recognize $750,000 because that is the midpoint within a range of outcomes with no outcome more likely than any other.


14


1. Incorrect, MFC would recognize $750,000 because that is the midpoint within a range of outcomes with no outcome more likely than any other.



4. Correct, MFC would recognize $750,000 because that is the midpoint within a range of outcomes with no outcome more likely than any other.


15

9

Measurement – U.S. GAAP vs. IFRS

Provisions under IAS 37 Best estimate

Expected value of amount required to settle at balance sheet

date or transfer to a third party

Loss contingencies under ASC 450 Reasonable Most likely outcome (or low end of a (FAS 5) estimate range when no estimate is more

likely than any other) or ultimate loss

Retirement obligations under ASC 410-20 (FAS 143) and restructuring obligations under ASC 420 (FAS 146)

Fair value Amount the liability could be settled in a current transaction between willing parties.


16

Present value

The amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation, if material (IAS 37.45)

The discount rate shall be a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability but shall not reflect risks for which future cash flow estimates have been adjusted (IAS 37.47)


17

10

Discount rate – Alternatives

Which option is generally easier to use?

DISCOUNT RATE adjusted for the risk

FUTURE CASH FLOWS adjusted for the risk


18

Often complex and involves high degree of judgment!

Question 3

Which discount rate should be used to determine the present value of a provision under IFRS in accordance with IAS 37?

1. The discount rate shall be a posttax rate and include reasonable estimates.

2 The discount rate shall be a pretax rate and the use of the incremental borrowing rate of the2. The discount rate shall be a pretax rate and the use of the incremental borrowing rate of the reporting entity would be the best reference point for its determination.

3. The discount rate shall the reporting entity’s weighted average cost of capital (WACC).

4. The discount rate shall be a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability, but shall not reflect risks for which future cash flow estimates have been adjusted.


19

11


1. Incorrect, the discount rate shall be a pretax rate.

2. Incorrect, the incremental borrowing rate is not the best reference point for the determination of the discount rate.

3 Incorrect the WACC does not reflect the risks specific to the provision3. Incorrect, the WACC does not reflect the risks specific to the provision.

4. Correct, The discount rate shall be a pretax rate that reflects current market assessments of the time value of money and the risks specific to the liability but shall not reflect risks for which future cash flow estimates have been adjusted.


20

Onerous contracts

Definition: Contract in which the unavoidable costs of meeting the obligation exceed the economic benefits expected to be received under it.

The present obligation under the contract should be recognized as a provision.

Measurement at the lower of the fulfillment cost and any compensation or penalties arising Measurement at the lower of the fulfillment cost and any compensation or penalties arising from failure to fulfill it.

First consider additional impairment losses on assets dedicated to the onerous contract.

The assessment should be based on the contract as a whole rather than on an item-by-item basis.

U.S. GAAP difference


21

12

Onerous contracts under IAS 37

Only unavoidable costs directly associated with meeting the entity’s obligations under the contract should be considered:

Costs that are directly variable and therefore incremental

Costs to be considered in evaluating onerous contracts

– Costs that are directly variable and therefore incremental

– Costs do not include allocated or shared costs that will be incurred regardless of whether the entity fulfils the contract or not.

Expected future inflows related to the contract

Benefits


22

Question 4

Which statement is correct?

1. The accounting for onerous contracts is the same between IFRS and U.S. GAAP.

2. U.S. GAAP has no accounting guidance related to onerous contracts.

3. IFRS provides for an accounting policy choice to account for onerous contracts if management believes recognizing a provision would be useful information to users of the financial statements.

4. Under IFRS, if an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision.


23

13


1. Incorrect, the accounting for onerous contracts is different between IFRS and U.S. GAAP.

2. Incorrect, there is guidance under U.S. GAAP dealing with onerous/loss making contracts.

3. Incorrect, the accounting for onerous contracts is not an accounting policy choice under IFRSunder IFRS.

4. Correct, under IFRS, if an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision.


24

Restructuring

A constructive obligation for a restructuring arises only when:

A restructuring is a program planned and controlled by management that materially changes the scope of the business or the manner in which it is conducted.

1. There is a formal plan for the restructuring.

2. The entity has raised a valid expectation in those affected that it will carry out the plan.


25

14

Disclosure

Significantly more detailed disclosure required by IAS 37 as compared to ASC 450 (FAS 5)

By category:

– Brief description, timing, and uncertainties of provisions

– Detailed rollforward of provisions

– Expected and recognized reimbursements relating to provisions

– Brief description and financial effect of any contingent assets and liabilities.


26

ProvisionsSummary of IFRS vs. U.S. GAAP differences

Recognition and measurement:

– Constructive obligations

– Definition of “probable”

– Range of equals – Midpoint vs. low end of range

– Discounting

Application:

– Onerous contracts

– Restructuring costs

– Asset retirement obligations


27

Disclosures

Presentation

15

Question 5

Generally, by comparing the accounting for provisions under IFRS versus the requirement under U.S. GAAP, which statement is correct?

1. Differences between U.S. GAAP and IFRS are not expected in practice.

2 IFRS has very thorough guidance in various standards and interpretations2. IFRS has very thorough guidance in various standards and interpretations.

3. U.S. GAAP generally requires the recognition of the present value of the estimated cash outflows.

4. In applying the recognition and measurement requirements under IFRS, it is possible that there could be significant differences with U.S. GAAP.


28


1. Incorrect, differences in the accounting are generally expected.

2. Incorrect, IAS 37 outlines the requirements for the accounting for provisions.

3. Incorrect, generally, U.S. GAAP does not require recognizing the present value.

4. Correct, in applying the recognition and measurement requirements under IFRS it is possible that there could be significant differences with U.S. GAAP.


29

16

IFRS versus U.S. GAAP differences

IFRS

Scope: IAS 37 covers various areas.

Recognition when:

U.S. GAAP

Scope: Different codification topics address different types of areas:

1 P b bl th t li bilit h1. Legal/constructive obligation

2. More likely than not outflow

3. Amount estimated reliably.

Measurement: best estimate of the expenditure to be incurred

Midpoint of the range concept

1. Probably that liability has been incurred

2. Amount is reasonably estimable.

Measurement: Depends on ASC topic

Lowend of the range concept

Cost inclusion depends on ASC Topic

Generally no discounting required


30

Anticipated incremental costs

Discounting required.

Generally, no discounting required.

IFRS vs. U.S. GAAP differences (continued)

Decommissioning (IAS 37)

Uncertainty regarding timing results in recognition with the uncertainty considered in the best estimate

Asset retirement obligation

Uncertainty might result in conclusion that is not recognized.

Di t th t d h fl imeasurement.

Pretax rate reflecting time value of money and the risk specific to the liability. Discount rate does not include an adjustment for an entity’s own credit risk.

Effect of any change to an existing obligation is added or deducted from the cost of the related asset and depreciated

Discount the expected cash flows using an interest rate that equates a risk-free interest rate adjusted for the effect of the entity’s credit standing (credit-adjusted, risk-free rate).

Unlike IFRS, if the estimated amount of cash flows changes, then the original discount rate is used for decreases, but a current rate is used for increases


31

prospectively. Changes in provisions include change in discount rate.

(layering approach).

17

Summary

The main factor to define a provision is if a present obligations exists from the result of a pastevent.

Four Major Factors for Recognition Legal Constructive Virtually Certain and Recognize Four Major Factors for Recognition – Legal, Constructive, Virtually Certain, and Recognize

Best Estimate Considerations – Should be taken into account when looking at the reliability of measurement, the outcome could be the amount an entity must pay on the balance sheet date.

Onerous Contracts – Only avoidable costs that are associated with meeting the entity’s obligations should be considered.

Restructuring – A constructive obligation can only occur when there is a plan for formal restructuring and there is a valid expectation to carry out the plan.


32

Disclosures– More info required in IAS 37 in comparison to ASC 450 including description, timing, and detailed roll forward of provisions.

Contact Information

Additional Questions or Inquiries

If you have any additional questions or inquiries around today’s IFRS Webcast please reach out to our speakers directly.

Contact InformationContact Information

Jason Anglin, Principal, Advisory Accounting [email protected]

Jonathan Guthart, President, KPMG USCMG [email protected]


33

18

KPMG Institutes and training

About the KPMG IFRS Institute

The KPMG IFRS Institute, part of the KPMG Institute Network, has been created as an open forum where board and audit committee members, executives, management, stakeholders, academia, and government representatives can share knowledge, gain insight, and access thought leadership about the evolving global financial reporting environment. To visit the IFRS Institute, go to www.kpmginstitutes.com/ifrs-institute.

Executive education

www.ExecEd.kpmg.com

Group Live, instructor-led CPE credit accounting courses, seminars, workshops, and update conferences for corporate accountants and financial executives.


34

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional

d i ft th h i ti f th ti l it tiadvice after a thorough examination of the particular situation.


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

ifrs requirements for provisions and contingent … webcast oct 29...1 ifrs requirements for...

Documents