FINANCIAL REPORTING AND IR

The date many financial statements preparers hoped would never come has finally arrived. Two years after performing a comprehensive adoption of International Financial Reporting Standards (IFRS), public companies rang in 2013 with four new standards to adopt:

• IFRS 10 – Consolidation
• IFRS 11 – Joint Arrangements
• IFRS 13 – Fair Value Measurement
• IAS 19R – Employee Benefits

With investors eager to understand the impact of these new standards, many companies have already carefully analyzed the implications. Others put off analysis until the adoption period came into effect.

If your company falls into this latter category, it’s time to take a good look at the new standards. Those who believe the impact on their business will be straightforward may be in for a surprise, as the full implications of the new standards are often not immediately obvious.

How will the new standards affect your company and your investors?

Each new standard presents potential benefits and challenges, so it’s important to understand the changes and their impact. Following is a high level review of each standard and the key considerations that should to be taken into account.

IFRS 10 – Consolidation: New model, new intricacies

The new standard replaces the two previous models with a single consolidation model that applies to all investees. The new model requires an investor to consolidate an investee when the investor has power and exposure to variability in returns, and when there are linkages between these two factors.

Unlike the previous consolidation model, IFRS 10 requires a broader understanding of circumstances in assessing control. Factors once disregarded may become relevant – and could even tilt the balance of the overall analysis under the new standard.

Even when the analysis yields the same conclusion as  the old standard, companies still cannot be complacent. The related disclosure standard has its own challenges and may require companies to collect additional data on their relationships with other entities – whether consolidated or not.

IFRS 11 – Joint Arrangements: Old arrangements, new challenges

The new joint arrangements standard addresses what the International Accounting Standards Board (IASB) believed were shortcomings of the old standard. Previously, companies could freely choose how they would account for jointly controlled arrangements (using the equity method or proportionate consolidation). This choice has been eliminated, and the accounting is now driven by the arrangement’s classification.

When determining classification, the standard sets out tests that no longer rely solely on the legal form of the arrangement, but also consider the substance of the arrangement. This makes the standard more difficult to apply than the previous model.

Once the analysis of joint arrangements is complete, the related disclosure standard presents its own challenges and may involve additional data collection as it requires disclosure of key assumptions in the analysis.

IFRS 13 – Fair Value Measurement: New definition, new considerations

IFRS 13 addresses inconsistencies in various IFRS standards by introducing a single, authoritative guide that defines and establishes a framework for measuring fair value, and sets out related disclosure requirements. While there are no new requirements as to when fair value measurements are necessary, IFRS 13 provides guidance on how fair value should be measured and disclosed when required or permitted under other IFRS standards.

Many old concepts regarding fair value have also changed. For instance, the new standard requires fair value to be measured as an exit price from the perspective of market participants in the ‘principal’ market – the market with the greatest volume and level of activity for the asset or liability – even if the company normally transacts in a different market.

The standard also contains new disclosure requirements, including additional information to be accumulated on certain assumptions used for fair value measurements.

IAS 19R – Employee Benefits: New approach, new intricacies

The employee benefits standard continues to apply to all forms of compensation given by a business in exchange for services provided by employees or for termination of employment – unless the compensation falls within the scope of IFRS 2 Share Based Payments. However, how a company accounts for defined benefit plans and termination benefits has changed under IAS 19R.

IAS 19R:

• eliminates the corridor approach to recognizing actuarial gains and losses by requiring immediate recognition of actuarial gains and losses in other comprehensive income;
• for companies with defined benefit plans, IAS 19R changes the measurement of interest income on plan assets by eliminating the concept of expected return on plan assets; and
• it introduces enhanced disclosures requiring detailed information to be collated for defined benefit plans.

IAS 19R also changes the timing of when termination benefits are recognized. As well, the standard changes the balance sheet classification of certain long-term and short-term employee benefits.

Applying IAS 19R may require the company to revise some model inputs, and actuaries may need to make detailed calculations. Understanding its requirements is the first step to determining the necessary inputs.

Do investors understand?

Investors will get their first glimpse into the application of the new accounting standards as 2013 first quarter financial results are released. While many investors are aware changes are in the pipeline, they may not understand how the new standards have impacted the financial statements.

IR professionals need to understand the impact of the new standards on financial statements, and ensure investors are provided with an understanding of the impact.