IFRS NEWS NOVEMBER 2018 - PWC
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IFRS news
November 2018
Must know
IASB amends definition of It is also no longer necessary to
In this issue: business in IFRS 3 assess whether market participants
are capable of replacing missing
1. Must know At a glance elements or integrating the acquired
On 22 October 2018, the IASB issued activities and assets.
• IASB amends definition of
business in IFRS 3 amendments to the guidance in IFRS An entity can apply a ‘concentration
3, ‘Business Combinations’, that test’ that, if met, eliminates the need
• Amendments to IAS 1 and
revises the definition of a business. for further assessment. Under this
IAS 8 - Definition of material
According to feedback received by optional test, where substantially all
• IASB agrees on criteria for the IASB, application of the current of the fair value of gross assets
evaluating any future guidance is commonly thought to be acquired is concentrated in a single
potential amendments to too complex, and it results in too asset (or a group of similar assets),
IFRS 17 many transactions qualifying as the assets acquired would not
2. Issues of the month business combinations. represent a business.
• PwC IFRS Blog – What is the issue?
IFRS 17 : Important New guidance What is the impact and for whom?
considerations for the legacy
To be considered a business, an The changes to the definition of a
market
acquisition would have to include an business will likely result in more
input and a substantive process that acquisitions being accounted for as
together significantly contribute to asset acquisitions across all
the ability to create outputs. The new industries, particularly real estate,
guidance provides a framework to pharmaceutical, and oil and gas.
evaluate when an input and a Application of the changes would
substantive process are present also affect the accounting for disposal
(including for early stage companies transactions.
that have not generated outputs). To Differences in accounting between
be a business without outputs, there business combinations and asset
will now need to be an organised acquisitions include, among other
workforce. things, the recognition of goodwill,
The definition of the term ‘outputs’ is recognition and measurement of
narrowed to focus on goods and contingent consideration, accounting
services provided to customers, for transaction costs, and deferred
generating investment income and tax accounting.
other income, and it excludes returns When does it apply?
in the form of lower costs and other
economic benefits. Entities shall apply these
amendments to business
combinations for which the
acquisition date is on or after the
beginning of the first annual
reporting periods beginning on or
after 1 January 2020 and to asset
acquisitions that occur on or after the
beginning of that period. Early
application is permitted.
Amendments to IAS 1 and Impact Background
IAS 8 - Definition of material The amendments clarify the 1. In connection with the issuance of
definition of material and make IFRS 17, the IASB established a
IFRSs more consistent, but are not transition resource working group
At a glance
expected to have a significant impact (‘TRG’) to provide a public forum for
On 31 October 2018, the IASB on the preparation of financial stakeholders to follow the discussion
issued amendments to the statements. of questions raised on
definition of material implementation of the new standard.
When does it apply? The purpose of the TRG is to
(amendments to IAS 1 and IAS 8).
These amendments should be facilitate a public discussion to
Issue applied for annual periods beginning provide support for stakeholders,
on or after 1 January 2020. Earlier and information to the Board, on
Amendments to the definition
application is permitted. implementation questions arising
of material
from the application of IFRS 17.
On 31 October 2018, the IASB issued
2. After issuance of the standard,
amendments to the definition of
IASB agrees on criteria for IASB staff have also been engaged in
material in IAS 1 and IAS 8.
evaluating any future a variety of activities with
The amendments to IAS 1, potential amendments to stakeholders to follow the
‘Presentation of financial IFRS 17 implementation of IFRS 17. During
statements’, and IAS 8, ‘Accounting these activities, and through the TRG
policies, changes in accounting The IASB notes that a high hurdle discussions, the staff have become
estimates and errors’, and will be set for any future aware of several instances where the
consequential amendments to other amendments to IFRS 17 standard might be interpreted in
IFRSs: i) use a consistent definition At a glance ways that were not intended by the
of materiality throughout IFRSs and Board. At the 24 October meeting,
the Conceptual Framework for On 24 October 2018, the Board the IASB staff presented to the Board
Financial Reporting; ii) clarify the unanimously agreed criteria for a list of 25 concerns and
explanation of the definition of evaluating any future potential implementation challenges raised by
material; and iii) incorporate some of amendments to IFRS 17. The Board constituents.
the guidance in IAS 1 about noted that the criteria set a high
hurdle for change, and any Items discussed at the IASB Board
immaterial information.
amendments suggested would need meeting
The amended definition is: to be narrow in scope and deliberated 3. Four staff papers were prepared
“Information is material if omitting, quickly to avoid significant delays in for the meeting (available here),
misstating or obscuring it could the effective date. In the coming including the TRG submission log
reasonably be expected to influence months, the Board will discuss and the IASB Summary from the
decisions that the primary users of whether any amendments to IFRS 17 September 2018 TRG meeting. The
general purpose financial are justified, including a potential IASB Board had no comments on the
statements make on the basis of deferral of the effective date. If the September 2018 TRG summary
those financial statements, which Board decides to amend the prepared by the staff, and the
provide financial information about standard, any amendments would be discussion in the Board meeting was
a specific reporting entity.” subject to the IASB Board’s due mainly focused on the criteria for any
process for amendments to IFRS potential amendments to IFRS 17.
The amendment clarifies that the standards, including developing an
reference to obscuring information exposure draft and subsequent Criteria for evaluating possible
addresses situations in which the consultation period. The Board amendments to IFRS 17
effect is similar to omitting or shared its concern about the 4. Subsequent to issuance of the
misstating that information. It also temporary exemption from IFRS 9 if standard, the IASB has received
states that an entity assesses it were to defer the effective date for feedback from both preparers and
materiality in the context of the IFRS 17. users of financial statements. The
financial statements as a whole.
The views in this In transition are staff noted that more than 500 users
The amendment also clarifies the based on our observations from the of financial statements have been
meaning of ‘primary users of general 24 October meeting, and they might interviewed, and the IASB has
purpose financial statements’ to differ in some respects from the received positive feedback on the
whom those financial statements are official minutes of the meeting to be standard through this outreach.
directed, by defining them as published by the IASB at a later
‘existing and potential investors, date.
lenders and other creditors’ that
must rely on general purpose
financial statements for much of the
financial information they need.
PwC | IFRS news | 25. The Board agreed that the 7. The Board acknowledged the 25 Specific concerns and
following criteria, as identified by the topics identified as concerns and implementation challenges
staff, should be applied for evaluating implementation challenges, and 9. The IASB staff recommended that
whether IFRS 17 should be subject to some Board members asked for the Board’s assessment of whether
any amendments: clarification or further information there is a need to amend IFRS 17
on several of the topics. The IASB should be balanced against the need
• The amendment would not result
staff in future meetings will present to limit any such amendments other
in a significant loss of useful
separate submissions for each topic, than those that meet specified
information relative to that
setting out firstly whether there is a criteria. As a basis for the discussion
which would have been provided
need to amend IFRS 17, and secondly in the Board meeting, a 61-page
by IFRS 17 for users of financial
whether the amendment satisfies the document (available here) was
statements. Any amendment
agreed criteria. The IASB staff prepared by staff, summarising the
would avoid:
emphasised that, even if the Board 25 concerns and implementation
• reducing the relevance and agrees that a potential amendment issues identified.
faithful representation of meets the criteria, it does not mean
information in the financial that amendments meeting these 10. The Board provided comments on
statements of entities that criteria will be made. That is, only some of the matters addressed
issue insurance contracts; meeting the criteria will not below, and it was agreed that the
automatically result in an discussion would continue in more
• causing reduced detail at a future meeting, including
amendment to the standard. Several
comparability or introducing addressing comments provided by
Board members and staff also noted
internal inconsistency in the Board. The staff noted that the
that they would need to look at any
IFRS standards, including issues are listed in the order in which
proposed amendments in aggregate,
within IFRS 17; or they appear in the standard.
and not just individually.
• increasing complexity for
8. Board members were reluctant to
users of financial statements,
amend the standard, because they
thus reducing
believe that it could lead to greater
understandability.
complexity, with many stating that
• The amendment would not the meeting had left them very
unduly disrupt implementation disheartened at the thought of doing
processes that are currently this. The Board did not comment on
underway or result in undue changes to the effective date of the
delays in the effective standard, or whether IFRS 9 would
implementation of IFRS 17. continue to be deferred with IFRS 17.
However, the IASB chairman did
6. In addition to the above criteria,
note his concern that, since insurers
Board members requested that the
are very active in debt markets and
IASB staff expand the analysis on
some are searching for high-yielding
each topic raised by constituents, to
debt, the impact of not implementing
consider the cost versus benefit
IFRS 9 would be difficult to accept.
analysis and to provide insight as to
He went on to voice his concern that,
whether any new arguments or
if insurers had not implemented
information are available, beyond
IFRS 9 by the next financial crisis, it
what was already considered in
would have severe repercussions.
deliberating the standard. That is,
several Board members were
unwilling to redebate any concerns
unless new information that was not
considered in the deliberations was
presented by the staff.
PwC | IFRS news | 3Next step
11. The Board will continue its
discussion in the forthcoming
months, including whether there is a
need to propose any changes to the
standard. The IASB noted that it is
too early to say whether these
discussions will result in any
proposals to change the standard.
Any amendments to the standard will
need to follow the IASB due process,
which will include issuance of an
exposure draft and a public
consultation period. The IASB has
already published a short note of the
meeting that is available here.
PwC has developed the following
publications and resources related to
IFRS 17, ‘Insurance Contracts’:
• In transition INT2018-04:
TRG debates more IFRS 17
implementation issues
• In transition INT2018-03:
Amendments to IFRS 17 on the
IASB Board agenda
• In transition INT2018-02:
Insurance TRG addresses unit of
account, contract boundary, and
coverage unit issues
• In transition INT2018-01:
Insurance TRG holds its first
meeting on IFRS 17
• In brief INT2017-05: IFRS 17
marks a new epoch for insurance
contracts
• In depth INT2017-04: IFRS 17
marks a new epoch for insurance
contract accounting
• Using Solvency II to implement
IFRS 17
• IFRS 17 – Redefining insurance
accounting
PwC clients who would like to obtain
any of these publications, or have
questions about this In transition,
should contact their engagement
partner.
PwC | IFRS news | 4Issues of the month
PwC IFRS Blog What does this mean in practice for • Changes to financial statement
acquirers and sellers? presentation will drive new key
IFRS 17 : Important
performance indicators and MI
considerations for the So what does this mean for the requirements across the industry,
legacy market legacy market? The key takeaway is for example deal metrics.
that under long-term reinsurance
As IFRS17 comes sharper into focus agreements and Part VII transfers, • All insurers operating in an
for the insurance industry as a whole, the ultimate profit will not change IFRS17 world will require
it is becoming ever-clearer that the but IFRS17 could change the way additional data and a more complex
legacy insurance market will not that profit from transactions measurement model under IFRS17,
escape its grasp. Potential changes to emerges over time, which could introducing greater levels of system
the way that profit from past and impact the perceptions of investors, complexity and cost, with
future transactions can be recognised dividend pay-out patterns, the KPIs corresponding impacts upon
on transition and in the future mean that are used to value transactions finance and actuarial processes.
that it is critical that these changes and potentially even deal pricing for
are fully understood by legacy market So what should you do now?
some insurers.
participants in order to plan for the It remains to be seen whether
financial and operational impacts on IFRS17 will also transform the IFRS17 will impact deal pricing but
your business. presentation of your consolidated regardless of this, it is important for
group financial statements on all run-off acquirers and disposers
What is changing? transition and in the future, and the to understand the financial impact
It’s no secret that the measurement entity financial statements to the of IFRS17 on transition and on the
of all insurance liabilities will change extent that IFRS is used as the accounting for future transactions.
to a risk-adjusted discounted basis accounting basis in entity accounts. Further consideration of the key
and that the current common It will also lead to a balance sheet judgments available, plus the
practice of holding additional impact on transition so it is impact on data, systems, and
margins will no longer be allowed. important to understand how processes will help companies
This means that profit will emerge historical transactions of business assess the scale of the change and
differently over time between current currently in the settlement period enable them to plan accordingly.
IFRS and IFRS17. will be accounted for in the new
world.
Of particular additional importance
to the legacy market is that acquired The move to IFRS17 can also impact
or retrospectively reinsured the tax position of companies,
portfolios of fully expired (run-off) especially where IFRS is used as the
contracts will have a new coverage tax base (in the UK, this is the case if
period, equal to the settlement the financial statements are on
period of the liabilities, and the IFRS). Transition could cause one-
This week's guest blogger is
embedded profit from transactions off profits or losses for tax purposes,
Graham Oswald, PwC Director.
will be released over this settlement and the ongoing profit profile may
period. This is in contrast to the change for tax purposes. Even where Connect with him on LinkedIn.
current environment where profit companies do not use IFRS as the tax
may often be recognised on the base, there may be deferred tax
transaction date. impacts to consider.
Furthermore, this reassessment is In addition to these headline
retrospective, so on transition to the impacts:
new standard, an acquirer’s balance • Enhanced disclosure
sheet will be restated to reflect this requirements will increase the
treatment for all unsettled historical transparency of reserve adequacy,
transactions. It is worth noting that expected profitability and quality of
the topic of exactly how historical earnings, which could change the
transactions should be treated on landscape of the deal market because
transition is an issue raised in the buyers will have access to more
October 2018 IASB meeting. information.
PwC | IFRS news | 5Coming soon:
Manual of accounting - IFRS 2019
(Two-volume set)
Key updates includes:
• Amendments to IAS 19, ‘Employee benefits’
- Plan amendments , curtailment or settlement
• Annual improvements 2015 – 2017
• Amendments to IFRS 9, ‘Financial instruments’
- Prepayment features with negative compensation
• Amendments to IAS 28, 'Investments in associates'
-Long term interests in associates and joint ventures
• Revised conceptual framework issued in March 2018
For more information visit www.pwc.com/manual
PwC | IFRS news | 6Contacts Revenue recognition, liabilities and other areas E: katja.van.der.kuij@pwc.com E: hugo.van.den.ende@pwc.com T: +31 (0) 88 792 4087 T: + 31 (0) 88 792 5283 Financial instruments and financial services E: kees-jan.de.vries@pwc.com E: geert.c.wognum@pwc.com T: +31 (0) 88 792 4922 T: +31 (0) 88 792 2159 Business combinations and adoption of IFRS E: maarten.hartman@pwc.com E: renick.van.oosterbosch@pwc.com T: +31 (0) 88 792 5191 T: +31 (0) 88 792 4057 This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2018 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 180126-165332-KR-OS
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