May/June 2013

Financial Reporting Update

Leases: on balance sheet - but at what cost?

In a major shake-up of lease accounting, the IASB and FASB have issued their latest proposals for lease accounting that would bring most leases on-balance sheet for lessees. A dual model would apply, based on a new lease classification test, which would affect the profile of lease income or expense recognised over the lease term. The impacts of these proposals, e.g., balance sheet and income statement volatility, would be felt across all sectors. 

With the release on 16 May of the IASB’s and FASB’s joint exposure draft (ED) Leases, discussions have restarted on this controversial topic. The Boards’ approach maintains their key objective of getting leases on balance sheet. Under the proposals, all leases, other than those with a maximum term of twelve months, would come on-balance sheet.

The current focus on whether a lease is an operating lease (off-balance sheet) or a finance lease (on-balance sheet) would be irrelevant. The proposals introduce a dual model whereby lessees would recognise an expense either on a front-end loaded or straight line basis. The model applied by a lessee is determined by whether the underlying asset is property or not and the extent of the consumption of that asset over the lease term. Lessees of a non-property asset with a lease term that is not insignificant compared to the life of that asset would recognise an expense on a front-end loaded basis.

Lessors would use the same lease classification test, which would result in many non-property lessors, and some property lessors, recognising a lease receivable and a residual asset rather than the underlying asset.

Implementing the proposals could be a real challenge for many entities and the impacts, including significant effort to identify leases and extract lease data, changes in financial metrics, and balance sheet and income statement volatility, are likely to be felt across all sectors.  In particular, entities that lease high-value assets of any nature would see significant increases in reported liabilities and entities with large volumes of lower-value leases could face high implementation costs, e.g., to address lease identification, classification, measurement and transition.

Whilst the concept of recognition by lessees of a right-to-use asset and a lease liability has been a constant throughout the project, some of the other key proposals are likely to attract much debate, including:

  • re-introduction of a dual model for lease classification (for income statement purposes) along with a different and untried classification test for property and non-property leases;
  • front-end loading of combined interest and depreciation expense on most non-property leases;
  • change to the definition of a lease such that a lease exists only when the contract is over the use of an identified asset that the lessee controls for a period of time.  This forms a new distinction between leases (on-balance sheet) and service contracts (off-balance sheet).  The ED contains further guidance on what constitutes an identified asset and how the right to control the use of an asset is demonstrated;
  • expectation that the asset and liability will be re-measured during the lease period (increasing the need to continually monitor leases); and
  • the requirement to reassess all existing and potential lease contracts on transition.

 

Although many of the key proposals have been debated for some time, there is still an expectation that the proposals will generate a significant level of response to the IASB.  The comment deadline is 13 September 2013 and we encourage you to consider responding to the IASB on these potentially significant proposals for lease accounting.

The ED, along with the IASB’s Snapshot document that seeks to explain the proposals, is available here.  KPMG IFRG Limited’s newly-released New on the Horizon: Leases considers the ED’s detailed proposals and provides KPMG’s insight on these proposals. KPMG’s press release raises questions on whether the proposals provide sufficient improvement over current lease accounting to satisfy financial statement users, or justify the considerable cost and complexity of implementation. 

No effective date for the intended standard has been announced although it appears unlikely that entities will be required to adopt this prior to the effective date for the revenue standard (1 January 2017).

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FRC defers implementation of Sharman proposals

The FRC has announced that it will defer implementation of its proposals outlined in its January 2013 consultation paper. Instead, it will reconsider how to clarify the distinction between the intended broader assessment of risks to the company’s viability, driving narrative reporting, and the assessment of going concern within the financial statements.

The Financial Reporting Council (FRC) has deferred implementation of its proposals on going concern after considering responses to its January 2013 consultation paper, Implementing the Recommendations of the Sharman Panel – Revised Guidance on Going Concern and revised International Standards on Auditing (UK and Ireland) (discussed in our January/February Update).  The proposals were originally intended for implementation for years commencing on or after 1 October 2012. 

These proposals were aimed at delivering better narrative reporting of the long-term risks to the viability of the company’s business model.  The FRC seems to accept, however, that referring to ‘going concern’ as both the specific assessment required when preparing the financial statements, and the broader assessment of the risks affecting a company’s viability, was confusing. A further consultation will take place in Autumn 2013.  KPMG in the UK is supportive of the principles behind Sharman’s recommendations but had some concerns over the implementation of the proposals. 

The FRC is rightly taking more time to redesign this important component of corporate reporting. It will reconsider how to clarify the distinction between the intended broader assessment of risks to the company’s viability, driving narrative reporting, and the assessment of going concern within the financial statements.  The revised proposals, if adopted, would take effect in October 2014.

The FRC’s press release is available here.

 


 

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New UK GAAP publication

KPMG’s new publication Cutting through UK GAAP is now available to download. It discusses the new UK GAAP regime and will be of great benefit when determining whether to adopt the standards early and which GAAP to apply from 2015.

As highlighted in the March/April Update, our new publication Cutting through UK GAAP discusses in detail the requirements of the new UK GAAP regime (FRSs 100, 101 and 102) applicable for periods commencing on or after 1 January 2015. It summarises the differences between FRS 102, current UK GAAP and EU-IFRS and will be of great benefit when considering whether to adopt the standards early, and also in making the decision as to which GAAP to apply from 2015.

The publication is available for download here. If you would like a hard copy version, please speak to your usual KPMG contact.

 


 

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News in Brief

Greater clarity on levy accounting
Levies have become more common in recent years, with governments in a number of jurisdictions introducing levies of various kinds. The key accounting question for those who pay the levy is when to recognise a liability.

In response to this issue, the International Accounting Standards Board (IASB) has issued Interpretation 21 Levies (IFRIC 21), which provides more clarity about when a liability for a levy should be recognised. IFRIC 21 defines the term ‘levy’ and confirms that the trigger for recognising a liability is the obligating event specified in the legislation.

IFRIC 21 is effective for annual periods commencing on or after 1 January 2014 and early adoption is permitted (once endorsed for use in the EU).

The IASB’s press release is available here.


Impairment disclosures for non-financial assets amended
The IASB has issued amendments to IAS 36 Impairment of Assets to reverse the unintended requirement in IFRS 13 Fair Value Measurement to disclose the recoverable amount of every cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated. 

Under the amendments, recoverable amount is required to be disclosed only when an impairment loss has been recognised or reversed.

The amendments apply retrospectively for annual periods beginning on or after 1 January 2014. Early application is permitted (once endorsed for use in the EU) and the amendments may be adopted at the same time as IFRS 13.

The IASB’s press release is available here.

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2013 UK GAAP Checklist

Our bi-annual UK GAAP checklist for 2013 is now available for download from our web site http://www.kpmg.co.uk/ or may be downloaded here.

 

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IFRS publications and other newsletters

KPMG in the UK publishes Financial Reporting Matters, a short newsletter to alert you to key changes in UK and International Financial Reporting Standards and UK company law.  It is available for download here. Alternatively, you may subscribe by sending an email to Financial Reporting Matters.

 

KPMG IFRG Limited has published the following since the March/April 2013 Update, which are available on its web site at http://www.kpmgifrg.com/:

 

IFRS disclosure checklist: Interim financial reports (April 2013)
Guide to condensed interim financial statements: Illustrative disclosures (May 2013)
IFRS Handbook: Share-based payments (May 2013)
New on the Horizon: Accounting for rate-regulated activities (May 2013)
New on the Horizon: Leases (May 2013)

 

 

KPMG IFRG Limited also publishes In the Headlines, which provide information in relation to new exposure drafts and standards issued by the IASB, as well as any other relevant developments affecting current and future IFRS reporters, including summaries of IASB meetings on a monthly basis.

 

In the Headlines, Issue 8 – Leases
In the Headlines, Issue 9 – Liabilities for levies
In the Headlines, Issue 10 – Reminder: Effective dates of IFRS
In the Headlines, Issue 11 – Insurance contracts

 

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Content

Leases: on balance sheet - but at what cost? »

FRC defers implementation of Sharman proposals »

New UK GAAP publication »

News in Brief »

2013 UK GAAP Checklist »

IFRS publications and other newsletters »