Times Of Change - PwC

www.pwc.com/skTimes of changeWhat CFO's need toknow about the newIFRS accountingstandardsHow accounting changeswill change your businessApril 2017

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ChangingyourperspectiveIf you use leases as a means to obtain access to assets, your companyis about to face a major change as the accounting requirements for leaseschange.The new leases standard eliminates operating leases for lessees and will affect almost allcommonly used financial metrics, with substantial changes to both balance sheet and incomestatement presentation and knock-on effects on a company’s arrangements with variousstakeholders.If you earn revenue and apply IFRS, your company is about to face amajor change as the accounting requirements for revenue change.The new revenue standard will impact your revenue cycle, key performance indicators,systems and processes.If you have financial instruments and apply IFRS, yourcompany is about to face a major change as the accounting requirements forfinancial instruments change.The new financial instruments standard introduces significant changes to classification andmeasurement, impairment and hedge accounting. Its impact is sure to reach far beyondfinance to areas such as credit risk, systems, data, tax, internal audit and others.The time to act is now5 questions CFO's should be asking1 What is management’s transition strategy, timeline and budget?2 What are the key issues, impacts and risks specific to our industry andcompany?3 How will the change impact our business, beyond the financial statements(e.g. strategy, budgeting/planning, processes, systems, controls, keyperformance indicators (KPIs), remuneration, debt covenants, regulatorycompliance, treasury, taxes, sales/procurement, etc.)?4 How and when are we communicating changes to stakeholders?5 How are our competitors addressing transition?1 Times of change – What CFO's need to knowPwC

IFRS 16: the new modelThe new standard presents a single lease model, a significant change from the dual modelapproach currently used in IAS 17.The new standard requires lessees to recognise nearly all leases on their balance sheet reflecting their right to use an assetfor a period of time and the associated liability to make rental payments. Recognition of interest on the lease liability andamortisation of the asset is required in the income statement. One consequence of the single model is that the pattern oflease expense recognition is front-ended due to the higher interest charge in the early period of the lease.The IASB has included an optional exemption for certain short-term leases and leases of low-value assets to be applied bylessees. The lessor’s accounting model largely remains unchanged.The IASB issupporting a singlelease model thatrecognises interestand depreciationin the incomestatement.PresentationOperating LeaseAccountingAssetNo asset recognisedLiabilityNo liability recognisedOperating leaseexpenseIncome statementFinance LeaseAccountingProperty, Plant &Equipment (PP&E)Lease liabilityDepreciation & interestexpenseLease AccountingRight-Of-Use (ROU)assetLease liabilityDepreciation & interestexpenseIAS 17IFRS 16Global lease capitalisation impact by industry*LesseesAll companiesAverage increase Median increasein interestin total assetsbearing debt22%5%13%Retail and tradeProfessional servicesAccommodation and food servicesTransport and warehousingConstructionManufacturingFinancial %3%7%2%3%1%Average increasein EBITDA* Global PwC Lease Capitalisation Research 2015What action should companies take and when?2017 – 20192016Final StandardIASB(Jan2016)Effective date(Jan 2019with restatedcomparative for2018)*Get organisedCompanyactionsUnderstand the impactTransition to the new standard* There are detailed accounting options that companies need to consider, relating to how theytransition.2 Times of change – What CFO's need to knowPwC

The new leases standard maychange key accounting metricsVirtually every company uses rentals or leasing as a means to obtain access toassets and will therefore be affected by the new standard.The new standard will affect virtually all commonly usedfinancial ratios and performance metrics such as gearing,current ratio, asset turnover, interest cover, EBITDA,EBIT, operating profit, net income, EPS, ROCE, ROE andoperating cash flows. These changes may affect loancovenants, credit ratings and borrowing costs, and couldresult in other behavioural changes. These impacts maycompel many organisations to reassess certain ‘lease versusbuy’ decisions.There will also be a change to both the expense character(operating lease expenses replaced with depreciation andinterest expense) and recognition pattern (accelerationof lease expense relative to the recognition pattern foroperating leases today) which will cause income statementvolatility.The impact of simple five-year leases on netprofit over a 10 year periodRenewals of key leases will also increase lease liabilities overnight, creating volatility in thebalance sheet too.How the timing of key lease renewals mayaffect the lease liabilities on the balancesheetThe change will also require an ongoing lease contract management process which manycompanies do not currently have in place.Although lessor accounting remains largely unchanged, lessors are expected to be affecteddue to the changed needs and behaviours of customers which impact their business modeland lease products.3 Times of change – What CFO's need to knowPwC

IFRS 15: the new modelThe newstandardpresentsa single, principles-based five-step model thatThenewmodel—applies to all industries.a 50,000 foot viewThe extent of change in applying the new standard will vary significantlyThestandardpresentsa single,principles-baseddependingon anewcompany’sindustry andthe complexityof its gthenewfive-stepmodelfive-step model that applies to all industries.will require more judgment. Entities will also have to consider changes dinternalwillcontrolsas a resultThe extentof changein applyingthe newvary significantlyof the newdecisiononpointsand increaseddisclosurerequirements,amongdependinga company’sindustry andthe complexityof its revenuegeneratingIn general, applying the new five-step modelother aspectsof thetransactions.model.will require more judgment. Entities will also have to consider changesto information technology systems, processes and internal controls as aresult of the new decision points and increased disclosure requirements,among other aspects of the model.DetermineFive-step modeltransactionFive-step modelpriceSeparateDetermineSeparatetransaction priceperformanceperformanceIdentify ct113322TransitionThe standard is effective in 2018 for public companies withtwo alternatives for ocatetransactionpriceAllocatetransaction price Change is comingWhile the extent will vary depending onindustry and complexity of contracts, allentities with revenue will be affected by thenew standard.What actionshould companies take and when?Modified RetrospectiveRetrospectiveContractsin2014 reported2015accordance with existingguidanceFinal(MayStandard2014)2017 reportingin 2018Contractsrestated andreported inaccordance withnew standardIASB2018 reportingNew and existing contractsContractsreportedin accordance withreported inGetorganisedaccordance with new standard, incrementalthe impactdisclosureUnderstandrequirednew standardCompanyCumulativeadjustment toopening retainedearningsAreas impacted may include:2016 – 2018 the number of deliverables in a contractto which revenue mustbe allocated(Jan 2018 withEffectiverestated comparativedate the method of allocationto thosefor 2017)*deliverables timing of recognition of revenue other recognition and measurement areas,such as the accounting for collectability,Transition to the newstandardcontingentrevenue and accounting forcontract costs (e.g. sales commissions)* There are detailed accounting options that companies need to consider, relating to how disclosuresthey transition.2017 actions2018PwC4 Times of change – What CFO's need to knowPwC3

The new revenue standard maychange when revenue is recognisedWhile the extent will vary depending on industry and complexity of contracts, allentities with revenue will be affected by the new standard.The structure and terms of revenue transactions usually vary and may contain more complex features:FeatureImpactLong-term contracts likely to be modifiedover the contract termThe standard provides explicit guidance on how to treatcontract modifications which may be different from thecurrent treatmentMultiple goods and / or services providedtogether in one transactionRevenue must be allocated to these items in line withstrict criteria – this might not be the price written in thecontractFree goods and / or services provided tothe customerAn amount of revenue must also be allocated to theseitems in line with strict criteriaLicenses that provide the customer withaccess to intellectual propertyGuidance is explicit on how to treat licenses – whichmay change the timing of revenue recognitionThe customer receives many different goodsand / or services over the length of thecontractIdentifying ‘performance obligations’ is a difficult andjudgemental area, requiring disclosure in the financialstatementsThere are varied terms which impact whenrisks and rewards pass to the customer (e.g.warehouse deliveries, customer acceptance,long-term freight, use of resellers)The guidance uses ‘transfer of control’ to indicate whenrevenue will be recognised, this new concept may leadto differences against current treatmentAreas impacted may include: the number of deliverables in a contract to which revenue must be allocated the allocation of revenue to those deliverables timing of revenue recognition other recognition and measurement areas, such as the accounting for collectability, contingent revenue,variable consideration, and accounting for contract costs (e.g. sales commissions) disclosures – such as disaggregation of revenue, performance obligation determinations and allocations,and judgements for when revenue recognition occurs5 Times of change – What CFO's need to knowPwC