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  • Welcome to Deloitte Financial Reporting Updates, our webcast series for issues and developments

  • related to the various accounting frameworks. Today’s presentation is Bringing clarity

  • to an IFRS world - IFRS quarterly technical update.

  • I am Jon Kligman, your host for today’s webcast, and I am joined by others from our

  • National Office. Before we get to our agenda and speakers, a couple of housekeeping items.

  • As you are aware, this webcast has been pre-recorded. If you know of colleagues who could not listen

  • in to the webcast at this time, they can simply access the webcast at www.deloitte.com/ca/update

  • at a later date. Now let me introduce our speakers and discuss the agenda.

  • First, you will hear from Kerry Danyluk who will provide an IFRS Interpretations Committee

  • update. After Kerry, Maryse Vendette, will discuss new developments on IFRS 15 Revenue

  • from Contracts with Customers. After Maryse, An Lam will provide an update on the leasing

  • standard as well as provide insight into future accounting amendments.

  • I would like to remind our viewers that our comments on this webcast represent our own

  • personal views and do not constitute official interpretive accounting guidance from Deloitte.

  • Before taking any action on any of these issues, it is always a good idea to check with a qualified

  • advisor.

  • I would now like to welcome our first speaker, Kerry Danyluk. Kerry joined Deloitte as a

  • partner in 2006 with over 20 yearsexperience in public practice, standard setting and industry.

  • Kerry is currently a partner in Deloitte’s National Assurance and Advisory services and

  • specializes in a variety of areas of IFRS, ASPE and not-for-profit accounting. Over to

  • you Kerry.

  • Thanks Jon and good day everyone. So, as Jon mentioned today, I am going to discuss some

  • aspects of the recent IFRIC meeting and some of the decisions that they have made. In March

  • 2015, they did discuss a number of different topics and ongoing projects, some of which

  • will no doubt be updating on in future webcasts as they get more advanced. So, today, what

  • we are really going to do is confine our discussion to a number of tentative agenda decisions

  • that they have finalized, the IFRIC has finalized related to IFRS 11, which is of course the

  • joint arrangements standard that we got, that became final in IFRS and effective in IFRS

  • a couple of years ago. So, during that couple of years or really the few years since the

  • standard was issued, there have been a number of interpretive questions raised and the IFRIC

  • has dealt with a bunch of these and discussed a number of them and finalizing decisions

  • in the March 2015 meeting. So, they decided not to take any of the matters onto their

  • agenda as projects. So, this means that there would not be any standard-setting activity

  • out of these discussions or any new IFRICs or amendments to the IFRS standard itself,

  • but they do provide their comments and their notes and the reasoning for not taking these

  • questions onto their agenda and while not authoritative, sometimes those notes and basically

  • the final decision that they publish offer some helpful interpretive guidance in how

  • they believe the standards should be interpreted. So, while we are not changing IFRS 11 at all,

  • these agenda decisions do add to the sort of body of literature out there that is available

  • for question, something that you might look at is if you are trying to look at different

  • interpretive matters under IFRS 11, which you will know if you had to deal with it,

  • did have a number of challenges around how things should be interpreted.

  • So, on the first slide here, we have got the decision tree, basically which takes you through

  • deciding whether your joint arrangement is a joint operation or a joint venture and of

  • course you remember that, that is an important determination because joint operations and

  • joint ventures get different accounting, with joint ventures being accounted for under the

  • equity method and then joint operation, each party accounts for its share of revenues,

  • expenses, assets and liabilities. So, it is an important consideration and really a big

  • area for interpretive questions has been around the part of the slide that has got the circled

  • box on it, other facts and circumstances. So, as you work through, one of the first

  • questions is whether the arrangement is conducted through a separate legal entity and if not

  • that is the easier consideration than it is a joint operation and the operators are accounting

  • for their share of revenues, expenses, assets and liabilities, sort of almost quasi kind

  • of line by line consolidation of each of the items, what we used to call proportionate

  • consolidation. So, that is a sort of the easy case, but where the issues have arisen is

  • as you work down this decision tree and you pass through the legal entity questions and

  • the questions about the contractual arrangements and you get to this notion of other facts

  • and circumstances. The idea is that there might be other facts and circumstances present

  • in the arrangement that indicate that the parties to the arrangement have rights to

  • assets and obligations for liabilities, in which case you would end up back in the joint

  • operation camp even if you had a separate legal entity for example. What we saw in Canada

  • in our implementation of IFRS 11 is it is often in that box that we end up because a

  • lot of the joint arrangements are conducted through a separate legal vehicle and so you

  • do sort of pass your way all the way down into other facts and circumstances and we

  • see such things as both parties are buying all the output for example, which may be an

  • indicator that you have a joint operation. So, a lot of the final decisions that we will

  • talk about today that the IFRIC has just released out of their March 2015 meeting do centre

  • around this question of interpreting other facts and circumstances.

  • So, on the next slide, issue #1 first addresses whether the assessment of other facts and

  • circumstances should be performed considering other facts and circumstances that create

  • enforceable rights to assets and obligations for liabilities, or is it a matter of we could

  • just look at the design, purpose and maybe the entity’s business needs and past practices.

  • So, maybe everything is not written down, but that is how we always do it or that was

  • our intention and so on. So, the IFRIC did discuss this question and where they landed

  • is, what their notes indicate is that they believe that these facts and circumstances

  • need to create enforceable rights to assets and obligations for liabilities in order to

  • be really considered in the other facts and circumstances part of the test. If they are

  • not enforceable, then they should not affect the determination of joint operation versus

  • joint venture. So, at the end of the day, the IFRIC decided that this was clear enough

  • within the body of the standard that already existed in IFRS 11 and so the issue has not

  • been added to the agenda, but as I said it does give us an important indication that

  • they do believe that these should be enforceable rights. So, of course, that does not answer

  • all the questions because we still get questions about does it need to be written down, could

  • you have an enforceable right based on a verbal agreement and so on and so, I think those

  • are still questions and really what is enforceable may come down to a legal question. So, it

  • does not answer everything, but at least it gives us some indication that they believe

  • that there should be enforceability. Next, they talked about how and why particular facts

  • and circumstances can create rights and obligations and so, there they sort of looked to, well,

  • we need to think about the rights and obligations that get created outside of the existing legal

  • agreement. So, for example, once you get down into this box, you have already passed through

  • considerations of the separate legal entity and the rights and obligations that the nature

  • of that separate legal entity confers and so then you are talking about being in, as

  • I mentioned enforceable rights and obligations, something it overcomes or goes beyond what

  • is already in the existing legal agreements and legal arrangements that are inherent in

  • the nature of the legal entity that you have. So again they have decided not to add anything

  • to the agenda on that point.  

  • The next number of issues talk about this whole idea of purchasing the parties to the

  • arrangement, purchasing the output. So, as we have seen in practice that is a common

  • consideration in figuring out whether we have got a joint operation or a joint venture,

  • because it is often the case that the parties to the joint arrangement are purchasing all

  • of the output. So, that has given rise to a number of questions about those purchase

  • arrangements and other factors in the arrangement and what impact they might have. So, as I

  • mentioned, one of the facts and circumstances that can get you to a conclusion of joint

  • operation is that the parties are buying all of the output and the standard IFRS 11 itself

  • actually has an example where the parties are buying all of the output, but they are

  • buying it in a cost plus arrangement. So, they are not paying market price for the output

  • necessarily, they are paying cost plus a margin and so that gave rise to a lot of questions.

  • Well, what about if the purchase price for the output is market and that is actually

  • the more common thing that we do see in Canada as purchase arrangements are at market price.

  • So, it is a perfectly valid question and one that we certainly consider through the application

  • or implementation of IFRS 11. So, the agenda decision that they published goes through

  • really to say that it is really important to think about the cash flows and where those

  • cash flows come from, through the parties, obligations to buy the output and so whether

  • it is at market price or not is not necessarily determined out in the determination of whether

  • it is a joint operation or a joint venture. So, I think that is a good interpretation

  • in the sense that that has been somewhat consistent with how we have interpreted the standard

  • or pretty much consistent with how we have interpreted the standard as we implemented

  • IFRS 11 in Canada. The next question is still within the context of the parties buying all

  • the output, what if you layer on the idea that there is third party financing as well?

  • So, in that case, the question arises perhaps because you have got not only the joint arrangement

  • parties providing the funding and the cash flows for the joint operation, but also there

  • is a third party involved who has provided funding. And again, the IFRIC has noted that

  • they do not believe that the existence of third-party funding should effect the classification.

  • So, based on the other factors that are present, it may be sort of neither here nor there.

  • They do note that yes some of the cash obligations in the joint operation may be settled by the

  • third-party financing, but eventually that third-party financing needs to be repaid and

  • it will come from the cash flows provided by the joint arrangement parties if they are,

  • in fact, required to buy the output. So, again nothing added to the agenda there.

  • In the next series of considerations, it is still within the context of buying the output,

  • the parties buying the output. The other question was does the nature of the output matter?

  • If the output is bespoke or customized, let us say does that make a difference compared

  • to if it is fungible or kind of interchangeable, identical type of output. So, gold bullion

  • compared to some kind of customized manufactured output, does that matter? And again, the IFRIC

  • has said well that is not a determinative factor either - we are just looking at the

  • cash flows in the joint arrangement and where they come from and the nature of the product

  • does not really matter. And then another question that has come up is around the volumes or

  • this concept of the joint arrangement parties buying substantially all of the outputs that

  • is the words in the standard. It talks about when they buy substantially all. So, of course,

  • the question has come up how should substantially all be interpreted? Is that volume or monetary

  • values? So that might be important, for example if the joint arrangement has different output

  • and maybe one set of output is expensive, but maybe lower volume and then the other

  • maybe a higher volume, but lower cost. Should we be looking at substantially all in the

  • context of the volume or the monetary value? So, the IFRIC has said that since it is cash

  • flows that matter and cash inflows and what the joint arrangement is earning from selling

  • to the parties then it is really the monetary or dollar value that is important in that

  • context.  

  • The next issue that they looked at was whether two joint arrangements could be classified

  • differently, when they have similar features except that one is structured through a separate

  • legal entity and the other is not? So, really, I guess, people were asking questions, well,

  • we hope, we want to, we believe that we should be having economic substance-based standards.

  • So if you have got two arrangements that are similar in a lot of respects except for ones

  • operated through not a separate legal entity, so maybe parties are owning shares of assets

  • directly and just kind of cooperating together, there is no separate legal entity. And then

  • you have a similar case where it is in a separate legal entity. So, in the one case with no

  • separate vehicle on the right-hand side of the slide that would be a joint operation

  • and the other part of the slide where it is through a separate vehicle that could be either

  • based on the analysis of facts and circumstances. So, the questions come up, does that make

  • sense and is that a good answer given that if you accept that the two arrangements might

  • be quite similar in other respects? So, the IFRIC did confirm that they do not believe

  • that, that does conflict with the concept of economic substance and they note that the

  • existence of a separate legal entity can play a big role in rights and obligations. So,

  • the differences in accounting probably relate to actual differences in people, in the two

  • parties rights and obligations. So they confirm that, that is a legitimate not unexpected

  • outcome.

  • The next issue considers how a joint operator should recognize revenue in relation to the

  • output that they purchase from the joint operation. So, remember it is a joint operation. So,

  • in this case, we are looking to be recording for the joint operators, to be recording their

  • share of revenues and expenses, assets and liabilities. So, the question is well if you

  • are doing that and so there is a point in time where the joint operators have bought

  • the output, but they have not yet sold it onto third parties, is it appropriate to record

  • that revenue? The IFRIC came out in their agenda decision to basically state that they

  • believe that what is consistent with IFRS 11 and the rest of IFRS is that when it is

  • a joint operator, if you are just recognizing your share of the revenue, it is not appropriate

  • to do that until that output has been sold onto third parties. So, that is another hint

  • or good indicator of where they think the standard should be applied in that question.

  • Finally, the last topic I am going to talk about relates to the maybe somewhat unusual

  • situation although we have seen it, where there are two joint operators and collectively

  • they are taking all the output, but they might be taking it in a different proportion to

  • what their ownership interest is. So, it is possible to have, let us say as we show on

  • the slide, a 50-50% ownership interest, but one party is taking 80% of the output and

  • the other party is taking 20%. The standard talks about joint operators accounting for

  • their share of things. So, how would you really mechanically do that when you kind of got

  • a 50% ownership interest, but your percentage of the revenues and expenses is maybe 80%

  • or 20%, so different than your ownership interest? So, it does create an anomaly and some interesting

  • debits and credits as you work through it. What the IFRIC concluded, which I think is

  • an appropriate answer is that there are probably a lot of different reasons why this situation

  • can exist and probably you need to understand those in order to come up with a reasonable

  • accounting answer for the situation and so, there is no one right answer, but it should

  • be facts and circumstances judgment-based analysis. So, basically, those are the IFRS

  • 11 final decisions that we have and in all cases the IFRIC has decided not to take them

  • onto the agenda. So, there will be no standard-setting activity and I think the good news is as I

  • said earlier at the outset is we often look to these agenda decisions that they do publish

  • even when they do not take an issue on and they often have a lot of clues and indications

  • of where the IFRIC thinks the standard really lies and even though they say at the beginning

  • of the published decisions that they do not change anything in IFRS, they can sometimes

  • add to or color our views on how the standard gets interpreted. So, I think, we have known

  • for a while that they were looking at all these issues and I think in Canada we are

  • probably a tiny bit nervous about that because we are pretty in our implementation of the

  • standard was a good two years ago now and we had made a lot of these decisions in a

  • vacuum without the benefit of having these agenda decisions. So, I think the good news

  • is that what they have come out with really does not conflict with anything that at least

  • we believe the interpretations have been in Canada and in terms of the way Deloitte has

  • interpreted a lot of these matters. So, I think that is good news. So, the body of literature

  • for IFRS 11 has increased, but I do not think that it should pose any really too many interpretive

  • issues. There may be some situations at the margin where maybe they do, but I think this

  • was overall not too disruptive of an outcome from our standpoint. So Jon, those are my

  • comments on the IFRS 11 agenda decisions.

  • Thanks a lot Kerry. Lots of substance there and given the volume and significance of these

  • clarifications, why weren’t they treated as narrow-scope amendments to IFRS 11 as opposed

  • to IFRIC agenda decisions?

  • Yeah, so Jon, I mean that is a good question. They could have, I suppose, gone through and

  • decided to make some limited changes to the standard. I think maybe there are places where

  • the standard could be clear, but I think overall it is probably a good news that they did not

  • do that. I believe that when they get these questions, what they really do look for is

  • whether the standard is clear enough to be applied the way it is written and I guess

  • that is in recognition of the fact that people have already been applying the standard and

  • it can be disruptive to start changing the standard so soon after it has been issued.