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Leasing & Revenue Recognition Webinar Convergence of Financial Instruments, Leasing & Standards

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Leasing & Revenue Recognition WebinarThe Ripple Effect: Convergence of Financial Instruments, Leasing, and Revenue Recognition for IFRS and US GAAP

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are moving closer in convergence of financial instruments, revenue recognition and leasing accounting standards in particular. Applying the new standards will cause several ripple effects from changing processes used to orchestrate financial reporting, increasing balance sheets, and impacting income statements. In this webinar we cover the potential impact that proposed changes in these key areas will have on accounting, processes, and systems. Learn all the "ins and outs" of the different types of reporting requirements that will affect your business. Hear from a panel of experts who will share their knowledge and advise you on the next wave of standards.

This Leasing & Revenue Recognition Webinar video is from the Proformative webinar "The Ripple Effect: Convergence of Financial Instruments, Leasing, and Revenue Recognition for IFRS and US GAAP: " held on July 19, 2012.  The webinar features presentations from Tom Anderson, Principal Consultant, SAP, Myles Corson, Principal, Ersnt & Young, Pete Graham, Director, SAP, Brian Heckler, Americas and US Partner in Charge, KPMG, Erik Moe, Director, Deloitte & Touche LLP, and Rich Cebula, Director, PwC.

 

Leasing & Revenue Recognition Webinar

 

John: "We've got a lot of things we want to cover today. The main topics of course convergence issues around record of recognition, lease accounting and financial instruments. We're going to be covering a lot of territory, so this is a bit of a survey course this morning. But we're happy to have you with us here today and I'm very confident that you'll come out of this hour knowing a lot more and, hopefully, being much better prepared personally and for your company to be ready to address all of these issues.

Okay, so at this point, let's go ahead and jump right in and to do that I'd like to start by introducing our first speaker. He's name is Pete Graham. He's the Director of Financial Solutions and Mobility at SAP Labs. Pete currently leads the global activities on IFRS accounting change and mobility for finance solutions at SAP. He helps customers understand the latest information about SAP solutions and how those solutions can make their company run better. He has 15 years of experience in the enterprise software industry in a variety of product and operational roles.

I would also like to introduce Tom Anderson, Principal Consulting for SAP. Tom is Principal Consulting for SAP in their North American real estate practice. He works closely with SAP development and has been involved with the development of SAPs FASB 13 solution, common area maintenance recoveries, and currently the IFRS solution for non-movable assets. He has 14 years of experience in the enterprise software industry, primarily in the delivery of solutions. He is also a frequent speaker presenter on real estate topics.

With that, Brian, feel free to take it away.

Pete: Okay, thanks John.

John: Oh, I'm sorry, Pete.

Pete: Thanks. As John mentioned, we have a great set of panelist here. First we want to thank the panelist for carving time out of their business schedule. They do this 24-7 and so it will be great to get their insights here. What we've scheduled or organized is just a quick overview of the key topic on IFRS convergence right now, financial instrument, leasing, and revenue recognition. What I'm going to do is go to a broad brush and really from a layman's perspective just paint this very broad brush. Then we will have a detailed discussion here shortly where our experts on the accounting set can really come in and give their insight.

So we're going to start with financial instrument. Certainly the background on this is that, and this is primarily related to financial services and there's also some hedge accounting, but essentially this was a product that was started in 2008. It's now been broken up into three phases. There's a classification in measurement, there's an impairment of financial assets and there's also hedge accounting. The objective is to improve the usefulness of the financial instrument for financial statements for users by simplifying the classification in measurements requiring for financial instruments.

The current status of the project is these three phases have been going fairly well. They seem like they're all on track. We've got some exposure drafts coming up in phase two and three but the effective dates are all on track at this point for January 1, 2015. In general, as I look across these topics, the one that we're getting the most interest on or conversation about is leasing, rev rec is next and financial instrument is farther behind and I think it's just because in general it seems to be working more smoothly.

From a layman's perspective, what do you need to know? On classification and measurement, the classification is going to be according to the cash flow characteristics of the instrument and the entity's business model. So, here might be changes related to current classification of financial assets more instruments are likely to be measured at their value. There are three categories left in terms of amortizing the costs, fair value OCI, fair value P&L. There's also ways to bifurcate financial liability, but not allow for financial assets.

There's also impairment of financial assets at amortized costs and this is going to be moving from the incurred lost approach to the expected loss approach. Essentially, this may allow losses to be recognized earlier. For all assets of recognition of the expected loss is within the next 12 months. There also could be a deterioration in  credit quality leads and that would lead to recognition of full lifetime expected loss.

The other areas around hedge accounting, and again this is a general model and macro hedge accounting will not be a part of IFRS 9. Certainly, there is going to be, we're trying to get stronger alignment with actual risk management, kind of versus the principle-based approach in hedge accounting.

So that is kind of a very high level financial instrument so let some of the experts kind of comment on this in a second. Let's now move to the next topic. A little latency on lease accounting. Lease accounting again is probably our top request at the moment from our customers. This project goes back to 2006. There's been a lot of comments on this in the back. I guess the famous quote is that "you can't really jump on an airplane around the world and it turns out that airplane is not on the balance sheet of any company because of all these operating leasing."

Editor's Note: Take a look at the Proformative library of recorded webinars, which include videos on topics such as Corporate Controller Webinar, Chief Revenue Officer Webinar, Compensation Negotiation Webinar, Investor Relations Analytics Webinar and Automating Financial Consolidation Webinar.

Long story short, the objective of the project was to eliminate the different accounting for operating capital  leases and better reflect the impact of operating leases on the company's performance and really make sure the recognition of the assets and liabilities related to those lease contracts are properly requested. There's also the objective of providing the information in the financial statement about the amount, timing and uncertainty of the cash flow from these lease contracts, just make it more transparent.

We have had a lot of work on this in the last couple of years. There was an update recently, a couple weeks ago. Right now the timing is at the re-exposure is likely to occur what they set in the exposure draft, by the end of this year. There have been some fairly big changes of all those lease accounting since the last exposure drafts, but what we're now seeing is kind of a convergence in that the boards really seems to put a line in the and that they have come to the major agreement so that they are going to get this resolved by the end of this year or next year.

I think there's a feeling that this lease accounting standard now is actually going to happen. The timeline is such that it might happen a little later maybe it goes out to a 2017 effective date, but that this will happen and so we're seeing a lot of interest in that. We'll talk about that with the panelist here in a minute.

Certainly in terms of what you need to know in lease accounting, you definitely want to get your arms around your leases. This could be as easy as creating an inventory of the lease contract and making sure that you understand the basic terms and conditions. Certainly for short-term leases there's some exceptions and it won't be major changes compared to the current regulations. The next two items we've kind of split up into lessees and lessors. For lessees, all the leases will be recorded on the balance sheet according to the right of use approach. For lessors, the plan regulation will be like current operating lease if the lessee does not apply more than an insignificant portion to lease the asset. One of the comments that I want to make in here is there's some language in here in the leasing that seems a little subjective. I'm going to leave that to our experts to comment on, especially around this term "insignificant portion to lease the asset."

With that, we'll move on to the next topic, and again this is a broad brush survey. We're going to have a deeper dive discussion in a few minutes and really let the experts add their insight.

On rev rec, again this is a project similar to leasing elements in the same timeframe. That was started to really make sure that there was a common revenue recognition model, a single model across all these different industries. It turns out there are a lot of inconsistencies and weaknesses in the current approaches across the U.S. GAAP standards and IFRSs. The boards are really trying to provide a single more robust framework, allow better comparability, better disclosures, hopefully, it simplifies the prep of the financial statements and it's more uniform across different entities. Now it could be there are some other industries that aren't covered by this standard such as insurance, but for the most part this would be across all industries."

End partial: Leasing & Revenue Recognition Webinar

 

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