2018 IFRS Update October 2018 KPMG Lower Gulf Limited kpmg.com/ae kpmg.com/om © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved What you (probably) missed in IFRS 15, IFRS and IFRS 16? © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved IFRS Update – Disclaimer September 2018 Whilst care has been taken in the preparation of this training material, details may be omitted which may be directly relevant to a particular entity Reference to the standards and other authoritative material should therefore be made, and specific advice sought, in respect of any particular transaction No responsibility for loss occasioned to any person acting or refraining from action as a result of anything in this training material can be accepted by KPMG This training material is based on standards, interpretations and other authoritative material issued until the 31 August 2018 Agenda IFRS 15 Revenue from contracts with customers IFRS Financial Instruments IFRS 16 Leases © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved IFRS 15 Agenda – IFRS 15 General guidance Practical examples Industry considerations Disclosures © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved Why go through the process if change is not big? IAS 18 IAS 11 IAS 18 Revenue CUXXX IFRS 15 IFRS 15 IFRS 15 Revenue may be only CUXXX ± ~10% The thought process changes even if the accounting doesn’t that much Single comprehensive framework Greater comparability Important with evolving products and business models Judgments made within the framework More useful information for investors (we will talk about these later…) © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved What have we learnt Clients underestimate the impact of IFRS 15 Nobody has read the ‘terms and conditions’ outcomes You may no longer continue the use of the Percentage of Completion method Revenues and cost not match anymore © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved Revenue recognition – New step model Step Identify the contract Step Identify performance obligations (PO) in the contract Step Determine the transaction price (TP) Step Allocate the transaction price to performance obligations Step Recognise revenue as performance obligations satisfied Contract PO PO TP for the contract TP allocated to PO TP allocated to PO Revenue on PO Revenue on PO © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved Identify the contract collection of consideration is considered probable Step rights to goods or services and payment terms can be identified A contract exists if it has commercial substance it is approved and the parties are committed to their obligations © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 10 Updated Liability Definition Existing Conceptual Framework Revised Conceptual Framework Present obligation Present obligation As a result of past events As a result of past events Expected outflow of economic benefits Potential transfer of an economic resource No practical ability to avoid the transfer © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved IFRS transitional considerations IFRS 15 Revenue from contract with customers IFRS Financial instruments September, 2018 IFRS 15: Revenue from contract with customers © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 10 Transition Option Differences Option to record adjustments in equity at start of current period .the transition option selected may significantly affect the look of revenue presented on application of IFRS 15 Revenue and certain expenses could be presented twice Mixed reporting in comparative periods No need to estimate variable consideration Restate all revenue or only revenue for the current period Required to disclose revenue under IAS 18 for the current period © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved Document Classification: KPMG Confidential 11 Retrospective Method at a Glance #1 #2 #3 Recognise the effect of applying IFRS 15 at the start of the earliest comparative period presented Apply IFRS 15 to open contracts (i.e not complete) under IFRS 15 at the start of the earliest presented comparative period Elect to use practical expedients to avoid restating certain types of contracts © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 12 Effect of the Retrospective Method Revisit all contracts – closed and open under IAS 18 Recreate facts and circumstan ces Disclose effect on the prior period of applying IFRS 15 Practical expedients provide some relief Enhanced comparability © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 13 Cumulative Effect Method at a Glance Apply IFRS 15 as of the date of initial application, with no restatement of comparative period amounts Apply IFRS 15 to open contracts (i.e not complete) under IAS 18 / IAS 11 at the date of initial application Disclose the amount each financial statement line item is affected in the current period as a result of applying IFRS 15 © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 14 Effect of The Cumulative Effect Method Reduced comparability Disclose revenue under IAS18 / IAS 11 for current period Only focus on contracts open under IAS 18 / IAS 11 – not all contracts Don’t need to recreate facts and circumstances © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 15 Option - Retrospective method Under the retrospective method, an entity is required to restate each period before the date of initial application that is presented in the financial statements The “date of initial application” is the start of the reporting period in which an entity first applies the new standard For example, if an entity first applies the new standard in its financial statements for the year ended December 31,2017, then the date of initial application is January 2017 Practical expedient For contracts that are completed under current standard – i.e for which the entity has fully performed its obligations under the revenue guidance that is in effect before the date of initial application – an entity need not restate contracts that begin and complete within the same annual reporting period Practical expedient The Company may use the transaction price at the date on which the contract was completed, rather than estimating the variable consideration amounts in each comparative reporting period Practical expedient The Company, for all reporting periods presented before the date of initial application, need not disclose: — the amount of the transaction price allocated to the remaining performance obligations; nor — an explanation of when the entity expects to recognize that amount as revenue © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 16 Option – Cumulative effect method Under the cumulative effect method, an entity applies the new standard as of the date of initial application, without restatement of comparative period amounts The entity records the cumulative effect of initially applying the new standard – which may affect revenue and costs – as an adjustment to the opening balance of equity at the date of initial application Under the cumulative effect method, the requirements of the new standard apply only to contracts that are open – i.e., not complete – under current standard at the date of initial application An entity that elects this method is also required to disclose the following information: the amount by which each financial statement line item is affected in the current period as a result of applying the new standard; and an explanation of the significant changes between the reported results under the new standard and those under current standard © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 17 Transition options APPROACH PRE-ADOPTION COMPARATIVE(S) YEAR OF INITIAL APPLICATION DATE OF EQUITY ADJUSTMENTS Full retrospective No practical expedients Legacy GAAP New GAAP New GAAP January 1, 2017 Retrospective with practical expedient(s) Legacy GAAP Mixed requirements New GAAP January 1, 2017 Cumulative effect Legacy GAAP Legacy GAAP New GAAP January 1, 2018 © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 18 Summary of the effect of each transition option Full retrospective method Cumulative effect method WHAT IS THE ACCOUNTING IMPACT? WHAT IS THE ACCOUNTING IMPACT? — Apply to all contracts — Apply to all open contracts — Option to elect out of restating — Only the current year is presented — Transition adjustments recorded in equity in earliest comparative period — Transition adjustments recorded in equity in the earliest comparative period WHAT ARE THE BENEFITS? WHAT ARE THE BENEFITS? — Revenue figures are comparable from one period to the next — Number of contracts considered for compliance significantly reduced — Investor can view trend in the revenue — No investigation and documentation of facts and circumstances required WHAT ARE THE DRAWBACKS? WHAT ARE THE DRAWBACKS? — Review all open contracts in earliest period — Figure are less comparable as reported under different revenue standard — Investigation and documentation of facts and circumstances — Investor cannot view the trend in the revenue — Application of practical expedient will make figures less comparable — Revenue can fluctuate as they are presented using different basis IS IT RELEVANT TO THE COMPANY? IS IT RELEVANT TO THE COMPANY? — If company expects change in revenue accounting — Entities that not expect significant change to their revenue accounting as a result of applying the standard will find the cumulative effect method relevant Enhanced comparability Need to look at all contracts (closed & open) Require more historical information Reduced comparability, dual reporting in year of initial application Only need to look at open contracts © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved Requires less historical information 19 IFRS 9: Financial instruments © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 20 Restatement of comparative periods IFRS 9, Financial Instruments, as issued by the IASB on July 24, 2014 (IFRS (2014), supersedes all other prior versions of IFRS The Standard is effective for annual period beginning on or after January 1, 2018, with earlier adoption permitted While IFRS (2014) must be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the Standard contains specific transition provisions Transition to IFRS with respect to impairment will be retrospective and the two options available are: Restate comparative Do not restate comparative — The entity will need to restate comparative periods in accordance with IAS Accounting Policies, Changes in Accounting Estimates and Errors — The entity will not restate comparative periods — The difference between – the carrying amount before adoption of IFRS 9; and — The difference between: – the carrying amount before adoption of IFRS 9; and – the new carrying amount calculated under IFRS at the beginning of the earliest comparative period presented in the financial statements is recognised in opening retained earnings (or another component of equity, if appropriate) as at the earliest comparative period presented or – the new carrying amount calculated under IFRS at the date of initial application (i.e the starting date of the reporting period in which an entity adopts IFRS 9) is recognized in opening retained earnings (or another component of equity, if appropriate) as at the date of initial application — The date of initial adoption is the beginning of the reporting period in which the entity first applies IFRS © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 21 Thank you kpmg.com/socialmedia kpmg.com/app The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future No one should act on such information without appropriate professional advice after a thorough examination of the particular situation © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved The KPMG name and logo are registered trademarks or trademarks of KPMG International © 2018 KPMG, KPMG LLP and KPMG Lower Gulf Limited, registered in the UAE and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 22 ... missed in IFRS 15, IFRS and IFRS 16? © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG. .. Instruments IFRS 16 Leases © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International... © © 2018 KPMG Lower Gulf Limited and KPMG LLP, operating in the UAE and Oman, member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG