Publié le 30 janvier 2015 | par Nathalie Mourlot0
Be aware of the entry into force of IFRS 10 and 11!
These standards become mandatory within the EU for financial years starting on or after 1 January 2014. The groups concerned shall have to pay very close attention to the presentation and explanation of impacts of these two new standards in their 2014 annual financial reports.
IFRS 10 – Consolidated Financial Statements and IFRS – 11 Joint Arrangements, become mandatory within the European Union for financial years starting on or after 1 January 2014; however, early application has been possible since the 2013 financial year.
The application of IFRS 10 and 11 should result in numerous modifications to the scope of consolidation and methods in 2014
IFRS 10 – Consolidated Financial Statements provides a single definition of control which can be applied to all entities, particularly structured entities or special purpose entities. According to IFRS 10, an investor has control of another entity when it has power over this entity, when it has exposure, or rights, to variable returns (profits or losses) from its involvement with the entity, and finally when it has the ability to use its influence over this entity to affect the amount of its returns.
IFRS 10 also provides analysis criteria for dealing with a certain number of complex cases relating to control, such as having control with less than 50% of voting rights, or taking into account convertible instruments (such as convertible bonds) and other stock options.
IFRS 11 – Joint Arrangements addresses two types of arrangements: joint operations and joint ventures and focuses on the rights and obligations of parties, rather than the legal form of joint arrangements. For a joint arrangement to meet the definition of a joint operation, the partners must have both the rights to assets and the obligations for liabilities of the joint arrangement. Entities that do not meet this definition are joint ventures and are now accounted for using the equity method, as only joint operations may be consolidated on a proportionate basis. The latter method should therefore be limited to very specific instances, and should never take into account joint arrangements in which the partners only have a right to the structure’s net assets.
European groups having early adopted IFRS 10 and 11 reported significant impacts in their 2013 financial statements
A research paper from HEC published in May 2014 by Pauline Rogier and Julie Kouyoumdjian (*) revealed that in 2013 approximately 20% of French groups and one-third of European groups had early adopted these standards. These are primarily groups listed in the United States that must use an identical reference to that published by the IASB in order to avoid producing an IFRS/US GAAP reconciliation table.
(*) “Application des normes IFRS 10 et 11 – Incidence sur le périmètre de consolidation et les comptes publiés par les groupes européens et impact sur les ratios d’analyse financière” (Application of IFRS 10 and 11 – Impact on the scope of consolidation and financial statements published by European groups and the impact on financial analysis ratios)
Based on a sample of 56 European groups used in a study conducted in 2013 which had early adopted IFRS 10 and 11, five groups reported material impacts due to the application of IFRS 10 whereas 21 groups reported impacts as a result of the application of IFRS 11. The results of the sample of 27 French groups having early adopted these standards are fairly similar, with two groups (Veolia Environnement and Unibail-Rodamco) reporting material impacts in their financial statements due to the application of IFRS 10 whereas eight groups reported material impacts due to IFRS 11.
In both sample groups, the sectors that were the most affected were real estate (in France, five of the seven groups will have significant impacts in their financial statements following the application of IFRS 11), telecommunications, public services, energy & utilities and major industry (aeronautics, automotive and metallurgy). This is due to the fact that groups in these sectors use joint arrangements and for the most part consolidate their investment portfolio using the proportional consolidation method. This is particularly true for the property development sector, as well as the public services sector including transport and the supply of electricity or water, since the groups were required to enter into joint arrangements with governments and local authorities, especially in emerging countries such as China. However, IFRS do not take into consideration the specific characteristics of these sectors of activity.
On average, revenue in the opening financial year (2012) of groups in the French sample decreased by 6.76% and operating income fell by 8.27% following the application of IFRS 10 and 11. The standard deviation is therefore rather significant. For example, Veolia Environnement’s revenue dropped 21.06% and its operating income fell 36.10%.
Similarly, the European sample group reported very significant impacts. For example, Portugal Telecom saw its revenue decrease by 53%, its operating income fall 42% as well as its net debt dive 66%, due to the fact that its largest joint ventures, Oi and Contax, are now consolidated under the equity method.
Recommendations by the ANC and the AMF to assist groups in presenting the impacts of IFRS 10 and 11
Following the concerns raised regarding the impact of IFRS 11 on the presentation of operating income, the French national accounting standards body (ANC) issued its recommendation no. 2013-01 in April 2013. This advised groups that deemed it relevant to present the share in net income of associates, whose activity is a continuation of the group’s activity, after operating income but before a new indicator entitled “operating income after share in net income of associates”. The share in net income of associates whose activity is not a continuation of the group’s activity must always be presented at the bottom of the income statement. However, this provision was not followed by all groups that early adopted IFRS 10 and 11, which made monitoring and comparison more difficult.
In light of both the potentially significant impacts, as seen above, and the difficulties of analysis and comparison, the French financial markets authority (AMF) insists in its 2014 recommendations on the obligation to properly explain the significant impacts and list the companies in the scope of consolidation whose consolidation method was modified in terms of IFRS 10 and IFRS 11. Accordingly, in the event that the nature of control that the group exercises is modified, especially without a change in the amount of capital held, the AMF recommends the highest level of transparency when the impact is significant by explaining in the notes to the financial statements, in addition to the impacts, the analysis and judgements made.
Significant impacts should be reported in the group’s main indicators and the operating segments explained in the press release.
The AMF also recommends for the first-time application of IFRS 11 that group’s follow the ANC’s recommendation and present the [share in net] income of associates within the indicator reporting operational activities.
Finally, it should be noted that since the beginning of 2014, numerous discussions are under way within the IFRS Interpretation Committee (IFRS IC) on the notion of joint operations. The Interpretation Committee has examined a number of structures that could be qualified as joint operations and has been studying the case of project entities. The IFRS IC should finalise the summary of its decisions in early 2015. The AMF recommends that all companies with project entities should update their analyses and take into account the conclusions of the IFRS IC at the end the financial year. Companies concerned may also find it useful to explain the analysis performed in the notes to the financial statements.
In conclusion, particular care needs to be taken as regards the presentation and explanation of impacts of these two new standards in the 2014 annual financial report for companies applying these standards for the first time.