The Bank Statement, Q3 2014 NEWSLETTER

22 Pages·2014·0.85 MB·English

THE IFRS – Global Banking
BANK STATEMENT
Q3 2014 NEWSLETTER

IFR S 1 5 is more prescriptive NEW REVENUE MODEL AND PROGRESS
than current guidance in some ON ENHANCING DISCLOSURES
areas relevant to bansk , and eW lcome to the 3Q 2014 issue o f our uq arterly banik ng nesw letter
in hw ich ew provide updates on IFR S developments that directly
introduces ne w guidance. It
impact bansk and consider the potential accounting implications o f
may reuq ire bansk to modiyf regulatoryr� euq irements.
their current accounting
Highlights
policies.� l
�hT e IA BS issues the complete IFRS 9 Financial Instruments, hw ich is
eef f ctive of r annual periods beginning on or atf er 1aJ � nuary 201 8 – see page2� .
l �hT e ne w revenue recognition model under IFRS 15 Revenue from
Contracts with Customers: eW � discuss potential impacts on bansk – see
Enrico Di Leo and page.5 �
Giorgio Vergani, l � How do you compare? eW have looek d at 1b�5 ansk reporting under IFR S and
Accounting Advisory compared the location and rf euq ency o f publication o f their Pillar 3 disclosures –
Services, see page 12.
KPMG in Italy l �hT e EDTF issues its 2014 report on bansk ’ progress in implementing its 2012
recommendations, noting that signic� ant progress has been made – see page 14.
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IASB ACTIVITIES AFFECTING YOUR BANK
Complete IFRS 9 nO 24 uJ ly 2014, the IA BS issued the complete IFR S 9 Financial Instruments.1 hT is marsk the
culmination o f the proej ct to replace IA S 93 Financial Instruments: Recognition and Measurement,
fnally issued
hw ich aw s launched in 200 8 in response to the n� ancial crisis. hT e ne w standard includes revised
guidance on the classic� ation and measurement o f n� ancial assets, including impairment, and
supplements the ne w hedge accounting principles published in 201.3 It carries of raw rd rf om
IA,93 �S iw thout substantive amendment, the reuq irements on recognition andd� erecognition.
hT e standard is eef f ctive of r annual periods beginning on or atf er 1 aJ nuary 201,8 and is
applied retrospectively iw th some eex mptions. aE rly adoption is permitted. hT e restatement
o f prior periods is not reuq ired, and is permitted only i f inof rmation is available iw thout the use
oh�f indsight.
hT e IA BS has carved out its deliberations on macro hedge accounting as a separate proej ct. In
April 2014, it issued a discussion paper PD 2/ 0141/ . 2
oC nvergence betew en the IA BS and the FA BS has not been achieved. hT e FA BS is continuing to
deliberate changes to the accounting of r n� ancial instruments under U S GAAP.
eW outline belo w the reuq irements o f IFR S 9 on classic� ation and measurement, andi� mpairment.
Classifcation and measurement
Although the permissible measurement bases of r n� ancial assets – amortised cost, af ir value
through other comprehensive income F( ICO V ) and af ir value through prot� and loss F( PTV L ) – are
similar to those under IA S ,93 the ne w criteria of r classic� ation into the appropriate measurement
category are signic� antly dief f rent, as illustrated by the diagram belo.w mE bedded derivatives are
no longer separated rf om n� ancial asset hosts ; instead, the entire hybrid instrument is assessed
of rc� lassic� ation.
Yes Are the contractual cash flows solely No
payments of principal and interest ?
Is the business model’s Yes
Amortised
objective to hold to collect
cost
contractual cash flows?
No
Is the business model’s
objective achieved both by Yes FVOCI
(debt
collecting contractual cash
instruments)
flows and by selling?
No
FVTPL
In addition:
• of r a nont- rading euq ity instrument, a company may elect to irrevocably present subseuq ent
changes in af ir value in other comprehensive income ICO( .) hT ese are not reclassie� d to prot� or
loss under any circumstances ; and
• i f classiyf ing a n� ancial asset at amortised cost or at FICO V ow uld create an accounting
mismatch, then a company can maek an irrevocable election to classiyf it as at FPTV L i f this
ow uld reduce the mismatch.
1. eS e our First Impressions : IFR S 9 Financial Instruments , eS ptember 2014.
2. For a detailed analysis o f the discussion paper, see our eN w on the oH rioz n : Accounting of r dynamic ris k
management activities, uJ ly 2014.
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For the classic� ation and measurement o f n� ancial liabilities, IFR S 9 retains almost all o f the
eix sting reuq irements rf om IA.93 �S oH ew ver, the gain or loss on a n� ancial liability designated at
FPTV L that is attributable to changes in its credit ris k is usually presented in ICO ; the remaining
amount o f change in af ir value is presented in prot� or loss.
Impairment
IFR S 9 replaces the i‘ ncurred loss ’ model in IA S 93 iw th an epx ected loss model. hT is means that a
loss event iw ll no longer need to occur beof re an impairment alloaw nce is recognised. In general,
the epx ected credit loss model uses a dual measurement approach, as of llosw .
12-month Transfer Lifetime
expected if the credit risk on expected
credit the financial asset has credit
losses* increased significantly losses
since initial recognition
Move back
if the transfer condition
above is no longer met
* 12-month expected credit losses are defined as the expected credit losses
that result from those default events on the financial instrument that are
possible within the 12 months after the reporting date.
I f the credit ris k o f a n� ancial asset has not increased signic� antly since its initial recognition, then
the n� ancial asset iw ll attract a loss alloaw nce euq al to 12m- onth epx ected credit losses. I f its
credit ris k has increased signic� antly, then it iw ll attract an alloaw nce euq al to lief time epx ected
credit losses, thereby increasing the amount o f impairment recognised. oH ew ver, the standard
does not den� e hw at is meant by s‘ ignic� ant ’ – so uj dgement iw ll be needed to determine
hw ether an asset should be transef rred betew en these categories.
hT e ne w model applies to n� ancial assets that are :
• debt instruments recognised onb- alance sheet, such as loans or bonds ; and
• classie� d as measured at amortised cost or at FICO V .
It also applies to certain loan commitments and n� ancial guarantees.
A simplie� d approach is available of r certain trade and lease receivables and of r contract assets.
pS ecial rules apply of r assets that are crediti- mpaired on initial recognition.
Measuring the hT ere has been diversity in practice regarding the unit o f account used to measure the af ir value o f
investments in subsidiaries, oj int ventures sVJ( ) and associates : the investment as a hw ole or the
fair value of
individual shares maik ng up the investment. In an attempt to introduce clarity, on 1 6 eS ptember
investments in
3
2014 the IA BS published an epx osure dratf dealing iw th investments in subsidiaries, sVJ and
subsidiaries, JVs
associates that are uq oted in an active marek t – i.e. Level 1 instruments in the af ir value hierarchy
and associates under IFR1�S 3 Fair Value Measurement.
hT is issue is important because i f the unit o f account is an individual share, then it cannot be
argued that a premium or discount related to the siez o f the holding – e.g. a control premium
– should be included in the measurement o f af ir value. oH ew ver, i f the unit o f account is the
investment as a hw ole, then it may be appropriate to add a control o( r other ) premium.
.3 2/DE 0144/ Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value
(Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13).
eS e our In the eH adlines – Measuring the af ir value o f investments in subsidiaries, sVJ and associates ,
eS ptember 2014.
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Fair value of quoted investments
Under the proposals, the unit o f account of r such investments ow uld be the investment as a
hw ole. oH ew ver, af ir value ow uld still be measured as the product P( )Q× o f the uq oted price o f
the n� ancial instrument P( ) and the uq antity )Q( o f instruments held. hT e oB ards’ reasoning is
that af ir value measurements are more relevant, obej ctive and veria� ble hw en they are based on
unaduj sted Level 1 inputs.
Implications for fair value measurements of unquoted investments
I f the investment is not uq oted, then af ir value ow uld be based on an eix t price of r the hw ole
investment – i.e. the siez o f the investment could aef f ct the af ir value measurement i f a marek t
participant ow uld consider it to be a relevant characteristic in pricing the investment.
Example added for portfolio measurement
I f certain conditions are met, then IFR S 1 3 permits an entity to measure the af ir value o f a group
o f n� ancial assets and n� ancial liabilities iw th osf f etting ris k positions on the basis o f its net
epx osure. hT e proposals illustrate the measurement o f a group that comprises only n� ancial
instruments iw th osf f etting marek t rissk that are all uq oted in an active marek t. In the eax mple,
af ir value is measured based on the Level 1 prices o f the instruments that maek up the net ris k
epx osure. hT ereof re, under the proposals it ow uld not be acceptable to aduj st the af ir value o f such
a portof lios’ net epx osure of r premiums or discounts.
oC mments are due to the IA BS by 1 6 aJ nuary 201.5
In J uly 2014, the IFR S Interpretations oC mmittee considered a reuq est to clariyf the classic� ation
Classifcation of
by the holder o f a hybrid n� ancial instrument hw ose issuer has an option to etx end maturity, settle
a hybrid fnancial
early ando/ r suspend interest payments. hT e uq estion raised by the submitter aw s hw ether the
instrument by the
host o f the instrument should be classie� d as euq ity or debt.
holder
nO the basis o f the responses to the outreach reuq est, the oC mmittee observed that the issue is
not iw despread. It also noted that the n� ancial instrument described in the submission is specic�
and it ow uld not be appropriate to provide guidance on this particulari� ssue.
oC nseuq ently, the oC mmittee decided not to add this issue to its agenda.
Also in J uly 2014, the IFR S Interpretations oC mmittee considered a submission about the
Exchange
accounting by the holder o f euq ity instruments hw en the issuer ecx hanges its original euq ity
of equity
instruments of r ne w euq ity instruments in the same entity but iw th dief f rent terms. pS ecic� ally,
instruments
this transaction involved euq ity instruments issued by a central ban k and the ecx hange o f
instruments aw s imposed on the holders as a conseuq ence o f a change in legislation. hT e
uq estion aw s hw ether the holders o f the euq ity instruments should account of r this ecx hange as a
derecognition o f the original euq ity instruments and the recognition o f ne w instruments.
hT e oC mmittee observed that:
• because o f the uniuq e nature o f the transaction, the issue is not iw despread ; and
• the submitter had not identie� d signic� ant diversity in accounting of r this transaction among the
holders o f the euq ity instruments in uq estion.
For these reasons, the oC mmittee decided not to add this issue to itsa� genda.
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IFRS 15: POTENTIAL IMPACTS ON BANKS
Editorial by Enrico Di Leo and Giorgio Vergani, Accounting Advisory Services, KPMG in Italy
Although
In May 2014, the IA BS and the FA BS published a ne w oj int standard on revenue recognition,
at the moment
hw ich replaces most o f the detailed guidance on revenue recognition that currently eix sts
the focus of under UG�S AAP and IFR.S hT e ne w reuq irements iw ll aef f ct dief f rent companies in dief f rent
banks reporting aw ys. hT is article highlights certain ek y impacts that iw ll be o f particular interest to those in the
banik ngs� ector.
under IFRS is
Although at the moment the of cus o f bansk reporting under IFR S is on the recently issued IFR,9 �S
on the recently
IFR1�S 5 Revenue from Contracts with Customers is also liek ly to shape bansk ’ accounts because
issued IFRS 9, o f its potential impact on the amount and timing o f revenue recognition.
the new
IFR S 1 5 is more prescriptive than current guidance in some areas relevant to bansk , and also
standard on introduces ne w guidance – e.g. on accounting of r variable consideration and capitalising costs to
revenues is obtain a contract. It may thereof re reuq ire bansk to modiyf their current accounting policies.
also likely to Although IFR S 1 5 is not eef f ctive until aJ nuary 201,7 bansk should not delay assessing its impact.
Applying the guidance in certain areas is comple,x reuq iring ne w estimates and the eex rcise o f
shape banks’
signic� ant uj dgement. In addition, the ne w uq alitative and uq antitative disclosure reuq irements
accounts are etx ensive and may reuq ire changes to systems and processes to collect the necessary data.
because of
nO e ek y decision that needs to be made soon is ho w to maek the transition to the ne w
its potential standard. aB nsk need to evaluate the iw de range o f transition options available, hw ich include
impact on uf lly retrospective application, partial retrospective application iw( th three optional practical
epx edients,) and the cumulative eef f ct method iw th no restatement o f comparative inof rmation.
the amount
and timing Is the item of revenue in the scope of IFRS 15?
of revenue IFR S 1 5 applies to a iw de range o f revenues typically generated by a ban,k most o f hw ich are
recognition. presented in the statement o f prot� or loss as ef es and commissions or other income. oH ew ver,
certain contracts are outside its scope e( .g. leases or n� ancial instruments in the scope o f
IFR )9 �S and certain contracts may be partially in the scope o f IFR S 1 5 and partially in the scope o f
another standard. hT e diagram belo w illustrates ho w to determine hw ether IFR S 1 5 applies to a
particularc� ontract.
Is the contract fully in the scope of Yes
Apply that other guidance
other accounting guidance?
No
Is the contract partially in the Yes Does that standard have specific
scope of other accounting guidance? guidance that applies?
No
Yes
No First apply the other accounting
guidance, then for the remainder ...
Apply IFRS 15
oS metimes, atf er accounting of r part o f a transaction under another standard, bansk may identiyf
only minimal consideration that ow uld af ll under IFR S 1.5 hT e residual amount to be accounted
of r under IFR S 1 5 may be ez ro in some cases. For eax mple, a ban k may enter into a contract iw th
a customer in hw ich it receives a cash deposit and provides treasury services of r no additional
charge. hT e cash deposit is a liability in the scope o f n� ancial instruments guidance and thereof re
the initial recognition and measurement reuq irements in the n� ancial instruments guidance are
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applied to measure the cash deposit. hT e residual amount, i f there is any, is then allocated to
the treasury services and accounted of r under IFR S 1.5 eB cause in this eax mple the uf ll amount
received of r the cash deposit is recognised as a deposit liability, there are no remaining amounts to
allocate to the treasury services.
Guidance currently included in the illustrative eax mples to IA S 1 8 Revenue, relating to ef es that
are an integral part o f the eef f ctive interest rate o f a n� ancial instrument, has been transef rred
to IAI/93 �S FR S 9 as part o f the conseuq ential amendments and is not included in IFR S 1.5 Fees
that are not an integral part o f the eef f ctive interest rate are accounted of r under IFR S 1.5 hT ese
include:
• ef es charged of r servicing a loan ;
• commitment ef es to originate a loan hw en the loan commitment is outside the scope o f IA 93 �S
or IFR S 9 and it is unliek ly that a specic� lending arrangement iw ll be entered into ; and
• loan syndication ef es received by an entity that arranges a loan and retains no part o f the loan
pacak ge of r itsel f o( r retains a part at the same eef f ctive interest rate of r comparable ris k as
other participants.)
Understanding the new model
IFR S 1 5 introduces a v� es- tep model to determine hw en to recognise revenue, and at hw at
amount. hT e model specie� s that revenue should be recognised hw en o( r as ) an entity transef rs
control o f goods or services to a customer at the amount to hw ich the entity epx ects to be
entitled. eD pending on hw ether certain criteria are met, revenue is recognised:
• over time, in a manner that depicts the entitys’ perof rmance ; or
• at a point in time, hw en control o f the goods or services is transef rred to the customer.
Step 1:
Step 3:
Contract (or combined Transaction price for the
Identify the
contracts) contract Determine the
contract with
transaction price
the customer
Step 4:
Step 2: Transaction Transaction
price price
Performance Performance Allocate the
Identify the allocated to allocated to
obligation obligation transaction price
performance performance performance
to the performance
1 2
obligations in
obligation obligation obligations in
the contract
1 2 the contract
Step 5:
Recognise revenue
Recognise Recognise
when (or as) the
revenue revenue
entity satisfies a
performance
obligation
IFR S 1 5 also provides guidance on hw en to capitalise the costs o f obtaining a contract, and the
costs o f uf ll� ling a contract that are not in the scope o f other accounting standards.
In the of lloiw ng sections, ew of cus on some o f the sectors and transactions that may be impacted
and provide eax mples to illustrate the impact. Lastly, ew provide an eax mple o f the application o f
the v� es- tep model to a typical agency contract betew en bansk and insurance companies.
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Potential impact on investment management
Variable fees
In the investment management and private euq ity sectors, variable consideration contracts that
include perof rmance and bonus ef es are common. For eax mple, an investment manager may
provide asset management services to a customer in ecx hange of r a perof rmance incentive
ef e based on the portof lios’ return in ecx ess o f the return o f an observable marek t inde x over
thatp� eriod.
IFR S 1 5 introduces specic� guidance on determining ho w much variable consideration to include
in the transaction price. An entity estimates the amount o f variable consideration by using either
the e‘ px ected value method ’ or the m‘ ost liek ly amount method,’ depending on hw ich method
is epx ected to better predict the amount o f consideration to hw ich the entity iw ll be entitled.
oH ew ver, this amount is subej ct to a c‘ onstraint ’ and only included in the transaction price to the
etx ent that is h‘ ighly probable ’ that a signic� ant revenue reversal iw ll not subseuq ently occur.
oT assess hw ether – and to hw at etx ent – this constraint applies, an entity iw ll need to use
uj dgement and consider the impact o f etx ernal af ctors such as marek t volatility.
4
An illustrative eax mple included in IFR S 1 5 concludes that the investment management company
cannot include a perof rmanceb- ased incentive ef e in the transaction price until the contingency
is resolved because the promised consideration is dependent on a marek t inde x and is thereof re
highly susceptible to af ctors outside the entitys’ inu� ence. Furthermore, the investment
management companys’ previous epx erience and the past perof rmance o f the marek t inde x are o f
little predictive value in determining the uf ture perof rmance o f the marek t.
oH ew ver, this conclusion may dief f r depending on specic� af cts and circumstances. An asset
manager is not precluded rf om recognising a portion o f a perof rmanceb- ased incentive ef e
beof re the contingency is resolved, i f it is highly probable that there iw ll not be a signic� ant
revenue reversal hw en the uncertainty is resolved. For eax mple, i f the asset manager locsk in the
perof rmance ef e beof re the end o f the contract period by investing the managed uf nds in money
marek t investments, and intends to hold the managed uf nds in money marek t investments until
the end o f the contract period, then the asset manager may be able to recognise a portion o f the
perof rmance ef es beof re the end o f the contract period.
Up-front fees
In the investment management sector, entities otf en receive nonr- euf ndable uprf- ont ef es at
or near contract inception. Under IFR S 1,5 an entity iw ll need to assess hw ether the ef e relates
to a specic� good or service transef rred to the customer – in hw ich case, consideration iw ll be
allocated to the good or service and revenue recognised hw en or as it is transef rred. For eax mple,
uprf- ont ef es may relate to the use o f a saef deposit bo x during the contract term, and the entity
may determine that the saef deposit bo x services represent a separate perof rmance obligation.
oH ew ver, in many cases, even though a ef e may relate to an activity that the entity is reuq ired to
undertaek in order to uf ll� the contract, that activity does not result in the transef r o f a promised
good or service to the customer – e.g. setting up the customer in the entitys’ systems. Instead,
the ef e represents an advance payment of r uf ture goods or services and, thereof re, under IFR1�S 5
revenue is recognised hw en those uf ture goods or services are provided.
hT ere are also cases in hw ich customers are not charged ef es of r the services provided. For
eax mple, hw en the volume o f customer assets under management is particularly high, an
investment company or ban k may oef f r certain services as a marek ting tool to attract ne w
customers. In these cases, the entity should assess hw ether the rf ee services provided meet the
den� ition o f a perof rmance obligation under IFR S 1.5 I f the entity concludes that the services are
a separate perof rmance obligation, then a portion o f the consideration that the ban k is entitled to
iw ll be allocated to the services accordingly.
4. axE mple 2 5 in IFR S 1 :5 Management ef es subej ct to the constraint.
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Costs to obtain a contract – Success fees
IFR S 1 5 provides specic� guidance on accounting of r the costs o f obtaining a contract and certain
costs to uf ll� a contract. Incremental costs to obtain a contract are reuq ired to be capitalised i f the
entity epx ects the costs to be recoverable and the amortisation period is more than 12 months.
hT is may be particularly relevant in the investment management sector because signic� ant
commissions are otf en paid – e.g. to broek rs or agents – hw en a ne w contract is signed.
aC pitalised costs are amortised on a systematic basis, consistent iw th the pattern o f transef r
o f the service or product to hw ich the asset relates, and are subej ct to impairment testing. hT e
amortisation period may include an anticipated uf ture contract – e.g. anticipated contract reneaw l
periods. nE tities iw ll need to apply uj dgement in determining the appropriate amortisation basis
and time period.
Potential impact on consumer banking
Customer options for additional goods or services – Credit card loyalty programmes
A ban k may oef f r a customer the option to acuq ire additional goods or services of r rf ee or at a
discount, customer loyalty points or other discounts on uf ture goods or services. IFR S 1 5 does not
provide any specic� guidance on its application to credit card loyalty programmes – and additional
compleix ties can arise iw th such programmes, because there are typically at least three parties
involved : the card issuer, a retailer and the end customer. hT ereof re, uj dgement iw ll be reuq ired
to determine hw ether a credit card loyalty programme gives rise to a perof rmance obligation o f
the card issuer. I f it does, then a portion o f the interchange ef e iw ll need to be allocated to the
perof rmance obligation, based on the relative standa- lone selling price o f the loyalty points, and
deef rred until redemption occurs.
Potential impact on other banking sectors
Bundled products or services
aB nsk otf en oef f r to customers bundled products that integrate dief f rent services in a single
pacak ge or contract – e.g. mortgages and unemployment protection insurance policies, or
mortgages and estate investment services such as marek t analysis and consultancy services.
iS milarly, investment bansk involved in an initial public oef f ring I( P )O process may oef f r a number
o f services iw thin the same contract, such as arranging the deal, underrw iting, organising road
shosw and other marek ting initiatives.
In these cases, bansk iw ll need to r� st identiyf hw ether a contract, or part o f the contract, is in the
scope o f IFR S 1.5 I f it is, in hw ole or in part, then the ban k iw ll need to identiyf the perof rmance
obligations and allocate the transaction price to each perof rmance obligation in proportion to its
standa- lone selling price. IFR S 1 5 states that the best evidence o f the standa- lone selling price is
an observable price. oH ew ver, it provides guidance on estimating prices hw en they are not directly
observable. aB nsk that engage in such transactions iw ll need to develop ne w processes, including
appropriate internal controls, of r estimating the standa- lone selling prices o f goods or services that
are not typically sold separately.
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Bank-assurance agreements
hT is eax mple illustrates ho w the IFR S 1 5 v� es- tep approach to recognising revenue may be
applied in practice.
Example – Applying the fve-step model
aB n k B sells to its customers, through its branches, insurance products on behal f o f Insurance
oC mpany .X Under the agreement betew en B and ,X B promises to provide three types o f
services, as of llosw :
a. acuq isition o f ne w clients in ecx hange of r a ex� d ef e to be paid by X on the signing o f a ne w
insurance product ;
b. collection o f successive annual premiums, reneaw ls, oneo- f f payments etc in ecx hange of r
ef es that are paid by X over time, once the contract is reneew d or premiums collected ; and
c. consultancy and posts- ale services provided to customers in ecx hange of r ef es that are paid
uprf- ont ; hoew ver, based on the premium reimbursements that customers are entitled to
claim due to contract or la w provisions, B may have to reuf nd part o f those ef es to .X
Step 1
Under tS ep 1 o f the model, B determines that its agreement iw th X creates enof rceable rights
and obligations based on the of lloiw ng:
• both parties have approved the contract, either in rw iting, orally or in accordance iw th other
customer business practices;
• the rights to goods and services and the payment terms are identie� d in the contract;
• the contract has commercial substance ; and
• collection o f the consideration rf om X is probable.
Step 2
B assesses the services promised in the contract iw th X and identie� s the perof rmance
obligations. hT is reuq ires assessing hw ether the services that it has promised to transef r
are distinct. In this eax mple, X can benet� rf om each service to be provided by B on its onw ,
indicating that they are separate perof rmance obligations. oH ew ver, IFR S 1 5 contains a
second criterion that must be met, hw ich reuq ires s’B promise to transef r each service to be
separately identia� ble rf om the other services promised. eD pending on the specic� af cts and
circumstances, eS rvices b( ) and c( ,) of r eax mple, may be more or less interr- elated, hw ich may
lead to the conclusion that b( ) and c( ) constitute a single perof rmance obligation.
In this eax mple, assume that B concludes that there are tow perof rmance obligations. eS rvice
a( ) is identie� d as a distinct perof rmance obligation – i.e. the acuq isition o f ne w clients and
services. eS rvices b( ) and c( ) represent a combined output of r hw ich X has contracted – i.e. the
bans’k ability to provide ongoing services to customers – and thereof re the combined bundle is a
perof rmance obligation.
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Step 3
In this eax mple, tS ep 3 is a critical one, especially i f ew loo k at eS rvice c( .) hT e transaction price
is the amount o f consideration to hw ich B epx ects to be entitled in ecx hange of r transef rring the
service to .X hW en establishing the amount o f consideration, B iw ll have to consider the ris k
and magnitude o f revenue reversal that the premium reimbursements claimed by customers
may generate. eD pending on the specic� af cts and circumstances, this estimate may reuq ire a
higher or loew r degree o f uj dgement and compleix ty e( .g. of recasts o f the amount o f premium
cancellations could also mean estimating customers ’ behaviour ) and dief f rent estimation
methods i( .e. the epx ected value or the most liek ly amount.) aB sed on this estimate, the
revenue iw ll be recognised only up to the constrained amount and there iw ll be a net contract
asset or liability depending on the balance o f perof rmance under the contract.
Step 4
nO ce the transaction price is determined, it iw ll be allocated to the perof rmance obligations in
the contract based on their standa- lone selling prices.
Step 5
B iw ll recognise revenue hw en or as it provides the services to .X In this eax mple, eS rvicea( � )
is satise� d at a point in time because X benet� s rf om the service only hw en a client signs a
ne w contract – i.e. X benet� s rf om s’B perof rmance only hw en the perof rmance obligation
is satise� d. oH ew ver, eS rvices b( ) and c( ) are satise� d over time, because X simultaneously
receives and consumes the benet� s o f the services that B provides to its eix sting customers.
What if B and X belong to the same group?
Its’ important to note that i f the insurance company and the ban k belong to the same group,
then the application o f IFR1�S 5 may have an impact on the consolidation process because those
services are carried out iw thin the same group. Looik ng at eS rvice a( ,) of r eax mple, X ow uld
capitalise the ef e paid to B as a cost o f obtaining a ne w contract, hw ereas B ow uld recognise
the ef e as revenue hw en it is paid. hT is ow uld create consolidation reconciling items that ow uld
reuq ire updating o f processes and policies.
New disclosure requirements
Under IFR S 1,5 bansk iw ll need to disclose more inof rmation about their contracts iw th customers
than is currently reuq ired, including disaggregated inof rmation about revenue and inof rmation
about the perof rmance obligations remaining at the reporting date.
Although IFR S 1 5 does not prescribe a minimum number o f disaggregation categories, bansk iw ll
need to evaluate hw at categories are needed in order to depict the economic af ctors aef f cting
the nature, amount, timing and uncertainty o f revenue and casho�- sw . hT e ne w disclosure
reuq irements are liek ly to have a signic� ant impact on bansk .
aB nsk iw ll need to evaluate the level o f granularity reuq ired to achieve the ne w disclosure
obej ctive. eD pending on the specic� af cts and circumstances, this may involve epx laining the
bans’k business model in more detail. oH ew ver, of r interim reporting IFR S preparers only need
to disclose a disaggregation o f revenue and then of llo w IA S 43 Interim Financial Reporting to
determine hw ether any other disclosures are reuq ired.
Further implications
hT e shrinik ng interest margin that bansk have epx erienced in recent years due to the general lo w
interest rate environment – hw ich has aef f cted some countries more than others – has increased
the importance o f other sources o f income of r bansk ’ prot� s, leading bansk to increase their oef f r
o f integrated services. hT e salesc- hannels o f many bansk are more otf en used to sell not uj st
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