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FS Business Update
PwC Indonesia Financial Services
13 October 2010
Jusuf M Wibisana
Partner Assurance Services
PwC
Slide 2
Agenda
Path to adoption of IFRS in Indonesia New PSAKs Tax Session Islamic Finance IT- How do you prepare for PSAK Implementation
PwC
Slide 3
Implementation in 2011
IFRIC 7** SIC 10* IFRIC12* SIC 25* IFRIC 14* IFRIC 16
Implementation in 2012
2009
2010
Educating all stakeholders. Preparing the IT system.
2011
2012
No significant difference
Assessing and anticipating the business impact. Anticipating other impacts of new standards
* Still in exposure draft ** Tentatively proposed to be effective in 2012
PwC
Slide 4
Dudi M. Kurniawan
Associate Partner Assurance Services
PwC
Slide 5
Agenda
Path to adoption of IFRS in Indonesia New PSAKs Tax Session Islamic Finance IT- How do you prepare for PSAK Implementation
PwC
Slide 6
New PSAKs
PSAK 4 (Revised 2009) - Consolidated and separate financial statements (IAS 27R) PSAK 5 (Revised 2009) - Operating segment (IFRS 8) ISAK 10 - Customer loyalty programs (IFRIC 13) PSAK 25 (Revised 2009) - Accounting policies, changes in estimates and errors) (IAS 8)
PwC
Slide 7
PSAK 4 (Revised 2009) - Consolidated & Separate F/S Comparison with previous standard
Differences with the previous version of PSAK 4, among others: Potential voting rights considered in determining control A subsidiary is not excluded from consolidation just because the investor is a venture capitalist or mutual fund Guidance when reporting date of the parent is different from that of the subsidiary Non-controlling interest can be negative Disposal of interests in a subsidiary that does not result in loss of control -> equity transaction Separate financial statements of the parent: as a supplementary information to the consolidated F/S investment in subsidiary at cost or in accordance with PSAK 55
PwC
Slide 8
An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance
PwC
Slide 9
PSAK 5 (Revised 2009) - Operating Segments What are the key features of an operating segment?
a. Engages in business activities
b. Operating results are regularly reviewed by CODM to assess performance and make decisions c. Discrete financial information available
PwC
Slide 10
Optional
Optional
For the remaining operating segments below 10% threshold, aggregate with each other if majority of aggregation criteria met
If reportable segments are less than 75% of revenue add more reportable segments
PwC
Slide 11
PSAK 5 (Revised 2009) - Operating Segments Determining reportable segments Aggregation criteria: Aggregation is consistent with core principle Segments have similar economic characteristics Segments similar on each of five specified criteria***
PwC
Slide 12
Must disclose
Non-GAAP Measures
Measure of assets
Measure of profit
PwC
Slide 13
PwC
Slide 14
s nt i po s d ar m e ew ram R g o pr
PwC
Slide 15
PwC
Slide 16
PwC
Slide 17
statements
PwC
Slide 18
Definition of related parties Clarifies that an entity is required to disclose whether the terms of a related party transactions are at arms length only when the terms can be substantiated
PwC
Slide 19
Relationships between parents and subsidiaries are disclosed irrespective of whether there have been transactions between them New disclosures, among others:
Total compensation of key management personnel by types of
employee benefits
Classification of transactions with related parties into different
PwC
Slide 20
PSAK 7 (R 2009) Disclosures of Related Parties Example Who is related to Cash Tight?
Cash Holding
Control
KMP
Cash Cow
Cash Cat
Cash or Glory
Joint Venture
Control
Significant influence
Joint Venture
Cash or Bust
Cash Subsidiary
Cash Associate
Slide 21 Slide 21
PwC
Slide 22
PwC
Slide 23
New PSAKs
PSAK 4R Consolidated and Separate Financial Statements (IAS 27R) ISAK 7R - Consolidation of Special Purpose Entities (SIC 12) PSAK 22R Business Combinations (IFRS 3R) PSAK 19R Intangible Assets (IAS 38) PSAK 48R Impairment of Assets (IAS 36) PSAK 55R Financial Instruments: Recognition and Measurements (IAS 39)
PwC
Slide 24
New PSAKs
PSAK 4R Consolidated and Separate Financial Statements (IAS 27R) ISAK 7R - Consolidation of Special Purpose Entities (SIC 12) PSAK 22R Business Combinations (IFRS 3R) PSAK 19R Intangible Assets (IAS 38) PSAK 48R Impairment of Assets (IAS 36) PSAK 55R Financial Instruments: Recognition and Measurements (IAS 39)
PwC
Slide 25
What is control?
Control is the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities.
PwC
Slide 26
Equity shareholding
This is when an entity owns instruments that, if exercised or converted, give the entity power over the financial and operating policies of another entity e.g. share warrants, share call options, debt or equity instruments etc. ALL FACTS AND CIRCUMSTANCES SHOULD BE EXAMINED PSAK 4 (revised) requires all potential voting rights that are CURRENTLY exercisable or CURRENTLY convertible be considered.
PwC
Slide 28
B A
20% + Call option 40% + Share warrants
C
40% + Share warrants
51%
PwC
D
Slide 29
New PSAKs
PSAK 4R Consolidated and Separate Financial Statements (IAS 27R) ISAK 7R - Consolidation of Special Purpose Entities (SIC 12) PSAK 22R Business Combinations (IFRS 3R) PSAK 19R Intangible Assets (IAS 38) PSAK 48R Impairment of Assets (IAS 36) PSAK 55R Financial Instruments: Recognition and Measurements (IAS 39)
PwC
Slide 30
SPEs activities
Benefits
But overall, the control concept requires, in each ISAK 7 case judgement in the context of all relevant factors
Decision making power over the SPE
Risk exposure
PwC
Slide 31
Bank
SUN
2. Sold all units (SUN as the underlying asset)
Mutual Fund
PwC
Slide 32
1. SPEs activities 2. Benefits 3. Risk exposure 4. Decision making power over the SPE
PwC
Slide 33
New PSAKs
PSAK 4R Consolidated and Separate Financial Statements (IAS 27R) ISAK 7R - Consolidation of Special Purpose Entities (SIC 12) PSAK 22R Business Combinations (IFRS 3R) PSAK 19R Intangible Assets (IAS 38) PSAK 48R Impairment of Assets (IAS 36) PSAK 55R Financial Instruments: Recognition and Measurements (IAS 39)
PwC
Slide 34
Principles Example
almost
Fair value everything!
PwC
Slide 35
Goodwill Consideration
Slide 36
almost
Fair value everything!
Identifiable assets, liabilities and contingent liabilities recognised at fair value (FV). Identify and recognise intangible assets at FV: brands, customer list, etc. Difference between cost and net FV of identifiable assets, liabilities and contingent liabilities is goodwill.
PwC
Slide 37
Example of business combinations Case 1 Consolidated Bank A Bank A Case 2 Stand alone
100%
Bank B
Division of Bank B (commercial banking)
PwC
Slide 38
Fair value 162 2 5 262 431 24 54 178 256 175 696 521
Slide 39
Intellectual Property
Intellectual Capital
Copyrights Trademarks Publishing Rights Brand logos designs Information databases Industrial Design Software Platforms Trade Secrets Confidential Information Know-How Customer Capital Knowledge Providing Value Human capital
Patents
Most Tangible
Least
PwC
Slide 40
IPR&D Brands
Licenses (eg UMTS/GSM) Customer Relationships Brands Software (eg Billing) Roaming Agreements (Inbound, Outbound) Interconnection Agreements Infrastructural Rights
The Intangible Assets mentioned above are examples. In performing a PPA facts and circumstances must be considered!
PwC
Slide 41
Licenses (eg UMTS/GSM) Customer Relationships Brands Software (eg Billing) Roaming Agreements (Inbound, Outbound) Interconnection Agreements Infrastructural Rights
Customer Relationships Internet-Platform Telecommunication Core Deposit Intangibles Core Overdraft Intangibles
The Intangible Assets mentioned above are examples. In performing a PPA facts and circumstances must be considered!
PwC
Slide 42
Valuation Approaches
Valuation Approaches Market Approach
Value estimate = Market prices or based on multiples or prices from market transactions involving the sale of comparable assets
Income Approach
Value estimate
=
Cost Approach
Value estimate = Reproduction / replacement cost adjusted for amortisation and obsolescence
Present value of earnings attributable to the asset or costs avoided as a result of owning the asset
Relief-from-Royalty Method Incremental Cash Flow Method Multi-Period Excess Earnings Method (MEEM)
PwC Slide 43
Relief-from-Royalty Method
Valuation of brand Valuation date: 1 January 2008 Brand valuation Fair value Brand-specific sales Royalty rate @ 4% Pre-tax royalty savings Corporate taxes @ 40% After-tax royalty savings Discount rate @ 10% Growth rate @ 2% Residual multiple Discount factor Present value after-tax royalty savings Tax amortisation benefit Fair value Step-up factor TAB from 2008 2000 80.0 32.0 48.0 11.918 572 114 686 1.2
Slide 44
Other Assets 50 Trademark 100 Customer Relationhips/ Core deposits &overdrafts 150 Loans 100 Total net fair value adjustments of assets and liabilities 400
Share Deal, Puchase Price USD 550 Mio. for 100% of shares, Net Book Value USD 100 Mio Corporate Tax Rate 40%
PwC
Slide 45
- Amortisable? - VAT-able?
Assets
Book value
Fair value
Intangible assets
Fixed assets Financial investments All other assets Liabilities Provisions Deferred tax liabilities All other liabilities Net assets Purchase price Goodwill
PwC
0
3 5 260 268 5 0 178 183 85
162
2 5 262 431 24 54 178 256 175 696 521
Slide 46
Amortisation upon expenditures to acquire intangible assets ..., including goodwill that has useful life of more than 1 year which is utilised to obtain, collect, and maintain income shall be calculated using a straight-line or declining balance method ...
PwC
Slide 47
VAT Law reference: Article 4(1)(a): The delivery of taxable goods within the Indonesia customs area. Article 16D: The delivery of taxable goods in the form of asset initially not for sale.
PwC
Slide 48
Subsequent measurement
PwC
Slide 49
New PSAKs
PSAK 4R Consolidated and Separate Financial Statements (IAS 27R) ISAK 7R - Consolidation of Special Purpose Entities (SIC 12) PSAK 22R Business Combinations (IFRS 3R) PSAK 19R Intangible Assets (IAS 38) PSAK 48R Impairment of Assets (IAS 36) PSAK 55R Financial Instruments: Recognition and Measurements (IAS 39)
PwC
Slide 50
Goodwill
Not amortised Test annually for impairment and when indicators arise Goodwill allocated to cash generating units (CGUs) or groups of CGUs
PwC
Slide 51
Entity
CGU
CGU
CGU
CGU
CGU
CGU
PwC
Slide 52
Measurement of goodwill
Lower of Carrying value Recoverable amount Higher of Fair Value Less Cost To Sell Value in Use
PwC
Slide 53
Key elements:
Internal value - company perspective Company-related valuation parameters Recognition of all synergies Use pre-tax cash flows and discount rate More detailed specifications in IAS 36
PwC
Slide 54
2004
2005
2006
2007
2008
Terminal Value
Discount Rate
FAIR VALUE
PwC
Slide 55
PwC
Slide 56
Source: Making acquisitions transparent (Professors Glaum, Street, and Vogel, 2007)
PwC
Slide 57
Write-offs are difficult to assess due to their ambiguous nature Impairments may represent good news when managers divest unprofitable operations to refocus on core competencies. Impairments may represent bad news when reductions in asset values foreshadow even deeper troubles yet to come Immediate effect on announcement is typically negative with a drop of 3.0-3.5% of the companys stock price. Average impact within one-year after announcement is minus 11.0%
Source: Hirschey, M. und Richardson, V.J.: Investor Underreaction to Goodwill Write-Offs, in: Financial Analyst Journal, Nov./ Dec. 2003
PwC
Slide 58
Total Value
more transparency
PwC
Amortisation of Intangibles in accordance to new rules Goodwill (indefinite life) Brand (indefinite life) Customer Relationship (definite life) Technology (definite life) 2007 2008 2009 2010 2011 2012
? 2013
Slide 59
2006
Accounting Not amortised but subject to impairment Loss impairment (300) ( 0 ) (500) (100) 100
PwC
Goodwill
New PSAKs
PSAK 4R Consolidated and Separate Financial Statements (IAS 27R) ISAK 7R - Consolidation of Special Purpose Entities (SIC 12) PSAK 22R Business Combinations (IFRS 3R) PSAK 19R Intangible Assets (IAS 38) PSAK 48R Impairment of Assets (IAS 36) PSAK 55R Financial Instruments: Recognition and Measurements (IAS 39)
PwC
Slide 61
Objective Objective evidence of evidence of impairment? impairment? No Record no specific impairment and assess for collective provision
Yes
Probable that entity will Probable that entity will not collect all amounts not collect all amounts due according to due according to contract? contract? No Record no Record no impairment impairment
Yes
Reduce carrying value of asset Reduce carrying value of asset to recoverable amount; record to recoverable amount; record impairment charge in P&L ** impairment charge in P&L **
(*) Use original effective interest rate or current effective interest rate, if variable (**) can be subsequently reversed
PwC Slide 62
Individual loan assessment (specific allowance) - Present value of future cash flow - Calculate unwinding for each single loan - Stop regular interest accrual
Assessment for impairment on a portfolio basis (portfolio allowance for non-impaired loans) - Exposure x PD x LGD - Continue to accrue interest on a regular basis (contractually agreed interest)
Collective loan assessment (portfolio allowance for insignificant loans) - EXP x PD x LGD - Calculate unwinding on a portfolio basis - Stop regular interest accrual
PwC
Slide 63
Balance at 1 January 2010 Effect of adoption of PSAK 55R impairment (note x) Restated balance at 1 January 2010
PwC
Key take-aways
Stay current on the future accounting standard changes Anticipate the potential impacts to business Increase internal accounting capabilities
PwC
Slide 65
Agenda
Path to adoption of IFRS in Indonesia New PSAKs Tax Session Islamic Finance IT- How do you prepare for PSAK Implementation
PwC
Slide 66
Tax Session
PwC
Slide 69
- Effective interest rate - Discounted cash flow method for calculation of impairment loss
PwC
Slide 70
Claim expense
as claim expense in statement as part of deduction from Tabarru fund of income. in liability
PwC
Slide 72
statement of
PwC
Slide 73
Profit sharing
PwC
Slide 74
Tabarrufund
None
PwC
Slide 75
PwC
Slide 76
PwC
PwC
PwC
Slide 80
3 Main Challenges
COMMUNICATION & OWNERSHIP
DATA AVAILABILITY
PwC
Slide 81
PwC
Slide 82
PwC
Slide 83
Existing data Where does the data reside? Obtaining the data
PwC
Slide 84
Conclude
COMMUNICATION & OWNERSHIP
DATA AVAILABILITY
If not sure Quickly consult/ Escalate to higher MANAGEMENT for their APPROVAL
PwC
Slide 85
PwC
Slide 86
PwC
19 October 2010
PwC
Slide 88
PwC
Slide 89
Thank you.
All materials can be downloaded at: http://www.pwc.com/id/en/publications/FSpresentation.pdf
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