July 2018

IASB® Investor Update

Our newsletter for the investment community
Editor’s welcome
Contact us
This summer issue marks four years since we published the first
Investor Update, featuring a profile on the then-recently issued
revenue Standard IFRS 15: Revenue from Contracts with
Customers. Now we are seeing the changes in action, with the
implementation appearing in 2018 interim results. Investment
professionals should know that while we are monitoring
implementation, regulators are also adapting to the new Standard.
One of this issue’s Spotlight articles highlights the recent efforts of
the European Securities and Markets Authority (ESMA), which has
issued publications on its enforcement priorities and on the
disclosures required by new IFRS Standards.

Fred Nieto, CFA Investors can also expect changes resulting from new Standards in
Investor Engagement 2019, when the effects of implementing IFRS 16 Leases shall appear
+44 (0) 20 7246 6956 in financial statements. Because we are halfway through the year
fnieto@ifrs.org and are also looking ahead to 2019, we share a Spotlight article
which provides a reminder of what is on the way.

For our In Profile in this issue, it’s a pleasure to hear the views of
Selim Gogus of Credit-Suisse HOLT. He brings us some
perspectives on his firm’s unique approach to financial statement
analysis and valuation. Selim is one of the new members of the
International Accounting Standard Board (Board) Capital Markets
Advisory Committee (CMAC), which is currently open to
applications for new members.
Siddhant Kumar, CFA
Investor Engagement We expect a busy second half of 2018 in investor outreach, as the
+44 (0) 20 7246 6928 consultation period for the Discussion Paper Financial
skumar@ifrs.org Instruments with Characteristics of Equity attracts interest on the
part of credit investors, among others. We look forward to hearing
The IASB Investor Update highlights your views on this topic.
market-relevant accounting topics
that could affect the companies that
investors follow. It also shares with All the best,
investors information on standard- Fred
setting and insights from our
dialogues with the investment
community. We invite investors
In this issue:
seeking further detail on accounting
proposals and current requirements  Spotlight—IFRS 16 Leases
to contact us.  Spotlight—ESMA and IFRS Standards
go.ifrs.org/Investor-Centre  In Profile—Selim Gogus, Credit Suisse HOLT
www.twitter.com/IFRSinvestors  We Need Your Views
 Stay up to Date

The IFRS Foundation is an independent, not-for-profit organisation working in the public interest. One of the principal
objectives of the IFRS Foundation is to develop a single set of high-quality, understandable, enforceable and globally
accepted IFRS Standards through its standard-setting body, the International Accounting Standards Board (Board). This
newsletter has been prepared by the staff of the IFRS Foundation and does not represent the views of the Board or any
individual member of the Board. Comments on the application of IFRS Standards do not purport to set out acceptable or
unacceptable application of IFRS Standards. For more information see www.ifrs.org.

Copyright ® 2018 IFRS Foundation. All rights reserved.

 July 2018
IASB Investor Update

Spotlight: IFRS 16 Leases What changes in the financial statements?

On the profit and loss statement, lease expense will be
divided into depreciation and interest expense
Keep calm and carry all leases on balance sheet components for all leases. The interest expense is
—IFRS 16 Leases determined using the effective interest rate method
(the same method used for finance leases under IAS-17
With the implementation date for the new leases Leases). If other subtotals in the P&L remain the same
Standard arriving shortly (1-Jan-2019), we highlight as those of 2018, the removal of the operating lease
some aspects of the new lessee accounting model and expense (under current requirements) would result in
disclosure requirements. We expect that investors will a higher EBITDA and operating profit on transition. The
find these new requirements useful in analysing transitional impact on profit-after-tax will depend on
companies that make significant use of leases. the characteristics of a company’s lease portfolio. For a
stable portfolio of leases (new leases replacing old
ones), the impact is not expected to be significant.
Why did the Board develop the new lessee
accounting model? The balance sheet will reflect a right-of-use (ROU) asset
and a corresponding lease liability at initial recognition
During outreach on the leases project, investors told (similar to finance leases under the IAS 17 model).
the Board that the current lessee accounting model fails
to provide meaningful information for their analysis. Even though there is no effect on total net cash flow
For instance, disclosure on future lease commitments from the accounting change, removing operating lease
for operating leases are often inadequate; only expenses will result in higher cash flow from
sophisticated investors make the necessary operations. Instead, the repayment of lease liability
adjustments to compare and analyse companies. The will flow through cash flow from financing. The interest
current off-balance sheet treatment for operating expense for all leases will flow through either operating
leases (even when lease payments are potentially or financing cash flows.
unavoidable), does not accurately portray the
underlying economics of leases. As a result, comparing
companies that use operating leases with companies What disclosures will companies provide?
that use finance leases or make outright purchases of Companies will be required to provide information for
assets (with borrowings) is a challenge for many all material leases such as the breakdown of lease costs,
investors. total lease cash flows, ROU assets by asset major class
During the project’s outreach, regulators also raised the of leased assets, and maturity analysis of lease
issue of high-profile liquidations of companies with commitments. Investors can use this information to
ballooned exposures to operating leases, highlighting determine the lease amounts recognised in the P&L,
the financial-stability blind spot resulting from off- cash flows related to leases and capital expenditure-
balance sheet leases. equivalent information.
When leases also contain complex features such as
extension/termination options, variable lease
What are the key features of the new model? payments, residual value guarantees, companies must
IFRS 16 removes the distinction between operating and provide additional disclosures to enable investors to
finance leases for lessees and introduces a single model understand the impact of such features on financial
for recognising and measuring almost all leases statements.
reported in the financial statements. IFRS 16 requires
companies to recognise almost all leases on the balance
sheet as the present value (PV) of lease payments that
For a more detailed look, we encourage
include all fixed payments (and optional payments that
are reasonably certain) plus any residual value readers to check out this Investor
guarantees. Perspectives article.
The discount rate used to calculate the PV must be the
rate implicit in the lease. If the implicit rate is not
readily available, the lessee’s incremental borrowing
rate is used to calculate the PV.

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IASB Investor Update
P&L. The Board is aiming to finish its initial discussions
in 2018 and to publish a consultation document in
Spotlight: ESMA and IFRS 2019. We expect a high level of investor engagement on
this project around the world.
Shining light on financial reporting
enforcement The Financial Instruments with Characteristics of
In this Spotlight article, we highlight the links between Equity (FICE) project is exploring improvements to
the enforcement priorities of European regulators and requirements in IFRS Standards (IAS 32 Financial
Board projects. We also examine the regulators’ Instruments: Presentation) for classifying financial
identification of financial reporting deficiencies in 2017. instruments that have characteristics of both liabilities
and equity. The Board is also examining presentation
and disclosure requirements for such instruments.
A summary of European enforcement in 2017
In 2017, ESMA and European regulators evaluated
corporate compliance with IFRS Standards in areas The Board is currently seeking feedback on
identified as European Common Enforcement the issues discussed in the FICE DP. The
Priorities (ECEP) for the 2016 annual financial comment deadline for this paper is 7
statements. Enforcers publish and communicate these January 2019.
priorities to companies before they finalise their annual
financial statements, with the goal of enhancing
financial reporting quality. Below, we highlight 2016
enforcement priorities and share some findings
published in the ESMA 2017 Annual Report1:
a) Presentation of financial statements Enforcers Transitional disclosure for IFRS 9 and IFRS 15
assessed whether presentation of financial
European enforcers have emphasised the requirements
performance and financial position followed the
in IAS 8 Accounting Policies, Changes in Accounting
principles in IFRS Standards. In many cases, the
Estimates and Errors for companies to disclose
enforcers acted on non-compliance with the reasonably estimable information about the expected
requirements relating to the presentation of line impact of new Standards on financial statements. To
items, heading and sub-totals, the presentation of examine the level of compliance with these
segmental information and the application of requirements in the 2016 annual and 2017 interim
ESMA’s Alternative Performance Measures reports, enforcers conducted a fact-finding exercise
guidance. (results published in October 20172).
b) Distinction between financial liabilities and
The transition to IFRS 9 Financial Instruments has
equity Enforcers found that in 44 cases where the resulted in examples of comprehensive, high-quality
distinction between a financial liability and equity transitional disclosures published in a timely manner.
instrument was relevant and material, about 40% In Europe, ex-ante guidance from the Enhanced
did not disclose the analysis made in their Disclosures Task Force and the European Banking
classification. In addition, many cases lacked the Authority has supported this trend for a wide base of
disclosure of key characteristics of the banks.
instruments. On the transition to IFRS 15, Revenue from Contracts
with Customers, we have heard from numerous
investors that companies have been slow to provide
What is the Board doing in these areas? entity-specific transitional disclosures. In many cases,
investors would have also liked transitional
The Primary Financial Statements (PFS) research information to reflect disclosures on performance
project is working to develop guidance on the structure obligations, judgements and disaggregation of revenue.
and content of the P&L statement. The Board is
currently debating defining subtotals such as earnings
before interest and tax (EBIT) and management-
defined performance measures for presentation on the

1 https://www.esma.europa.eu/document/enforcement-and- 2 https://www.esma.europa.eu/document/summary-results-fact-
regulatory-activities-accounting-enforcers-in-2017 finding-exercise-ifrs-9-and-ifrs-15

Issue 16|Page 3
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IASB Investor Update
order to show a recurrent level of earnings. CFROI
calculations also exclude Goodwill from the balance
In profile sheet, as we do not view it as an operating asset. We
also capitalise operating leases and R&D as part of our
In every issue, we feature IFRS gross assets.
events or interviews with key
stakeholders or Board members. In Investor engagement team: How does the HOLT
this issue, we interview Selim Gogus, methodology adapt to new accounting standards
HOLT specialist at Credit Suisse, and (e.g. IFRS 9, 15, 16)?
member of the Capital Markets
Advisory Committee (CMAC). The HOLT methodology is committed to continuous
improvements whether based on adjustments made to
deliver greater economic insights, or led by accounting
Investor engagement team: What is HOLT, and what standard changes. In the run up to the implementation
led to the development of its proprietary of new Standards, we review the need to make specific
methodology? adjustments, and at the same time take cues on the
materiality of the change from early adopters. For
HOLT is a team in Credit Suisse that helps investors instance, IFRS 16 brings us to an interesting crossroads
make better decisions by using an objective framework as we have a long history of capitalising operating
for comparing and valuing companies. The HOLT global leases based on our uniform calculation. Reported
database covers about 20,000 companies, reflecting values under IFRS 16 may differ from our adjustment,
c.98% of the Global Market Cap from across 67 given assumptions around the contract life and
countries. At the heart of the HOLT framework is the discount rate, at which point we would assess whether
propriety Cash Flow Return on Investment to incorporate these values or continue with our
(CFROI®)—a cash-based return on capital metric that adjustment systematically across all companies.
is free from distortions in financial statements that may Additional disclosure is vital for us to draw thorough
affect traditional accounting ratios like EPS, ROE, ROCE, conclusions.
etc.
Investor engagement team: In your view, what do
Investor engagement team: Could you give us some you believe are the top three changes to current
insights into how the CFROI methodology goes accounting (presentation or disclosure) that would
beyond commonly used accounting ratios? deliver the biggest upside to investors?

The CFROI methodology was developed with the Firstly, I would like to see more detailed and consistent
intention to minimize accounting distortions in segment disclosure because disclosures currently vary
measuring a firm’s economic performance, particularly between companies—particularly for segmental
distortions related to inflation. For example, a balance sheet items. Secondly, I would like more
traditional ROIC (return on invested capital) is consistency in the P&L given the number of
influenced by asset age—simply letting the assets adjustments we make to reported net earnings. This
depreciate can increase the ROIC measure. HOLT starts would aid comparisons between companies and data
by looking at gross assets (adding back accumulated aggregation. Finally, I would welcome greater focus on
depreciation), eliminating the issues of old vs. new transparency around “non-GAAP EPS”, given the level
assets. The values are in turn inflation adjusted, of subjectivity in these adjusted numbers.
allowing for comparison across time and countries. A
time series of the CFROIs help in forecasting a firm’s
likely returns on future investments. This allows us to The investor engagement team thanks Selim for
elegantly link corporate performance to valuation— taking the time to speak with us.
where traditional accounting metrics do not.

Investor engagement team: What are the common

adjustments made to financial statements? Selim Gogus is an equity analyst within the Credit
Suisse HOLT team, based in London.
Given the shortfalls of net income, the CFROI
calculation adjusts financials to bring a company’s net His primary role is to advise institutional investors
income closer to economic reality. Typically, we add on key accounting, tax and valuation issues as part
back any non-cash charges such as depreciation and of their investment process. Prior to this position,
amortisation. We eliminate the P&L impact from he was at PricewaterhouseCoopers for 5 years in
pension accounting and only include pension service their audit and transaction services teams.
cost as the most relevant cost of running defined
benefit schemes. We reverse out one-off items such as
impairments, M&A costs, gains or losses on disposals in

Issue 16|Page 4
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IASB Investor Update
We Need Your Views  get richer information through presentation
about features of financial liabilities and
The Board sets Standards to help you, the investor, equity that are not captured by classification.
make decisions about companies. But we can’t do it For example, the Board is considering
without your views. Your participation helps us possible presentation requirements that
understand whether potential changes to the would show investors how companies’ profit
Standards will provide you with the information
or loss and other comprehensive income are
necessary for investment analysis. Below are some of
attributed among different equity instruments
the projects that we expect to engage with investors on
as well as among ordinary shares.
during 2018. For a full list of topics please visit the
Workplan.  get richer information through disclosure
about features of financial liabilities and
equity, such as the priority of financial
Financial Instruments with Characteristics of liabilities and equity instruments at
Equity liquidation, potential dilution of ordinary
shares and contractual terms and conditions
On 28 June 2018 the Board published the Discussion relevant to understanding the features of
Paper Financial Instruments with Characteristics of instruments.
Equity. The Discussion Paper sets out the Board’s
preferred approach to improving information We would like to understand whether the Board’s
companies provide in their financial statements about preferred approach set out in the Discussion Paper
financial instruments they have issued. would provide information you would find useful. In
Today, IAS 32 Financial Instruments: Presentation sets some places, the Board explored more than one
out how companies classify financial instruments that possible way to improve the information provided,
they have issued as financial liabilities or equity in and we need your views to determine which approach
their financial statements. would best serve your needs. We intend to meet with
a range of investors around the world on this
IAS 32 proved robust during the global financial crisis consultation in the coming months.
of 2007–08 and it works well for most financial
instruments. However, the Board observed that
continuing financial innovation means that companies Further information on this topic can be found on
find it challenging to use IAS 32 to account for some the project page here.
complex financial instruments that combine features
of both liabilities and equity.
The challenges of using IAS 32 to account for these Targeted Standards-level Review of
complex financial instruments can result in diversity Disclosures
in practice. Such diversity, in turn, makes it difficult for
investors to assess how these financial instruments The Board expects to select one or two Standards for
affect the issuers’ financial position and performance. review in July 2018. The Board will then seek
feedback from investors about the disclosure
In addition, the Board is acutely aware that investors requirements in those Standard(s). The Board will be
have been calling for better information about equity looking to understand in detail:
instruments.
- what information investors would like to see;
To help address these challenges, the Board has
developed an approach that would: - why that information is useful; and

 provide classification principles with a clear - the types of analysis that investors would
perform using that information.
rationale for why an instrument is classified
as either a liability or equity without The Board intends to use this information to improve
fundamentally changing the existing the disclosure requirements in the selected
classification outcomes of IAS 32; and Standard(s) and to help improve the Board’s own
 enhance the information provided through process for developing effective disclosure
presentation and disclosure. requirements. The Board will be aiming to develop
requirements that clearly reflect the objectives and
information needs of investors to help preparers apply
In the Board’s view, its approach would help investors:
more effective judgement about what to disclose.
 get more comparable information about
financial instruments issued by companies
Further information on this topic can be found on
because the Board’s preferred approach the project page here.
would improve the consistency in how those
financial instruments are classified;
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IASB Investor Update
We Need Your Views Summaries of investor feedback

Management Commentary
Below are some examples of how investor views were
fed back to the Board on various projects. Further
The Board has discussed plans for updating its summaries of investor feedback can be found at our
Management Commentary Practice Statement. Investor Centre here.
The Board tentatively decided that in updating the
Practice Statement it would consider the following
four areas of content:
Date Summary of Investor Feedback Document

 descriptions of business models, strategies Goodwill and Impairment research

and risks—focusing on narrative and analysis of April 2018 project—recent feedback from CMAC and
the entity’s strategy, business model and GPF
operating environment;
 current year financial performance analysis— Principles of Disclosure Discussion
focusing on performance information applying Paper—investor feedback summary
IFRS Standards; February 2018
IFRS 17 Insurance Contracts—investor
 operational information—focusing on education activities update
strategically relevant operational performance
analysis; and
 forward-looking statements—focusing on Investor reactions to IFRS 17 Insurance
July 2017
Contracts
explanations and analysis of forecast information
where provided.
Post-implementation Review of IFRS 13:
Phase 1 outreach feedback
The specific areas for consideration will evolve as the
project develops over 2018, supported by January 2017
Post-implementation Review of IFRS 13:
consultation. Matrix of areas of experience with IFRS 13
shared by stakeholders
Further information on this topic can be found on
the project page here. Primary Financial Statements: result of
November 2016
outreach on scope of project

Management Commentary Consultative Group 2015 Agenda Consultation: overview of

April 2016
investor feedback
The Board has announced the formation of a
consultative group on its Management Commentary Amendment to IFRS 4: applying IFRS 9
project. The group will provide the Board with access Financial Instruments with IFRS 4
to practical experience and expertise in developing, March 2016 Insurance Contracts: investor feedback
implementing and using management commentary Conceptual Framework: summary of
regimes, and advise the Board as it develops proposals investor feedback
for updating the Management Commentary Practice
Statement. The Board expects to announce the
membership of the consultative group in July. The
work of the consultative group will be supplemented
by a wider outreach program with a broad group of
stakeholders, including investors and analysts.

Further information on this topic can be found on

the project page here.

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IASB Investor Update
Stay up to date IASB Chair Hans Hoogervorst delivered a keynote
speech entitled ‘IFRS Standards as enlightened self-
interest’ at the IFRS Foundation’s conference in
Announcements Frankfurt. Mr Hoogervorst provided an update on the
adoption of IFRS Standards around the world and the
current focus areas of the International Accounting
IFRS Foundation leaders urge constituents to Standards Board. Click here to read the full speech.
respond to a European Commission consultation
Chair of the Board, Hans Hoogervorst and Chair of the
IFRS Foundation Trustees, Michel Prada respond to the The Capital Markets Advisory Committee held its
European Commission consultation on Fitness Check on annual joint meeting with the Global Preparers’ Forum
the EU Framework for Public Reporting by Companies at the Board’s offices in London on 14 & 15 June. A
and call for broad participation in the consultation. To
summary of the meeting will be published in the
find out more, click here.
coming weeks and will be available here. The next
CMAC meeting takes place in London on 1 November.
The Board completes revisions to its Conceptual
Framework The Board issued a revised version of
its Conceptual Framework for Financial Reporting that
underpins IFRS Standards. Supporting materials can
Resources for investors
be found here.
Sue Lloyd: IFRS 9 and equity investments Sue Lloyd,
Vice-Chair of the Board, discusses IFRS 9 and explains
Sue Lloyd reappointed for a second term as Board
the Board’s thinking behind the requirements for
Vice-Chair The Trustees of the IFRS Foundation
equity instruments in the Standard. The article can be
appointed Sue Lloyd to serve a second term as Vice-
accessed here.
Chair of the Board. Find out more here.
Investor Perspectives: Insurance Contracts—
IFRS Foundation publishes 2017 Annual Report The
Accounting to reflect economics Board member
IFRS Foundation published its annual report, including
Darrel Scott offers his perspective on the new
the audited financial statements, for the financial year
information about insurers’ financial performance that
that ended 31 December 2017. The document can be
will be available when IFRS 17 is applied. Read more
accessed here.
here.
Makoto Takahashi appointed as IFRS Foundation's Webinar: Introducing the revised Conceptual
Office Director in Tokyo Makoto Takahashi replaces Framework for Financial Reporting Board member
Mitsuhiro Takemura as Office Director of the Asia- Françoise Flores and technical staff provide an
Oceania Foundation’s regional liaison office in Tokyo. overview of the revised Conceptual Framework for
Click here to read the full announcement. Financial Reporting. To watch the webinar, please visit
our dedicated page.
Speeches and events
New IFRS 17 Insurance Contracts webcast:
Joint IFRS Foundation and CFA Institute event: recognising the contractual service margin in profit
Transforming the impact of financial information— or loss IFRS Foundation staff present a webcast on
the role of technology On 5 June the IFRS Foundation IFRS 17 Insurance Contracts that provides a basic
and CFA Institute hosted their third joint event for the overview of recognising the contractual service margin
investment community. The event took place at in profit or loss. The webcast is available here
Guildhall London and featured a panel discussion on
the role of technology in transforming financial
information. Further details about this event can be May 2018 TRG for IFRS 17 meeting summary and
found here. podcast available The Transition Resource Group for
IFRS 17 Insurance Contracts held a meeting on 2 May
2018. Click here for the meeting summary and podcast.
The IFRS Foundation Conference was held in
Frankfurt on 28-29 June and brought together the
Board and staff with private sector and regulatory
Register for investor alerts
leaders in financial reporting as well as accounting
professionals and other people interested in IFRS Click here to register for investor email alerts to stay up
Standards. Visit the conference page for more to date with accounting changes, investor-focused
information. activities and other IFRS Foundation events.

Issue 16|Page 7