Impairment of tangible assets

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1 JANUARY 2014 Dutch Accounting Standards 2013 Edition Introduction Major changes applicable from 1 January 2013 The Dutch Accounting Standards Board (DASB) recently published the 2013 edition of the Standards for large and medium-sized entities. Unless stated otherwise, the revised Standards apply to reporting years starting on or after 1 January This factsheet provides an overview of the major changes in the 2013 edition. It does not identify changes with respect to specific industries. In order to provide a complete overview, we start with a summary of the major changes in the Standards that came into effect from the 2013 financial year. We conclude this factsheet with a summary of the major changes in the Standards for small entities, which are published concurrently with the Standards for large and medium-sized entities. Impairment of tangible assets In order to determine the amount of impairment, goodwill has to be allocated to cash-generating units. RJ applies with effect from 1 January It stipulates that upon disposal of operations in a cash generating unit, goodwill should be allocated to the disposed operations in order to determine the gain or loss on the sale. This allocation should be made based on the values of the disposed operations in relation to that of the other operations in the cash generating unit, except if the entity can demonstrate that the application of another method is more effective. The following example illustrates a possible approach for this: Contents Introduction 1 Major changes with effect from 1 January Major changes with effect from 1 January Draft Standards 8 Changes in Standards for small entities 10 In conclusion 11 A company has cash generating unit X, consisting of operations A, B and C. The company sells operation A for 100. Goodwill is allocated to X. The goodwill cannot be reliably allocated to a lower level than X. The recoverable amount of the remaining operations B and C is 300. In the carrying amount of the disposed operation A, 25% of the goodwill allocated to X (100/ ) should be included to calculate the gain or loss on the disposal of A. 1 Dutch Accounting Standards

2 If a restructuring results in a change in the composition of one or more cash generating units to which goodwill has been allocated, RJ requires the entity to reallocate the goodwill as described above. Furthermore, based on RJ , all general operating assets must be allocated to cash generating units to the extent that there is a reasonable and consistent basis for this allocation. If not, it should be determined whether allocation to a higher level is possible. Subsidiary 120 Equity method Application of combination 3 Measurement of participating interests in company financial statements Title 9 Book 2 of the Netherlands Civil Code gives entities the option to prepare their consolidated financial statements in accordance with EU-IFRS in combination with company financial statements under Title 9 Book 2, with the entity applying the same accounting principles as for the consolidated Goodwill 20 Subsidiary 100 Net asset value Equity method vs. net asset value: difference in presentation of goodwill financial statements ( combination 3 ). This option has been provided in order to keep the shareholder s equity and result in accordance with the company financial statements equal to the shareholder s equity and result according to the consolidated financial statements. The DASB has clarified that in the company financial statements, participating interests that are consolidated in the consolidated financial statements may be recognised at net asset value or in accordance with the equity method. If the participating interests are presented at net asset value, goodwill is recognised as a separate balance sheet item; if the equity method is applied, it is included in the participating interests item. Changes in existing equity interests RJ b includes provisions on the recognition in the company financial statements of a number of scenarios when applying combination 3: 2 Dutch Accounting Standards

3 0% 50% 100% step acquisition Measure existing interest at FV Take value adjustment to P&L Revaluation reserve Add to goodwill loss of control Measure new interest at FV Take value adjustment to P&L Revaluation reserve Write off goodwill continuation of control Change in third-party share Take value adjustment to equity No change in goodwill Changes in existing equity interests step acquisition; loss of control with retention of a remaining interest; and transactions with minority shareholders with retention of control. A step acquisition occurs when a entity increases an existing equity interest, whereby it obtains control. For these purposes, loss of control with retention of a remaining equity interest can be regarded as the opposite of a step acquisition. In both cases, the existing or remaining equity interest is measured at fair value at the transaction date, i.e. at the date of acquisition or the date of disposal of the equity interest. Value adjustments of existing and remaining equity interests must be recognised in the profit and loss account. In both cases, unless regular market quotations are available for the residual equity interest, a revaluation reserve has to be recognised equal to the value adjustment of the residual equity interest, as the corresponding gains or losses have not been realised yet. If an entity buys or sells part of an existing equity interest while retaining control, the transaction is recognised directly in equity. This is based on the view, in accordance with IFRS, that these are transactions between shareholders that cannot affect profit and loss account. Under combination 3, the equity and result in the company financial statements are kept identical to the group equity and result in the consolidated financial statements. Guideline for the practical application of IAS 19R in the Netherlands In May 2013, the DASB issued a revised guideline (RJ-Uiting ) that seeks to provide assistance in applying IAS 19R. The changes relate to the measurement of DB plans and specifically to the provisions of IAS 19R on risk sharing and shared funding, such as regarding the recognition of employee contributions. The guideline, which is part of Standard 921 as included in the 2013 edition of the Standards, is not an interpretation of IFRS, nor does it include any requirements or recommendations. For more information, please refer to the factsheet IAS 19R: New rules for pension reporting, which summarises Dutch Accounting Standards 3

4 the major changes in IAS 19R and addresses the potential consequences for companies. Act on management and supervision With effect from 1 January 2013, an amendment was incorporated in Book 2 of the Netherlands Civil Code (NCC) in connection with amendments of the rules on the management and supervision of public (NVs) and private (BVs) limited liability companies. In this context, the DASB issued two guidelines: RJ-Uiting and RJ-Uiting RJ-Uiting stipulates that if there is not a balanced gender ratio in the composition of the management and/or supervisory board, RJ a is applicable. Pursuant to Sections 2:166 and 2:267 NCC, a balanced gender ratio is defined as a management or supervisory board where at least 30% of the positions are held by women and at least 30% by men. However, this only applies to NVs and BVs that satisfy the size criteria referred to in Section 2:397(1) NCC and when the seats on the board(s) in question have been allocated to natural persons. If the management and/or supervisory board do not have a balanced gender ratio, the following should be disclosed in the management report: why there is no balanced gender ratio; what steps the company has taken to achieve a balanced gender ratio; and what steps the company will take to ensure there is a balanced ratio in future. RJ-Uiting states that as a result of the change in the law, it is possible to specify in the articles of association that managerial duties in an NV or BV are allocated to one or more non-executive directors under a one-tier regime. This act does not contain specific requirements regarding the remuneration of the members of the one-tier board. In legal terms, all the members of a one-tier board are considered directors. An NV or BV with a one-tier board does not have a supervisory board. Under a one-tier regime, the supervisory role is performed by the non-executive directors. Section 2:383 BW requires that the amount of the remuneration of the joint directors and joint supervisors be disclosed in the financial statements. As the non-executive directors are not supervisors, no separate disclosure of the remuneration of non-executive directors is required pursuant to the above. Draft orj a stipulates that the total amount paid in remuneration to the directors should be specified into the amount paid to 4 Dutch Accounting Standards

5 the executive directors and that paid to non-executive directors, unless it all relates to a single natural person (executive or non-executive director) in order to provide separate overviews of the costs of the directors responsible for management and of those responsible for supervision. Crisis levy and disclosure of directors remuneration RJ b prescribes how to disclose the crisis levy payable on the remuneration of managing and supervisory directors if an entity, pursuant to Section 2:383(1) or 2:383c NCC, is required to disclose the remuneration of these directors in its financial statements. The entity has the option to include the crisis levy in the presented amount of the remuneration of these directors; it then has to state in the notes whether the crisis levy has been included in the presented amount or not. Regardless of whether the presented remuneration includes the crisis levy or not, the crisis levy on the remuneration should be disclosed in the notes. The following example illustrates how this can be disclosed if the entity opts to include the crisis levy in the presented remuneration. In 2013, the remuneration of the management board totalled 100 (2012: 90). This includes 15 (2012: 10) in respect of the crisis levy. In 2013, the remuneration of the supervisory board totalled 50 (2012: 40). This includes 10 (2012: 5) in respect of the crisis levy. Act on Standardisation of Remuneration of Senior Officials in the Public and Semi-Public Sector In addition to the requirements regarding their directors remuneration under RJ 217.7, public and semi-public institutions are also subject to disclosure requirements under the Act on Standardisation of Remuneration of Senior officials in the Public and Semi-Public Sector ( Wet normering bezoldiging topfunctionarissen publieke en semipublieke sector, WNT). This Act took effect on 1 January 2013, replacing the WOPT (Act on Disclosure of Publicly Funded Remuneration of Senior Officials). This Standard includes a number of disclosure requirements regarding the remuneration of both senior and other officials whose remuneration exceeds the limit referred to in Section 2.3(1) WNT. The limit differs per sector and can be found on The following information should be disclosed in the financial statements: remuneration; social insurance contributions 1 ; taxable fixed and variable expense allowances; provisions for benefits payable in the long term; position or positions held; and duration and size of the employment in the financial year. For senior officials, their name should also be disclosed. The following information should also be disclosed for (senior or other relevant) officials who have terminated their employment: benefits paid during the financial year related to the termination of their employment; their name and the position(s) they held during their employment; and the year in which their employment was terminated. Pursuant to Section 4.2(6) WNT, the entities concerned must also include the comparative figures in their financial statements. An exception is made for the financial statements for the first year in which the Act takes effect (2013), in which the comparative figures for 2012 do not need to be included. 1 The proposal of 22 March 2013 regarding scope changes and other technical changes under the Act on Remuneration of Senior Officials in the Public and Semi-public Sector proposes excluding social insurance contributions from the presented remuneration. Dutch Accounting Standards 5

6 Major changes with effect from 1 January 2014 Financial instruments The following aspects regarding hedge accounting and embedded derivatives have been revised: when applying cost price hedge accounting ineffectiveness is determined in the same way as in fair value hedge accounting and cash flow hedge accounting. Such a quantitative ineffectiveness measurement is only required when the critical terms of the hedge instrument and the hedged position differ. Under cost price hedge accounting, ineffectiveness is only recognised if and to the extent that it concerns a (cumulative) loss; separating the embedded derivatives from the host contract in measurement at cost or lower market value (if certain criteria apply); disclosure of liquidity and cash flow risk related to hedge accounting, for example the disclosure of the obligation to deposit collateral (margin calls). In addition, it is explained that for each subcategory of derivatives to which hedge accounting is applied a separate hedging strategy may be chosen. This means, for example, that fair value hedge accounting can be applied to currency derivatives and cost price hedge accounting to interest rate derivatives. These changes become effective for financial years starting on or after January 2014, with earlier application permitted and recommended. The DASB points out that if the entity is not able to apply the changes for financial years starting on or after January 1, 2013, the entity will have to disclose this fact together with the disclosure of the (qualitative) effect of the changes on the financial statements. Gross or net revenue recognition RJ a to 105d addresses the issue of whether revenues should be recognised gross or net. It explains that amounts the entity receives for its own account should be recognised as 6 Dutch Accounting Standards

7 revenue. Amounts that the entity receives on behalf of third parties are not recognised as revenue. Indicators have also been added based on which it can be determined whether amounts are received for the entity s own account and therefore should be recognised gross: the entity has the primary responsibility for the delivery or implementation, e.g. is responsible towards the client for the deliverables; the entity bears inventory risk; the entity has freedom of action in determining the price, also if indirectly, e.g. by delivering additional goods or services; the entity bears the credit risk for the amount payable by the client. entity, its subsidiaries and other consolidated companies during the financial year, with a breakdown specifying the fees relating to: the audit of the financial statements; other audit engagements; tax advice; and other advisory services. Since it would benefit the assessment of the auditor s independence, it is recommended that the fees of the network of the accounting organisation also be included in the specification. The following example illustrates a possible approach for this (it excludes the comparative figures): Where the entity prepares company and consolidated financial statements, it is recommended that the specification be included in the consolidated financial statements. RJ-Uiting states that two different methods are used in practice for the disclosure of auditors fees: in respect of the financial year in which the work is performed; and in respect of the financial year to which the work relates. The RJ has no preference for either method but intends to prescribe that the chosen method be disclosed in the notes. The relevant Standards also apply to taxes other than income tax. Examples of such taxes include VAT, excise duty and tourist tax. In deviation from this, a specific Standard (RJ a) applies to private motor vehicle and motorcycle tax (BPM), which advises dealers and other vehicle companies to recognise BPM as part of their net sales revenue with a view to mutual comparability. The DASB has not expressed a specific preference for motor vehicle importers. The recognition of BPM and the relevant amount must be disclosed in the financial statements. Illustrative presentation of auditor s fees KPMG Other KPMG Total KPMG accountants N.V. network network Audit of financial statements Other assurance engagements Tax advisory services Other non-assurance services 2-2 Total Disclosure of auditors fees RJ covers a number of issues related to the application of Section 2:382a NCC regarding the disclosure of auditors fees. This section applies to entities that satisfy the size criteria in Section 2:397(1) NCC. It requires entities to disclose information about the fees charged by the auditor to the Dutch Accounting Standards 7

8 Draft standards Liquidation and significant doubt about going concern assumption The DASB has included a proposal in draft Standard orj for the principles for financial statements prepared under the liquidation basis of accounting. Liquidation is defined as a situation where the entity has no longer the ability to continue as a going concern. If the entity has been established for a fixed period or if a decision has been made to continue for a fixed period, it is not necessary to apply the liquidation basis of accounting. The liquidation basis of accounting entails that: all assets are recognised, regardless of whether they have been recognised before, and are stated at their (expected) net realisable value; all liabilities that meet the requirements of RJ are regognised at the best estimate of the amounts required to settle the liabilities (for debts, this is usually the nominal value of the amounts payable); and accruals and deferrals are recognised to account for the expected costs and revenues until the expected settlement date. The transition from the going-concern basis to the liquidation basis should be recognised prospectively, with the difference recognised in profit or loss. The comparative figures are not adjusted. Investment property Draft Standard orj addresses the ambiguity about how to determine the revaluation reserve for investment property carried at fair value. To clarify this, the DASB has proposed introducing a choice for determining the revaluation reserve. Pursuant to Section 2:390(3) NCC, the revaluation reserve may not exceed the balance of the carrying amount based on cost and the carrying amount based on fair value. When determining the carrying amount based on cost, it is recommended that the accumulated depreciation and impairments that would apply if the cost model had been used be taken into account. As an alternative, it is acceptable not to take into account accumulated depreciation and impairments when determining the carrying amount based on cost. The method applied should be disclosed. Pursuant to draft Standard orj it is permitted, in deviation from RJ 140 Changes in accounting principles, to apply any change prospectively. Reverse acquisition In practice, there appears to be some ambiguity about how a reverse acquisition should be recognised in the company financial statements. A reverse acquisition occurs when a Revaluation reserve party obtains the shares in another party in return for the issuance of so many shares that the majority of its voting rights are transferred to the other party. Based on the legal form of the acquisition, the party that issues the shares can be deemed the acquiring party (acquirer), whereas based on the economic substance of the acquisition, the party whose shareholders acquire control over the new combination is deemed to be the acquirer. The new draft Standards orj and orj explains that two ways of recognising a reverse acquisition in the company financial statements are possible: 1. Recognition according to economic substance, whereby the acquirer in the financial statements is the same party as the acquirer in the consolidated financial statements. The acquirer is recognised in the company financial statements at net asset value. The assets and liabilities of the acquirer are restated to their fair value, with the difference between the net assets thus If carried at current value, a revaluation reserve must be formed Carrying amount at cost Investment property = - Carrying amount current value Carrying amount at cost Does not include accumulated depreciation and impairment Includes accumulated depreciation and impairment 8 Dutch Accounting Standards

9 calculated and the purchase price being recognised as goodwill. This is the most appropriate accounting treatment when applying combination Recognition according to legal form. The party that can be deemed the acquiree based on the legal form of the acquisition is recognised at net asset value, which is determined by measuring its assets and liabilities at fair value. The shares issued by this acquiree are recognised at fair value, with the difference between the net asset value and fair value of the issued shares being recognised as goodwill. Method S1 C Purchase accounting Pooling of interest P 100% 100% 100% S2 Valuation acquired assets and liabilities Fair value at acquisition date Carrying amount at start comparative year S1 P Restate comparative figures No Yes S2 100% C Goodwill Yes No Mergers and acquisitions between entities under common control Carry over accounting Carrying amount at acquisition date No No Draft Standards orj and orj stipulate how a merger and acquisition between entities under common control should be recognised in the financial statements of the acquiree. The following methods can be used: the purchase accounting method, the pooling of interests method and the carry-over accounting method. Under the purchase accounting method, the assets and liabilities of the acquiree are restated at the date of acquisition. Mergers and acquisitions Under the pooling of interests method, the acquisition is retrospectively recognised at the start of the financial year, with the comparative figures also being adjusted, based on the carrying amounts of the acquiree. Under the carry-over accounting method, the acquiree is recognised at carrying amount at the date of acquisition without adjusting the comparative figures. Consolidation Draft Standards orj and orj address changes in the international standards for consolidated financial statements. Draft Standard orj proposes a change in the assessment of whether financial instruments contain potential voting rights that can be exercised directly, resulting in significant influence or actual control. In making this assessment, all the facts and circumstances associated with such instruments should be considered, including aspects that were previously excluded, namely the intent of management and the financial ability. Draft Standard orj a proposes to also consider other rights in addition to voting rights, such as protective rights, in determining whether the entity can exercise control. Protective rights are rights that protect those holding them without giving them the ability to exercise control. Examples of protective rights include the right to agree to decisions, such as agreeing to major investments that are not required in the context of ordinary operations, the issuance of shares or bonds, the awarding of directors remuneration, or transactions with other shareholders. Dutch Accounting Standards 9

10 Changes in Standards for small entities Major changes in 2013 edition The DASB recently published the 2013 edition of the Standards for small entities (RJk). This edition is effective for reporting years starting on or after 1 January Below is an overview of the major changes in the 2013 edition. The introduction of the new Act on Remuneration of Senior Officials in the Public and Semi-Public Sector ( Wet normering bezoldiging topfunctionarissen publieke en semipublieke sector, WNT) has led to a number of changes in the Standards for small entities. These changes are identical to those for in the Standards for large and medium-sized entities explained above. Standard B in the Standards for small entities also clarifies that amounts received by the entity on behalf of third parties that are paid on do not qualify as revenue. Amounts received by the entity for its own account should be recognised as revenue. Indicators have also been added for determining whether amounts are received on behalf of third parties or for the entity s own account. The paragraphs relating to this Standard also apply to taxes other than income tax. Examples of such taxes include VAT, excise duty and tourist tax. Draft Standard orj A 2.216, the DASB describes the liquidation basis of accounting. This draft Standard refers to the relevant draft Standard in the Standards for large and medium-sized entities (orj Discontinuation of the entity s activities as a whole is unavoidable ). A number of points concerning small non-profit organisations are also explained in section C1 of the Standards for small entities. 10 Dutch Accounting Standards

11 In conclusion Sources The information in this factsheet is primarily derived from the introduction to the 2012 and 2013 editions of the Dutch Accounting Standards. Further information Your KPMG contact would be pleased to expand further on the information contained in this publication and the consequences for your company. About KPMG KPMG offers services in the field of audit, tax and advisory. We work for a broad spectrum of clients: major domestic and international companies, medium-sized entities, non-profit organisations and government authorities. The complicated issues facing our clients demand a multi-disciplinary approach. Our professionals stand out in their own specialities but, at the same time, work closely together to create added value enabling our clients to excel in their own environment. To this end we rely on a rich source of knowledge and experience gained worldwide in the widest range of organisations and markets. Dutch Accounting Standards 11

12 KPMG Laan van Langerhuize DS AMSTELVEEN T +31 (0) Wiert Smid T +31 (0) smid.wiert@kpmg.nl The information contained herein is of a general nature and not intended to address the specific circumstances of any particular individual or entity. Although we endeavour 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. As such, no one should act upon such information without appropriate professional advice after a thorough analysis of the particular situation KPMG Accountants N.V., registered with the trade register in the Netherlands under number , is a subsidiary of KPMG Europe LLP 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. The KPMG name, logo and cutting through complexity are registered trademarks of KPMG International.