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Impact of ifrs: BANKING | 1

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2 | Impact of ifrs: BANKING

Contents:
Overview of the International Financial Reporting
Standards (IFRS) conversion process
Accounting and reporting
Financial instruments – classification, measurement,
recognition and derecognition
Financial instruments – impairment
Hedge accounting
Consolidation and special purpose entities (SPEs)
Definition of debt versus equity
Presentation of financial statements and disclosures of
financial instruments
Leases
Insurance contracts
Post-employment benefits
IFRS 1 – first-time adoption

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Systems and processes
From accounting gaps to information sources
How to identify the impact on information systems
Banking accounting differences and respective
system issues
Parallel reporting – timing the changeover from
local GAAP to IFRS reporting
Harmonisation of internal and external reporting

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People

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Business
Stakeholder analysis and communications
Audit Committee considerations
Monitoring peer group
Other areas of conversion risks to mitigate
Benefits of IFRS

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KPMG: An Experienced Team, a Global Network

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© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Impact of ifrs: BANKING | 3

Foreword:

Given the significance of the financial crisis over the last few years, there is greater
political and regulatory will than ever before for a single set of converged, global
accounting standards. Transparency and comparability across the banking sector is in
the spotlight once again.
With many countries having converted to IFRS in 2005, conversion is imminent for
other countries such as Canada, South Korea and Mexico in 2011 and 2012; and with
the US debating the merits of conversion to IFRS, it’s clear that IFRS is high on the
accounting agenda across the globe.
Since the first major wave of adoption in Europe and Australia there is a mass of
information available for individuals to sift through – over 699,000 hits for “IFRS
in banks” alone on some internet search engines. This publication is focused on
assisting conversions to IFRS in the banking sector. Whether you are starting your
project or merely considering the impact, the broad overview of the topics listed
below will help you to better understand the implications of an IFRS conversion:
• Overview of the IFRS conversion process. We look at how the conversion
management needs to take a holistic view of the different aspects of the
accounting under IFRS and its impact across the entity.
• “Top Ten” IFRS banking accounting and reporting issues, giving guidance on
the key areas of focus that are likely to be the cornerstone of the project. Many
other accounting areas are not specifically banking related and are therefore
excluded from our discussions, but will need consideration.
• Information technology and systems considerations. We discuss how the
banks will need to bridge the gap between IFRS reporting and the general ledger
and sub-ledger systems so as to deal with parallel reporting (i.e. local generally
accepted accounting principles and IFRS reporting at the same time) and internal
vs external reporting.
• People – knowledge transfer and change management. Ways to drive training
and knowledge management into the teams dealing with the changes required.
• Business and reporting. The issues around operational performance and
measurement that needs to reflect the impact of IFRS and how to communicate
this to different groups of stakeholders.
While the main audience of this publication are those contemplating IFRS conversion
rather than those already converted, we hope there is something stimulating and
thought-provoking for all those dealing with IFRS, particularly given the forthcoming
changes in standards such as IFRS 9 Financial Instruments, which will have a
significant impact on banks.

Colin Martin
Head of UK Assurance Services, Banking

© 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

systems and processes. your management style. the key is to tailor the conversion specifically to your own issues. Accounting and Reporting s)DENTIFY'!!0DIFFERENCES s)DENTIFY)&23DISCLOSUREREQUIREMENTS s3ELECTANDADOPTACCOUNTINGPOLICIES ANDPROCEDURES s!SSESSIMPACTONLEGALENTITY REPORTING s4AILORFINANCIALREPORTINGTEMPLATES s2EVISEANDORDESIGNANDIMPLEMENT TEMPLATESFORDATAGATHERING Systems and Processes How to link? s4OOLS s4EMPLATES MANAGE ME RAM NT OG R P s)DENTIFYINFORMATIONhGAPSvFOR CONVERSION s!SSESSIMPACTONINTERNAL CONTROLSPROCESSES s)DENTIFYCURRENTSYSTEM FUNCTIONALITYSUITABILITY. the structure of your working groups. the engagement of your stakeholders and the requirements of your corporate governance. people and the business. Whilst banks may be similar in many respects there will always be differences in the corporate DNa that makes this tailoring of the project a necessary part of the Ifrs conversion.4 | Impact of ifrs: BANKING Overview of the International Financial Reporting Standards (IFRS) conversion process: all Ifrs conversionsAhave consistent themes and milestones to them. the Ifrs conversion management overview diagram below presents a holistic approach to planning and implementing an Ifrs conversion by ensuring that all linkages and dependencies are established between accounting and reporting.

RELATED NEWINFORMATIONTECHNOLOGY)4 SYSTEMNEEDSANDPERIOD ENDCLOSE CONTINGENCYPLANS s4AILORCHARTOFACCOUNTSCONSIDERING )&23ACCOUNTINGNEEDS How to link? s#OMMUNICATION Business s$EVELOPCOMMUNICATIONPLANSFORALL STAKEHOLDERSINCLUDING n2EGULATOR n!UDIT#OMMITTEE n3ENIOR-ANAGEMENT n)NVESTORS n%XTERNAL!UDITORS s!SSESSINTERNALREPORTINGANDKEY PERFORMANCEINDICATORS s!SSESSIMPACTONGENERALBUSINESS ISSUESSUCHASRISKMANAGEMENT PRACTICES.

TREASURYPRACTICES.

this includes. reporting or competitive requirements. . consideration of the impact of Ifrs transition on the regulatory and tax aspect of your operations. How to link? s0ROCESSCHANGES s4RAINING PR OG RAM MANAGE NT ME Overall Management IFRS CONVERSION How to link? s#HANGE -ANAGEMENT People s$EVELOPANDEXECUTETRAININGPLANS n)&23STECHNICALTOPICS n. product. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. federal. for example.EWACCOUNTINGPOLICIESAND REPORTINGPROCEDURES n#HANGESINPROCESSESANDCONTROLS s2EVISEPERFORMANCEEVALUATIONTARGETS ANDMEASURES s#OMMUNICATIONPLANS s#ONSIDERIMPACTONINCENTIVE COMPENSATIONPROGRAMS s&OCUSONKEYFUNCTIONSTHATWILL UNDERGOCHANGE © 2011 KPMG International Cooperative (“KPMG International”). which may vary depending on state.ETC theTconversion needs to effectively address the challenges and opportunities of adopting Ifrs to all aspects of your business.

calculating effective yield or impairment of financial instruments. that we have not considered in this publication. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. or review of contracts to determine whether they meet the definition of an insurance contract.Impact of ifrs: BANKING | 5 Accounting and reporting: The first key area to tackle in the holistic approach outlined above is the accounting and reporting. to name a few. • issues may have significant impact on information systems and accounting processes and internal controls. It is essential that this is undertaken for your specific entity. indeed it does not cover many areas that banks need to consider. for example review of special purpose entities (SPEs) to decide whether or not they should be consolidated. or whether to apply hedge accounting. we outline below the “Top Ten” accounting issues for banks to consider when converting to IFRS. This list is not meant to be comprehensive. even if the sector issues are deemed to be similar. It will involve a diagnostic and in-depth analysis of the differences between your local Generally Accepted Accounting Principles (GAAP) and IFRS. from which will flow all the project requirements around which any organisational change needs to be managed. In our experience. these Top Ten issues are significant to banks as: • they may result in significant accounting policy decisions that impact future results. • they may require significant time and cost to evaluate and implement. tax. Top Ten issues Financial instruments – classification. joint ventures. or collecting data for the additional disclosures relating to financial instruments. Based on our firms’ experience of IFRS conversions. and other areas of accounting for financial instruments. for example deciding whether to account for certain financial instruments at amortised cost or fair value. measurement. Making sure that this upfront assessment of the impact of IFRS and the “Gap analysis” is accurate and comprehensive is critical to a successful conversion. for example. . recognition and derecognition 1 6 Presentation of financial statements and disclosures of financial instruments Financial instruments – impairment 2 7 Leases Hedge accounting 3 8 Insurance contracts Consolidation and special purpose entities (SPEs) 4 9 Post-employment benefits Definition of debt vs equity 5 10 IFRS 1 – first-time adoption © 2011 KPMG International Cooperative (“KPMG International”). There are many other important accounting topics such as share-based payments.

with gains and losses recognised in profit or loss. There is a limited exemption for unlisted equity investments when fair value cannot be reliably measured. which most often. Derivatives are generally accounted for at fair value with gains and losses generally recognised in profit or loss. After initial recognition they are measured at fair value. transaction costs and discounts/ premiums over the lives of those instruments. amortised cost. this often leads to major implementation challenges. is the transaction price. If derivatives are “embedded” in other contracts (those contracts may or may not be financial instruments) they may have to be separated and accounted for separately from the host contract. at fair value. but not always. measurement. The types of financial assets that can be accounted for under amortised cost are mostly limited to debt instruments held to maturity and those not quoted in an active market. or cost. “Amortised cost” is a concept similar to cost. . Financial instruments are initially measured at fair value. Financial assets that do not meet the amortised cost criteria are accounted for at fair value with gains and losses recognised either in profit or loss or in other comprehensive income. Equity investments are generally accounted for at fair value. which are accounted for at cost less impairment. recognition and derecognition: financialFInstruments make up the majority of most banks’ assets and liabilities and Ifrs requirements for accounting for financial instruments are prescriptive. © 2011 KPMG International Cooperative (“KPMG International”).6 | Impact of ifrs: BANKING 1 Financial instruments – classification. but involves adjusting the balance sheet amount for the effect of calculating the yield on certain financial instruments by spreading fees. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Requirements relating to derecognition of financial instruments are complex. Accounting for financial liabilities remains similar to that in IAS 39 except that the effect of changes in credit risk on financial liabilities designated as at fair value is generally recognised in other comprehensive income. requiring a comprehensive analysis of the transaction. For equity investments. Financial assets that do not meet the criteria for amortised cost accounting are measured at fair value with gains and losses recognised in profit or loss. © 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. The requirements are a mixture of “risk and rewards” and “control” models. . the standard removes the “cost” accounting category for investments in equity instruments and introduces new classification criteria. they cover classification and measurement for financial assets and financial liabilities and are effective for accounting periods starting on or after 1 January 2013. financial assets are eligible for accounting at amortised cost only if they are held within a business model whose objective is to collect contractual cash flows and their contractual terms give rise to cash flows that are solely payments of principal and interest. Under its requirements.Impact of ifrs: BANKING | 7 In November 2009 and october 2010 the IasB issued the first two parts of a new standard on accounting for financial instruments – Ifrs 9 Financial Instruments. but can be adopted early. an election can be made to recognise gains and losses in other comprehensive income.

expected cash flow approach). . on conversion to Ifrs. The impairment of financial assets is currently measured on an “incurred loss” basis. Any subsequent changes to the initial estimate would be recognised immediately in profit or loss. The IASB is in the process of revising the accounting for the impairment of financial assets.8 | Impact of ifrs: BANKING 2 Financial instruments – impairment: Impairment of financial assets is an area in which accounting. Extensive additional disclosures are also proposed. any accounting solution minimises the need for additional systems. For AFS assets impairment is measured as the difference between acquisition cost and fair value. or AFS). Under this model the initial estimate of credit losses would be spread over the expected lives of the financial assets as part of the recognition of return from those assets. It is important that. discounted at the asset’s original rate of return. which proposes to replace the incurred loss approach with an approach based on expected losses (i. Impairment is recognised if objective evidence indicates that an asset is impaired due to events occurring after initial recognition. The proposals are likely to be very challenging for banks to implement. Unlike IAS 39. the expected cash flow model would become the single impairment model for financial assets. regulatory and internal risk management requirements meet. current discussions by the IASB indicate that significant changes may be made to the proposals. process and internal control changes and also ensures that differences between those requirements are well understood and managed.e. However. the new IFRS 9 will only require an impairment assessment on assets measured at amortised cost. © 2011 KPMG International Cooperative (“KPMG International”). An impairment loss is measured differently for financial assets accounted for at amortised cost than those accounted for at fair value with gains and losses recognised in other comprehensive income (the latter measurement category is called Available for Sale. For financial assets measured at amortised cost. This means that no impairment allowance can be established at initial recognition of a financial asset. the impairment loss is measured as the difference between an asset’s carrying amount and the present value of the estimated future cash flows. In November 2009 the IASB issued Exposure Draft Financial Instruments: Amortised cost and Impairment. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. therefore.

• For cash flows hedges and hedges of a net investment in foreign operation. Hedge accounting requirements are detailed and prescriptive. accounting implications of each are as follows: • for fair value hedges. Care needs to be taken to ensure that hedge relationships are identified in a manner that meets the requirements of the standard and. They define the items that can be hedged (including components and risks) and the allowed hedging instruments. hedge accounting aims to mitigate profit or loss impact in respect of the portion of the hedge that is effective. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. with gains and losses recognised in profit or loss. In addition. as under Ifrs generally all derivatives have to be accounted for at fair value. that the effectiveness tests are designed in a way that minimises the risk of future hedge relationships failure. including formal designation and documentation of the hedging relationship at inception of the hedge. © 2011 KPMG International Cooperative (“KPMG International”). IFRS specifically allows some types of portfolio hedges in which many derivatives can be used to hedge many assets/liabilities in a single relationship. It should also be demonstrated. both at the outset and throughout the existence that the hedge is expected to be and has been highly effective. cash flow hedges and hedges of a net investment in a foreign operation. in particular. Care should be taken to put such documentation in place by the first day of the first IFRS comparative period presented to ensure that hedge accounting can be applied from that date. interest rates. The IASB is currently revising the hedge accounting requirements and issued an exposure draft in December 2010. The initial documentation and subsequent effectiveness testing can be time consuming and systems-based solutions may be helpful in monitoring the effectiveness of the hedging relationships. Hedge accounting is often used to minimise profit or loss fluctuation arising due to volatility in foreign exchange. This so-called “macro-hedging” can be very useful in minimising documentation requirements. . the gains and losses relating to both the hedged item and the hedging instrument are recognised in profit or loss. A hedging relationship only qualifies for hedge accounting if certain criteria are met. there are three types of hedging relationships under Ias 39: fair value hedges. the gains and losses on the hedging item are recognised in other comprehensive income. and other changes in fair values of certain financial instruments and other non-financial items. that is remaining within 80 – 125 percent range.Impact of ifrs: BANKING | 9 3 Hedge accounting: IFRS has strict rules on hedge accounting and it is not possible to apply hedge accounting until all documentation is complete.

design investment products for customers or effect certain leasing transactions.10 | Impact of ifrs: BANKING 4 Consolidation of Special Purpose Entities (SPEs): Banks often use spEs. The IASB issued a staff draft of the standard in September 2010 and intends to issue the standard in the first quarter of 2011. judgement is often needed to conclude whether an entity should be regarded as an spE. In practice. as many spEs have predetermined objectives and so it is more difficult to determine who controls them. © 2011 KPMG International Cooperative (“KPMG International”). the resulting structures can be complex and are likely to require review of each individual transaction in order to determine whether consolidation under Ifrs is appropriate. • the entity has a right to the majority of the SPE’s benefits. for example to securitise loan receivables. which is defined in Ias 27 Consolidated and Separate Financial Statements as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. A consolidation exemption for investment companies has been separated from the main project and will be the subject of an exposure draft scheduled for the second quarter of 2011. The IASB is developing a new consolidation standard to replace IAS 27 and SIC–12. or • the entity has the majority of residual interest in the SPE. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. consolidatedCfinancial statements should include all subsidiaries of the parent company. an spE is defined as an entity created to accomplish a narrow and welldefined objective (e. The objective of the project is to develop a single definition of control that can be applied to all investees and to develop enhanced disclosure requirements for entities involved with structured entities. sIc 12 Consolidation – Special Purpose Entities provides guidance on when an spE should be consolidated and gives the following indicators of control: • the spE conducts its activities to meet the entity’s specific needs. • the entity has decision-making powers to obtain the majority of the benefits of the SPE’s activities. some banks are party to many hundreds of spEs that may not be consolidated under the local accounting rules. . for example through setting the “autopilot” mechanism through which its activities are run. the definition of a subsidiary focuses on the concept of control.g. securitisation of receivables). Ifrs contains specific guidance on the application of the control concept to spEs. Significant judgment is often required to determine whether the criteria for consolidating an SPE are met.

Impact of ifrs: BANKING | 11 © 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. .

It may also affect a bank’s regulatory capital and ratios. The IASB started a project to review its guidance on the definition of debt vs equity. . KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.12 | Impact of ifrs: BANKING 5 Definition of debt vs equity: the definitionTof an instrument as debt or equity may have an important impact on a bank’s results and equity. an equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. which give the holder the right to put the instruments back to the issuer for cash or another financial asset or instruments imposing an obligation on an entity only in liquidation. © 2011 KPMG International Cooperative (“KPMG International”). an instrument is classified as a financial liability if it contains a contractual obligation to transfer cash or another financial asset. an exception to the rules are puttable instruments. An example is a convertible bond that comprises a debt instrument and an equity conversion option. In general. Ias 32 Financial Instruments: Presentation addresses the liability or equity classification of financial instruments. Some contracts may contain both equity and liability components. This is an example of another area that requires contract-by-contract analysis during the IFRS conversion process. the classification is dependent on the substance of the contractual arrangements rather than its legal form. an obligation to transfer cash may arise from a requirement to repay principal or to pay interest or dividends. but has decided to postpone deliberations until after June 2011 when it expects to have more time available. or if it may be settled in a variable number of the entity’s own equity instruments. then such instruments are classified as equity. which may have to be accounted for separately. If certain criteria are met. The equity conversion option would require analysis to determine whether it meets the definition of equity.

However. including its content and guidelines for their structure. this project is currently postponed and IasB expects to resume its deliberations after June 2011. this means that the format has to be carefully developed to appropriately reflect the activities of each entity. As a result.Impact of ifrs: BANKING | 13 6 Presentation of financial statements and disclosures of financial instruments IFRS is not prescriptive as to the format of the statement of comprehensive income. The standard provides entities the option to present an analysis of expenditures either on the basis of nature or based on function. some of the information required by Ifrs 7 may not be readily available and new systems. its exposure to risk and how this exposure is managed. the IasB is working on a financial statement presentation project which may introduce changes to the existing requirements. IAS 1 Presentation of Financial Statements provides minimum requirements for the presentation of financial statements. processes and internal controls may need to be put in place to collect it. Subsequent to the adoption of IFRS. the balance sheet or other primary statements. variations on presentation and disclosure may exist across the banking sector. Instead of being prescriptive. IFRS stipulates very few line items. © 2011 KPMG International Cooperative (“KPMG International”). can be extensive. A first-time adopter of IFRS is required to present the opening balance sheet at the start of its earliest comparative period. a move away from so-called “Boiler plate” compliance with the standard. Here. but call for management to select the method of presentation that is most reliable and relevant. However. for example for financial instruments. . including explanation of significant management judgement and sensitivity analysis. this third balance sheet is presented only in certain circumstances. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. and there is considerable demand from financial statement users to improve the quality of the disclosures. for example separate presentation of items measured using different bases. Probably the most sensitive of the financial statements is the statement of comprehensive income. Disclosures in many areas. the financial crisis has had a significant impact on the banking sector. Ifrs 7 Financial Instruments: Disclosures requires extensive qualitative and quantitative information explaining the significance of financial instruments to an entity’s financial statements.

. Classification of a lease does not depend on which party has legal ownership of the leased asset. The IASB published an exposure draft in August 2010 and the revised standard is expected in the second quarter of 2011. an entity may enter into an arrangement comprising a transaction or a series of transactions that do not take the legal form of a lease but convey the right to use an asset. many more leases could be recognised on the balance sheet upon conversion to IFRS. Lease accounting under IFRS may affect those banks that under local GAAP keep assets off-balance sheet as operating leases. Determining whether an arrangement constitutes an operating or a finance lease may require judgement.14 | Impact of ifrs: BANKING 7 Leases: Banks commonly engage in leasing activities. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Accounting for leases under IFRS currently depends on whether a lease is a finance or an operating lease. The aim of the project is to develop a new approach to lease accounting for lessees and lessors. © 2011 KPMG International Cooperative (“KPMG International”). As a result. Such arrangements would have to be reviewed on conversion to IFRS to determine whether they contain a lease and therefore whether lease accounting is appropriate. when the substance of the arrangement is that the bank obtains substantially all of the risks and rewards incidental to ownership of the asset. In addition. the application of Ifrs may potentially result in many more leased assets being recognised on-balance sheet. The IASB is reviewing the accounting for leases. Operating leases require the lessor to continue to recognise the leased assets on its balance sheet. Finance leases are accounted for by the lessor as financing transactions. particularly in financing transactions that can take many legal forms. but rather on which party has substantially all of the risks and rewards of ownership.

. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Impact of ifrs: BANKING | 15 © 2011 KPMG International Cooperative (“KPMG International”).

Ifrs has minimal guidance on accounting for insurance contracts. insurers often offer what are substantially investment products in which mortality or other insurance risk is minimal or non-existent. on conversion to Ifrs. which in most cases allow companies to continue using existing Gaap and require some specific disclosures. one of the significant work streams for an insurance business is to determine which of its contracts meet the definition of an insurance contract and which meet the definition of a financial instrument. . T © 2011 KPMG International Cooperative (“KPMG International”). However. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.16 | Impact of ifrs: BANKING 8 Insurance contracts: many banking groups undertake insurance business and some that do not may still find that they have contracts that meet the definition of an insurance contract under Ifrs. Ifrs 4 Insurance Contracts only provides minimum accounting criteria. such instruments are required to be accounted for as financial instruments. Ifrs 4 does define an insurance contract and some contracts entered into by an insurance business may not meet the definition of an insurance contract and instead may have to be accounted for as a financial instrument under Ias 39.” for example. an insurance contract is defined as one “under which one party accepts significant insurance risk from another party (policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder.

Under IAS 19 Employee Benefits. using the so-called “corridor” method. . which allows companies to defer recognition of a portion of the actuarial gains and losses. Defined benefit plans are plans other than those in which an employer pays a fixed contribution and has no other obligations. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. The IASB is also considering undertaking a more comprehensive review of accounting in this area. This will result in the full actuarial gain/ loss being recognised immediately in other comprehensive income rather than being unrecognised until it is amortised into profit or loss. especially if they have large unfunded pension obligations. A final standard is scheduled for the first quarter of 2011.Impact of ifrs: BANKING | 17 9 Post-employment benefits: Banks that operate defined benefit pension plans may be significantly impacted on conversion to Ifrs. Many banks have in place defined benefit pension plans and/or retirement healthcare schemes for their employees. this in turn may affect regulatory capital and ratios. © 2011 KPMG International Cooperative (“KPMG International”). or recognised in profit or loss over time. the accounting for a defined benefit plan involves applying actuarial techniques to estimate the employer’s obligations. These may be recognised immediately in other comprehensive income or profit or loss. One of the main proposed changes is to eliminate the corridor method. The IASB is working on a project to amend IAS 19 and issued an exposure draft in April 2010. Actuarial gains and losses may arise as a result of estimation differences from period to period.

KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. .18 | Impact of ifrs: BANKING 10 IFRS 1 – first-time adoption of IFRS: A S © 2011 KPMG International Cooperative (“KPMG International”).

acquisitive banks may not wish to revisit previous acquisition accounting under prior Gaap. © 2011 KPMG International Cooperative (“KPMG International”). this is regardless of the classification under previous Gaap. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Impact of ifrs: BANKING | 19 Ifrs 1 is not industry-specific. we recommend that you refer to KpmG’s publication IFRS Handbook: First-time Adoption of IFRS. for a full understanding of the relief available upon the adoption of Ifrs. We note below a couple of issues to consider. . Banks will need to go through each of the available options in Ifrs 1 and decide which are the most appropriate for them based on the corporate profile they have. liability) as at fair value through profit or loss or available for sale provided that the relevant criteria to qualify for classification are met at that date. one of the most commonly used Ifrs 1 exemption by banks is the option not to restate pre-Ifrs business combinations. Here. there is also an optional exemption in Ifrs 1 that allows a first-time adopter to designate at the date of transition any financial asset (or where applicable.

the more effort and planning the conversion process will take • the number of systems required for financial reporting – a greater number of systems will require significant updating for consolidation and reconciliation purposes.20 | Impact of ifrs: BANKING Systems and processes: A in existence years after the conversion project is finished. the extent of differing information systems within an © 2011 KPMG International Cooperative (“KPMG International”). . some entities take the opportunity of an Ifrs conversion project to streamline the existing systems and processes. many of these processes will need to be analysed and potentially redesigned under Ifrs. most banking operations have a number of processes to deal with both geographic and product reporting. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. much depends on factors such as: • whether the bank utilises enterprise resource planning (Erp) systems – all major Erp systems are able to handle parallel accounting • the volume and mixture of in-house developed and vendor systems for financial reporting processes • the level of customisation – the more customised the system.

Some of this data may well reside in end-user computing applications that do not always have the same level of rigour and robustness over production. The silver lining is that there may be an opportunity to simplify and streamline processes and controls and ultimately reduce the longterm costs of reporting. One of the difficulties banks face in creating technical specifications is to understand the detailed end-to-end flow of information from the source systems to the general ledger and further to the consolidation and reporting systems. information systems and internal controls. Data warehouses will need to support consolidated financial information from multiple financial systems and ledgers. Embedded accounting rules in frontoffice transactional systems need to be identified. What banks need to determine is which systems and processes will need to change and translate accounting differences into technical system specifications. Process for identifying the information systems of IFRS Accounting and Disclosure Gaps Data warehouse General ledger s)DENTIFYTHEGENERALLEDGERACCOUNTS TOWHICHTHEGAPSRELATE Source systems s4RACETHEGENERALLEDGERTRANSACTIONS BACKTOTHEIRSOURCE nDIRECTLYTOSOURCESYSTEMSANDOR nTHROUGHTHEDATAWAREHOUSES  Front-end applications s4RACETHETRANSACTIONSBACKTOTHE FRONT ENDAPPLICATION. completeness and accuracy as the mainstream systems. That initial analysis needs to be followed by determining the effect of those accounting gaps on internal processes. Subledgers that reside on the back end of transactional systems may contain posting rules that will change on the basis of IFRS. as this may not contain key data fields to comply with IFRS.Impact of ifrs: BANKING | 21 organisation and differing local reporting requirements will complicate matters further. catalogued and modified based on the revised accounting policy. and may require expansion and modification to accept the greater level of detail required. as described earlier. The simplified diagram below outlines a process that organisations can adopt to identify the impact of IFRS conversion on information systems. is to understand the IFRS to local GAAP accounting differences. From accounting gaps to information sources The foundation of the project. especially if internal control reporting is necessary. Significant data cleansing and sourcing exercises may be required to enhance data quality and data sets designed to support local GAAP reporting.

KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.WHEREAPPROPRIATE © 2011 KPMG International Cooperative (“KPMG International”). .

. new fields. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. and information may need to be calculated on a different basis. New systems interface and mapping changes When previous financial reporting standards did not require the use of a system. Modifications to existing systems New reports and calculations are required to accommodate IFRS. The following table shows some areas in which information systems change might be required under IFRS depending upon facts and circumstances. Changes to the chart of accounts There almost always will be a change to the chart of accounts due to reclassifications and additional reporting criteria. Create new accounts and delete accounts that are no longer required. Make amendments such as: • new or changed calculations • new or changed reports • new models. if required). mapping these tools will require updates to reflect changes in the chart of accounts. interfaces may need to be changed or developed and there may be changes to existing mapping tables to the financial system. it may be necessary to implement new software. Reconfiguration of existing systems Existing systems may have built-in capabilities for specific IFRS changes. Change Action New data requirements New accounting disclosure and recognition requirements may result in more detailed information. new types of data. particularly the larger enterprise resource planning (ERP) systems and high-end general ledger packages. Interfaces may be affected by: • modifications made to existing systems • the need to collect new data • the timing and frequency of data transfer requirements. or the existing system is inadequate for IFRS reporting.22 | Impact of ifrs: BANKING How to identify the impact on information systems There are many ways information systems may be affected. Implement software in the form of a new software development project or select a package solution. When introducing new source systems and decommissioning old systems. When separate reporting tools are used to generate the financial statements. Reconfigure existing software to enable accounting under IFRS (and parallel local GAAP. © 2011 KPMG International Cooperative (“KPMG International”). from the initiation of transactions through to the generation of financial reports. Spreadsheets and models used by management as an integral part of the financial reporting process should be included when considering the required systems modifications. • Modify the work procedure documents. • Modify the general ledger system and reporting system to capture new or changed data.

KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Modify: • reporting tools used by subsidiaries and branches to provide financial information • mappings and interfaces from the general ledger • the consolidation systems used to report consolidated financial statements based on additional reporting requirements such as segment reporting. the application of the concept of “control’’ may be different under IFRS. Reporting packages Reporting packages may need to be modified to: (1) gather additional disclosures in the information from branches or subsidiaries operating on a standard general ledger package. Banking accounting differences and respective system issues Each standard under IFRS will require different information system changes. or (2) collect information from subsidiaries that use different financial accounting packages. An example of a standard that can have a major impact on information systems is IAS 39. Modify reporting packages and the accounting systems used by subsidiaries and branches to provide financial information Financial reporting tools Reporting tools can be used to: (1) perform the consolidation and the financial statements based on data transferred from the general ledger. . Update consolidation systems / models to account for changes in consolidated entities. © 2011 KPMG International Cooperative (“KPMG International”). For example. or (2) prepare only the financial statements based on receipt of consolidated information from the general ledger. there potentially will be changes to the number and type of entities that need to be included in the group consolidated financial statements.Impact of ifrs: BANKING | 23 Change Action Consolidation of entities Under IFRS. The following table outlines some of the requirements of IAS 39 and the possible information systems impacts arising from these changes.

At a minimum. in many cases this will be an on-going requirement as data under local GAAP may be required for. transaction costs. However. fees. Hedge accounting Hedge accounting systems may be required to perform hedge effectiveness calculations at regular intervals.24 | Impact of ifrs: BANKING IFRS accounting treatment Potential information systems impacts Calculation of amortised cost/ effective yield from the loan book For retail portfolios systems will need to be designed to incorporate prepayment information. but IFRS comparatives are prepared prior to the go-live date of IFRS. The systems will need to handle the re-estimation of cash flows. The parallel reporting may be based on real-time collection of information through the accounting source systems to the general ledger or on “top-side” adjustments posted as an overlay to the local GAAP reporting system. The manner and timing of processing information for the comparative periods in real-time or through “top-side” adjustments has to be selected. the following should be considered: © 2011 KPMG International Cooperative (“KPMG International”). Impairment of financial assets Systems and/or process changes may be required to incorporate the data required (timing of expected cash flows) and discount those cash flows using the instruments’ effective interest rates. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. In deciding the preferred method. say. Parallel reporting – timing the changeover from local GAAP to IFRS reporting Conversion from local GAAP to IFRS will require parallel accounting for a certain period of time. tax purposes. this will happen for one period as local GAAP continues to be reported. . steps in interest etc to arrive at an effective yield from the portfolio. Classification of financial assets as “held to maturity” A system/process will need to be developed to flag any disposals before maturity.

.Impact of ifrs: BANKING | 25 © 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

OCAL'!!0 POSTINGS Features Features s!CCOUNTINGGENERALLEDGERBALANCESWITHNO DIFFERENCESBETWEEN)&23ANDLOCAL'!!0WILLBE POSTEDONLYONCEONACOMMONACCOUNT s/NECOMMONCHARTOFACCOUNTSFOR)&23AND LOCAL'!!0 s$EFINEADDITIONALACCOUNTSFORONLY)&23ANDONLY LOCAL'!!0WHERETHEREAREACCOUNTINGDIFFERENCES s$IFFERENCESBETWEEN)&23ANDLOCAL'!!0WILLBE POSTEDTOTHEDIFFERENTLEDGERSONTHESAME ACCOUNTSPOSTINGSAND s)&23ANDLOCAL'!!0WILLBEPOSTEDONDIFFERENT ACCOUNTS s$ELTADIFFERENCESBETWEEN)&23ANDLOCAL'!!0 ACCOUNTSORFULLRE POSTINGINTOBOTH)&23ANDLOCAL '!!0WILLNEEDCONSIDERATION s4WOSEPARATELEDGERS s!CCOUNTINGPOSTINGSWITHNODIFFERENCESBETWEEN )&23ANDLOCAL'!!0WILLBEPOSTEDONLYONCEAND TRANSFERREDTOBOTHLEDGERSONTHESAMEACCOUNTS POSTING  © 2011 KPMG International Cooperative (“KPMG International”). Oracle. but can be achieved off-line.OCAL'!!0 Local GAAP /NLY. business as usual). • Changes to systems and information may continue to be needed in the comparative year if the IFRS accounting options have not been fully established. which GAAP will management use to run the business). • More applicable for large/complex organisations with many changes. • If leading ledger is IFRS in comparative year. SAP. The two most implemented solutions are the Account Solution or the Ledger Solution. • Strict control on system changes will need to be maintained over this phased changeover process. Real-time parallel accounting • Consideration needed for “leading ledger” in comparative year being local GAAP or IFRS (i. • Migration to IFRS ledgers needed prior to first day of the year in which IFRS reporting commences. • Less risky for ongoing reporting requirements in comparative year. . Peoplesoft) are able to handle parallel accounting.26 | Impact of ifrs: BANKING Parallel accounting option in comparative year Effect Considerations Parallel accounting through top-side adjustments: • No real-time adjustments to systems and processes will be required for comparative period. All major ERP systems (e. Account Solution Depending on the release of the respective ERP systems one or both options are available. Ledger Solution General Ledger Only IFRS Only Local Common Accounts IFRS /NLY)&23POSTING )&23. • Comparative period will need to be recast in accordance with IFRS. conversion back to local standards is necessary for the usual reporting timetable. • Local GAAP reporting will flow through subsystems to the general ledger (i. • Tracking two sets of numbers for large volume of transactions will make systemisation of comparative year essential.e.g. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. • Real-time reporting of two GAAPs in comparative year puts more stress on the finance group. • Available for all but more typical when there are less volume of transactions to consider.e. • Migration of local GAAP to IFRS happens on first day of the year in which IFRS reporting commences. • More applicable to small/less complex organisations or when few changes are required.

Basel. solvency) • Business key performance indicators • Business unit reporting • Product/service reporting • Cost accounting Compliance Performance improvement Shareholder value reporting Planning and budgeting • Economic Value Added (EVA) • Annual budget • Cash value-added • Rolling forecast • Management incentives • Operational forecast • Stock compensation plans • Strategic plans • Closing preview forecast The process of aligning internal and external reporting will involve the following: • When mappings have changed from the source systems to the general ledger. External reporting Management reporting • IFRS • US GAAP • Stand-alone financial reporting per local GAAP • Tax reporting • Regulatory reporting (i. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.e. using the same data and systems. which will therefore need to change to align with IFRS. • Alterations to calculations and the addition of new data in source systems as well as new timing of data feeds could have an effect on key ratios and percentages in internal reports. careful co-ordination and rigorous change management and testing are key to success.Impact of ifrs: BANKING | 27 Harmonisation of internal and external reporting Banks should consider carefully the impact of IFRS changes on data warehouses and relevant aspects of internal and external reporting. mappings to the management reporting systems and the data warehouses also should be changed. In many entities. The following diagram represents the possible internal reporting areas that may be affected by changing systems to accommodate the new IFRS reporting requirements. With potential multiple changes to the same information systems being required. . © 2011 KPMG International Cooperative (“KPMG International”). • When data has been extracted from the source systems and manipulated by models to create IFRS adjustments that are processed manually through the general ledger. the impact of these adjustments on internal reporting should be carefully considered. which may need to be redeveloped to accommodate them. internal reporting is performed on a basis similar to external reporting.

.28 | Impact of ifrs: BANKING © 2011 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

Impact of ifrs: BANKING | 29 People: When your Bank reports for the first time under Ifrs. Although most conversions are driven by a central team. • Many entities manage their training through a series of site visits – typically partnerships of one member of the core central team along with a second technical expert. There is a broad spectrum of people and process related issues. Training should not be underestimated and entities often don’t fully appreciate the levels of investment and resource involved in training. © 2011 KPMG International Cooperative (“KPMG International”). Even with the best planning and training possible. and senior sponsorship. hedge accounting etc are best conveyed through “workshop” training approaches in which entity-specific issues can be tackled. training. There needs to be an emphasis on communications. People issues range from an accounts payable clerk coding invoices differently under IFRS to an Audit Committee approval of the internal controls over IFRS reporting. • More complex areas such as financial instrument classification and measurement. Distinguishing between different audiences and the nature of the content is the key for successful training. all of which require an estimation of the changes that are needed when reporting under the IFRS. the preparation of those financial statements will require Ifrs knowledge to have been successfully transferred to the financial reporting team. Few entities claim significant benefit from external nontailored training courses. The success of the project will depend on the people involved. • Geographically disparate companies are considering web-based training as a cost and time-efficient method of disseminating knowledge. engagement. We recommend building “dry runs” into the conversion process at key milestones to test the level of understanding among finance staff. often an external advisor. Some useful knowledge transfer pointers are as follows: • Training tends to be more successful when tailored to the specific needs of the entity. all of which are part of change management. it is critical that an appropriate support structure is in place so that the business units implement the desired conversion plans properly. . support. timely and effective knowledge transfer is an essential part of a successful and efficient Ifrs conversion project. IFRS knowledge only really becomes embedded in the business when the stakeholders have the opportunity to actually prepare and work with real data on an IFRS basis. you ultimately need to ensure the conversion project is not dependent on key individuals and that the business-asusual operations can be performed when the project ends. • Some entities use training as an opportunity to share their data collection process at the same time. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

is a key component of an IFRS conversion project. all Ifrs conversions should ensure that Board and audit committee meetings are acknowledged on the project plan as these meetings will drive key deliverables and provide incentive for timely delivery. However. Audit Committee considerations audit committees and Board of Directors (Board) need to be actively and appropriately engaged in the conversion process. Every identified group should be factored into the timing of when and how to present changes in operational performance because of IFRS. most banks in a given geography will want to know what their peers are doing as it relates to IFRS and what choices and options are being taken by those groups. but a clear and consistent message should be given to those directly but also those not directly involved in the project. the most successful conversion projects are sponsored by a member of the Board who is closely involved in the project. Your project will have to deal with a large number of internal and external stakeholders so as to manage one fundamental issue – the operational performance stays the same but the “scoreboard” of the financial statements gives a different result under IFRS. so as to factor those differences into their various buy/sell/hold recommendations. industry analysts and the financial media. middle office and back office functions that will need to be involved in certain system/reporting changes. In a similar context. but may need a much broader ranging communications strategy. regulators. banks have front office. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Investors and analysts will also want to be able to look across banks and be aware of the differences. . Stakeholder analysis and communications A thorough review of the internal and external stakeholders is an essential first step. not all of these groups will need to participate in detailed accounting discussions earlier on in the conversion process. Monitoring peer group The banking community tends to be close-knit and often uses sector benchmarks and peer group comparisons. For example. The assessment of who those affected groups are. © 2011 KPMG International Cooperative (“KPMG International”). these senior management groups need to have tailored and periodic training to suit their knowledge requirements so as to not overwhelm them with accounting theory on Ifrs. the format of communications needs to be personalised to the nature of the bank. Management will need to assess its peer group. Furthermore. Banks should actively consider the communications strategy through which they will ensure that all key stakeholder groups are fully informed of the project’s progress. Measurement of operational performance cuts across all parts of an organisation and effects the internal business drivers and external perceptions of the entity.30 | Impact of ifrs: BANKING Business One of the challenges of IFRS adoption stems from the number of stakeholders that have a vested interest in the financial performance of the organisation. at a minimum this includes the quarterly and annual disclosures in the financial reports. and when is the appropriate time for communications. project related deliverables should be incorporated into key stakeholder objectives to ensure their successful achievement. external stakeholders should be properly identified and communicated with throughout the IFRS conversion. As such. the project structure needs to ensure that they receive relevant and timely information while not becoming a bottleneck for decisions. Certain less obvious internal stakeholder groups may be engaged only in the conversion process at a late stage but the awareness of when to engage those groups is necessary. Examples include groups such as the tax authorities. but the manner in which this is achieved may vary depending on the working relationship with other banks.

© 2011 KPMG International Cooperative (“KPMG International”). procedures and the underlying internal controls will all need to be reflected as part of the Ifrs process. . senior management should not lose sight of the wider benefits of Ifrs conversion. and that may help facilitate cross-border acquisitions. It is important that these benefits be kept in mind throughout the project to provide clear direction and obtainable goals for all concerned. Benefits of IFRS While the majority of this paper has focused on the micro-based risks and issues associated with Ifrs and Ifrs conversions.Impact of ifrs: BANKING | 31 P T of any manual work-arounds used. Documentation of new policies. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. ventures and spin-offs. Ifrs may offer more global transparency and ease access to foreign capital markets and investments.

We are committed to providing a structured approach with the aim of delivering consistent. protect intellectual property. Your conversion to IFRS As a global network of member firms with experience in more than 1. industry-tailored audit. We offer customised. and meet the myriad challenges of the digital economy. we can help ensure that the issues are identified early. tax and advisory services that can lead to value-added assistance for your most pressing business requirements. can help you reduce costs. KPMG firms have extensive experience and the capabilities needed to support you through your IFRS assessment and conversion process.500 IFRS convergence projects around the world.aspx. and controls • People. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. © 2011 KPMG International Cooperative (“KPMG International”). improve controls of a complex value chain. the Middle East. Our approach comprises four key work-streams: • Accounting and reporting • Business impact • Systems. For more information. and can share leading practices to help avoid the many pitfalls of such projects. insights and knowledge based on substantial experience working with the banking sector to understand the issues and deliver the services needed to help banks succeed wherever they compete in the world. including training company personnel and transitioning financial reporting processes.com/Global/en/WhatWeDo/ Industries/Financial-Services/Pages/ default. kpmg. mitigate risk. processes. visit http://www. through its global network of highly qualified professionals in the Americas. Europe. . Africa and Asia Pacific.32 | Impact of ifrs: BANKING KPMG: An Experienced Team. a Global Network: KPMG’s Banking practice KPMG’s Banking practice is dedicated to supporting Retail and Investment banks globally in understanding industry trends and business issues. KPMG. Our firms’ professionals offer skills. high-quality services for our clients across geographies. Our global network of specialists can advise you on your IFRS conversion process.

Impact of ifrs: Impact of ifrs: Automotive | BANKING | 33 © 2011 KPMG International Cooperative (“KPMG International”). . KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.

gleave@kpmg. Smith fs Line of Business Head Abizer Diwanji fs Line of Business Head tel: +1 416 777 3395 tel: +91 (22) 3090 2380 email: marklsmith@kpmg.com.com © 2011 KPMG International Cooperative (“KPMG International”).ca email: adiwanji@kpmg.fr email: smarcello@kpmg.com canada India Mark D.cn email: VanNek. .br email: kbecker@kpmg.com china Netherlands Simon Gleave fs Line of Business Head Jeroen Van Nek fs Line of Business Head tel: +86 10 8508 7007 tel: +31 20 656 7360 email: simon.nl france Usa Fabrice Odent fs Line of Business Head Scott Marcello fs Line of Business Head tel: +33 1 5568 7227 tel: +1 212 954 6960 email: fodent@kpmg.34 | Impact of ifrs: BANKING contact us: Global FS practice Global FS contacts Global fs.uk Ricardo Anhesini fs Line of Business Head Klaus Becker fs Line of Business Head tel: +55 11 21833141 tel: +49 69 9587-3225 email: rsouza@kpmg.anderson@kpmg.co. KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.com.Jeroen@kpmg. chairman Brazil Germany Jeremy Anderson tel: +44 20 73115800 email: Jeremy.

including: Ewa Bialkowska KpmG International standards Group (part of KpmG IfrG Limited) Colin Martin KpmG in the UK Other KPMG publications We have a range of Ifrs publications that can assist you further.Impact of ifrs: BANKING | 35 Acknowledgements We would like to acknowledge the authors of this publication. • regular Briefing sheets summarising current developments © 2011 KpmG International cooperative (“KpmG International”). – New on the Horizon: Hedge accounting. – New on the Horizon: Insurance contracts. the following may be of particular relevance to the banking sector: – first Impressions: Ifrs 9 financial Instruments. for example fair value disclosures • Illustrative financial statements for banks • Disclosure checklist. the following may be of particular relevance to the banking sector: – New on the Horizon: ED/2009/12 financial Instruments: amortised cost and Impairment. KpmG International provides no client services and is a swiss entity with which the independent member firms of the KpmG network are affiliated. • first Impressions publications that discuss new pronouncements. including: • Insights into Ifrs • Ifrs: an overview • Ifrs compared to Us Gaap • Ifrs Handbook: first-time adoption of Ifrs • New on the Horizon publications that discuss exposure drafts. . – New on the Horizon: Leases. – first Impressions: additions to Ifrs 9 • Ifrs practice Issues publication which discusses current issues.

kpmg. a Swiss entity.co.com/ifrs Global FS practice Jeremy Anderson Global FS. Designed by Evalueserve. KPMG International provides no client services. Member firms of the KPMG network of independent firms are affiliated with KPMG International. Publication name: Impact of IFRS: Banking Publication number: 314593 Publication date: February 2011 . No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 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. nor does KPMG International have any such authority to obligate or bind any member firm.kpmg.uk www. Chairman T: +44 20 73115800 E: Jeremy. Although we endeavor to provide accurate and timely information. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties. © 2011 KPMG International Cooperative (“KPMG International”).com/ifrs The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. The KPMG name. logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. All rights reserved.Anderson@kpmg.