C.5. Changes in accounting policies and correction of prior year errors
C.5.1. Changes in accounting policies and financial statements presentation
Presentation of FX derivatives
In order to improve a presentation of a performance of financial instruments and to align with Generali Group reporting The Company has decided to further develop a presentation of a return on investments. As a consequence the presentation in the Income statement of a result from FX derivatives, other than unit-link investments derivatives, has been amended. The overall result from these FX derivatives previously presented as a part of realized and unrealized gains and losses from derivatives (as part of Net income/loss from financial assets at fair value through profit or loss in the Income statement) is now presented as a gains and losses on foreign currency – both for realized and also unrealized valuation (as part of Other income and Other expenses in the Income statement).
Presentation of other income and other expense
A volume of services which the Company acquires and further reinvoices to its subsidiaries and other GCEE group companies has increased. In prior years these reinvoiced services were presented net in the Income statement of the Company. In order to improve presentation of the financial statements, the Company has decided to change the presentation and the expense related to the shared services acquired is presented as a part of Other expense and the income from these services reinvoiced to other companies is presented as a part of Other income.
The Company has performed retrospective restatements of the Income statement. Both changes have not affected Statement of financial position. Impacts on Income statement are presented in a table in section C.5.2.
C.5.2. Correction of prior year error
The Company has made an error in calculation of a remuneration for the Employer’s Liability Insurance which the Company service on behalf of the state. The correction of an amount which was recognized retrospectively in the Income statement for the year 2015 represents a decrease of Other income in the amount CZK 68 million and correspondingly increase of Payables.
The error has affected 2015 Statement of financial position. There is no impact on 2014 Statement of financial position and therefore 2014 Statement of financial position is not presented.
Following table shows the impact of the change in the presentation:
| 2016 | 2015 restated | 2015 | |
|---|---|---|---|
| Net income/loss from financial assets at fair value through profit or loss | 239 | 40 | (273) |
– of which FX derivatives (other than unit-link derivatives) | – | – | (313) |
| Other income | 2,488 | 4,621 | 1,447 |
– of which gains on foreign currency from FX derivatives | 955 | 2,884 | – |
– of which change of presentation of the other income | 611 | 358 | – |
– of which correction of prior year error | – | (68) | – |
| Other expenses | (3,123) | (5,257) | (1,702) |
– of which losses on foreign currency from FX derivatives | (1,219) | (3,197) | – |
– of which change of presentation of the other expenses | (611) | (358) | – |
C.5.3. Standards, interpretations and amendments to existing standards relevant for the Company and applied in the reporting period
There are no published amendments and interpretations of existing standards mandatory and relevant to the Company which should have been applied by the Company starting from 1 January 2016.
C.5.4. Standards, interpretations and amendments to published standards that are not yet effective and are not relevant for the Company´s financial statements
Amendments to IFRS 11, Accounting for Acquisitions of Interests in Joint Operations (effective for annual periods beginning on or after 1 January 2016)
IAS 1 Disclosure Initiative – Amendments to IAS 1 (effective for annual periods beginning on or after 1 January 2016)
The amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify i)The materiality requirements in IAS 1; ii) That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated; iii) That entities have flexibility as to the order in which they present the notes to financial statements; iv)That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and other comprehensive income.
IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (effective for annual periods beginning on or after 1 January 2016).
The amendments clarify the principle in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, the ratio of revenue generated to total revenue expected to be generated cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets.
Amendments to IAS 16 and IAS 41, Bearer plants (effective for annual periods beginning on or after 1 January 2016)
Amendments to IAS 19 Defined Benefit Plans: Employee Contributions
IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after 1 July 2014(EU: 1 February 2015). This amendment is not relevant to the Group, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties.
Amendments to IAS 27, Equity Method in Separate Financial Statements (effective for annual periods beginning on or after 1 January 2016, with earlier application permitted)
Annual Improvements 2010–2012 Cycle
In the 2010–2012 annual improvements cycle, the IASB issued seven amendments to six standards (IFRS 2, IFRS 3, IFRS 8, IAS 16, IAS 38 and IAS 24), which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 is effective immediately and for the other amendments for periods beginning at 1 July 2014 (EU: 1 February 2015), and it clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 has no impact on the Group.
Annual Improvements 2012–2014 Cycle
In the 2012–2014 annual improvements cycle, the IASB issued, in September 2014, five amendments to four standards (IFRS 5, IFRS 7, IAS 19 and IAS 34). The changes are effective 1 January 2016. Earlier application is permitted and must be disclosed.
C.5.5. Standards, interpretations and amendments to published standards that are not yet effective and are relevant for the Company’s financial statements
Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2016 or later, and which the Company has not early adopted.:
- IFRS 9 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. Key features are as follows:
- Classification and measurement of financial assets
All financial assets are measured at fair value on initial recognition, adjusted for transaction costs, if the instrument is not accounted for at fair value through profit or loss (FVTPL). Debt instruments are subsequently measured at FVTPL, amortised cost, or fair value through other comprehensive income (FVOCI), on the basis of their contractual cash flows and the business model under which the debt instruments are held. There is a fair value option (FVO) that allows financial assets on initial recognition to be designated as FVTPL if that eliminates or significantly reduces an accounting mismatch. Equity instruments are generally measured at FVTPL. However, entities have an irrevocable option on an instrument-by-instrument basis to present changes in the fair value of non-trading instruments in other comprehensive income (OCI) without subsequent reclassification to profit or loss. - Classification and measurement of financial liabilities
For financial liabilities designated as FVTPL using the FVO, the amount of change in the fair value of such financial liabilities that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation in OCI of the fair value change in respect of the liability’s credit risk would create or enlarge an accounting mismatch in profit or loss. All other IAS 39 Financial Instruments: Recognition and Measurement classification and measurement requirements for financial liabilities have been carried forward into IFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. - Impairment
The impairment requirements are based on an expected credit loss (ECL) model that replaces the IAS 39 incurred loss model.
The ECL model applies to debt instruments accounted for at amortised cost or at FVOCI, most loan commitments, financial guarantee contracts, contract assets under IFRS 15 and lease receivables under IAS 17 Leases. Entities are generally required to recognise 12-month ECL on initial recognition (or when the commitment or guarantee was entered into) and thereafter as long as there is no significant deterioration in credit risk. However, if there has been a significant increase in credit risk on an individual or collective basis, then entities are required to recognise lifetime ECL. For trade receivables, a simplified approach may be applied whereby the lifetime ECL are always recognised. - Hedge accounting
Hedge effectiveness testing is prospective, without the 80% to 125% bright line test in IAS 39, and, depending on the hedge complexity, will often be qualitative. A risk component of a financial or non-financial instrument may be designated as the hedged item if the risk component is separately identifiable and reliably measureable. The time value of an option, any forward element of a forward contract and any foreign currency basis spread can be excluded from the hedging instrument designation and can be accounted for as costs of hedging. More designations of groups of items as the hedged item are possible, including layer designations and some net positions.
In July 2015 the IASB took a decision to amend IFRS 4 to permit an entity to exclude from profit or loss and recognise in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 and the amounts recognised in profit or loss in accordance with IAS 39, subject to meeting certain criteria.
In September 2015 the IASB decided to propose a package of temporary measures in relation to the application of the new financial instruments Standard (IFRS 9) before the new insurance contracts Standard comes into effect.
An entity can apply the temporary exemption from IFRS 9 for annual periods beginning on or after 1 January 2018. An entity may start applying the overlay approach when it applies IFRS 9 for the first time. During 2016, the Group performed an assessment of the amendments and reached the conclusion that its activities are predominantly connected with insurance as at 31 December 2016 .
The Group intends to apply the temporary exemption in its reporting period starting on 1 January 2018.
IFRS 15 Revenue from Contracts with Customers including Clarifications to IFRS 15 issued in April 2016 (effective for annual periods beginning on or after 1 January 2018 – not yet endorsed by the EU)
IFRS 15 replaces all existing revenue requirements in IFRS (IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC 31 Revenue
– Barter Transactions Involving Advertising Services) and applies to all revenue arising from contracts with customers. It also provides a model for the recognition and measurement of disposal of certain non-financial assets including property, equipment and intangible assets. The standard outlines the principles an entity must apply to measure and recognise revenue. The core principle is that an entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.
IFRS 16 – Leases (effective for annual periods beginning on or after 1 January 2019 – not yet endorsed by the EU)
The new standard constitutes an innovation in that it established that leases be reported in entities’ balance sheet, thus enhancing the visibility of their assets and liabilities. IFRS16 repeals the distinction between operating leases and finance leases (for the lessee), requiring that all lease contracts be treated as finance leases. Short term contracts (12months) and those involving low value items (e.g. personal computers) are exempted from this treatment. The new standard will take effect on 1 January 2019. Early adoption is permitted provided that also IFRS15, Revenue from Contracts with Customers, is applied. IAS 17 will be superseded by IFRS 16.
Amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2018)
Amendments to IAS 7, Disclosure Initiative (effective for annual periods beginning on or after 1 January 2017)
The amendments come with the objective that entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities.
The Company is considering the implications of the above standards, the impacts on the Company and the timing of their adoption by the Company. The Company is not considering early application of the above standards.
C.5.6. Standards, interpretations and amendments to published standards that are not yet effective and are not relevant for the Company’s financial statements
Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception – Amendments to IFRS 10, IFRS 12 and IAS 28 (effective for annual periods beginning on or after 1 January 2016)
The amendments address issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS 10 clarify that the exemption (in IFRS 10.4) from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures all of its subsidiaries at fair value.
Amendments to IAS 12, Recognition of Deferred Tax Assets for Unrealised Losses (effective for annual periods beginning on or after 1 January 2017 – not yet endorsed by the EU).
The amendments clarify the accounting treatment of deferred tax assets related to debt instruments measured at fair value.
Amendments to IAS 40 Transfers of Investment Property (effective for annual periods beginning on or after 1 January 2018)
The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use.
Entities should apply the amendments prospectively to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. An entity should reassess the classification of property held at that date and, if applicable, reclassify property to reflect the conditions that exist at that date. Retrospective application in accordance with IAS 8 is only permitted if that is possible without the use of hindsight. Early application of the amendments is permitted and must be disclosed.
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration (effective for annual periods beginning on or after 1 January 2018)
The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the nonmonetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration.
Entities may apply the amendments on a fully retrospective basis. Alternatively, an entity may apply the interpretation prospectively to all assets, expenses and income in its scope that are initially recognised on or after: (i) The beginning of the reporting period in which the entity first applies the interpretation; or (ii) The beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies the interpretation. Early application of interpretation is permitted and must be disclosed.
Annual Improvements 2014–2016
In the 2014–2016 annual improvements cycle, the IASB issued, in December 2016, amendments to three standards (IFRS 12, IFRS 1 and IAS 28). The changes are effective 1 January 2017 for IFRS 12 and 1 January 2018 for the amendments to the other two standards. Earlier application is permitted for the amendments to IAS 28 and must be disclosed.
C.5.7. IFRS 4 – exposure draft on Insurance contracts (IFRS 17)
The IASB (“the board”) released a revised exposure draft on 20 June 2013 proposing a comprehensive standard to address recognition, measurement and disclosure for insurance contracts.
The proposals retain the IFRS 4 definition of an insurance contract but amend the scope to exclude fixed fee service contracts but some financial guarantee contracts may now be within the scope of the proposed standard.
The proposals would require an insurer to measure its insurance contracts using a current measurement model. The measurement approach is based on the following building blocks: a current, unbiased and probability-weighted average of future cash flows expected to arise as the insurer fulfils the contract; the effect of time value of money; an explicit risk adjustment and a contractual service margin calibrated so that no profit is recognised on inception.
- an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach;
- an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach.
An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9.
An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied.