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Gerald Kogler

Implementation of IFRS in the banking sector: Austria case study – An Auditor‘s Perspective March 14, 2006. Gerald Kogler. Agenda. Auditing Issues Leases Financial Instruments Hedge Accounting Impairment Consolidation – Special Purpose Entities IT Environment

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Gerald Kogler

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  1. Implementation of IFRS in the banking sector:Austria case study – An Auditor‘s PerspectiveMarch 14, 2006 Gerald Kogler

  2. Agenda • Auditing Issues • Leases • Financial Instruments • Hedge Accounting • Impairment • Consolidation – Special Purpose Entities • IT Environment • Internal Reporting/Controlling • Highlight Summary

  3. Leases • Classification of a lease • Review of procedures and analyses performed by the company in order to identify all contracts containing a lease • Verify classification • Adequate evaluation of recorded balance sheet items • Initial direct costs to be integrated into the calculation of the implicit interest rate • Treatment of contracts involving non-constant lease payments • Sale & lease back arrangements

  4. Financial Instruments -Overview

  5. Financial Instruments • Classification of financial assets • Assets recognized at fair value through P&L (trading and fair value option) • Available-for-sale (AFS) • Held-to-maturity (HTM) • Measurement • Fair value considerations • Application of effective interest rate (including acquisition costs, discounts and premiums) • HTM investments – compliance with “Tainting Rules”

  6. Financial Instruments - Derivatives • Identification of derivatives • All derivatives recorded on balance sheet • Procedures used for measuring all derivatives at fair value

  7. Financial Instruments - Embedded Derivatives • Identification of embedded derivatives • Host contracts containing embedded derivatives • Economic risks closely related to host contract • Allocation of the fair value of the hybrid instrument between the host contract and the embedded derivative

  8. Hedge Accounting • Requirements of Hedge Accounting • Hedged item • Hedging instrument • Hedge effectiveness • Documentation • Cash flow hedge • Fair value hedge

  9. Hedge Accounting • Formal designation & documentation at inception • Highly effective • Effectiveness of the hedge can be reliably measured • Hedges are being assessed on an ongoing basis

  10. Hedge Accounting • Methods applied for effectiveness testing • Prospective assessment of effectiveness • Retrospective assessment of effectiveness • Termination of hedging relationships

  11. Impairment • Statutory & tax driven influences vs. requirements under IFRS • Cash flow oriented • Objective evidence • General provisions

  12. Financial Instruments – Disclosures • Requirement of IAS 32 • Requirements of IAS 30 • Implementation of IFRS 7 (1 January 2007, supersedes IAS 30)

  13. Financial Instruments – Disclosures • Extensive requirements • Terms & conditions • Risk management policies • Interest rate risk • Credit risk • Hedging • Fair value

  14. Consolidation – Special Purpose Entities • SIC-12 • Majority of risks & rewards • Local legislation vs. IFRS principles • Structured transactions

  15. IT Environment • IT system changes • Delta accounting vs parallel accounting • Implementation of the new Basel Accord will create additional pressure on the IT Resources and may decelerate IT transition process to IFRS

  16. Internal Reporting/Controlling • Segment Reporting • Management approach • Corporate Management • Risk Management

  17. Highlight Summary • IT Restrictions often cause issues on full adoption of IFRS • Differences between local GAAP and IFRS may result in accounting arbitrage • Consistent results under local GAAP vs. volatility under IFRS

  18. Thank you

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