Royal Bank Of Canada · TSX:RY
Royal Bank Of Canada — Investor Presentation (January 2011)
46 slides from Royal Bank Of Canada's investor presentation, Jan 10, 2011
Slide 1: IFRS for Banks in Canada
IFRS for Banks in Canada January 10, 2011
Slide 2: A Note about Forward-Looking Statements
A Note about Forward-Looking Statements The following presentation discusses accounting changes that are expected to be significant to a majority of the Banks in Canada upon adoption of International Financial Reporting Standards (IFRS). The presentation contains a number of forward-looking statemen
Slide 3: IFRS in Canada: An Overview
IFRS in Canada: An Overview Tricia O’Malley Former Board Member / Director of Implementation Activities International Accounting Standards Board
Slide 4: Why IFRS?
Why IFRS? What’s in it for Canada?
Slide 5: The short answer
The short answer Financial reporting is intended to serve the needs of the capital markets. The capital markets are global and investors are international. They want a common language. Canada’s capital market is too small to expect investors to learn special Canadian accounting rules to unders
Slide 6: We chose IFRS because…
We chose IFRS because… Similar philosophy of serving investor needs. Similar style and level of detail as Canadian standards. Experience in harmonizing with US GAAP. Developments after TFOSS report: • IASB up and running • European adoption • Norwalk agreement
Slide 7: How does our transition compare?
How does our transition compare? Our consultation began 2004. Plan finalized 2006 with transition slated for 1/1/2011. Date confirmed February 2008. In Europe, IAS Regulation passed mid-2002 without widespread debate. Implementation 1/1/05. Similar timeline in Australia. Major standards to b
Slide 8: Result?
Result? Adoption went remarkably smoothly considering short timeframes and potential for confusion: • Many studies have shown no significant effect on overall capital markets • Share price effects generally company-specific as a result of enhanced disclosure. Took a couple of years to bed down.
Slide 9: The future
The future Convergence with US GAAP: • US adoption not key to Board decision • Removal of SEC reconciliation requirement for Foreign Private Issuers following IFRS key step • All major projects are joint but getting Boards to agree sometimes a challenge • SEC reviewing the role of IFRS in the US,
Slide 10: IFRS for banks in Canada
IFRS for banks in Canada Jason Boggs Partner, Global Capital Markets Group, PwC
Slide 11: Discussion topics
Discussion topics Key Dates and Milestones Financial Reporting Impacts OSFI Transitional Relief Future Changes to IFRS Key Takeaways 11
Slide 12: Key Dates and Milestones
Key Dates and Milestones
Slide 13: When will we see the impacts of IFRS
When will we see the impacts of IFRS Based on October 31 year end 13
Slide 14: European bank illustrative example – reconciliation of profit
European bank illustrative example – reconciliation of profit Excerpt from HSBC Holdings plc Annual Report and Accounts 2005 Reconciliation or previously reported profit attributable to shareholders under UK GAAP to profit attributable to shareholders under IFRS for the year ended 31 December 2004
Slide 15: Financial Reporting Impacts
Financial Reporting Impacts
Slide 16: Accounting areas expected to be impacted most by the transition to IFRS
Accounting areas expected to be impacted most by the transition to IFRS Major accounting changes: • Securitization • Consolidation of off-balance sheet vehicles • Pension accounting • Acquisition accounting (including goodwill) • Transition and opening balance sheet Other areas of interest: • Ot
Slide 17: Each accounting area may have a one-time transition and/or ongoing impact
Each accounting area may have a one-time transition and/or an ongoing impact Each topic will be assessed using the following criteria: Accounting Balance Income statement Tier 1 Asset-to- Option sheet impact impact Capital Multiple Book value Earnings Efficiency (ACM) per share ratio One-time tran
Slide 18: Accounting areas may impact balance sheet line items
Accounting areas may impact balance sheet line items in varying degrees & magnitude Securitizations Consolidation Pensions Acquisition accounting Assets Cash Investments Loans Employee related assets Derivatives Property, plant and equipment Goodwill Liabilities and equity Deposits Fundi
Slide 19: Securitizations - balance sheet leverage may increase
Securitizations - balance sheet leverage may increase Impacts • Certain securitized assets are expected to no longer receive off balance sheet treatment, examples include Canada Mortgage and Housing Corporation (CMHC) mortgage programs • Increase to assets and liabilities • Corresponding impact on
Slide 20: Securitizations may have both one-time and ongoing impacts
Securitizations may have both one-time transition and ongoing impacts Impacts – cont’d Accounting Balance Income statement Tier 1 Asset-to- Option sheet impact impact Capital Multiple Book value Earnings Efficiency (ACM) per share ratio One-time transition impact Ongoing impact x
Slide 21: Illustrative example - securitization
Illustrative example - securitization Canadian GAAP IFRS Assets - Cash $102 $102 - Mortgage - $100 - Retained interest $3 - Liabilities - $102 Equity – one time - $(5) Income Statement - one time $5 - - ongoing - $1 Bank ABC securitizes $100 of 5 year mortgages Under Canadian GAAP, a gain of $2
Slide 22: Expected change to IFRS may provide some relief
Expected change to IFRS may provide some relief Ongoing Differences • Focuses on the substance of the transfer of risks and rewards to remove assets from the balance sheet, rather than the legal form as under Canadian GAAP Transition • Banks with October year ends will have a choice to apply IFR
Slide 23: Consolidation of previous off-balance sheet vehicles
Consolidation of previous off-balance sheet vehicles have one-time and ongoing impacts Impacts • More entities may be consolidated due to the different assessment of current off- balance sheet vehicles, thereby increasing assets and liabilities Accounting Balance Income statement Tier 1 Asset-to-
Slide 24: Illustrative example – consolidation of off-balance sheet vehicles
Illustrative example – consolidation of off-balance sheet vehicles Canadian GAAP IFRS Assets $100 $1,000 Liabilities - $900 Equity - Non-controlling interest* - $60 - Retained earnings - $40 Income Statement $4 $10 Bank ABC has a $100 investment in an off balance sheet vehicle earning $4 The veh
Slide 25: IFRS provides an opportunity to “start fresh” with pension accounting
IFRS provides an opportunity to “start fresh” with pension accounting Impacts • Unrecognized market-related and other actuarial amounts may be recorded directly as a reduction in retained earnings at transition, depending on the choice made by the bank • If this choice is made, post-transition pen
Slide 26: Pension accounting choices may have impacts at transition and ongoing
Pension accounting choices are available which may have impacts at transition and ongoing Impacts – cont’d • Assumption is that the transition choice is taken: Accounting Balance Income statement Tier 1 Asset-to- Option sheet impact impact Capital Multiple Book value Earnings Efficiency (ACM) per
Slide 27: Illustrative example – pension accounting
Illustrative example – pension accounting Canadian GAAP IFRS Assets $9,900 - Liabilities - $100 Equity – at transition - $(10,000) Income Statement – ongoing expense* $400 - Bank ABC has a defined benefit plan with a plan deficit of $100 (plan obligations exceed plan assets by $100) and cumulative
Slide 28: Pension plans will have options that may change the accounting
Pension plans will have options that may change the accounting under IFRS Ongoing Changes • Banks in Canada commonly amortize movements outside the defined range into pension expense • Under Canadian GAAP, the equity approach is not permitted • There may be differences in the measurement basis bet
Slide 29: Purchase prices are computed differently under IFRS
Purchase prices are computed differently under IFRS Impacts • Purchase price is computed differently, for example, in cases where part of the purchase price is dependent on future outcomes (inclusion of contingent consideration) or where there is a share offer (acquisition vs announcement date) •
Slide 30: Contingent consideration and deal costs are accounted for differently
Contingent consideration and deal costs are accounted for differently Ongoing differences • Deal costs are expensed under IFRS • The part of the purchase price that is dependent on future outcomes must be recorded at acquisition date fair value with subsequent changes in fair value recorded in the
Slide 31: Acquisition accounting can be onerous if applied retrospectively
Acquisition accounting can be onerous if applied retrospectively under IFRS Transition • Banks can choose to account for business combinations on an IFRS basis from November 1, 2010 onwards or elect a date prior to that and restate business combinations prospectively from that date • IFRS goodwill
Slide 32: IFRS provides relief from retrospectively applying each standard
IFRS provides relief from retrospectively applying each standard IFRS 1 – First-time Adoption of IFRS • Overarching principle is that IFRS should be applied as if it had always been in effect (“retrospectively”) resulting in catch up adjustments in retained earnings • Due to the difficulties in ap
Slide 33: Cumulative foreign exchange difference may “start fresh” at transition
Cumulative foreign exchange difference may “start fresh” at transition IFRS transition exemptions impacting opening retained earnings (November 1, 2010) include: • Foreign Exchange Banks can choose to transfer the cumulative foreign exchange differences on foreign operations (including hedging i
Slide 34: European illustrative example – opening IFRS balance sheet
European illustrative example – opening IFRS balance sheet Excerpt from 2005 Royal Bank of Scotland Annual Report and Accounts Analysis of IFRS adjustments, excluding IAS 32, IAS 39 and IFRS 4. Share Software Investment Based Employee Total UK GAAP Dividends Income Tax Leases Consolidation Develop
Slide 35: European illustrative example – opening IFRS balance sheet – cont’d
European illustrative example – opening IFRS balance sheet – cont’d Excerpt from 2005 Royal Bank of Scotland Annual Report and Accounts Analysis of IFRS adjustments, excluding IAS 32, IAS 39 and IFRS 4 (Cont’d). Share Software Investment Based Employee Total UK GAAP Dividends Income Tax Leases Con
Slide 36: Canadian GAAP and IFRS have mostly converged in some areas
Canadian GAAP and IFRS have mostly converged in some areas These items have a greater alignment with current Canadian GAAP reporting: • Financial instruments classification and measurement Classifications consistent with Canadian GAAP (held to maturity, loans and receivables, available-for-sale,
Slide 37: OSFI Transitional Relief
OSFI Transitional Relief
Slide 38: OSFI has provided some transition relief to capital requirements
OSFI has provided some transition relief to capital requirements Mortgages sold through the CMHC Programs prior to March 31, 2010 plus subsequent top-ups are excluded from the calculation of the asset to capital multiple Five quarter phase-in of IFRS transition impacts on capital • Irrevocable e
Slide 39: Future changes to IFRS
Future changes to IFRS
Slide 40: A number of significant IFRS projects are underway
A number of significant IFRS projects are underway and will impact post-transition A number of significant accounting standards are changing and could impact banks in Canada with October 31st year-ends as early as Q1, 2014 (this timing is under discussion): Financial instruments • Classification
Slide 41: Some proposals are expected to simplify and others more complex
Some proposals are expected to simplify and others will be more complex Financial instruments – cont’d: • Hedging Simplifying hedge accounting criteria, however, income statement will still reflect ineffectiveness • Impairment and loan loss provisioning The IASB and FASB are working on an amen
Slide 42: Some fundamental changes to accounting are in progress
Some fundamental changes to accounting are in progress Pension accounting • The option to amortize market-related gains/losses and other actuarial amounts through pension expense may be removed • The impact of the proposed change is that the gains and losses would be recognized in equity Insuran
Slide 43: Key Takeaways
Key Takeaways
Slide 44: Key Takeaways
Key Takeaways The transition to IFRS is complex Transition elections and accounting policy decisions to be made by individual banks Impacts will differ from bank to bank Reconciliations and disclosure to be provided to bridge between CGAAP and IFRS Uncertainty around future changes to key
Slide 45: Panel Discussion
Panel Discussion Jean Dagenais Linda Mezon Senior VP - Finance, Tax & IR, Chief Accountant, National Bank RBC John Ferren Manjit Singh VP Investor Relations, CIBC Senior VP, TD Securities Cally Hunt Senior VP & Chief Accountant, BMO Maria Theofilaktidis Senior VP & Chief Accountant, Scot
Slide 46: IFRS for Banks in Canada
IFRS for Banks in Canada January 10, 2011
Royal Bank of Canada — Investor Presentation (January 2011) on 6ix