The Application of Ifrs Food Drink

EXECUTIVE SUMMARY
The Application
of IFRS:
Food, drink and
consumer goods
companies
November 2012
kpmg.com/ifrs
2 The Application of IFRS: Food, drink and consumer goods companies

Executive summary
Contents
Foreword 1
About this executive summary
Our Global FDCGPractice
Revenue 3
Intangible assets
Inventory 5
Property, plant and equipment
Impairment of non-financial assets
Business combinations
Operating segments
Critical judgements and key sources of estimation

uncertainty 10
Provisions and contingencies
11
Financial instruments
12
Interests in joint ventures
13
Biological assets
14
Performance measures
15
Presentation of comprehensive income and cash flows 16

Contact us
2011
2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
IBC
The Application of IFRS: Food, drink and consumer goods companies

Executive summary
Foreword
The IASB is at a crossroads in terms of its future direction. Having launched its Agenda Consultation in July 2011, the Board
is now in the process of setting its priorities and finalising its feedback statement to constituents. What remains clear is that
the Board is still committed to completing its four high-priority projects: financial instruments, insurance contracts, leases
and revenue recognition. The IASB has been collaborating with the FASB on these projects, but the convergence of the final
standards remains unclear. The Boards joint project on revenue recognition currently appears to be the main success story,
with a converged standard expected in 2013.
The food, drink and consumer goods (FDCG) sector is marked by intense competition and uncertainty, presenting a host of
challenges for global FDCG businesses. Rising input costs, technology, sustainability concerns and global sourcing options
are driving manufacturers to constantly examine their supply chains and processes to ensure cost efficiency and compliance.
Economic, social, cultural and demographic shifts are fundamentally changing consumer preferences and behaviour. Developed
markets are growing slowly, while emerging markets are experiencing tremendous growth. And regulation is impacting the
FDCG sector more than ever before.
Our survey discusses many of the key sector accounting issues and provides illustrations of how FDCG companies have sought
to address them. We provide examples of sector-specific accounting disclosures, including in some cases detailed explanations
of the business context in which accounting judgements have been made. For companies already applying IFRS, it gives some
idea of the extent of consistency within the sector; for companies that havent yet adopted IFRS, it gives some idea of what
your reporting future might be.
We hope that this publication serves as a useful resource for both existing users of IFRS and FDCG companies seeking to
understand the potential impact of adoptingIFRS.
Willy Kruh
Global Chair
Consumer Marketsand FDCG
KPMG International
Mark Baillache
Global Audit Sector co-Lead
FDCG
KPMG in Hong Kong
Guilherme Nunes
Global Audit Sector co-Lead
FDCG
KPMG in Brazil

Executive summary
About this executive summary

This executive summary has been
drawn from our publication The
Application of IFRS: Food, drink and
consumer goods companies, and
focuses on the results of a survey of the
IFRS financial statements of 27FDCG
companies from 15 countries. This
publication has been produced by the
KPMG International Standards Group, in
collaboration with KPMG inJapan.
findings from the survey. In addition,

that publication includes disclosures
made by FDCG companies in their
consolidated financial statements that
we believe may be useful in assessing
the type of information being disclosed
in practice. That publication also includes
a chapter on significant differences
between IFRS and US GAAP in respect
of the issues discussed.
This executive summary should be read

in conjunction with that publication
in order to understand more fully the
IFRS-related technical information is

available at www.kpmg.com/ifrs.
For access to an extensive range of

accounting, auditing and financial
reporting guidance and literature, visit
KPMGs Accounting Research Online.
This web-based subscription service
can be a valuable tool for anyone who
wants to stay informed in todays
dynamic environment. For a free 15-day
trial, go to www.aro.kpmg.com and
register today.
Our Global FDCGPractice

KPMGs Global Food, Drink and
ConsumerGoods (FDCG) practice is a
network of experienced professionals
based in member firms around the
world. The Global FDCG practice
encompasses food, drink, tobacco,
apparel, consumer durables, fast
moving consumer goods (FMCG), and
luxury goods.
Our aim is to help member firms clients

make the most of the challenges and
opportunities presented by a constantly
changing business environment. We
offer a number of services to help
clients address the issues facing their
industry, in the key areas of governance,
performance and growth.
For more information, visit

www.kpmg.com/FDCG.

Executive summary
Revenue
Revenue is the key financial measure
for any consumer-facing organisation,
and this is especially true for FDCG
companies. There is no shortage of
revenue recognition issues for the
sector, mainly because of the different
terms and conditions of sale to
customers, including product returns,
sales incentives, product warranties,
discounts and rebates. One of the
challenging issues facing some FDCG
companies is the treatment of salesrelated taxes, such as excise duties,
which can be accounted for differently
depending on the tax regulations in
a particular jurisdiction. Some of the
examples are included in this chapter.
It is interesting to see how these
issues are reflected in the disclosures
that FDCG companies include in their
financial statements.
Key messages from our survey group

All companies provided a generic revenue recognition policy around the sale of
goods and services, with the most common specific policies relating to sales
incentives, items excluded from revenue and returns.
The timing of revenue recognition varied between companies, from the
dispatch or shipment of goods to the delivery or acceptance by a customer,
depending on terms and conditions used for trading.
Nearly all companies provided a breakdown of revenue within their segment
disclosures. When operating segments were not organised by products,
companies presented a separate breakdown of revenue by types of products
or services; vice versa, when operating segments were not organised by
geography, companies presented a separate breakdown of revenue by
geographic location.

Executive summary
Intangible assets
Despite the slowdown in M&A activity
in 2011, intangible assets remain a
key feature of statement of financial
position. Key categories of intangible
assets in the FDCG sector include
brands, trademarks and customerrelated intangibles.
Accounting for intangible assets
involves significant judgements,
such as determining whether these
assets could be recognised or not,
whether they have finite or indefinite
useful lives, how long they should be
amortised for and whether they show
any signs of impairment.

All companies disclosed an accounting policy for intangible assets. Threequarters of companies provided a detailed accounting policy for different
categories of intangible assets.
The most common intangible assets included brands, trademarks, software
and customer-related intangibles. Nearly all companies recognised either
brands or trademarks as intangible assets.
All companies that discussed the amortisation of intangible assets applied
the straight-line method. Estimated useful lives of intangible assets of similar
nature varied greatly between companies. The classification of brands and
trademarks as indefinite- or finite-lived also varied between companies.

Executive summary
Inventory
Typically, FDCG companies carry a
large volume of inventory, including raw
materials, work in progress, and finished
goods. Some goods produced by FDCG
companies require special storage
conditions and have fairly short shelf
life, and some goods may be exposed
to high volatility in prices on the market.
Therefore, one of the critical issues for
FDCG companies is a regular review of
inventory for any signs of impairment.

While all companies disclosed an accounting policy for inventory, the level of
detail in disclosures varied.
Nearly all companies disclosed their inventory costing policy. Weightedaverage cost was the most common method. Some companies applied
different costing methods for different groups of inventory.
More than two-thirds of companies disclosed the basis for determining
net realisable value. Just under three-quarters of companies wrote down
inventory during the period surveyed, although write-downs were generally
not significant. The presentation of write-downs of inventory and movements
in the allowance for obsolescencevaried between companies.

Executive summary
Property, plant and equipment

By its very nature, the FDCG sector
is highly capital intensive, with
manufacturing being integral to the
success of most companies. For that
reason, property, plant and equipment is
typically a large item in the statement of
financial position of a FDCG company.
The number of challenging issues in
respect of accounting for property,
plant and equipment should not be
underestimated. Amongst significant
issues facing companies are accounting
for returnable containers, component
accounting and estimates in respect
of the useful life of assets and their
recoverable amounts.

All companies disclosed an accounting policy for property, plant and
equipment, encompassing recognition, measurement and depreciation.
All companies applied the straight-line method of depreciation. In addition,
some companies applied the reducing balance and the unit-of-production
methods to some groups of assets.
The estimated useful lives of assets of similar type varied significantly
between companies.
Only one company elected to revalue certain property, plant and equipment.
There was limited disclosure in respect of returnable containers.

Executive summary
Impairment of non-financial assets

FDCG companies face a variety of risks
that can lead to possible impairment
issues, such as cyclical fluctuations
in customer demand, the increasing
influence of low-cost competitors
from Asia, and restructuring that can
introduce new production frameworks.
Therefore, impairment testing is a
critical accounting topic for the sector.
The economic turmoil of the last few
years has seen particular pressure on
impairment testing, and part of the
challenge that companies face these
days is whether any of those previously
recorded impairment losses should
bereversed.
Impairment testing requires significant
judgement, and relies heavily on
discounted cash flow projections
as well as on the appropriate
determination of cash-generating
units. It is therefore interesting to see
the disclosures that FDCG companies

All companies disclosed an accounting policy for the impairment of nonfinancial assets.
A large majority of companies specified how cash-generating units (CGUs)
were determined. The majority determined CGUs at a level that was lower
than operating segments.
A majority of companies recognised an impairment loss in the period
surveyed. Although the reasons for impairment varied, economic downturn
was cited most often. Few companies recognised a reversal of an impairment
loss during the period surveyed.
Value in use was the most common approach used by companies in
determining recoverable amount. The inputs used for calculating recoverable
amount, including the cash flow forecast period, discount rates and growth
rates, varied significantly between companies.
provided about their approach to
impairment testing and critical
judgements and estimates used for
performing the tests.

Executive summary
Business combinations
In 2010, M&A activity had climbed
steadily and by the end of that year,
market participants saw the growing
volume and value of deals being
completed as an encouraging sign
that companies and economies were
recovering from the global economic
downturn of the past three years.
Globally, 2011 saw a gradual decline
in M&A deals in both the FDCG
manufacturing and retail sectors,
followed by signs of recovery in the
fourth quarter. However, while the
momentum continued throughout 2011
in many growing markets including
Brazil, China and Mexico, economic
disruptions, particularly the euro zone
crisis in the summer of 2011, all but
stagnated activity in others, especially
the UK, Germany and Italy.
The quantity and size of business
combinations is closely related to
companies financial position. In recent
years, a tightening capital market has
led to some difficulty for companies

The majority of companies had a business combination in the period surveyed.
Nearly half of companies that reported a business combination disclosed
information that revealed the extent of fair value adjustments in the acquisition
accounting. The most common fair value adjustments were to deferred tax
balances, intangible assets, and property, plant and equipment.
The most commonly recognised intangible assets in the acquisition
accounting were brands, trademarks and customer relationships.
The factors that gave rise to the recognition of goodwill included synergies,
developing a position in strategic markets and assembled workforce.
in securing the required funds.
Consequently, those FDCG companies
with sufficient capital and a willingness
to assume risk would have been more
likely to have expanded successfully
through acquisitions than others that
were less well-funded or more riskaverse.
Typical issues arising in accounting
for a business combination that could
be encountered by a FDCG company

include establishing fair values and
useful lives of acquired property,
plant and equipment and identifying
intangible assets, particularly brands,
trademarks and customer relationships.

Executive summary
Operating segments
Communicating a companys
performance to shareholders is a
challenge, requiring disaggregation to
explain the trends and results that have
been affected by different factors or
that have different prospects. FDCG
companies are used to discussing
their performance on a disaggregated
basis in the narrative sections of their
annual reports. These sections are
often relatively free-form, allowing
flexibility to management to choose
the most appropriate way to describe
theirbusiness.
FDCG companies may have diverse
operations and operate in various
geographical locations. In our experience,
companies in the FDCG sector tend to
manage their operations by grouping
together risks based on the nature of the
operations to align with their strategic
and operating goals. However, there

Over half of companies discussed how the chief operating decision maker
(CODM) was identified. The role of the CODM was usually performed by the
board of directors or executive committee.
Just under half of companies used products and services as a basis for
determining their reportable segments. The most common range of reportable
segments was 4 to 6.
The measure of segment profit or loss disclosed by companies varied;
however, adjusted operating profit was used most frequently.
Nearly all companies reported sales by destination and sales by the type of
product either in the entity-wide disclosures or in the reportable segment
disclosures. The other most frequently reported entity-wide disclosures
included non-current assets or assets by geographic location and capital
expenditure by geographic location.
were some companies in the survey
that managed risks with a greater focus
on geography and therefore identified
segments accordingly.

Executive summary
Critical judgements and key

sources of estimation uncertainty
FDCG companies make a number of
key estimates and judgements, some of
which are sector-specific and others that
apply across sectors. One of the most
important areas for FDCG companies
is estimates applied in impairment
testing, which requires assumptions
about future cash flow projections,
expected future growth and the useful
lives of assets, all of which are based
upon strategic operating models and
business decisions. The changing
customer behaviour and economic
downturn make reliable estimates
difficult to achieve.
Another key area frequently cited by

FDCG companies in which management
applies estimates is employee benefits.
Developing appropriate estimates for
defined benefit obligations can be a
particularly complex area for a number
of reasons. The worldwide nature of
most companies operations requires
the development of assumptions that
can vary widely between jurisdictions
due to differences in anticipated salary
inflation, retirement age, return on
assets and discount rates.
Key messages from our

surveygroup
The majority of companies
presented separate note
disclosure on critical judgements
and estimation uncertainty.
The impairment of intangible
assets and goodwill, and employee
benefits, were the most commonly
disclosed areas of critical
judgement and key sources of
estimation uncertainty. They were
followed by provisions and taxes.
The Application of IFRS: Food, drink and consumer goods companies 11

Executive summary
Provisions and contingencies

FDCG companies are exposed to
a variety of risks in their day-today operations and from historical
activities that might result in future
cash outflows. These risks frequently
relate to the products sold, litigation
from competitors and customers and
obligations in connection with various
restructuring programmes. One of
the challenging accounting issues for
the sector is determining whether a
claim received from a customer or a
competitor gives rise to a provision.
FDCG companies often use
restructuring to adjust to the rapidly
changing environment, changing

Nearly all companies disclosed their accounting policies for provisions and
contingencies, specifically for restructuring and litigations.
Most companies provided detailed note disclosures for provisions. The most
frequently disclosed provisions related to restructuring, litigations and onerous
contracts.
Nearly half of companies disclosed contingent liabilities relating to litigations.
consumer behaviour and changing
trends in fashion. Under IFRS, there
are strict criteria to be met before
a provision for restructuring can
be recognised, as well as detailed
disclosure requirements about the

nature of the obligation and the timing
of expenditure.

Executive summary
Financial instruments
Most large FDCG companies tend to
have a number of foreign operations,
and are involved in various investing
and financing activities, which expose
them to a variety of financial risks. These
risks include credit risk, market risk
(foreign currency risk, interest rate risk,
and commodity price risk) and liquidity
risk. Derivatives are frequently used to
manage these risks.
Various factors influence a FDCG
companys hedging strategy, including
the companys risk management
objective, the nature of risks being
hedged, the companys risk appetite,
the nature of its selling arrangements,
the general economic outlook, and the
companys funding structure.

All companies discussed their exposure to liquidity, foreign currency and
interest rate risks. Nearly all companies discussed their exposure to credit and
commodity price risks.
Nearly all companies hedged foreign currency exchange risk and interest rate
risk.
Almost all companies that applied hedge accounting used cash flow hedging
and a large majority used fair value hedging.
These wide-ranging factors mean that

hedging and risk management activities
vary from company to company within
the FDCG sector, not just in terms of the
type of risks being managed, but also in
terms of the specific instruments that

they use for the purpose of achieving
those objectives.

Executive summary
Interests in joint ventures

FDCG companies often enter into
collaborative arrangements to expand
their business into new markets or to
share the financial burden and risks
associated with the high competition
in the sector. One strategy is to enter
into co-production arrangements or
form alliances with others in the sector.
Benefits of this approach include sharing
initial investing costs as well as jointly
exploiting assets such as new brand or
customer relationship or the know-how
of production. Alliances can take various
forms, including joint ventures.
Under IFRS, there are strict criteria that
must be met in order for joint venture
accounting to be applied, and when an
FDCG company refers to an operational
involvement in a joint venture it does not
necessarily follow that the arrangement
will be accounted for as a joint venture
in accordance with IAS 31 Interest in
Joint Ventures.
In May 2011, the IASB published IFRS11

Joint Arrangements, which requires
companies to evaluate the contractual
rights and obligations agreed to by the
parties to joint arrangements; the legal
form of the arrangement is no longer
the most significant consideration in
determining the accounting for joint
arrangements.
The standard requires that a company
recognise an interest in a joint venture,
previously a jointly controlled entity,
using the equity method. Unlike
IAS31, proportionate consolidation is
not permitted as an accounting policy
choice.
As the effective date of IFRS 11 (annual
periods beginning on or after 1 January
2013) approaches, investors will be
increasingly interested in the financial
statement impact of any required
changes in accounting policy.

surveygroup
Most companies disclosed an
accounting policy for joint ventures.
All joint ventures were in the form
of jointly controlled entities.
A small majority of companies with
an interest in a jointly controlled
entity applied the equity method.
Proportionate consolidation,
which was used by the remaining
companies, will no longer be
permitted as an accounting
policy choice under IFRS 11 Joint
Arrangements, which becomes
effective in 2013.

Executive summary
Biological assets
Biological assets are essential to the
operations of many FDCG companies,
and their nature may vary from vines
and grapes to livestock of pigs or
poultry. Accounting for biological assets
under IFRS is not without a challenge.
One of them is determining the fair
value of biological assets. This task
involves significant estimates and
judgements.

Just under a third of companies carried biological assets in their statement of
financial position. The nature of the biological assets varied from trees, vines
and grapes to livestock.
The fair value of biological assets was determined by applying various
techniques, depending on the nature of the assets.

Executive summary
Performance measures
FDCG companies use a wide variety
of KPIs to measure both financial and
operating performance. Often these
indicators are intended to provide
meaningful insights to shareholders and
analysts about the financial health and
social responsibility of the company, and
represent measures emphasised by the
investor community.
Whether in the management discussion
and analysis (MD&A), part of a board
report, within commentary from
company executives, or business
overviews, all companies surveyed
provided performance analysis as part
of their annual report. Though this
analysis frequently focused on financial

All companies used key performance indicators (KPIs) to discuss their
performance, with about three-quarters of companies presenting them in a
separate section in the annual report.
Performance measures widely varied. Indicators of financial performance were
more common than indicators of operating performance. The most common
indicators of performance included revenue and operating profit.
Just over half of companies mentioned alternative performance measures in
their financial statements, and the majority of them provided reconciliations
with the amounts reported in the financial statements.
performance, varying degrees of
emphasis were also placed on nonfinancial measures.

Executive summary
Presentation of comprehensive income

and cash flows
IFRS requires the following as a
complete set of financial statements:
a statement of financial position
(balance sheet);
a statement of comprehensive
income, presented either in a
single statement of comprehensive
income (which includes all
components of profit or loss and
other comprehensive income) or
in the form of two statements,
being an income statement (which
displays components of profit or loss)
followed immediately by a separate
statement of comprehensive income
(which begins with profit or loss as
reported in the income statement
and displays components of other
comprehensive income to sum to
total comprehensive income for the
period);
a statement of changes in equity;

a statement of cash flows, in which
cash flows from operating activities
can be presented using either the
direct or indirect method;
notes, comprising a summary of
significant accounting policies and
other explanatory information; and
a statement of financial position
as at the beginning of the earliest
comparative period when a company
restates comparative information
following a change in accounting
policy, correction of an error or
reclassification of items in the
financial statements.
All financial statements within a
complete set of financial statements are
presented with equal prominence.

surveygroup
Most companies presented
their performance using two
statements: an income statement
and a separate statement of
comprehensive income.
The majority of companies
presented expenses by function on
the face of the income statement
or statement of comprehensive
income.
Most companies presented cash
flows from operating activities
using the indirect method.
Contact us
Willy Kruh
Global Chair, Consumer Markets and FDCG
KPMG International
T: +1 416 777 8710
E: wkruh@kpmg.ca
Mark Baillache
Global Audit Sector co-Lead, FDCG
KPMG in Hong Kong
T: +852 2685 7833
E: mark.baillache@kpmg.com
Guilherme Nunes
Global Audit Sector co-Lead, FDCG
KPMG in Brazil
T: +55 112 183 3104
E: grnunes@kpmg.com.br
Dan Coonan
Global Executive, Consumer Markets
KPMG International
T: +44 20 76941781
E: daniel.coonan@kpmg.co.uk
Elaine Pratt
Global Head of Marketing, Consumer Markets
KPMG International
T: +1 416 777 8195
E: epratt@kpmg.ca
Nick Debnam
Head of Consumer Markets and FDCG
Asia Pacific region
KPMG in Hong Kong
T: +852 2978 8283
E: nick.debnam@kpmg.com
John Morris
Head of Consumer Markets
Europe, Middle East and Africa region
KPMG in the UK
T: +44 20 7311 8522
E: john.morris@kpmg.co.uk
Pat Dolan
Head of Consumer Markets and FDCG
Americas region
KPMG in the US
T: +1 312 665 2311
E: patrickdolan@kpmg.com
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.
Publication name: The Application of IFRS: Food, drink and consumer goods companies Executive summary
Publication number: 121241
Publication date: November 2012
KPMG International Standards Group is part of KPMG IFRG Limited.
KPMG International Cooperative (KPMG International) is a Swiss entity that serves as a coordinating entity for a network of
independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services
are provided solely by member firms of KPMG International (including sublicensees and subsidiaries) in their respective geographic
areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein
shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member
firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any other member firm, nor
does KPMG International have any such authority to obligate or bind KPMG International or any other member firm, in any manner
whatsoever.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is
accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information
without appropriate professional advice after a thorough examination of the particular situation.

The Application of Ifrs Food Drink

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Application of Ifrs Food Drink

Uploaded by

Copyright:

Available Formats

EXECUTIVE SUMMARY

2 The Application of IFRS: Food, drink and consumer goods companies

Our Global FDCGPractice

Impairment of non-financial assets

Critical judgements and key sources of estimation

Interests in joint ventures

Presentation of comprehensive income and cash flows 16