Every accountant that hasn’t been living under a rock will be aware that there have been significant changes to IFRS 9, 15 and 16 over the past couple of years.
It affects those of you who report in Commerce & Industry very differently from those in Financial Services, affects those of you in the Property sectors very differently from those of you in Retail or FMCG sectors, and even affects you differently depending on your Financial year.
This can understandably get a little confusing, and companies are actively engaging with professional services firms and seeking advice from the Big 4 to ensure that their Finance teams are as up to speed as possible. That can often take time though, and we’ve seen a spike in the need for candidates with pre-existing knowledge of the IFRS changes.
So I’ve been doing research of my own, making sure I know what’s of vital importance to communicate to my clients in terms of skills and experience they’re seeking, as well as allowing me to better advise my candidates on what the best paths towards enlightenment are during this time of change.
Take a look below for the key ‘need to know’ highlights of the IFRS changes, and then head on over to the links at the bottom of this article to find out more!
IFRS 9 - Financial Instruments
Now most people think Financial Instruments will only affect those in the Financial Services industry but, in fact, any entity with long term loans, equity investments, or ‘non-standard’ financial assets, could need to brush up.
Corporates are most likely to experience the impact of IFRS 9 in the followings areas:
• Classification and Measurement - Companies will need to assess their business models for managing financial assets and whether the cash flows from such are solely payments of principal and interest in order to correctly classify them. The new classification criteria are very different to the old IAS 39 and more assets will fall under Amortised Costs, FVOCI or FVTPL than the old IAS 39 using a new method to assess hybrid instruments.
• Impairment - The requirements for financial asset impairment have also changed fairly significantly, with the introduction of a new ‘expected’ credit loss (ECL) model instead of the previous ‘incurred’ model. This means that the model is more forward looking - and that an event need not even occur before an impairment loss is recognised under the new IFRS 9.
• Hedge Accounting - Hedge accounting now sits more closely aligned with Risk than before - and if your company chooses to take on the new IFRS 9 hedging model then more risk management strategies will apply.
The first financial statements to include the new IFRS 9 statements will be the ones completed for 31st December 2018.
IFRS 15 - Revenue
The new revenue standards are designed to assist in filling the gap between IFRS and US GAAP with regards to contracts with customers. This will have different effects depending on if you are in Telco, Power and Utilities, Building and Construction or even Transport. Prior to this IAS 18 was pretty broad and left a lot of areas for interpretation in revenue recognition, in contrast to over 100 documents and protocols used in US GAAP.
The core principle of IFRS 15 is in when you recognise revenue, as it will now be based on when an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the payment to which the entity expects to be entitled in exchange for those goods or services. This means extensive new disclosure requirements as well.
How will your industry be affected?
• Telcos will have to look at contracts regarding subsidised handsets, and contracts paid over more than a year, which gives rise to considering contract terms and new business practices that could provide new commercial opportunities
• Construction & Infrastructure will have to look at the impacts of sale of WIP such as incomplete buildings - including when to recognise it as revenue and how much to recognise, as well as how they treat sales involving government backing, warranties and claims
• Power & Utilities need to look at the timing of asset transfers, customer contract lengths and the treatment of contract costs and contracts with multiple goods or services e.g. oil, gas and electricity
• Transport companies will need to re-evaluate loyalty programmes, travel cards and rewards recognition for customers, timing of revenue recognition for ancillary services, freight and shipping, ticket breakage and extra charges
• FMCG and Food & Beverage businesses will have to evaluate timing for recognition surrounding trade incentives, licenses and franchises. As well as payments to distributors and retailers, and all their loyalty programmes, discounts, rebates and other incentives
The first financial statements to include the new IFRS 15 statements will be the ones completed for 31st December 2018
IFRS 16 - Leases
The newest of the IFRS changes to be announced and the one that companies are arguably struggling with the most currently, is IFRS 16 for Leases that will require companies to bring most leases on-balance sheet from 2019.
Under the new standard, companies will recognise new assets and liabilities, bringing added transparency to the balance sheet. It’s meant as a positive shake up to encourage faith in the balance sheet and finance in general, given currently analysts will often adjust financial statements to reflect lease transactions held off-balance sheet. But many industries including retail, airlines, shipping, healthcare and transport & logistics are looking at a lot of work with the change. Retailers are definitely feeling the hit as some may have up to 10,000 leases to review and collect around 80 data points per lease.
Key highlights on the IFRS 16 changes you need to know are:
• IFRS 16 eliminates the current dual accounting model for lessees - which distinguishes between on-balance finance leases and off-balance operating leases
• Lessors accounting remains the same - i.e. lessors will continue to classify leases as financial and operating
• The lease is now an on-balance sheet liability - which means it attracts interest, alongside the new asset on the other side of the balance sheet
• This means lessees will appear more asset rich but also more indebted
• There are also effects over the life of the lease - e.g. companies will now recognise a front-loaded pattern of expense across most leases
Companies will have to decide how to apply the new lease definition, and whether or not to grandfather the lease definition for practicality reasons.
The first financial statements to include the new IFRS 16 statements will be the ones completed for 31st December 2019
It is certainly an exciting time for finance as the new standards come into play.
If you find yourself in need of candidates with specialised technical skills or experience in the new reporting standards, please get in touch with our Accounting & Finance team, who are partnering with a number of contract and permanent candidates specialising in these areas.
For more information take a look at these articles:
And thank you to KPMG for their vital information regarding the changes: