Accountants Face Multiple Threats From New IFRS Accounting Standards
Across the globe, many countries are starting to make the transition to new IFRS accounting standards.
So far, nearly all countries have made a public commitment to supporting the high-quality global accounting standards. At the time of releasing their Pocket Guide to IFRS Standards in early 2017, the IFRS Foundation reports that only Albania, Belize, Bermuda, the Cayman Islands, Egypt, Macao, Paraguay, Suriname, Switzerland and Vietnam have not agreed to make the switch.
Many companies are also faring well in implementing the standards. In Australia, for example, the transition process seems to have been reasonably smooth for most sectors.
“Some entities, in particular, those that operate in other countries that use IFRS Standards, have experienced cost saving in preparing financial reports,” reads a report by the Australian Accounting Standards Board. “In contrast, some small and medium-sized entities (SMEs) and NFP entities have concerns about the costs of fully complying with AASB Standards, particularly the disclosure requirements.”
These findings, according to Hans Hoogervorst, Chairman of the International Accounting Standards Board, are consistent with similar studies conducted in Canada, the European Union and Korea.
But, while many companies across the globe seem to be on track, the task of changing to the new IFRS Standards should not be underestimated. Most companies need to change at least some of their systems and practices in order to comply. And it is important to realise that the implications, in most instances, extend far beyond the accounting function.
“Companies that are ahead in this regard, and currently working to implement these standards, are finding implementation to be more complex and time-consuming than expected,” reads an article on Deloitte’s website. “It is time to take action in order to ensure a smooth, no-surprises implementation of the new standards.”
Overview of the financial reporting standards
According to the IFRS Foundation’s Pocket Guide to IFRS Standards, the new standards prescribe the items in a business that have to be recognised as assets, liabilities, income and expenses; how to measure those items; how to present them in a set of financial statements; as well as related disclosures about those items.
We share a brief roundup of some of the new IFRS standards and take a look at how they impact financial reporting.
This standard specifies how an organisation should classify and measure their financial assets, financial liabilities and some contracts to buy or sell non-financial items.
“IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument,” the IFRS Foundation explains in an article on their website.
According to an IFRS 9 fact sheet by PwC, possible consequences of applying the standard include more income statement volatility (IFRS 9 raises the risk that more assets will have to be measured at fair value), earlier recognition of impairment losses on receivables and loans (including trade receivables), and significant new disclosure requirements (many companies need new systems and processes to collect the necessary data).
The IFRS 15 Standard establishes the principles that an organisation applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows related to their contracts with customers, says the IFRS Foundation.
The core principle of IFRS 15, Deloitte explains, is that an entity must recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
This standard is ruffling a few feathers because it has a major impact on certain kinds of businesses. For example, IFRS 15 significantly changes mobile operations’ practice of quietly using customers’ service plan charges to subsidise the up-front costs of handsets, according to an IFRS 15 review by PwC.
“As a result, it brings profound implications for communications companies’ operations, with knock-on effects in areas from pricing to marketing to scale incentives,” the review continues.
The objective of IFRS 16, according to the IFRS Foundation, is to report information that faithfully represents lease transactions and that provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet this objective, a lessee should recognise assets and liabilities arising from a lease on balance sheet, the IFRS Foundation says.
According to PwC, this new standard redefines commonly used financial metrics. The new requirements eliminate nearly all off-balance-sheet accounting for lessees and redefine many commonly used financial metrics such as the gearing ratio and EBITDA, they write in a document entitled IFRS 16: The lease standard is changing. “This will increases comparability, but may also affect covenants, credit rating, borrowing costs and your stakeholders’ perception of you.”
Adapting accounting systems to comply with this new standard can be a headache. Fortunately, good lease accounting software, such as Innervision’s Lease Optimisation and Information Software (LOIS), can simplify the process and make it relatively easy for companies to comply.
IFRS 17 is the first comprehensive and truly international IFRS Standard that establishes that accounting for insurance contracts, notes the IFRS Foundation. With existing accounting for insurance contracts, investors and analysts find it difficult to identify which groups of insurance contracts are profit or loss-making. They also find it difficult to analyse trend information about insurance contracts.
IFRS 17, in turn, provides updated information about the obligations, risk and performance of insurance contracts, while increasing transparency in financial information reported by insurance companies. It also introduces consistent accounting for all insurance contracts based on a current measurement model.
Like the other IFRS standards, IFRS 17 will have a significant impact on business operations. “The new standard should be considered much more than an accounting issue,” says PwC. “The standard will have significant implications for IT systems, strategic management, business processes and employee skill sets.”
Insurance companies still have a bit of time to get the correct systems in place, as IFRS 17 will only be effective from 1st January 2021.
Get Up To Speed On The New Lease Accounting Standards
Whether you are looking for a quick introduction to IFRS 16 or you are looking to gain a better understanding of the impacts the new standard may have on your business. This brief downloadable fact sheet will provide you with a top-level snapshot of whats changing, outlines the key implications and offer insight as to how to prepare. Just click on the link below to get your copy.