The financial services industry is changing. So, whether you’re a hefty multinational corporation or a small enterprise, one thing is certain: what produced success in the past may not work as well in the months ahead.
Here is our pick of the four developments that are likely to most affect finance professionals in 2018.
1. IFRS 15 Revenue From Contracts With Customers
IFRS 15 became effective for annual reporting periods beginning on or after 1st January 2018. The standard concerns the principles applied to reporting information about revenue and cash flow from a contract with a customer. The IFRS 15 standard recognises revenue as “the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”.
Five steps are applied to the recognition of revenue under IFRS 15:
- The contract(s) with a customer must be recognised.
- Performance obligations (promises in a contract to transfer distinct goods or services to a customer) in the contract must be identified.
- The transaction price (the amount of consideration an entity is entitled to in exchange for transferring promised goods or services to a customer) must be determined.
- The transaction price must be allocated to each performance obligation. This is based on the relative stand-alone selling prices of each distinct goods or service promised in the contract.
- Revenue must be recognised when a performance obligation is satisfied. A performance obligation may be satisfied at a specific point in time (usually for goods) or over time (for the transfer of services).
It is envisaged that the IFRS 15 amendments will clarify how companies identify a performance obligation (the promise to transfer goods or a service to a customer in a contract). Additional clarification is expected around how a company defines if it is a principal (the provider of a good or service), or an agent (responsible for arranging for the goods or service to be provided) and whether revenue from granting a licence should be recognised at a specific point in time or over a period of time.
2. IFRS 16 Leases
IFRS 16 is the new lease accounting standard effective for annual reporting periods beginning or after 1st January 2019. Under the new standard, lessees must account for their leases under a single accounting treatment, bringing almost all leases on balance sheet. The aim of the new standard is to improve the transparency of financial statements through the recognition of a use of asset and a lease liability arising from the agreement.
The challenge many companies face is to become fully compliant by 1st January next year. The transition to adjust to the new standard is expected to take one to two years. Companies affected by IFRS 16, that haven’t already begun to transition to the requirements of the new standard, may find it difficult to make the 1st January 2019 deadline.
Companies will need to first assess their current active leases and review which of these will be affected by the new standard. This means scrutinising each lease contract to pinpoint the key data that will allow them to bring the lease on balance sheet and make changes to the income statement. For multinational organisations with high volumes of active leases for various assets in many locations, gathering the necessary data on these leases will be an enormous task.
Time is running out for companies to understand the new legislation, implement internal processes, prepare a transition contingency plan and review internal leasing policies in response to the new rules.
Investing in specialised leasing software that is able to data mine, analyse and centralise the lease portfolio into one secure and manageable system, is an important consideration that can help ease the pressure of this transition period, with the added benefit of improving long-term lease management practices.
IFRS 17 Insurance Contracts
IFRS 17 will become effective from 1st January 2021. The new standard governs the requirements applied by a company when reporting information about insurance contracts it issues, and reinsurance contracts it holds. It is the first international IFRS standard that sets out the accounting for insurance contracts.
The new standard is expected to overcome present difficulties involved in deciding which groups of insurance contracts are profit-making or loss-making and the analysis of trend information about insurance contracts.
The changes IFRS 17 will bring to insurance contracts accounting includes:
- Entities will need to provide updated information about the obligations, risks and performance of insurance contracts.
- Increase transparency of the financial information reported by insurance companies. This will give investors and analysts more confidence in understanding the insurance industry.
- Establish a standard of consistent accounting for all insurance contracts based on a current measurement model.
4. The Impacts of Brexit
One of the most common questions around the impact Brexit is likely to have on accounting standard is: will the UK abandon its use of international standards?
This is unlikely because IFRS is used by both companies on the main market and AIM companies. If anything, IASB’s standards are viewed as the benchmark for reporting by listed companies across the world. The UK government has been a strong supporter of IFRS and is unlikely to abandon its stance on international accounting standards, particularly in light of evidence that the mandatory adoption of IFRS in the EU has brought economic benefits.
The UK will continue post-Brexit to be a major global financial centre, so a decision to continue to adhere to internationally-accepted standards seems most likely.
It might be that the UK considers replacing the EU’s convoluted IFRS endorsement mechanism with a domestic alternative. When no longer bound by EU law, the UK would be able to review other aspects of the financial reporting system that originated with EU directives.
The consensus at this point is that companies can breathe easy. Any Brexit-inspired changes to UK accounting standards are unlikely to come for some time because the legislative programme of Brexit adjustments will remain full for many years to come. Any accounting standards reforms are unlikely to find their way to the top of government’s agenda. And IASB as a concept will transcend all of this.
If you would like to find out more, download IFRS 16 at a Glance. This free guide is a concise overview that gives you a clear understanding of how IFRS global lease accounting standards have changed and the practical implications this will have on your business.