General purpose financial statements: 3 new accounting standards

There are changes in the wind

Three new accounting standards are just around the corner.

Financial reporting in Australia faces big changes when three new accounting standards from the Australian Accounting Standards Board (AASB) come into effect over the next three years. AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers apply to accounting periods beginning on or after 1 January 2018, while AASB 16 Leases applies to accounting periods starting on or after 1 January 2019.

The new standards will apply to all entities that prepare General Purpose Financial Statements (GPFS), but are not mandated for companies preparing Special Purpose Financial Statements (SPFS). Practitioners who prepare SPFS should, however, keep in mind the specific information users must include in their financial statements, and decide if the new standards are applicable.

AASB 9 (IFRS 9) Financial Instruments

IFRS 9 was developed by the International Accounting Standards Board (IASB) in response to concerns about the role of financial instruments in the corporate collapses of the 2007-2008 global financial crisis. The new standard also updates other aspects such as hedge accounting.

The new AASB 9 (IFRS 9) requirements replace AASB 139 Financial Instruments and could have a significant impact on banks, financial institutions and other entities with financial instruments.

AASB 9 introduces a new classification and measurement model for financial instruments. One of the more radical changes is its introduction of an “expected credit loss model”, which requires impairment of financial assets predicated on a future-based assessment of 12-month or lifetime expected credit losses. But assessing information that may indicate future impairment to an asset’s value will require significant judgement.

Trade receivables, loans, debt securities and lease receivables are some of the financial assets to be affected by the new impairment requirements in AASB 9. A simplified approach is available for trade receivables and contract assets (assets arising from revenue recognised for the provision of goods or services), which essentially requires the recognition of 12-month expected credit losses for such short-term assets.

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AASB 15 (IFRS 15) Revenue from Contracts with Customers

AASB 15 replaces accounting standards including AASB 111 Construction Contracts and AASB 118 Revenue. Following its publication, the AASB is finalising a new standard to give guidance on applying AASB 15 for the not-for-profit (NFP) sector. This new standard will also address “non-exchange” transactions in the NFP sector, previously addressed in AASB 1004 Contributions

AASB 15 moves to a “transfer of control” model of revenue recognition – compared to the “transfer of risks and rewards” approach taken by its predecessor AASB 118 – and takes a five-step approach to revenue recognition (see right).
"IFRS 9 was developed by the International Accounting Standards Board (IASB) in response to concerns about the role of financial instruments in the corporate collapses of the 2007-2008 global financial crisis"

AASB 16 (IFRS 16) Leases

The size of off-balance sheet assets and liabilities, and the lack of transparency around them, were the main drivers behind the IASB’s Leases project, which culminated in the issue of IFRS 16 earlier this year. It’s estimated that the present value of future off-balance sheet lease payments globally is currently more than US$2 trillion. The new standard aims to bring most of this value back onto company balance sheets.

Simply put, for lessee accounting, the new standard will no longer distinguish between finance and operating leases. Lease contracts will result in a lease asset and lease liability. The lease asset will have to be depreciated over its useful economic life, while the lease liability will be unwound through interest charged to the income statement over the lease term. 

However, these requirements do not apply to short-term leases (lease term <1 year) and low-value asset leases (<US$5,000).

Related: Everything you need to prepare for IFRS 16

Lessor accounting under AASB 16 remains largely unchanged from its predecessor AASB 117. Most of the modifications concern changes to disclosures.

Access the new standards at

5 steps to revenue recognition

  1. Identify the contract with the customer
  2. Identify separate performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to separate performance obligations 
  5. Recognise revenue when each performance obligation is satisfied

Be prepared

Entities affected by the new standards will have to ensure their accounting systems can capture the information needed to meet the new requirements. For example, with lease contracts under AASB 16, a formal system like that used for asset registers may be necessary to capture and monitor information relating to lease contracts.

Other things to think about include:
  • Training staff in the new requirements well in advance of the new standards coming into force.
  • Communicating with the auditors of any affected entities to ensure accounting systems are sufficiently robust to capture the information needed to prepare the financial statements that will be audited.
  • Auditors themselves will need to consider if any modifications are required for their audit testing and evidence-gathering processes.

Ram Subramanian is CPA Australia’s policy adviser, reporting

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