The clock is ticking on IFRS changes

The wave of change is about to hit financial reporting

Three crucial new international accounting standards may add up to the biggest impact on Australian financial reporting in over a decade – and the first two are less than 15 months from starting.

By Tom Ravlic

A huge wave of change in the way companies tell their stories in numbers is about to hit and accountants must get ready, Australia’s corporate regulator is warning.

Three standards impacting on critical areas in accounting – IFRS 15 (revenue from contracts with customers) and IFRS 9 (financial instruments) – will become effective for financial years beginning on or after 1 January 2018. The new leasing standard, known as IFRS 16, will be effective a year later.

The Australian Securities and Investments Commission (ASIC) is alerting Australian accountants to the changes. It is urging them to ensure that the entities they work for are ready to disclose, in words and numbers, the expected impacts of the new standards.

The most challenging issues in the new standards include changes to the ways that:

  • new assets and liabilities are treated on balance sheets;
  • financial instruments are classified;
  • impairment is tested for financial instruments; and
  • revenue is accounted for in accordance with contracts and agreements

ASIC expectations

“The three new standards will have the greatest impact on the financial reporting of Australian entities since the adoption of IFRS in 2005,” says Doug Niven, ASIC’s senior executive leader of accounting and audit.

“Many companies will find that these new standards will have a greater impact [than the current reporting standards] on the way in which they report their financial position and their operating results to stakeholders.”

The corporate regulator has gradually turned up the heat over the past 12 to 18 months in its surveillance of company financial reports. Releases on its financial reporting surveillance have contained pointed references to the move towards new accounting in the three big-ticket areas.

A number of accounting firms have already begun highlighting to clients the commission’s prodding.

“As a regulator we have already indicated an interest in ensuring companies are preparing appropriately for the implementation of the new standards. Those individuals that went through the implementation of standards for the 2005 introduction of IFRS will have some idea of what is expected of them,” Niven says.

“I know there will be accountants new to this kind of implementation of standards and ASIC as a regulator will provide more detailed guidance before the end of 2016.”

The guidance is expected to reflect the firm but educational tone of documentation issued by ASIC, the Australian Securities Exchange and the Australian Accounting Standards Board (AASB) when Australian entities were preparing for IFRS implementation more than 11 years ago. As they did for the original 2005 introduction of IFRS standards, ASIC and other global regulators will be expecting entities to disclose the status of their implementation projects and estimates of the impact of the new standards on their accounts.

Once regulators issue further guidance, auditors will also be expected to ensure their clients provide sufficient information to ensure that the market is informed of the progress of their implementation of the new rules and an estimate of their quantitative impact.

Work to be done

Accountants will need to apply the technical requirements of the new rules, but KPMG partner Peter Carlson cautions that they must also do plenty of homework before they can provide the right information to the marketplace.

Dr Carlson, a member of the AASB, says companies should not underestimate the amount of work that needs to be done. That work may in some circumstances require adjustments to accounting software, financial modelling done by a company’s treasury department, and other databases containing historical valuation or pricing data to ensure information required for compliance is collected by the entity.

“The implementation projects might start as an accounting project and turn into an information system project and then come back to financial reporting again,” Dr Carlson says.

Explaining the impacts

Communication with boards of directors, shareholders and analysts also becomes critical in explaining why changes are occurring so that there is no reason for unjustified panic about the future of the business. Some entities, such as the Great Barrier Reef Foundation, have already begun publishing some analysis of their assets and liabilities impacted by changes to reporting rules.

In the case of lease accounting, the Foundation says there is one significant operating lease for which an asset and corresponding liability will be recognised and the amortisation and interest charges are not expected to be material.

Others, such as BHP Billiton, are still reviewing their situation before making more detailed disclosures about the impact of the standards on their operations.

Frank Micallef, Incitec Pivot Limited’s group chief financial officer, says that areas such as financial instruments require greater effort from internal company experts to help boards of directors understand the impacts.

Micallef points out that most board members are not deeply experienced in financial instruments. “A thorough education process for new board members and an occasional board refresher for existing board members can ensure that informed discussions and decisions can be had about the hedging activities that are undertaken,” Micallef says.

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