Three new accounting standards coming into force over the next 18 months are expected to have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards (IFRS) in 2005.
For some companies, the impact on their reported results will be even more significant than was the case with the adoption of IFRS.
We remind directors and management of the importance of planning for the new standards and informing investors of the impact on reported results. The new standards can significantly affect reporting of revenue, values of financial instruments, loan loss provisions, and the impact of lease arrangements. The three major accounting standards being introduced for future financial years are:
- AASB 9 Financial Instruments (applies from 1 January 2018).
- AASB 15 Revenue from Contracts with Customers (applies from years commencing 1 January 2018).
- AASB 16 Leases (applies from years commencing 1 January 2019).
The International Accounting Standards Board has also issued a new accounting standard for insurance companies. Public disclosure on the impact of the standards, coupled with their timely implementation, will play an important role in informing investors and maintaining market confidence. Directors are primarily responsible for the quality of the financial report, including ensuring that management produces quality financial information.
Companies should apply appropriate experience and expertise, particularly in more difficult and complex areas covered by the new standards. Companies must have appropriate processes and records to support information in the financial report, rather than relying on the independent auditor.
Implementation plans could consider required system changes, business impacts, impacts on compliance with financial requirements, disclosures required in financial reports prior to the effective dates of the standards, possible continuous disclosure obligations, and the impact on any fundraising or other transaction documents.
We remind preparers of financial reports to address matters such as:
- Determining whether and how new standards will impact on their future reports, and developing implementation plans. Directors and management should ensure that progress is monitored against plans and action taken where milestones are not met.
- Identifying systems, processes and any associated internal control changes needed to produce information required under the new standards.
- Determining the impact on compliance with financial condition requirements (loan covenants and capital requirements), future tax liabilities, paying dividends and employee incentive schemes.
- Providing required disclosure in the notes to financial statements, prior to the effective date of the new standards, regarding information relevant to assessing the possible impact that adoption of the new standards will have on the issuer’s future financial statements. This may mean quantification of the impacts for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report. Subject to transitional arrangements, that date is 30 June 2017 for new standards on revenue and financial instrument valuation. Information that there will be no material impact may also be important information for the market.
- Providing information to the market on the company’s preparedness and the possible financial impact in accordance with continuous disclosure obligations.
- Providing appropriate disclosure of the future impact of the new standards in fundraising and other transaction documents. Companies should consider how much prominence is given to financial information presented under the pre-existing standards and under the new standards having regard to:
- Proximity to the first financial report under the new standards.
- The size and extent of the impact of applying the new standards.
Consideration should also be given to:
- Presenting past and prospective financial information in a document on a consistent basis or presenting information on both bases for an overlap period.
- Ensuring impacts on historical financial statement information are presented clearly by general discussion, reconciliations of key items such as profit and net assets, and/or line-by-line reconciliations for one or more years. More detailed information and quantification may be required closer to adoption.
- Disclosing key assumptions made when applying the new standards to forecast information.
- Clearly identifying whether the old or new standards have been applied to particular information.
To maintain their independence, auditors should not be implementing new standards or advising on accounting treatments for their clients.