Three new accounting standards will give company financial reporting its biggest shake-up in more than a decade. The Australian Accounting Standards Board (AASB) 9, 15 and 16 standards relate to financial instruments, revenue from contracts with customers and treatment of leases. The standards apply to companies that meet two of three criteria — if they have consolidated revenue of $25m or more, consolidated gross assets of at least $12.5m or employ more than 50 staff in company and controlled entities. But are companies ready? In a December 2017 survey of ASX 100 companies, PwC found that less than 10 per cent had completed their impact assessment for each of the three standards.
AASB 9 Financial Instruments applies for the first time to the December 2018 financial year. Patricia Stebbens, Audit, Assurance & Risk consulting partner at KPMG Australia, explains the changes.
AASB 9 will affect businesses across most industries, resulting in impairment losses on loans and receivables having to be booked much earlier. The standard addresses classification and measurement of financial assets and liabilities, provides a new set of hedge accounting rules and prescribes new principles on the impairment of financial assets. It will affect how lenders provision for any losses or impairments.
They will now be required to use an expected loss approach, where they provision for what they estimate losses will be — rather than waiting until the loss event has occurred.
This could affect the timing of banks’ profits and, as a result, their capital. Because the changes will affect banks’ capital, they might have to raise additional capital in order to meet regulator requirements. Many organisations would still be working their way through the conversion to the new standards.
Key questions for directors to be asking of the finance team at this stage include: Where is the project at? Have you done a run of the numbers? What do the numbers look like, and could you explain the differences between the old provisioning number and the new provisioning number?
AASB 16 Leases will apply for the first time for financial reporting years from December 2019. It affects common leases for office, warehousing and manufacturing premises, or retail stores premises.
Stebbens says it will have wide-ranging impacts for any entity entering into operating leases, whether that’s leasing buildings, transport equipment, heavy plant or computer equipment.
The standard requires that organisations incorporate the cost of most operating leases and service agreements on the balance sheet, which will increase both assets and liabilities.
Such changes could affect a company’s debt ratios, and some entities could appear more highly geared following the change. Even smaller organisations can easily have a thousand or more leases, so collating all of a company’s arrangements is potentially a massive project.
Directors should ask the finance team: Have you managed to ensure you have captured all the arrangements? Have you computed the numbers? What is the impact on the balance sheet? What is the impact on the profit and loss? What conversation should we start to have with our stakeholders?
It will have the most wide-reaching impact on organisations that have long-term arrangements with customers, such as the telecommunications and software sectors.
Revenue from Customers
AASB 15 Revenue from Contracts with Customers applies for the first time to the December 2018 financial year.
It will have the most wide-reaching impact on organisations that have long-term arrangements with customers, such as the telecommunications, software, technology and construction sectors.
The new standard requires entities to unbundle all distinct goods and services they provide to a customer. Items that have in the past been treated as marketing costs, for example, “free” vouchers, help desk, extended warranty, training, hosting and updates may require identification.
Stebbens says the new standard may have a significant impact on how and when revenue is recognised — with new estimates required — and the possibility of revenue being accelerated or deferred.
It will require collating a lot of information for disclosure and reporting and, once again, directors will need to understand where the standards conversion project is at in their company, and the potential impact of AASB 15, both on initial adoption and on an ongoing basis.
The new standard requires many judgements, particularly on transition. Directors need to have the numbers in front of them.
Complying with new accounting standards is a major systems exercise, says Robert Hubbard MAICD, chair of Primary Health Care’s audit committee.
With 70 medical centres, 100 imaging radiology centres and 2500 collection premises, Primary Health Care is particularly affected by the new standard on leasing, AASB 16. It also leases equipment such as MRI and X-ray machines.
The new standards mean that instead of treating lease payments as an annual expense in the profit and loss, the payments will be put on the balance sheet, appearing on the profit and loss statement as a depreciation expense and an interest expense. This will make the EBITDA line appear higher and change the company’s interest cover ratio.
Primary Health Care had already outsourced its property management, but had to find a provider that could meet both the commercial obligations of managing leases and the obligations imposed by the new accounting standard.
For non-property leases, a different decision was required. Like many other companies, Primary Health Care was using an old lease management system, so the board decided to update. “If you’ve got the bulk of your leases sitting in a uniform system, you can test the controls and the process, and be comfortable that the outputs are robust,” says Hubbard. “If it’s sitting on a spreadsheet, you’ve got to test each individual line item — every year.”
Judgements around each lease add to the complexity, Hubbard says. For example, the standard applies to non-cancellable lease payments that an organisation can’t get out of. However, most property leases have options to extend and the accounting standard requires companies to decide whether to do this or not — on a lease-by-lease basis.
Hubbard says directors shouldn’t underestimate the complexity of their business. “Spend time understanding how many leases you’ve got in your business so you don’t run out of time to meaningfully comply.”
The new standard requires many judgements, particularly on transition. Directors need to have the numbers in front of them to make the best choice.
National Australia Bank (NAB) director David Armstrong MAICD says starting early is the way to success. NAB was an early adopter of AASB 9 Financial Instruments in 2014–15, because the standard on lending was advantageous.
Armstrong, chair of NAB’s audit committee, says the bank has a process for dealing with accounting standard changes.
“Resources are divided to monitoring what’s coming down the pipeline. Once standards become formalised, it’s quite a significant assessment to make sure we’re in a position of compliance.”
NAB set up steering groups with representatives from affected areas to understand the implications for different parts of the business. “We’re getting quarterly feedback on the project: Is adequate resourcing being applied? Are unforeseen issues arising?” Armstrong says.
He favours an ongoing solution to a quick fix. “You want to ensure you’re building a sustainable outcome rather than seeking point-in-time compliance. If you’re going to have a sustainable implementation of the new standard or reporting requirement, it’s going to be embedded in systems at some point.”
The other big accounting change for the bank is AASB 16, which will bring leases onto its balance sheet. Along with its own leases, NAB has clients with significant numbers of leases. That could affect the client company’s level of indebtedness or interest cover against various measures, with implications for the lending organisation.
“If you’re ready early, there’s no real downside,” Armstrong says. “Guidance can also change over time, particularly involving a higher degree of judgment. You need to be more attuned to the broader marketplace as to emerging views or positions.”