2018 is a big year for the International Financial Reporting Standards (IFRS). Following the roll out in January of the new IFRS 15 for Revenue from Contracts with Customers, accountants will also have to get to grips with a new IFRS 9 for Financial Instruments and, by the end of the year, the IFRS 16 for Leases.
The IFRS sets the global benchmark for financial reporting across jurisdictions. It is especially important for companies which operate in more than one country, and slowly but surely is being adopted by national governments to replace individual standards. The roll out of three new standards in a year represents the biggest upheaval since the IFRS was first introduced.
It spells a lot for accountants and financial reporters to get their collective heads around. Here is a top-level overview of the main changes, and what they mean for businesses.
The new IFRS 15 makes some significant and substantial changes to previous revenue recognition guidance. It demands much more qualitative and quantitative disclosure, and greater separation of goods, services and incentives from bundled packages when it comes to reporting.
This will have a greater impact on industries which routinely combine sale of goods with services. For example, it will change accounting practices significantly for tech and telecoms companies which have ‘software-as-a-service’ models, or include aftercare and maintenance services in purchase agreements. It also changes how revenue from licenses is treated, again affecting the software industry, as well as broadcast services for film, TV and radio.
IFRS 9 has been around since 2014, but becomes mandatory this year – unless you are an insurance company, in which case you have until 2021 to adopt the new standard. As its name suggests, IFRS 9 deals with the reporting of financial assets and investments.
Compared to the previous standard, it makes significant changes to the handling of impairment, hedging and also how assets themselves are classified and measured for accounting purposes. Impairment assessments for equity instruments are abolished, with a new calculation for expected credit losses introduced on loans and receivables.
Due to come into force as a mandatory requirement on 1 January 2019, IFRS 16 is expected to have a widespread impact on all institutions that use IFRS protocols. Such is its far-reaching impact, businesses are being encouraged to act now to prepare and get ready to adopt as soon as possible.
Any business which has a lease of any kind will be subject to the new IFRS 16 standard. The biggest change is that it will require all leases to be accounted for on the balance sheet, including those for retail and commercial properties. This is a significant shift from the current practice of treating most property leases as operating expenses in profit and loss accounts.
This has numerous knock-on effects, such as increasing the reported assets and liabilities on the balance sheet and significantly altering the classification of expenses. One positive effect is that it will likely lead to higher earnings before interest, taxes, depreciation and amortisation (EBITDAs). On the other hand, it could undermine the benefits of sale and leaseback arrangements, and also alter covenant calculations.