Over the next two years, there are three major new international financial reporting standards (IFRS) that Australian companies should be aware of. IFRS 9 for financial instruments, IFRS 15 for the recognition of revenue which will be effective from 1 January 2018 and IFRS 16, which covers lease accounting effective from 1 January 2019 (although available for early adoption). They are complex accounting standards and have the potential to transform the way that companies present their performance and financial position across every industry sector.
IFRS 15 fundamentally changes the financial reporting landscape for how entities recognise revenue, by introducing a five-step model to determine when to recognise revenue and at what amount. The core principle of this standard is to recognise revenue to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The current accounting treatment of operating leases in the records of lessees is well understood and quite simple. However, IFRS 16 introduces a single lessee accounting model (all leases, finance and operating leases, will be accounted for in the same way) and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of “low value.”
The objective of the new IFRS 9 standard is to simplify accounting for financial instruments. This new standard applies to financial instruments including, cash, trade receivables, trade payables and investments in shares. The standard introduces significant changes to the classification and measurement of financial assets, how impairment losses are recognised and the rules around qualifying to apply hedge accounting.
The headline change is a new impairment model for bad debt provisions and rather than having an incurred loss model (where something has to have happened before you make a provision), there is a forward-looking expected loss model which requires you to make predictions about the future.
Organisations should now begin to consider how to prepare their financial statements using these three new accounting standards. The changes can be complex and can have impacts beyond just the accounting. When adopting these “triple threat” new accounting standards, including deciding which transition route to apply, organisations need to consider the commercial and practical impacts of the changes in their accounting. As the choices made by organisations will affect the way the performance of their business is measured and reported, it is vital to consider not only the commercial and practical issues, but also any tax impacts of these changes.
Aletta Boshof, IFRS Advisory Partner, BDO Australia
