New IFRS rules: a higher degree of judgment is necessary
On October 3rd, TriFinance CFO services hosted an IFRS round-table discussion with some of Belgium’s top IFRS reporters to discuss their experiences in implementing the new standards. Exchanging insights and experiences created an excellent opportunity to learn how companies are getting on with the implementation processes. Also vividly discussed were the bottlenecks and pitfalls reporters encounter, as well as the different opportunities they see. What did we learn?
Article by Mario Matthys, expert practice leader Corporate Reporting, CFO Services
Different business departments are affected
The new standards affect many different departments. Financial administration and reporting teams will need to spend considerable time with other business departments to make assessments on definitions, options, obligations and other key contract data. Procurement teams have an important role to play in the adoption of IFRS 16, sales teams in IFRS 15 and treasury in IFRS 9.
A higher degree of judgement is necessary
All reporters agreed that more judgement will be necessary. Assessing whether a contract falls in scope of IFRS 16 or whether a separate performance obligation exists in IFRS 15 requires more involvement of senior staff both at implementation date and on an ongoing basis. A process of continuous monitoring of new contracts and contract modifications will need to be put in place.
Transition options matter
It’s crucial that companies reflect about the implementation options now. Preparing the company for the changes turns out to be a challenging and time-consuming process. It’s time to determine the right balance between accuracy and completeness at one side and work load and cost on the other side before you start the implementation exercise. A clear implementation strategy with careful consideration and clear communication of the transition options can avoid chaos and costs. The choice of transition methods and which practical expedients to apply have a major impact of the complexity of the conversion but also on the comparability of data between fiscal years.
New systems and processes
Finance executives should not only focus on the technical aspects of the standards but also on the impact for their organisation. New technology requirements and processes are emerging. Most companies will for instance use a lease management tool to bridge the gap between input of date and journal entries. Impacts of new accounts, inventory costing needs, new subtotals or KPI’s in the current ERP tools, consolidation and BI tools need careful consideration and planning.
Communication is important
All stakeholders need to understand the impact of these standards on the measurement of the performance of the business; not only their effect on the key financial ratio’s or financial results but also on potential impacts and proposed changes for business practices. Some considerations have not found their way across all management levels yet.
IFRS 16 challenges ongoing
Identifying and locating all lease contracts is already a substantial exercise. Having effective contract management systems in place turns out to be very helpful in this search for data, but only a minority of companies have them in place.
Most companies have or are currently establishing a process for uploading the key lease terms into specific lease tools and generating the required entries for import into their systems. Ensuring the accuracy and completeness turns out to be very time consuming.
Most IFRS reporters acknowledged their first diagnostics show an increased lease population when they apply IFRS 16 compared to what they previously disclosed in their financial statements in the operating lease commitments note. Past disclosure notes may turn out to be incomplete or inaccurate.Info on the implicit rate in the lease contracts is often missing. Nearly all reporters had to use incremental borrowing rates as a lease factor instead.
IFRS 15: a documentation exercise?
Apart from the software, telecommunication, real estate and aerospace industry, for many the exercise so far has turned out to be a documentation project rather than a game changer in revenue recognition. For quite some industries first conversion exercises show limited net change in the amount and timing of revenue recognized. However, reaching this conclusion required a lot of effort in explaining the new standard to the business and quite some analysis to investigate potential impact for transactions and contracts.
IFRS 9: forgotten or deemed not important?
While most reporters were in full preparation or implementation of IFRS 15 and 16, IFRS 9 projects received less effort and attention. The standard is considered to be important primarily for financial institutions. While this is of course something that cannot be denied, attention is required here as important impacts can arise for industrial companies as well. Companies need to review their current credit risk models and verify which impact the “expected” loss model will have on their processes and financial figures. As hedging according to IFRS will better align with the risk management activities of the companies, finance executives should explore underlying opportunities.
All three standards focus on providing more relevant disclosures to the users of the financial statements. The scope of disclosures enlarges, and companies need to be ready to effectively compile the data that will be required.