This year and next year are busy ones in the field of International Financial Reporting Standards (IFRS). Companies with financial year ends beginning on or after 1 January 2018 will need to have regard to the requirements of IFRS 15 (Revenue). This may have a significant effect on the timing of recognition of revenue for companies which sell bundles of goods and services.
Businesses in a number of sectors are likely to be affected, including computer software, telecommunications, automobiles, airlines, construction and engineering amongst others. At present, such companies charging a single price for a bundle of goods and services often recognise the revenue up front. This will not be possible under IFRS 15, as revenue will have to be “unbundled” and some of it may need to be deferred. An example of this is what happened to Capita, the outsourcing specialist, who adopted IFRS 15 early and restated its operating profit for 2016, seeing it drop from £481m to £335m. Rolls Royce also saw its shares fall in value when it revealed that its profits would have been lower under IFRS 15. Extensive guidance is given in IFRS 15 on particular situations, including warranties, bill and hold arrangements, customer loyalty programmes, non-refundable upfront fees and licences.
This year also sees the introduction of IFRS 9 (Financial instruments), which changes the rules not only for financial institutions. Many companies who use derivatives, such as interest rate swaps, commodity options, forward purchases of fuel or foreign currency forward exchange contracts, have to revalue these to fair value with consequent volatility to profit or loss. Hedge accounting can be used, but there are currently restrictions, notably a strict 80:125 ratio between the respective movements in the hedge item and the hedging instrument. This will be replaced with a more realistic “economic link” test commonly referred to as the “business model test”.
In 2019, IFRS 16 (Leases) will take effect. This is the biggest shake-up in lease accounting for years. A lease which gives the lessee the right to use an asset will be recorded as an asset and a liability, although there will be exceptions for short-term leases and low value assets. It will mean an end to most operating leases, under which there is neither an asset nor a liability. As of March 2017, 70% of public companies said that they had assigned a formal project manager to the transition. The 2018 financial statements will need to reflect the new rules when they are restated as comparatives.
In Quorum’s course IFRS Update – Including Revenue, Financial Instruments and Leasing, Peter Hughes, a practising chartered accountant, will take you through the three new standards and will also discuss changes to other areas of accounting. There are numerous practical examples to work through, and you are welcome to come armed with your questions about the new standards.
To learn more about International Financial Reporting Standards (IFRS), remember to book your place here.