If you haven’t prepared already, now is the time. Well-established as the global financial reporting standard for over 40 years, the International Financial Reporting Standards (IFRS) provide a common global language for business affairs that improve financial transparency by bringing consistency to company accounts.
Required in over 125 jurisdictions, the IFRS standards have come to be the principal accounting framework for international businesses, replacing many different national accounting standards.
Of course, with such widespread adoption of the IFRS, there is an undeniable need to regularly discuss and revise the policies in place to ensure they are robust, futureproof and capable of supporting modern businesses with their financial activity.
The next few years mark some major changes to the IFRS, and the benefits cannot be understated. As a global standard, the IFRS represents the highest quality of financial reporting and accounting.
However, with a quarter of accountants saying that the transition to the new UK GAAP was enough to make them want to quit, how can businesses and accountants ensure that they are fully prepared for further regulation upheaval and avoid potential pitfalls?
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1. IFRS 9: (replacing IAS39 Financial Instruments: Recognition and Measurement)
IFRS 9 Financial Instruments (completed in July, 2014) has been further improved to address credit losses, meaning greater disclosure on risk management activity and the effects of hedge accounting on financial statements. This forms the final part of the International Accounting Standards Board’s response to the financial crisis, when delayed recognition of credit losses on loans was a key weakness in the original accounting standards.
The IAS 39 Financial Instruments: Recognition and Measurement was generally seen as over-complex and difficult to apply, and will be replaced by IFRS 9 from 1 January 2018. The new standard includes a more straightforward model for classification and measurement driven by cash flow characteristics.
The move to IFRS 9 will impact the banking sector, but will also reflect a reformed approach to hedge accounting, with enhanced disclosures about risk management activity. After the financial crisis, this standard is perceived as a positive step, enabling entities to better reflect risk management activity in their statements.
2. IFRS 15: Revenue from Contracts with Customers (replacing IAS 18)
Previously, under IAS 18, risks and rewards of ownership where transferred along with the sale of goods. But, under IFRS, businesses will be able to split a contract or sale into its constituent parts. For example, under the old IAS 18 regulations, if you were to purchase a good or service and the contract dictated that £X amount a month must be paid, you would have to continue paying that fee until the cost was satisfied. However, under IFRS 15, you can extract the cost of the good or service at face value - and pay the remainder of the contract over a split term.
In the early days, some companies will be significantly affected, with companies such as Rolls Royce estimating that over £700m could be wiped off its profits; while UK telecoms companies and suppliers of software are likely to see their profits booked earlier, which could cause challenges in relation to cash flow to pay dividends.
The key with any major transition is to allow plenty of time to prepare, and estimate the impact and cost to your business. While it is difficult to pinpoint how long a transition to IFRS will take, early adoption of standards is permitted and some businesses may decide to pick the IFRS regulations that potentially improve their financial situation, so it is worth considering. Though understandably, after the shift to UK GAAP, most businesses will seek stability rather than more upheaval!