In part one of this blog, we discussed preparing for the new IFRS reporting standards, specifically IFRS 9 and IFRS 15. In this blog, we will address the IFRS 16, set to replace the IAS 17 leases and the IFRS 17, that will replace the IFRS 4 Insurance Contracts.
IFRS 16: New regulation of leases (replacing IAS 17 leases)
IFRS 16 Leases will replace IAS 17 leases for reporting periods beginning on, or after, the 1st of January, 2019. The IFRS 16 Leases can be adopted before that date by entities that also apply IFRS 15 Revenue from Contracts with Customers.
The previous accounting model for leases, IAS 17, required lessees and lessors to classify their leases as either finance leases or operating leases and account for them differently. However, the model was criticised as it failed to meet the needs of investors and analysts and did not provide a faithful representation of leasing transactions.
Furthermore, under IAS 17 a lessee was not obligated to report assets and liabilities from operating leases on the balance sheet – typically resulting in an inaccurate portrayal of a company’s outstanding expenses and final estimations.
With IFRS 16 however, a greater emphasis on transparency where leasing is concerned has been applied. IFRS 16 will require companies to bring most leases onto the balance sheet, providing greater accuracy where financial metrics are concerned.
Of course, the impact of IFRS 16 on the balance sheet is highly dependent on how many leases the company has. But ultimately, it will bring greater accuracy to the measurement of outstanding expenses and the company’s final estimations.
IFRS 17 (Replacing interim standard IFRS 4 Insurance Contracts)
After 20 years of consultation, the new accounting standard for insurance contracts, IFRS 17, is getting closer. It represents a significant change in insurance contacts – and will apply to accounting periods from the 1st of January 2021 onwards.
IFRS 17 will bring consistent accounting for all insurance contracts by all companies, enabling comparability with non-insurance products. As it stands currently, this level of comparative insurance reporting is incredibly difficult; insurance contracts are accounted for differently across jurisdictions – and may even be accounted differently within the same company. As a result, evaluating profit and loss based on groups of insurance contracts can be a challenge for investors and analysts.
IFRS 17 however, will provide a standardised measurement process, simplifying complex financial statements to deliver greater comparability and transparency. Investors will benefit from a clearer picture regarding both risk and return on investment.
For businesses, IFRS 17 will undoubtedly influence the reporting process, with actuarial models, systems, taxation, balance sheets and financial reporting, income statements and much more affected by IFRS 17. The industry is only just recovering from the Solvency II and other regulatory capital regimes – and yet more disruption is still to come.
Even so, approaching IFRS 17 with the perspective of ‘sooner’ rather than ‘later’, will enable firms to get up-to-speed quickly and establish a reporting framework that works for them and their clients.
How will Brexit affect the IFRS regulations?
Another key aspect to consider in relation to IFRS is Brexit. The international reporting standards are somewhat complex as it is, even if they do add greater transparency and consistency across the board. However, a step away from the IFRS could prove detrimental for the UK, especially as all listed companies in the EU will be operating under IFRS – and it is widely recognised as the global standard for financial reporting.
Given this global status, trusted by investors and regulators alike, it is in the UK’s best interests to continue with the integration of the IFRS. What will be key for businesses however, is how they approach the new standards.
Preparing for the changes now rather than later will put businesses in an excellent position for the months and years to come post Brexit. To find out more about how IFRS could affect your financial reporting, click the button below to download our essential guide.