Johannesburg, 16 April 2018 – As companies usher in the new financial reporting standards (IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers) in 2018, management and those charged with governance should be asking the right questions to understand the business impact of these standards. The effects of these standards will vary from company to company and from industry to industry.
“Companies should be reviewing contracts they have in place to determine whether the existing terms and conditions produce a different accounting outcome when reported under the new standards and how those contracts will be disclosed under the new standards,” says Bongeka Nodada, SAICA Project Director: Financial Reporting. “IFRS 9 and IFRS 15 may significantly impact a company’s reported figures, key leverage ratios, headline earnings, debt covenants, and IT systems, amongst others. Employees may also be impacted where their performance incentives or share-based payments are linked to International Financial Reporting Standards (IFRS) numbers.”
“Engagements with key stakeholders is also imperative during the implementation phase to manage expectations,” adds Nodada.
Nodada states that IFRS 9 introduces a fundamental change as companies will have to reflect the impairment losses on financial assets - for example, trade debtors and home loans - much earlier than under the existing financial instruments standard. The impairment losses will also be recognised over the life of the financial asset. This change will therefore introduce some volatility to the company’s financial performance. Under the current financial instruments standard, which will be replaced by IFRS 9, companies are required to recognise impairment losses when a credit event has occurred, for example, at the point in time when the customer defaults.
Companies will also be required to review their financial asset classification as this is likely to change under IFRS 9. A change to the classification is likely to impact how a financial asset is measured. Classification is determined on the basis of the company’s business model and cash flow characteristics of the financial asset.
IFRS 15 establishes a single comprehensive framework for determining when and how much revenue a company should recognise in the financial statements. It removes inconsistencies and weaknesses in the previous revenue requirements, improve comparability amongst revenue recognition practices across companies, industries, jurisdictions and capital markets and simplify the preparation of financial statements by reducing the number of requirements to which companies refer to. The core principle of this new standard is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
Nodada notes that these new requirements are applicable to companies which are required to prepare financial statements in terms of IFRS including companies listed on the JSE and those required in terms of the Companies Act 71 of 2008 or any other legislation to comply with IFRS and others who have opted to apply IFRS,” concludes Nodada.
IFRS 9 and IFRS 15 are effective for annual reporting periods commencing from 1 January 2018.
More information on IFRS 9 and 15 can be obtained from https://www.saica.co.za/Technical/FinancialReporting/tabid/117/language/en-ZA/Default.aspx .
The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 46 000 members and associates who are chartered accountants [CAs(SA)], as well as AGAs(SA) and ATs(SA), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.
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