Significant change lies ahead, are you ready for it?

THEY say there are two things one cannot avoid, death and taxes.

Unfortunately, in the life of an accountant there is a third thing, International Financial Reporting Standards (IFRS) changes.

The next three years sees significant changes in three major areas: Revenue, Financial Instruments and Leases.

The new revenue standard, IFRS15 introduces a revised core revenue recognition principle: An entity should recognise as revenue the amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services when (or as) it transfers control. This replaces the current model of recognising revenue at fair value as or when risks and rewards are transferred.

To assist in making this assessment IFRS 15 proposes a five step model. IFRS 15 is effective for all periods commencing on or after 1 January 2018. This standard affects all industries in one way or another and progress globally towards implementation has been slow, making audit committees, CFO’s, regulators and auditors nervous. Even entities that expect to see little changes in the numbers still face new disclosures and potentially significant changes in accounting processes.

On the other side of the transaction, the new financial instruments standard, IFRS 9 brings its own challenges. IFRS 9 applies to all entities, not just financial institutions.

While the new impairment model of “expected credit losses” which replaces the current “incurred loss” model is having a greater impact on financial institutions, all entities need to assess the impact of this change. In essence the “expected credit loss” model recognises an impairment based on future expectations and does not wait not until a loss event has occurred. This will result in most finance houses showing greater provisions for losses in their balance sheets which will in turn, result in more useful information for current and potential investors. Further, the classification and measurement of financial assets may change as a result of new criteria that involve an assessment of the contractual cash flows and management of the investment. On the positive side hedge accounting is now potentially available for a broader range of hedging activities. All of these changes together with extensive new disclosures will potentially require more judgments combined with new processes and controls. IFRS 9 is effective for all periods beginning on or after 1 January 2018.

Last but not least at all, the new leases standard IFRS 16. We currently account for leases by initially classifying them into either operating or finance leases, with this classification then driving the accounting treatment. The latter being accounted for on the balance sheet and the former in the income statement. IFRS 16 requires all lessees to account for leases on the balance sheet. Lessor accounting remains largely unchanged. IFRS 16 is effective for all periods beginning on or after 1 January 2019.

KPMG will be hosting a breakfast on the 24th August 2017, at the International Convention Centre in Durban to highlight the practical implementation of these standards.