Although the next round of changes to accounting standards will not come into effect until 2018, alert financial analysts should already be asking companies about how they plan to address them, according to Canada’s top accountant.
“Pay attention now, because companies do have the option to adopt” and some, such as Canadian banks, are adopting IFRS 9 early, said Linda Mezon, Chair of the Accounting Standards Board (AcSB). She was speaking at a webinar on January 21, 2016, to members of CFA Society Toronto and CPA Canada on the recent developments in accounting standards and emerging trends impacting financial statements.
Major changes become effective in 2018 and 2019. These have to do with:
She advised analysts and accountants that “disclosures about adopting the new standards will already start appearing in the MD&A,” referring to the Management Discussion & Analysis sections of financial statements. Financial analysts should therefore ask company management for status on implementing the new standards.
The changes to IFRS 15 are intended to:
• Remove inconsistencies and weaknesses in existing revenue standards and practices
• Provide a more robust framework for analyzing revenue
• Improve comparability of revenue across companies and geographies; and
• Establish a common set of disclosures
There will be rules of disclosure relating to:
• New criteria for when revenue is recognized
• Contract costs
• Disclosures and
• Effect on amount and timing of revenue recognition
As one example, Mezon cited pricing for cell phones as an example of a contract with multiple deliverables. Under old rules in Canada, the carrier often bundles the cell phone to the service and the customer is enticed to sign on with promise of a “free phone.”
“Under the new standard, there will be allocation of revenue for the device. The cell phone company must recognize the revenue sooner—when they give the phone to the customer,” Mezon said. “This will make Canada more comparable to the rest of the world.”
Financial Instruments – Impairment
“Big changes are coming for financial instruments,” said Mezon. Under the old rules, banks have provisions for loan loss. For impairment, the loan loss had to be incurred as of the balance sheet date.
The new rules depend on expected loss models that use historical, current, and forward-looking data. “Where is the economy going? What should I expect for credit deterioration over the next year?” are the considerations that the new model must address.
“Regardless of how a financial instrument is classified, they will look at deterioration of creditworthiness,” said Mezon.
The impairment calculation must be based on expected credit losses within 12 months of the reporting date, OR lifetime expected credit losses.
The initial measurement occurs at fair value, but subsequent measurement of the financial instruments is a combination of profit/loss (P&L), other comprehensive income (OCI), and amortized cost.
“Ask management about their intentions,” she suggested to the analysts.
Financial Instruments – Hedging
The new rules will allow hedging in more cases. “There were entities that did not do hedge accounting previously, because requirements were so onerous,” said Mezon. “Now there is less documentation required, so we think this will be applied more often.”
There are three types of hedging relationships covered under the new rule IFRS 9:
An obvious question that analysts could pose to management is whether they plan to use more hedge accounting. “Overall, ask management what their plan is, to implement IFRS 9,” she said. “There are some early adopters.”
“The main news about leases is that they will go on the balance sheet,” said Mezon. The standard was released in mid-January 2016. “Expect to see a bigger balance sheet, starting January 1, 2019.” The goal of the change was to ensure improved comparability between companies that purchase, and companies that lease, assets.
She said that analysts should expect to see lower asset turnover and lower return on asset ratios, simply because the dollar amount of assets will increase.
Besides the IFRSs changes, Mezon said there are two major projects underway. “A new standard on insurance will maintain key aspects of current Canadian methodology. It will be a big change, from a global perspective, but it will allow more comparability.” Coming soon to financial reports near you in 2016.
The second major project is a broad-based initiative to improve disclosure.
“If you have a concern, respond to AcSB on Canadian issues,” Mezon said, “or respond directly to IASB.”
After all, Mezon concluded, the financial analysts in CFA Society Toronto and the accountants in CPA Canada have a shared goal of high quality, transparent and comparable financial statement information to support economic decision making.ª