Going into a new year, there are a few things that those who prepare financial statements need to keep in mind. Here are my top 5:
1. The new standards applicable for the year that affects your financials
A number of amendments to standards became effective in 2014, either from 1 January or 1 July 2014, that would affect 2015 year-end financial statements, including:
· changes to the business combinations standard;
· additional disclosure requirements for segment reporting;
· an exemption for investment entities allowing them to fair value their investments together with certain disclosure requirements for these;
· guidance on accounting for revaluations of property, plant and equipment as well as intangible assets;
· impairment disclosures where using fair value less costs to sell;
· judgment disclosure as to whether acquisitions are investment properties or business combinations; as well as an interpretation as to how to account for levies.
Where relevant, these have to be applied to the business and disclosures around this include three of the essential questions one always asks:
· What: the title of the IFRS;
· How: the nature of the change to the accounting policy; as well as
· Effect: the amount of the adjustment for each financial statement line affected, any additional disclosures as well as earnings per share where applicable.
2. The new pronouncements not yet effective
These always need to be considered going into a new financial year. Not just leaving the “to be considered” in your financial statements, but really looking at them and what their likely impact is expected to be. We’re not talking numbers here (unless you already have them and they are readily available), but what is expected to be affected… from disclosure impacts to how revenue or profits are likely to be impacted.
3. The big changes coming up
The two big changes that are likely to affect every company in one way or another are the new IFRS standards, IFRS 15 Revenue and IFRS 9 Financial Instruments. These two standards might require accounting system changes to be able to extract the information necessary to apply these.
The new revenue standard is the biggie. This new standard establishes a single framework for the recognition, measurement and disclosure of revenue. It introduces a 5-step approach to revenue recognition and requires new disclosures, including the expected future revenue from contracts. It is effective for years beginning on or after 1 January 2017, so, should you decide to apply the standard retrospectively, the 2015 numbers will be your opening balances.
Some companies have done comprehensive assessments of this standard and discovered they have had to make changes not only to their accounting systems, but also their policies, for example, rewording their commission and bonus policies affected by revenue. Don’t wait for 2017 to look at this one!
The new financial instruments standard is only applicable for years beginning on or after 1 January 2018 and, besides the new ‘categories’, the main impact on the smaller entities is expected to be the revised impairment assessment methodology and possibly hedge accounting.
· Impairment assessment methodology is expected to impact everyone as it requires moving from recording losses only when something happens, to recording losses that are expected to happen… and right from the moment the financial asset is recognised.
· Hedge accounting is less tedious to apply and is expected to align with management’s risk management processes.
4. Bedding down the current standards that were applied in the current year
Many companies are still trying to bed down the application issues on the consolidation suite of standards that were effective for years beginning 1 January 2013 as well as the application of and disclosure for fair value in accordance with IFRS 13.
People, including the regulators, are still trying to get their heads around the concept of ‘structured entities’, with more and more of them creeping out of the woodwork. One of the IFRS 13 disclosures that seems to have caused some consternation is the disclosure about the significant unobservable inputs used in the fair value measurement.
5. Say what you mean and mean what you say.
I review financial statements on a daily basis and am amazed at the volumes of excess information included and complicated language people use to explain things. It’s no wonder people don’t read financial statements! One is only required to include what is relevant to the years presented, and when explaining transactions in the financial statements explain them simply and in terms we can all understand.
There has been a lot of focus on this with speeches from the IFRS Foundation and comments from the JSE, through their pro-active monitoring process, on moving away from boilerplate disclosures and ensuring what is disclosed is relevant. This was even the topic of discussion in the IASB’s press release on the 18th of December stating that improving the effectiveness of disclosure is widely considered to be one of the most important and challenging tasks of financial reporting. This is also emphasised through a recent exposure draft proposing amendments to IAS 1 called the “Disclosure Initiative”, which is part of a portfolio of projects aimed at improving the effectiveness of disclosure.
As a preparer you are inundated with information, meetings, new standards, changes… not to mention the auditors! Keeping these five things in mind when readying yourself for a new financial year’s financial statement preparation should help you in keeping your focus on the light no matter which way you’re swimming.
Author: Justine Combrink, Director, Mazars