After Years in the Pipeline, IFRS 17 Has Been Released

02 Jun 2017

The IASB Completes the Last of Its Four Major Projects

The International Accounting Standards Board (IASB) continually seeks to optimize its guidelines with the goal of standardizing international accounting procedures, while making them more transparent. In addition to continuous minor adjustments, the Board has also worked for several years on four fundamental new regulations in international accounting. On May 18, 2017, the last of these large projects was completed with the publication of the International Financial Reporting Standard 17 (IFRS 17).

The four new standards, IFRS 9 – Financial Instruments, IFRS 15 – Revenue from Contracts with Customers, IFRS 16 – Lease Accounting and IFRS 17 – Insurance Contracts, replace the previous standards in each category and present such fundamental changes that almost every publicly traded company must now adapt to procedures that may intervene in its business processes. The reforms, however, have not been met with a warm welcome at all companies.

 

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Winners and Losers of IFRS 9

As with all fundamental system changes, some corporations will benefit from the new rules, while others must also endure considerable disadvantages due to the new standards. A good example of this is IFRS 9 – Financial Instruments. A core aspect of IFRS 9, hedge accounting, offers industrial companies a welcome opportunity to positively influence their profit and loss accounts by including individual hedging components in their balance sheets.

For banks, however, IFRS 9 entails a significant increase in procedures. The extensive reclassification of assets included in the new standard will adversely affect not only their overall balance sheets. It also implies fundamentally converting their business and IT processes; as a result, some institutions can now expect to pay up to EUR 125 million or more for switching to the new standards.

 

IFRS 15 Has Also Raised Eyebrows – Particularly in the Telecommunications Industry

For industries with multi-component businesses such as the telecommunications industry, the new standard for Revenue from Contracts with Customers means significant changes to their previous accounting and business processes. IFRS 15 lays out new regulations on when partial performance of a contract must be included in the balance sheet. The previous margin of discretion and flexibility for corporations has been removed.

This change alone as well as reevaluating existing contracts may mean expenses in the millions for large telecommunications providers and also providers of customer loyalty cards and other bonus programs. But this will not be the end of the process as changes to existing contracts will have to be reassessed in the future. IFRS 15 will significantly increase the cost of accountants for many corporations even after completely converting to the new system.

 

IFRS 16 Establishes a Clear Distinction Between Lessee and Lessor

Until now, IAS 17 on lease accounting had offered many CFOs the opportunity of reporting off-balance sheet lease obligations; the new IFRS 16 standard has almost completely eliminated this loophole. According to the new standard, all lease obligations that have a term longer than 12 months and are valued above a ‘minor’ amount (i.e., more than approx. USD 5,000) are now to be reported on-balance. This is likely to adversely affect debt, interest rates, and the equity ratio of many companies.

A further difficulty presented by IFRS 16 is the clear lack of equal treatment of lessors and lessees. In contrast to the drastic changes for lessees, there are no fundamental differences for lessors. In the future, it is therefore conceivable that the same asset values will be reported twice, both by the lessor and the lessee. It also remains unclear how companies should proceed when they act as lessor and lessee at the same time.

 

IFRS 17 Eliminates a Global Lack of Transparency

Based on the standard in place thus far, IFRS 4, which was meant to act as a transition to the new standard, international comparability of consolidated financial statements in the insurance industry was de facto impossible because local accounting rules were admissible in financial statements drawn up according to IFRS. Investors will be happy to learn that this condition has now been solved in IFRS 17 – Insurance Contracts.

However, the insurance industry itself will initially experience the need for extensive restructuring along with the expenses this will entail. The extent of the changes depends on which methods have been used up to this point. The new standard, for example, foresees three possible methods for assessing insurance contracts, which itself presents a paradigm shift in the industry. In addition, external reporting and data processing requirements will rise significantly.

These changes also require a good communication strategy: Almost every company will be affected by changes in the areas of earnings and equity. Particularly countries in which accounting has thus far been based on predictions as of the reporting date can expect to see greater volatility in earnings. The changes caused by the transition to the new standard must be communicated both externally and within the company.

 

The Four New Standards Have Caused Structural Changes Across the Globe

As welcome as the increasing level of transparency and a standardization of consolidated financial statements have been, they could lead to considerably increased burdens for the industries and companies affected. Since the four discussed standards apply to nearly every publicly traded company in any form, with these projects the IASB has launched a comprehensive structural transformation of international accounting procedures.

On top of all this, time is of the essence: Even if the new mandatory guidelines will only apply to the financial years starting on January 1, 2018, 2019 and 2021, respectively, companies must quickly implement the reforms now, because comparative figures for the previous financial year must also be reported when using the new standard for the first time.

If you have any questions about the new standards, please do not hesitate to contact us. We would be happy to assist you in switching to the new standards and will ensure that your annual financial statements comply with all new statutory provisions.