ASIC expects companies to respond to the three new accounting standards
In December 2016, the Australia Securities and Investments Commission (ASIC) issued Media Release 16-442, reminding companies that there are three new accounting standards effective during 2018 and 2019 that are expected to have the biggest impact on financial reporting since we first adopted International Financial Reporting Standards (IFRS) in 2005:
|AASB 9 Financial Instruments
||Annual periods beginning on or after 1 January 2018
|AASB 15 Revenue from Contracts with Customers
||Annual periods beginning on or after 1 January 20181
|AASB 16 Leases
||Annual periods beginning on or after 1 January 2019
1 Deferred to 1 January 2019 for not-for-profit entities
The new standards could have a significant impact on how companies recognise revenue (how much and when), and how they measure financial instruments (more at fair value). Also, most companies have operating leases which will be capitalised on the balance sheet as right-of-use assets with the related lease liabilities.
‘We remind directors and management of the importance of planning for the new standards and informing investors and other financial report users of the impact on reported results.
Given the extent of changes to financial reporting, it is important to determine the extent of any impact now and to put in place implementation plans for these new standards. Public disclosure on the impact of the standards and timely implementation is important to investors and to retain market onfidence.’
ASIC Commissioner, John Price (ASIC MR 16-442)
The Media Release reminds directors and management that implementation plans are vital to ensure a timely and smooth implementation process, and these plans should cover:
- Required system changes to be able to account under these new standards, and how progress will be monitored to take action if milestones are not met
- Business impacts
- Compliance with any financial requirements (bank covenants and other regulatory requirements, tax implications, the ability to pay dividends, and employee incentive schemes)
- Disclosure of the impacts of the new standards prior to them becoming effective as required by AASB 108, paragraph 30 (i.e. December 2016 and December 2017 for December balancing companies, and June 2017 and June 2018 for June balancing companies)
- Possible continuous disclosure obligations, and
- Impact on any fundraising or other transaction documents.
Quantify transition impacts in financial statements
ASIC considers it reasonable for the market to expect quantitative information about the impacts of the three new standards to be included at the start of the first comparative period (‘opening balance sheet’ date) that will be affected once the new standards are implemented. This means that ASIC expects the impacts of the new standards to be quantified in financial statements from:
||AASB 9 - Financial instruments
||AASB 15 – Revenue2
||AASB 16 - Leases
||31 December 2016
||31 December 2016
||31 December 2017
||30 June 2017
||30 June 2017
||30 June 2018
2 Deferred to 1 January 2019 for not-for-profit entities
If the directors/management believe that there will be no material impact on application of the new standards, or the entity has not yet considered the impact of the new standards, this is also important information to include.
ASIC’s view is based on the AASB 108, paragraph 30 requirement for information to be disclosed in the financial statements of the impact of accounting standards issued but not yet effective, including ‘known or reasonably estimable information’.
| In complying with paragraph 30, an entity considers disclosing:
- the title of the new Australian Accounting Standard
- the nature of the impending change or changes in accounting policy
- the date by which application of the Australian Accounting Standard is required
- the date as at which it plans to apply the Australian Accounting Standard initially, and
- a discussion of the impact that initial application of the Australian Accounting Standard is expected to have on the entity’s financial statements, or
- if that impact is not known or reasonably estimable, a statement to that effect.
AASB 108, paragraph 31
Many entities have not yet commenced their implementation process, or are still early in the process. Entities not fully appreciating the complexities associated with these three standards, or entities intending to adopt the modified retrospective transition approach where comparatives will not be restated, will struggle to meet ASIC’s expectations that entities should be able to quantify the impacts for AASB 9 and 15 at ‘opening balance sheet date’ (31 December 2016/30 June 2017).
Even though the entity may choose the modified retrospective restatement approach permitted (i.e. transition adjustments are made via opening retained earnings on 1 January 2018/1 July 2018 rather than on opening balance sheet date), ASIC’s view is that quantifiable information should be available because retrospective adjustments are required back to the ‘opening balance sheet date’.
Please contact BDO IFRS Advisory Services for more information on transitioning to AASB 9, 15 and 16.
The Media Release also reminds directors and management that they should consider their continuous disclosure obligations and provide adequate information to the market on:
- How prepared the company is for transition, and
- The possible financial impacts.
Fundraising and other transaction documents
Fundraising and other transaction documents should also include disclosure about the future impact of the new standards, with more detailed information provided if such documents are prepared closer to the effective dates of these new standards.