Article:

The ‘Triple Whammy’ of New Accounting standards and Why Lawyers should Care

19 September 2016

Wayne Basford , Asia Pacific Leader, IFRS
Partner, Audit & Assurance
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“Fortunate are those that live in interesting times” the English translation of what is purported to be a traditional Chinese saying or as some believe a traditional Chinese curse. Certainly accountants and auditors involved in the preparation of general purpose financial reports are about to live in “interesting times” Whichever way you look at it, we are certainly up for some interesting times over the next 4 years!!

Between now and 2020 financial reporting will go through the biggest change this century with the introduction of three new accounting standards, AASB 9, 15 & 16 .This ‘Triple Whammy’  of standards will impact how bad debt provisions are calculated, cause more financial assets to be measured at fair value, introduce very complex rules as to when revenue can be recognised and effectively scrap the operating lease classification, bringing all leases, together with the lease liability onto a company’s balance sheet.

It is very unlikely that any entity preparing general purpose financial reports will not be impacted by one or more of these standards.  The prime impact of these standards lies in the change to the timing of recognising profits and reported earnings, changes to bad debt provisioning rules meaning that bad debts will be recognised earlier than they are currently. Application of the new rules on revenue recognition will most likely delay revenue, with the new leasing standard front loading lease expenses but improving reported EBITDA.

The transition rules can also lead to some interesting impacts, with the possibility of showing revenue in 2017 under the existing standards, then reporting that same revenue AGAIN in 2018 under the new standard. In respect of bad debt expenses it may be possible that a bad debt expense will not be recorded in 2017 under the old rules, but under the new rules rather than be recorded in 2018, it will be adjusted for against retained earnings.

This complexity will require significant consideration for any lawyer drafting contracts that include clauses around reported revenue, reported EBITDA and reported profit in 2018, 2019 and 2020. Contracts likely to be impacted include (but are not limited to) employment contracts, employee share schemes, deferred payment terms and any contracts which refer to EBIT ,EBITDA, etc.  In such circumstances clarity around the basis on which these figures are being calculated needs to be established. 

Given the impending nature of these changes, it is highly recommended that lawyers take a proactive approach in ascertaining the impact of these new accounting standards on both existing contracts as well as those drafted after the standards have come into effect.

It is doubtful that as a lawyer you will want to be involved in establishing the case law around contracts that are not “IFRS 9, 15 and 16 proof’!