Countdown to IFRS 9 and IFRS 15 starts

4 Jan 2017

With one year to go until the effective date for sweeping changes to accounting rules with the introduction of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, the International Accounting Standards Board (IASB) has issued a recap on key changes and compliance costs

Companies will have to apply the two IFRS standards for reporting periods beginning on or after 1 January 2018. However, those in the insurance sector will have the opportunity to defer IFRS 9 adoption until after the release of IFRS 17, the new standard for insurance contracts.

IFRS 9 changes

In summary, IFRS 9 will replace IAS 39 Financial Instruments and bring together the following aspects of accounting for financial instruments:

classification and measurement;
impairment; and
hedge accounting.

IFRS 9 will have the greatest effect on financial institutions. In practice, the most significant change will be in the way financial institutions account for loan losses. IFRS 9 replaces the incurred loan loss model of IAS 39 with an expected loan loss model. The new model is likely to result in greater loan loss provisions by financial institutions and will provide investors with useful information on changes in credit risk exposure.

IFRS 15 changes

In a major overhaul of the reporting rules on revenue recognition, IFRS 15 will replace IAS 18 Revenue and IAS 11 Construction Contracts. It will establish a framework for determining when to recognise revenue and how much revenue to recognise. It is expected to increase comparability among companies across sectors and markets. However, it comes with large compliance costs for certain sectors including telecoms, construction and transport.

IFRS 15 will affect almost all companies because it covers revenue from all contracts with customers, except for revenue from leases, financial instruments and insurance contracts.

Heads up for investors

The changes in reporting requirements will affect the balance sheets of many listed companies, which will create a communications’ dilemma as analysts and investors question significant changes in the overriding balance sheet and profit and loss (P&L).

As part of the IFRS framework, companies need to report any changes to reporting in the notes in their annual financial statements, including the expected impact of a new standard even before companies apply that standard (this is a requirement in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).

This has already seen Rolls-Royce issue a warning that the financial impact of IFRS 15 would have caused a £900m hit on the profitability in 2015-16 had the company been reporting under the new revenue recognition standard.

For IFRS 9 this might include information about how loan loss provisions are likely to change, and for IFRS 15 it might include information about the likely effects on the amount or timing of revenue recognition.