Prepare for the transition to IFRS 15 and IFRS 16 with our example methodology and sector workshops.
The next few years are going to raise a number of challenges if you are applying International Financial Reporting Standards (IFRS).
- The new revenue standard, IFRS 15 Revenue from contracts with customers (EU effective date for periods on or after 1 January 2018), will result in 'distinct' performance obligations in a contract being accounted for separately, which may see the acceleration or deferral of revenue compared with existing practice.
- Leases will also be affected by IFRS 16 Leases (EU effective date for period on or after 1 January 2019), which will result in almost all leases being recognised on the balance sheet as an asset with a corresponding liability for the payments.
More than just an accounting change
For those who have transitioned to new IFRS standards in the past, you will remember that understanding the key requirements of a new standard and evaluating the potential financial reporting impact on your business is only one part of the transition. There are often much wider commercial implications that need to be considered in managing a transition.
We have seen that for companies transitioning to IFRS 15 and IFRS 16, the new standards may not only require updates to existing financial accounting policies, procedures and systems but also affect controls, contracts and compensation, as well as tax accounting.
You may expect to encounter changes in the following areas:
- accounting policies and disclosures
- processes needed to develop and incorporate new management judgments
- related internal controls that will require updating, if not comprehensive overhauling, to reflect changes in accounting policies and processes
- systems to capture and process new data
- profit-based employee bonus and compensation arrangements
- income and other taxes
- debt covenant compliance
- negotiation of contract terms and agreements
- business valuations.
Applying the new standard
For both IFRS 15 and IFRS 16, companies are permitted to apply the new standard either retrospectively, subject to some practical expedients, or through an alternative transition method.
As such, one of the first decisions an entity must make, after assessing materiality of the change to the relevant balances and transactions, is to determine which transition approach it will apply. Based on the current drafts, you could choose to transition to IFRS 15 before IFRS 16, or have the option to implement them both together.
An exercise like this should never be approached in isolation. You should also consider the information needs of stakeholders – investors, lenders, analysts and others – to ensure that their needs and expectations are addressed by the transition approach taken.
An example methodology for transition
So you’ve realised you have some work to do. How might you approach your transition?
In implementing new standards, having a structured methodology is key to a smooth and successful transition; we have provided an example methodology as to how you might approach this below. You should spend some time now to tailor this methodology so that it is specific to your business model and environment, and design a customised project plan and timeline best suited to your needs.
Our proposed approach also addresses the impact of accounting changes not only on financial reporting but on other affected areas, such as tax, IT and functions within your company that use the financial statements to inform decision-making.
Phase 1: Needs assessment and scoping
This is where you look to gain a further understanding of your:
- revenue recognition and lease structure and process
- external and internal financial reporting needs
- current financial reporting system environment
- current tax accounting method
- desired transition approach (ie, retrospective or modified approach)
- other functional areas that interact with and use the financial information.
Phase 2: Project plan and kickoff
Using the information obtained in Phase 1, conduct further scoping of your company’s current revenue and lease arrangements to develop a customised work plan that includes specific work streams and timelines. This helps to prioritise those areas that will require the most lead time to implement.
Phase 3: Identify and analyse
Analyse each significant revenue stream or lease in detail, identifying policy changes from current practice and impacts on other areas.
Phase 4: Implement, test and monitor
Incorporate the impact of policy changes into your accounting procedures, financial reporting systems and tax accounting methods to quantify adjustments, draft disclosures and address other affected areas.
Join our IFRS 15 and IFRS 16 workshop
During October and November 2016, we will be running a number of interactive half-day workshops to assist you in your transition to the new revenue and leasing standards. The session will be structured to enable you to understand how the new standards will affect you and also share your questions around the practical application of the changes.
The workshops will include sector focused events for:
- real estate and construction
- technology, media and telecommunications
- professional practices.
If you would like to join us at one of our workshops, please click here to email the event organiser.
To discuss your current revenue or lease contracts, and how these changes could impact the way in which your business will recognise revenue or leases in the future, please contact your usual Grant Thornton contact or Jon Wallis, Senior Manager in our Financial Reporting Advisory Group, who will be happy to support you.