Todd Buchanan is the National Leader of Accounting Advisory Services at KPMG in Canada.
When you mention “the Big Four,” many Canadians will know you’re talking about the world’s leading accounting firms. But mention the term to the teams and leaders responsible for their companies’ financial reporting – at least over the next two or three years – and a different foursome may come up; namely, a series of IFRS (International Financial Reporting Standards) guidelines currently coming into force.
Why will corporate reporting groups be preoccupied? Because the complexity involved in implementing any one of these standards is unprecedented for some industries and will test the efficiency, capacity and resources of companies. Given that implementation may prove even more challenging than the first phase of IFRS in 2011 – and that regulators will require updates on progress and potential impacts – those companies that are not preoccupied with the process should become so, and quickly.
The four new standards cover a broad range of new requirements. IFRS 9 – Financial Instruments, for example, introduces changes to the classification and measurement of financial instruments, as well as to impairment provisions and hedge accounting. This will particularly affect financial institutions since they must determine how the changes affect every instrument they hold. At the same time, they will need to shift their impairment calculations from an “incurred loss” to a “projected loss” model. Finally, hedge-accounting rules are being relaxed, requiring deeper analysis of where hedging can be applied to better manage risk, a change that will affect large global companies engaged in complex risk-management strategies.
Any company with revenue will be affected by IFRS 15 – Revenue from Contracts with Customers. The standard introduces a new five-step model that takes an entirely new conceptual approach to revenue recognition (for example, by separating revenue from cash flows). Not only may the amount of revenue recognized change, but also the timing of when it’s recognized, – which will particularly affect any companies with long-term or multielement customer contracts.
With IFRS 16 – Leases, operating leases will start being recognized on the balance sheet, the opposite of the current practice. This change will have its biggest effect on large companies with a large number of leases, for example in industries such as retail, power and utilities, banks and telecommunications. Since there are a number of implementation options available, companies will have to go through their lease inventory one by one to assess what needs to be done. The transition will be data- and calculation-intensive and may require significant IT system updates, so effective resource assessment is critical.
Finally, IFRS 17 – Insurance Contracts is set to turn the insurance industry on its head with a number of fundamental changes affecting all insurers based in Canada, large and small, as well as resident foreign insurers. Changes will be seen in areas such as profit recognition, financial metrics, disclosures, data management, IT systems, processes and projections. To enhance the challenge, insurance companies will have to co-ordinate implementation with that of IFRS 9 – Financial Instruments, as the two standards will be interdependent. The resulting financial statement will look quite different and effective change management will be a key part of the process.
If addressing the impacts these four standards will have on specific financial-reporting practices isn’t enough, companies can also look forward to certain impacts outside the reporting sphere that they may not have considered. In the area of IT, for example, many companies will have to update their systems to collect, parse and analyze data in different ways. Given the calculation-heavy nature of these standards, ad hoc solutions and Excel patches simply won’t do.
Other significant impact areas include: Tax, where each standard could have specific impacts depending on the tax jurisdictions in which you operate; HR/compensation, as incentive-based compensation plans may need to be adjusted if the new standards alter the metrics currently in use; bank-covenant renegotiation, which will be required in some cases when IFRS 16 – Leases, which moves operating leases off the balance sheet, changes the asset-to-liability ratio on which borrowers’ loans are based; and investor relations, as it’s critical that investor confidence is maintained by a steady flow of communication around what impacts the new standards will have and what new information disclosures may be available.
While most Canadian companies are aware that change is coming, it’s crucial that they don’t underestimate the extent of that change or the way it may extend beyond core reporting requirements. Courting regulatory recrimination or unnecessary financial distress is hardly worth it.
Source: The Globe and Mail