FRC flags implementation issues with IFRS 9 and 15

The Financial Reporting Council’s (FRC) thematic reviews of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers show that the early application of both standards has raised a number of problems, particularly in explaining the transition to key stakeholders

IFRS 9, which became effective on 1 January 2018 and replaced IAS 39 Financial Instruments: Recognition and Measurement, has already been taken up by some companies. The FRC found that some ‘companies, in particular, some smaller banks, did not sufficiently explain the impact of adopting IFRS 9’. IFRS 9 did not have a material effect on the results of nonbanking entities and, in those banks that were affected, 'there was no evidence that banks were taking advantage of some of the transitional exemptions permitted' under the standard.

It found that disclosures could be improved, including improvements to estimation uncertainty, ‘in particular the quantification of sensitivities of expected credit losses to changes in assumptions’. The FRC encourages prepares to consider the extent of disclosures in upcoming annual reports and ensure that mandatory disclosure requirements are met.

IFRS 15, which became effective on the same date, was found to not have been early-adopted with the same frequency as IFRS 9. In those companies that did adopt it, a pattern was found under which companies disclosed the use of the new policies but gave no comparison to the old policies, ‘thereby failing to explain changes made’. Insufficient or confusing explanations of variable consideration were also detected, with a ‘reliance on vague and boilerplate language’ that failed to adequately explain the consequences of the change.

The FRC concluded that in applying IFRS 15, the main issues were a lack of meaningful explanation of transition adjustment, or no disclosure of the change at all. The most helpful disclosures 'were those that, regardless of transition method adopted, broke their opening balance sheet adjustment down into impact categories and provided appropriate linkage to their new revenue accounting policies'.

Paul George, FRC’s executive director for corporate governance and reporting, said: 'Revenue is a key metric for all companies. IFRS 15 will have a significant impact on the timing of revenue recognition for many companies. It is very important that companies clearly explain the changes to their revenue recognition policies and the impact of the new standard on their results.  Disclosures in the interim accounts that were reviewed as part of our thematic work were of mixed quality.'

'The expected credit loss model introduced by IFRS 9 will have a major effect on how banks calculate their loan loss provisions. High quality disclosures, including quantification of estimation uncertainty, is essential in order to communicate the impact of the new model to users. Although IFRS 9 will not have a material effect on many non-banking companies, we still expect them to undertake a thorough impact assessment to support that conclusion.'

Thematic reviews 2019/20

The FRC has also set out a busy work plan for the next financial year with plans to undertake a number of thematic reviews in 2019/20, with the focus on impairment of non-financial assets; the effect of the new International Financial Reporting Standard, IFRS 16 Leases, on companies’ 2019 interim accounts; and the effects of Brexit on companies’ disclosures.

As is standard practice, the FRC will select companies for its impairment review predominantly from sectors of the economy that are currently under pressure. It will also review the accounts of companies where there are signs that circumstances and events in the current year indicate that impairment may be a significant matter.  Some, but not all, companies in the sample will be pre-informed of the review.  

It also plans to review the early impact of IFRS 16 Leases on companies' interim reports issued in June 2019. The new lease accounting standard comes into effect for accounting periods commencing 1 January 2019.

The review will focus on the information reported in June 2019 interim reports, focusing on sectors where the adoption of the new standard, IFRS 16 Leases, may have a material effect.

IFRS 9: thematic review is here 

IFRS 15: thematic review is here 

Report by James Bunney, additional reporting Sara White

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