We continue our focus on the implementation of the big new International Financial Reporting Standards, IFRS 9, 15 and 16. All businesses reporting under IFRS have to devote time and resources to implementing these standards and the effective dates are getting nearer. Businesses and their advisers should be discussing these standards, and where necessary, engaging professionals with the expertise who can assist with implementation.
New format audit reports will be appearing soon in many countries. Users of audit reports will see longer and more detailed reports. Reports for listed companies will include "Key Audit Matters" (known as KAM) that will explain the significant matters arising from the audit. For the first time, audit reports will reveal information about the issues arising from the audit.
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The standards are effective for periods commencing 1 January:
These standards will be the last "big" new standards from the International Accounting Standards Board (IASB) for some time, as IASB's main focus is going to be on monitoring implementation of its existing standards. The scope and impact of these new standards varies.
All businesses have financial instruments, but the most significant impact of IFRS 9 will be on complex financial instruments. Most businesses who will see real accounting changes from IFRS 9 are already working on implementation. For those who need a briefing about IFRS 9, refer to our article here.
IFRS 16 is regarded as being a "straightforward" standard. Put simply, it places operating leases on the balance sheet. The impact of the standard on balance sheet ratios should not be overlooked, meaning that it's important to check that implementing the standard does not result in a breach of a debt covenant. More about IFRS 16 can be found at here.
IFRS 15 does result in significant change, replacing two old and somewhat limited standards. Every company has to consider the impact of IFRS 15, and it is not just about accounting. Contractual terms should be reviewed for their accounting implications, and, if necessary, standard terms for future contracts revised. There are also significant new disclosures. Investing now in considering the impact of IFRS 15 will save time, effort and possible surprises later. Find out more here.
In many countries, the new and revised audit reporting standards are now effective.
All audit reports will be longer and contain more information about the role and responsibilities of the auditor. There are new requirements for auditors to consider the disclosures about going concern "close calls." The audit reports of listed companies now contain "Key Audit Matters" (KAM) that describe the most significant matters arising from the audit.
There are extensive resources available to assist auditors with applying the new reporting requirements. IAASB's (International Audit & Assurance Standards Board) resources can be found at http://www.iaasb.org/new-auditors-report. A presentation about implementing KAM can be found here.
The UK Financial Reporting Council (FRC) has recently issued an interesting report that although based on UK activity are both influential and informative for a wider audience. The good practice guidance on audit tendering discusses the following:
An additional UK Financial Reporting Council (FRC) report that is also relevant for a wider audience is a paper on the use of data analytics techniques by auditors. The paper discusses good practices that the FRC has identified in its inspections of audit firms in the UK. Any business interested in making more use of data analytics might find this paper an interesting account about its use by professional services firms.
The UK Parliament has passed an Act to enable the UK government to invoke Article 50, the measures in the European Treaties to commence the process for exiting the European Union, to be invoked. A two-year process of negotiation will then begin, at the end of which there should, in theory, be an exit agreement between the UK and the EU. As the UK joined the then European Economic Community in 1973, the process of unraveling the UK from the EU is going to involve detailed and complex discussions.
The underlying UK economy continues to perform well, exceeding the pessimistic forecasts last year about the immediate consequences of a leave vote. However, in the absence of an agreement between the UK and the EU about their future trade and economic relations concerns continue to be raised about the risks of investing in the UK. Any business that is considering trading with the UK or investing in the UK has to be alert to these risks and balance them against what they consider to be the positives of working with the UK. Our UK member firm, Crowe Clark Whitehill, has a Brexit hub to keep you updated. The nature of the negotiations, as well as elections in several important EU Member States, means that it may be sometime before a clear outcome can be seen.