Adoption of IFRS 9 and IFRS 15 for interim reports
It seems to me that ‘Disclosure’ is the forgotten child of IFRS 9 and IFRS 15.
Like many others, I have followed the discussion and debates surrounding IFRS 9 and IFRS 15. I have reviewed the literature, attended discussions and seminars and joined in the debate. I have been presented with various scenarios, some helpful, others less so, and through it all I have been struck by the lack of attention on ‘Disclosure’.
I understand that addressing and resolving issues related to ‘Recognition’ and ‘Measurement’ are crucial. I also accept that the correct order of things would be to recognise and measure correctly and then disclose. However, I am of the view that too much of the discussion has simply ignored ‘Disclosure’ and left us with a two-sided triangle.
Fortunately, it is not too late to address this lack of attention and to begin considering how disclosures may change as a consequence of IFRS 9 and IFRS 15.
Amid all the concern, uncertainty and doubt that may have been generated by the adoption of these new accounting standards, the reality is there aren’t any monsters hiding in the cupboard and in fact there may be no impact (for some) and minimal impact (for many). For those that are impacted there are a few things that stand out, such as: Disaggregation of revenue (what a term!).
This is certainly going to add to the disclosure workload, slicing and dicing the revenue into a variety of categories. Categories that could be used as basis for disaggregation include:
- Type of good or service (for example, major product lines)
- Geographical region (for example, country or region)
- Market or type of customer (for example, government and non-government customers)
- Type of contract (for example, fixed-price and time-and-materials contracts)
- Contract duration (for example, short-term and long-term contracts)
- Timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time)
- Sales channels (for example, goods sold directly to consumers and goods sold through intermediaries)
This disclosure will require careful consideration as it has the potential to provide a treasure trove of market sensitive information to competitors.
Allowance for expected credit losses may see an uplift in the impairment of receivables expense, as you are expected to group the receivables and apply an expected credit loss rate. This will be particularly tricky if you have a major customer paying unexpectantly late after period end.
Contract assets may only be a reclassification from accrued revenue, but there is the possibility of additional revenue being recognised.
The capitalisation of customer acquisition costs and customer fulfilment costs will see short-term profits rise (including EBITDA/operating profit) as costs are amortised over the life of the contracts.
Contract liabilities may only be a reclassification from revenue received in advance, deferred revenue and accrued expenses. There is also a new disclosure for unsatisfied performance obligations, whereby you must estimate the period over which this may be recognised as revenue.
The following are some potential trigger points that would suggest that IFRS 9 'Financial Instruments' impacts your Interim Report:
- Assets in the latest Annual Report included 'Available-for-sale financial assets' and 'Held-to-maturity investments'. If still held, these would be reclassified to another investment category, such as 'Financial assets at fair value through other comprehensive income'
- Bad debt / impairment of receivables expense in previous periods, indicating that the expected credit losses on receivables needs to be applied
The following are some potential trigger points that would suggest that IFRS 15 'Revenue from Contracts with Customers' impacts your Interim Report:
- 'Accrued revenue' is now reclassified into 'Contract assets'
- 'Revenue received in advance' and 'Deferred revenue' is now reclassified into 'Contract liabilities'
- Consider if any 'Accrued expenses' should be reclassified into 'Contract liabilities'
Impact on the adoption of IFRS 9 and IFRS 15 for Interim Reports, the following is a summary of the new disclosures (where applicable):
- Statement of profit or loss and other comprehensive income: 'Interest revenue calculated using the effective interest method' (expanded description) moved from the notes to the face of the statement
- Statement of profit or loss and other comprehensive income: new income items on the face of the statement for 'Net gain on derecognition of financial assets at amortised cost', 'Net gain on remeasurement from reclassification of financial assets at amortised cost to fair value' and 'Net gain transferred from other comprehensive income on reclassification of financial assets'
- Statement of profit or loss and other comprehensive income: new other comprehensive items for 'Gain/(loss) on the revaluation of equity instruments at fair value through other comprehensive income' (will not be reclassified) and 'Gain/(loss) on the revaluation of financial liabilities at fair value through other comprehensive income' (may be reclassified)
- Statement of financial position: new classifications for 'Contract assets', 'Financial assets at fair value through other comprehensive income' and 'Contract liabilities'
- Notes to the financial statements - Significant accounting policies: include IFRS 9 and IFRS 15 into the new or amended Accounting Standards and Interpretations adopted
- Notes to the financial statements - Significant accounting policies: new accounting policies for revenue recognition, trade and other receivables, contract assets, customer acquisition costs, customer fulfilment costs, right of return assets, investments and other financial assets, contract liabilities and refund liabilities
- Notes to the financial statements - Restatement of comparatives: disclose the impact on the comparatives and consider changing the note name to Restatement of comparatives - adoption of IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers'
- Notes to the financial statements - Revenue: new disclosures for disaggregation of revenue
- Notes to the financial statements - Trade and other receivables: new disclosures for allowance for expected credit losses
- Notes to the financial statements - Contract assets: new note including a reconciliation
- Notes to the financial statements - Other assets: new items for 'Customer acquisition costs', 'Customer fulfilment costs' and 'Right of return assets'
- Notes to the financial statements - Contract liabilities: new note including a reconciliation and a breakdown of unsatisfied performance obligations
- Notes to the financial statements - Other liabilities: new item for 'Refund liabilities'
IFRS SYSTEM has created a free booklet that provides a ‘before’ and ‘after’ example of Interim Report disclosures; and the booklet can be downloaded here.
There will be a further article discussing the adoption of IFRS 9 and IFRS 15 for Annual Reports, in which we discuss, among other things, the new disclosure in the financial instruments note.
Michael Berrington is the founder and chief architect of IFRS SYSTEM and for many years has been regarded as a leading authority on the automation of statutory financial statements.
Since his very early PwC days Michael has been drawn to statutory financial reporting, so much so that he...