10 questions for audit committees – to focus discussions with management of corporates on implementation of the new standards
In a matter of months, the biggest changes in accounting for more than a decade will come into effect, but our research shows that the vast majority of companies aren’t ready.
Progress varies by geography and by industry. But overall, it’s clear that a considerable amount of work still needs to be done.
You, as an audit committee member, have a crucial part to play. Regulators are expecting high-quality implementation, and your role is to set the right tone at the top and oversee implementation.
For companies with December year ends, the new revenue and financial instruments requirements are effective in less than nine months, so it’s time to step up your efforts on the implementation of these mandatory requirements.
Management will implement the new requirements, but the audit committee is tasked with the crucial oversight role: to evaluate management’s progress, challenge the judgements and assess the controls.
I regularly speak with regulators and clients about the challenges of implementation.
My key recommendation is not to underestimate the sheer volume nor the complexity of new judgements and estimates that the new standards
introduce – whether in the context of the new expected credit loss model under IFRS 9, or in determining how many performance obligations a customer contract contains and how much revenue to allocate to each performance obligation under IFRS 15.
Management of companies are already making judgements and estimates
and, as an audit committee member, you need to make sure that you’re on top of this.
One question I’m asked regularly is: “How much global consistency can we expect these new standards to deliver?” The answer is not straightforward. In the case of revenue recognition, for example, there will now be a common language and framework in which to analyse disparate transactions. This will help.
But each company is unique in the way it makes money and the business model(s) it pursues. And companies operate in different jurisdictions, with potentially different contract laws.
Add to that mix the significant judgements that management need to make under the principles that underpin the new standards, and it becomes clear that consistency does not always mean the same outcome for each company.
Disclosure of significant judgements and estimates, and accounting policies will therefore be more important than ever under the new standards – to help investors and analysts understand your company and frame useful comparisons across your peer group.
In fact, the securities and markets regulators are already fully focused on disclosures and are urging companies to inform investors in a transparent and timely way about the impact of the new standards on their financial
statements, and provide a meaningful update on their progress with implementation.
There are some broad principles that you can apply in overseeing the efforts of management to schedule and design their response. Of course, the circumstances will vary, but the right questions need to be asked at a high level to maximise the chances of achieving the quality outcome that is needed and, indeed, expected.
Here are some overarching questions that audit committees can use to focus discussion on the implementation plans for the new standards.
Remember, tone at the top matters and audit committees are in the strongest position to set this. The need to engage with the new standards is now, so if – as an audit committee member – you haven’t yet engaged with management on the new standards, then I believe you would be well-advised to start…
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Mark Vaessen is KPMG’s global IFRS leader.
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