Disclosure requirements more detailed than ever before
Your first annual disclosures under the new standards may feel a long way off – but have you thought of the time and effort required to get everyone comfortable with the detail that you’ll need to provide? And if you’re required to publish interims, time is running out even faster. The volume may be less, but even your interims will require some demanding disclosures.
If you haven’t started yet, there’ll be no rest after you’ve done your 2017 accounts. You’ll need to start planning the disclosures under the new revenue and financial instruments standards. Even if your headline numbers aren’t impacted, you’ll still need to make the disclosures. No one is exempt.
The requirements are more detailed than ever before and may force you to display your organisation’s ‘inner workings’ in new and uncomfortable ways – so getting to grips with the exact requirements of each standard and how they affect you will be essential.
While revenue has always been a KPI, companies haven’t had to provide detailed information about what lies behind the revenue number until now. Saying that information is “commercially sensitive” isn’t an acceptable excuse for omitting a disclosure.
Disaggregating your revenue streams, linking them to your segment note, giving information on payment terms, being explicit about the amount and when you expect to receive the revenue from open contracts – none of these things will come naturally. But that is what the disclosures require you to do. And this will provide others – including your competitors – with greater insight into how you run your business.
It’s a big change from the old revenue standard, where entities typically gave one number broken down into a few line items in the notes.
Now, disclosure requirements could run across several pages – and will need to tie through to other disclosures inside and outside the financial statements. There will be many qualitative statements to make with judgements and estimates involved, particularly where contracts have variability built in.
It will be crucial to get it right in year one, because that will set expectations for future years.
And, as I’ve said, even if your reported revenues are not greatly affected by the new standard, you’ll still have to make all the new disclosures. It’s like a maths exam question where it’s not enough to just write the answer – you have to show your full workings.
The first big challenge is already fast approaching – in the interim statements, you’ll need to provide a big-picture view of the impact of the new standard and how it will affect revenue going forward. Given that IFRS 15 is already effective, analysts will want to understand your transition adjustment and new accounting policies.
In addition, you’ll need to disaggregate revenue and show the relationship to your segment reporting. This could be a sensitive matter. So put the new disclosures in front of the audit committee and the board and start the discussion in earnest.
I strongly recommend beginning this as soon as the 2017 accounts are finished. If you leave it too late, you could seriously struggle to get the disclosures through the multiple layers of sign-offs.
Then there’s IFRS 9. For banks, the task will be considerable, adding many pages to the notes. But for corporates, the additional information needed will vary depending on the relevance of the different requirements to your business. So it’s important to assess the additional requirements carefully.
For example, the new standard has extensive disclosure requirements about the effect of credit risk on the amount, timing and uncertainty of future cash flows, as well as about the effect of hedge accounting and related risk management strategies.
And don’t forget about leases. In some respects, the disclosure requirements are relatively straightforward. The volume of disclosures may be high, but you’ll need to gather most of the information anyway, to do the accounting. It’s a case of following the disclosure checklist and working through it.
It shouldn’t be a surprise that the operating lease commitment note in your 2018 financial statements will be subject to greater scrutiny, given that it will provide an indication of your lease liability going forward. However, what may be surprising to some is the requirement to reconcile your operating lease commitment note under the old standard with your opening liabilities under the new one. This applies to companies that don’t apply the standard retrospectively – by far the simpler approach for most.
Your operating lease commitment note may be tucked away at the back of your financial statements, but that doesn’t mean you can ignore it until the last minute! Get onto it soon so you are not left regretting it later.
Across all three standards, there will be the challenge that some of the data needed won’t sit in the general ledger. You may need workarounds to locate and pull it through. It’s important to capture the information and find a way of keeping it up to date. Disclosures won’t ‘roll over’ from one year to the next. They will change each year, so you will need to be able to access current information each time.
Finally, remember that the disclosures are not just about numbers. There will be lots of narrative and descriptions – so getting the wording right in how you define things will be very important. Think carefully about the language – loose descriptions could come back to bite you.
Sanel Tomlinson provides training and technical accounting advice to companies in Mainland China and Hong Kong on the application of the new standards and other aspects of corporate reporting.
© 2018 KPMG IFRG Limited is a UK company, limited by guarantee. All rights reserved. KPMG IFRG Limited, registered in England No 5253019. Registered office: 15 Canada Square, London, E14 5GL, UK.