What disclosures will you have to make in this year’s interim and annual reports?
In just over six months, the new financial instruments and revenue standards – IFRS 9 and IFRS 15 – will become effective.
Many companies will be preparing for their interim financial reporting soon, so this is a good time to think about communication, and the disclosures you’re going to have to make now and later in the year about the impacts of these new standards.
Investors will want to know two things: are you on top of your implementation project and what is the impact going to be on your key performance metrics and trend data. In addition, they’ll want to know whether these impacts are temporary – i.e. as a result of transition provisions – or permanent.
For banks in particular, as they implement the new expected credit loss model under IFRS 9, investors will be keenly focused on what the impacts on regulatory capital will be.
Providing transparent and meaningful information about the impacts of new standards is obviously also high up on the agenda of the market regulators, who are paying close attention. For example, IOSCO, the international association of securities market regulators, and ESMA, the European regulator, have both set out their expectations in guidance to issuers.
Although ESMA anticipated relatively simple, high-level disclosures in 2016 annual financial statements, it wants to see quantified impacts disclosed in 2017 interim reports, in addition to qualitative information about the status of implementation. ESMA’s sense of urgency is clear, but it remains to be seen for how many companies it will be feasible to provide quantitative information.
The nature and extent of these disclosures will be dependent on how advanced management is with the implementation of its transition plan, but
the aim is for companies to progressively enhance the disclosures as new
accounting policies are defined, estimation uncertainty reduces and the effective date of the new standards approaches. Quantitative information may well be given only in the form of an impact range or a number that
is appropriately caveated in interim reports.
At the latest, ESMA expects the impacts to be able to be reliably quantified in early 2018 – i.e. when calendar year-end companies release their 2017 financial statements.
This illustrative timeline (PDF 115 KB) sets out the detail.
Some of you may be thinking: ‘So what? I’m not in Europe, so ESMA isn’t my regulator.’
Well, although that may be true, securities market regulators across the globe do talk to each other – and IOSCO’s guidance shows that most market regulators are likely to have similar expectations.
So, if your company is using IFRS and is based outside Europe, you may want to remind yourself of IOSCO’s statement. ESMA’s guidance may also be useful when considering which disclosures you include in your forthcoming interim and annual financial statements.
To avoid surprises, discuss your planned disclosures with your auditor ahead of time. Make sure that your expectations are aligned and that there’s sufficient time for the auditor to review/audit these disclosures.
Regulators’ expectations aside, it’s worth remembering that IAS 8 already requires companies to make additional disclosures when they change accounting policies due to the adoption of new standards.
And banks applying IFRS 9 also need to consider the principles and recommendations issued by the Enhanced Disclosure Task Force, which is also encouraging a gradual and phased approach to disclosure in the run up to the 2018 implementation date.
Our website contains a wealth of information on all these matters. And our Illustrative disclosures give examples of how your IFRS 9 and IFRS 15 disclosures could look. Visit our Revenue, Financial Instruments and Disclosures hot topics pages to find out more.
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Mark Vaessen is KPMG’s global IFRS leader.
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