IASB Update: The end balance and looking forward| Wolters Kluwer
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  • IASB Update: The end balance and looking forward

    by Jeroen Van Doorsselaere, VP Market Management Risk & Finance EMEA, Wolters Kluwer

    Published December 21, 2017

    In the IASB world it has been a difficult year for Financial institutions with 1 major standard to be released (IFRS 17) and 4 standards coming in place in the next 4 years. The IASB further deployed the Transition resource groups to give a bit more guidance on how implementation needs to proceed. Although the standard remains the standard, some additional discussions are worthwhile to follow and sometimes change the interpretation of the implementation of the standard.

    IFRS 17 and what does it mean for Investors.

    IFRS 17 which includes the standard for measuring and accounting for Insurance contract was released as is applicable for 1st of January 2017. The IASB also released an investor guide that explains why IFRS 17 is important. The main idea is that this would introduce a common standard across the globe replacing the different local GAAPs trying to deal with these instruments. The fact that comparability is on the agenda is maybe a plus for the investors, but the first question is more towards the impact it has on the investment. The IASB formal response is that the impact on the dividends should be neutral as the insurance standard will only affect the timing revenue is taken into account rather than the calculations itself of the revenue. As mentioned IFRS 17 will have a global view at least in the IFRS adopted jurisdictions but is the comparability complete with for instance regulatory reporting and the relations with for instance Solvency II. The key difference between IFRS 17 and Solvency II is the requirement in IFRS 17 to calculate and maintain a ‘contractual service margin’—the yet-to-be earned profit that a company recognizes in the income statement as it provides the insurance coverage. Solvency II has another concept and purpose and by consequence is not to be compared. Solvency II will have an impact in IFRS and more specifically could play a role as data provider or even aligning on the modeling features in IFRS 9 when modeling the default risk for insurance contracts. Where insurance contracts were all about premium, it is no longer recognizing this and is replaced by insurance revenue that not only take into account the premiums but also several risks and other profit and cost that are made for these insurance contracts.

    Implementation of IFRS 9 and IFRS 15

    The last year was very busy for companies on the IASB front as two standards come into play in 2018 which is the IFRS 9 standard around Financial Instruments and IFRS 15 under revenue recognition. For the first part financial institutions particularly have been on the spot in implementing the standard which consist of 3 parts from classification and measurement, impairment and finally hedge accounting. Certainly on impairment with the calibration of models and the final measurement around expected credit losses have been a challenge for most financial institutions dividing them in 3 categories. A first category of institutions went all out of internal modelling for IFRS 9 and started years ago and are now faced with the last of the compliance reporting requirements. A second group are the ones that kind of forgot about the finance implications and are able to produce the ECL but still have a way until they can produce all required disclosures. The last group are still in denial or at least went for patch solutions which will need replacements. The year of 2018 will show who was out and what the eventual impact will be on the financial statements.

    Enough about IFRS 9, IFRS 15 has been a challenge for all corporates. The standard on revenue recognition which structures if revenue can be recognized directly in the P&L or should be spread over time has had the most impact on the business and how revenue is recognized or spread. Of course one of these side effect is how growth levels and other KPIs but also remuneration has been adapted to this new accounting standard. Luckily there is a point of restatement and adjustment within the comparable data but the necessary guidance for users of financial statements will proof to be highly important.

    Outlook and Agenda for the IASB in 2018

    IFRS 16 Leasing and IFRS 17 Insurance will be the standards which are under implementation respectively by 1st of January 2019 (IFRS 16) and 1st of January 2021 (IFRS 17). Obviously this will increase comparability in these Industries. However a clear indication from the IASB also happened on the leasing side as the biggest impacts are for Lessees a lot of companies are actually affected by this standard and now have to urgently gather all information they need to scramble towards this IFRS 16 compliance. A second point worthwhile mentioning is that although for Lessors there is not a lot of change it needs to be said that a lot of these leasing assets when on balance will fall under the IFRS 9 regulations and by consequence are applicable for expected credit loss modelling which implies for those leases (finance leases in balance sheet) a direct application of IFRS 9, which would come at a rapid pace.

    Looking at the work plan from the IASB we have had the major 3 standards which are now issued but it is clear there are still some standard setting activities which will be conducted in the next year. The one to look forward to is a research process that will adapt IFRS 9 which is the dynamic risk management project on which another discussion paper will see the light and hopefully this will settle all the elements of the financial instruments standard. The other standards that will impact companies are the conceptual framework, a definition of materiality, rate regulated activities and management commentary. Although all of them are already being mentioned in the latest board meetings, some of these element does have things to look after for. One being materiality which would even lead to adoptions which lowers thresholds and making old standards suddenly becomes applicable. Even more important is the management summary; As the IASB has noticed annual reports are always growing and the amount of disclosure presented to the stakeholders are huge even to the point that physical copies are denied by post offices to delivered. This also means that investors which needs to know the essence are concentrating on the management summary, for that reason the IASB is looking how to regulate this or at least set some basic ground rules to accommodate for this.

    The end of the big all-encompassing standard releases are maybe over, it is still a long way to go until the last one (IFRS 17) will be implemented 3 years from now which will be in maybe already a changed environment and with amendments or other projects to deliver. So people specializing in implementing these standards won’t be out of a jobs soon as a lot of these requirements will still be important even in the New year even though it is the year of go live of IFRS 9.

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