Is there really comparability under IFRS?
Three new international financial reporting standards could lead to confusing comparisons with clear vision only restored in 2020, writes Jamie Tomlin.
The introduction of three major international financial reporting standards presents a big challenge for preparers of financial statements. It is also going to create a challenge for users in understanding how the reported information has changed for the application of the standards and how that information has changed due to changes in the underlying activities of the business.
Comparability is a major aid to assessing how an entity has evolved in the year, but we are about to enter a period that could be described as a ‘whirlwind of change’. As I say, this will be challenging.
Allow me to explain. IFRS 15 Revenue from Contracts with Customers contains two approaches to implementation. On transition the standard can be applied retrospectively, properly, with comparatives restated, subject to some practical expedients. Alternatively, the impact can be determined retrospectively but with the cumulative net effect applied as at the date of initial application and without restatement of the comparatives.
If we throw IFRS 9 Financial Instruments into the mix for 2018, this, subject to a not inconsiderable number of exceptions and possible redesignations, requires a retrospective approach to be taken.
Looking forward, the implementation of IFRS 16 Leases also contains a choice for transition. As with revenue, an entity may either apply the standard retrospectively, or using a modified retrospective approach with the cumulative effect recognised at the date of initial application (ie, without restating comparatives).
The effect of this on comparability could be as follows:
- 2017 (as originally reported) – under IAS 17, 18 and 39
- 2017 (as comparative to 2018) – under IAS 17, 18 and IFRS 9
- 2018 (as originally reported, and as comparative to 2019) – under IAS 17 and IFRS 9 and 15
- 2019 – under IFRS 9, 15 and 16
- 2020 – under IFRS 9, 15 and 16
Other permutations are possible!
While an explanation of the impact may assist in explaining the effect of applying the new standards, how this is disclosed could severely test the ‘understandability’ element of the presentation assertions. There could be a period of at least three years without comparability, both over time and between entities until (forgive the pun) in 2020 vision is restored!
Jamie Tomlin is chair of the LSCA Technical Committee.
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