Aletta Boshoff, IFRS Advisory Partner at BDO in Australia, outlines the tough questions directors should be asking now.
Over recent years, Australian CEOs, CFOs and finance teams have grappled with the complexities of the new accounting standards and how to implement them. With the first reporting dates (31 December 2018 and 30 June 2019) looming, directors need to ask their management teams the following tough questions to assess the potential impact these new accounting standards will have.
Organisations must invest time to understand the potential impact of the new standards to the business and plan implementation to preserve value.
- How could these new accounting standards impact shareholder value?
- How can we mitigate the potential negative impact of these accounting standards on shareholder value?
- Would the organisation be able to continue to declare dividends? Would these dividend declarations be aligned to our current dividend policy?
- How do these accounting standards impact the profit of the organisation in year of implementation and thereafter?
- How do these accounting standards impact the balance sheet position (assets, liabilities & equity) of the organisation in the year of implementation and thereafter?
- How have we updated and incorporated these new accounting standards into our budgets and forecasts?
- Would the organisation be able to continue to meet their current bank covenants?
- Should the organisation renegotiate their bank covenants to minimise the potential impact of the new accounting standards on their current bank covenants?
- What is the impact of the new accounting standards on current remuneration structures and incentives to key management personnel and other employees?
- Does the organisation need to adjust performance hurdles and KPIs of key management personnel and other employees, to reflect the impact of the new accounting standards?
- How are we going to communicate the immediate and future impact of the new accounting standards to our shareholders and other users of our financial statements?
- Has the organisation performed and documented an impact and/or risk assessment of the implementation of the new accounting standards?
- Does the organisation have documented position papers to support and justify the appropriate accounting treatment of existing transactions under the new accounting standards?
- Has the organisation updated their accounting policy manual to reflect the requirements of the new accounting standards?
- Has the organisation obtained independent accounting advice in relation to the implementation of the new accounting standards?
- Have the auditors of the organisation been involved in the discussions and impact assessment of the new accounting standards on the organisation?
- What research has been done on the potential impact of the new accounting standards on the organisation’s industry?
- Has the organisation considered their technology needs and required changes to their existing systems and processes to deal with the new accounting standards?
- How can the directors access further information on the requirements and potential implications of the new accounting standards?
AASB 16 Leases
- Has the organisation decided on an appropriate transitional approach?
- What process did the organisation follow to decide on the appropriate transitional approach in relation to AASB 16?
- What is the impact of each of the three possible transitional approaches on the organisations:
- Retained earnings at the date of initial application
- Lease liabilities and right-of-use assets at the date of initial application
- Profit before tax (i.e. depreciation and interest expenses).
- Does the organisation have a register of all leases?
- Does the organisation have a copy of all lease agreements?
- What process did the organisation follow to identify all leases, including embedded leases?
- How did the organisation decide whether it is reasonably certain to exercise lease extension options, termination options and purchase options included in lease agreements?
- Does the organisation have a technology solution to manage leases on an ongoing basis, i.e. after the date of initial application?
AASB 15 Revenue from Contracts with Customers
- Has the organisation identified and assessed all the different types of contracts it enters into with customers?
- Has the organisation performed and documented an impact assessment of each of the different types of contracts entered into with customers?
- Has the organisation assessed all the different types of contracts it enters into with customers to ensure that is aligns with the organisation’s business model?
- Has the organisation assessed whether any of its customary business practices contradict our contracts?
- Is there is a need for the organisation to review and amend all contracts with customers?
- Has the organisation made changes to systems and processes to capture and record the information required to apply the new AASB 15?
AASB 9 Financial Instruments
- Has the organisation evaluated each financial asset, especially financial assets previously classified as available-for-sale financial assets, to determine the appropriate classification in terms of the new AASB 9?
- Has the organisation decided how to value unlisted equity investments under AASB 9?
- Has the organisation developed and documented triggers for financial assets to move from stage 1 to stage 2 and stage 2 to stage 3 for the purposes of impairment testing?
- Has the organisation identified how to access good quality historical credit loss information?
- Has the organisation identified how to access and obtain forward looking macro-economic data for the purpose of impairment testing under the expected credit loss model?
- Has the organisation developed a process to perform impairment testing in relation to lending arrangements with related parties (i.e. intercompany receivables)?
- Has the organisation reconsidered whether to apply hedge accounting?
AASB 1058 Income of Not-for-Profit Entities (NFP Entities Only)
- How will AASB 1058 impact the timing of the recognition of government grants?
- How will AASB 1058 impact the organisations future fundraising activities?
- How will the organisation assess whether transactions occur in an agreement with another party that creates enforceable rights and obligations, which is necessary to apply AASB 15 instead of AASB 1058?
- How will the organisation assess whether the organisation’s performance obligations are sufficiently specific, which is necessary to apply AASB 15 instead of AASB 1058?
Please contact the IFRS Advisory Team at BDO (firstname.lastname@example.org) to discuss any of the above further.
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