Financial institutions in particular are affected by several new standards issued by the IASB and FASB that require replacing the current incurred-loss models with expected-loss accounting for financial instruments. It’s one of the most significant rules changes in financial standards..
It’s a lot of work for a company’s lean financial reporting group to adopt on top of VAT introduction within the next 12 months. Most companies are behind schedule with plans to adopt the new revenue recognition standards despite a one-year delay in the effective date that FASB and the IASB announced last year. This is a concern because many will need systems change and as well as process re-engineering and staff retraining.
Most companies have competing priorities. Number one, they’re trying to run a business Theyhave the annual reporting period and the quarterly reporting periods, month end close, budget cycles, and financial auditors etc. to cope with. Meanwhile with a tough economy collections and cash management are immediate priorities. Many are constrained by human resources, or lack financial resources. This is where proven systems, built on familiar platforms, and cloud based can reduce up front implementation and support costs and reduce the dependency on acquiring expertise that is in short supply.
So many companies and their leaders, particularly the CFO are somewhat overwhelmed right now. Economic uncertainty and disruptive changes to technology and business models require agile business with dynamic forecasting and frequent rebudgetting, micro cost control in a world of ever stricter compliance. Flexible systems with automated processes are essential.
First things first. Revenue recognition is a standard whose implementation date is coming up first, and for many companies, it may be the most challenging of the three standards to implement. Start and more important finish your revenue recognition assessment. This is a process that while led by i finance should also involve process-focused and IT-focused personnel so that a company can come to a conclusion collectively on what changes need to be made to systems and processes.
By year end affected companies need to finish that process of collecting the information and need to design the changes they need to their systems and processes. That will give them 6- 12 months to design and implement those systems and processes.
Tax The new revenue recognition rules and the introduction of VAT will require tax-compliance processes, which may also need a review of transfer pricing.
Examine your current lease structure.
As companies begin their lease accounting implementation, they need a project plan. based on an understanding of what is the current lease environment], a centralized FA system, or subsidiaries that may maintain multiple [systems] that have to be aggregated? What is the level of data in the system?
Companies generally are not having much trouble identifying contracts and collecting data from their real estate portfolios because real estate usually involves large sums of currency managed under an existing system,.
But the data being captured for real estate leasing often don’t incorporate the terms or data needed to help account for the leases in the future. Leases for items such as copiers, computers, equipment, and auto fleets often are managed offline in a spreadsheet, Chances are, there are terms in the lease contract that aren’t being captured in current systems
As a result, extracting data from lease contracts can be a challenge.
Be mindful of debt covenants.
The lease accounting standard will bring new liabilities onto company balance sheets, it has the potential to affect debt covenants that may be based on debt-to-equity ratios. Bankers may seek to adjust debt covenants to allow for the reduction in net-worth ratios. Companies should have a discussion with their bankers as soon as possible about the impact of the standard on the balance sheet.
Multinationals may have dual solution to credit losses. The expected credit loss standards in IFRS 9, Financial Instruments, and FASB’s recently issued standards are not converged and use different models to measure impairment.
IFRS 9 takes effect for annual periods beginning on or after Jan. 1, 2018; for SEC filers, FASB’s expected credit loss standard will take effect for fiscal years and interim periods within those fiscal years beginning after Dec. 15, 2019.
Multinational banks may wish to expedite their assessment of the FASB standard to take advantage of work they are already doing for the IASB implementation, The costs of regulatory compliance with Basel II and Basel III and FATCA etc. are very high for this whole sector, and where they can find efficiencies and scalability, I would think that’s in the interest of the banks.
Potential efficiencies may cause banks to adopt the FASB standard early, but they won’t be able to begin reporting under the standards at the same time. FASB’s early adoption period begins for fiscal years and interim periods beginning after Dec. 15, 2018—nearly a year after the IASB standard is required to be adopted.
CPM and Reporting tools, workflows, and automation, are going to be increasingly important.
