The European Securities and Markets Authority (ESMA) has issued a Public Statement on issues to consider when implementing IFRS 15 Revenue from Contracts with Customers. Although the Statement is primarily addressed to companies that are listed on an EU-regulated market, its content is of relevance to all companies that have adopted IFRSs and is likely to inform the focus of regulators such as the Financial Reporting Council’s Corporate Reporting Review team.
In the Statement, ESMA makes reference to paragraph 30 of IAS 8 Accounting Policies, which requires disclosure of ‘known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements in the period of initial application’. ESMA highlights that this requirement entails the disclosure of both qualitative and quantitative information to enable users of the financial statements to understand the effect that the application of a new accounting standard will have on the financial position and performance of a company before the date of the initial application of the new standard.
ESMA indicates that it expects that, for most companies adopting IFRS 15 for periods beginning on or after 1 January 2018 (the mandatory effective date of the new standard), the effect of the initial application of IFRS 15 will be known or reasonably estimable at the time of the preparation of their 2017 interim report. Furthermore, it states that it generally would not be appropriate to provide disclosures about the effect of the adoption of IFRS 15 on the company’s financial statements (or the magnitude of its effect) only in a company’s 2017 annual report.
ESMA acknowledges that the exact effect of the adoption of IFRS 15 will be determined at least in part by the company’s specific business and economic conditions at the date of initial application and that those circumstances cannot be fully anticipated prior to the date of transition. However, if reasonably estimable quantitative information on the expected effect of the adoption of the new standard exists prior to the transition date (eg at the date of the 2016 annual report or the 2017 interim report), ESMA states that this should be disclosed notwithstanding that the actual figures in the 2018 financial statements might be different owing to changes in the contracts in place or prevailing economic conditions.
Where the effect is expected to be significant, ESMA expects companies to:
- Provide information about the accounting policy choices that are to be taken upon first application of IFRS 15 (such as the accounting policy choice to apply a full retrospective approach, the cumulative catch-up transition method or the use of practical expedients).
- Disaggregate the expected effect depending on its nature (ie whether the impact will modify the amount of revenue to be recognised, the timing or both) and by revenue streams.
- Explain the nature of the effects so that users of the financial statements understand any changes from current practices and their key drivers when compared with the currently applicable standards.
When the quantitative information is not disclosed in the 2016 annual report because it is unknown or not reasonably estimable, additional qualitative information should be presented enabling users to understand the magnitude of the expected impact on the financial statements of the issuer.
Furthermore, ESMA encourages issuers to explain the impact, if any, to risk management and/or to alternative performance measures (APMs or non-GAAP measures) that a company may use in any regulated information (financial communication of the issuer and/or in other parts of the annual financial report) to which the ESMA Guidelines on APMs apply.
The Statement includes an illustrative timeline and description of good practice disclosures for the 2016 and 2017 annual reports and 2017 interims.
Where a company intends to implement IFRS 16 Leases at the same time as IFRS 15, ESMA draws issuers’ attention to the need to provide relevant information about the expected impact of IFRS 16 in their financial statements in addition to the impact for IFRS 15.
For further information on this issue please contact Scott Knight.
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