IFRS 15 and IFRS 16: Accounting standards impact companies

With the International Financial Reporting Standards - IFRS, the Accounting Pronouncements Committee (CPC) has issued new standards and companies need to be aware of the impacts on their business, promoting adjustments, including operational adjustments, when necessary.

The full joining to these standards requires preparation of a plan, which, among other things, involves a diagnosis of the differences between the accounting method adopted until then and the new changes, in order to outline an action plan for effective joining.

This article is dedicated to the analysis of impacts brought by two specific standards: IFRS 15, which deals with Revenue from Contracts with Costumers and entered into force on January 1, 2018, and IFRS 16, dealing with Leasing, which will enter into force on January 1, 2019.

IFRS 15 - Revenue from Contracts with Costumers - CPC 47

IFRS 15, considered one of the largest updates since the introduction of IFRS in the Brazilian scenario, creates a single model for treating revenues from contract with clients, in order to standardize and guarantee ways to establish a comparison between practices for revenue recognition.

The fundamental principle of IFRS 15 is the recognition of revenue when goods or services are transferred to the customer at the transaction price. The revenue recognition is in accordance with this principle, applying a five-step model:

1. Identify the contract signed with the customer

2. Identify obligations established in the contract

3. Determine the transaction price

4. Allocate the price of the transaction

5. Recognize revenue in compliance with the obligation

Some organizations are more impacted, depending on the characteristics of the market segment and the types of transactions they perform. In any case, all companies need to evaluate the effects of the standard on their accounting records.

Sectors such as housing, telecommunications, software, engineering, construction, defense, and aerospace, for example, are among those who were hardly affected.

In addition, there are influence to sales of mixed or conjugated products. The standard establishes that there should be a record of revenue per item. Thus, some companies need to modify their revenue postings and accounting systems by selling combined products or services.

Enforcement

IFRS 15 has been in force since January 1, 2018. However, companies that did not adapt to the new accounting reality are still seen in the national scenario.

Impacts of IFRS 15

By changing the form of revenue recognition, it is inevitable that the business structure faces changes. Thus, it is necessary to look on the business, and evaluate all the processes, raising operations and sales information, data of the legal, HR, financial and taxes departments, among others. It is necessary to measure how revenue recognition affects each business component.

It is fundamental that companies organize themselves, realize the extent of the impact on their business and branch of activity, and seek the adequacy to the norm.

IFRS 16 - Leasing - CPC 06 (R2)

IFRS 16 brings a significant change to lease-related standards. The rule standardizes the handling of cases, which follow a single accounting model (similar to the leasing treatment).

The main purpose of the amendment is the companies recognize the liabilities currently unrecognized and that, in fact, distort a correct valuation during a certain period.

Enforcement

IFRS 16 will enter into force on January 1, 2019. The deadline approaching puts the adequacy to the standard as something that must be urgently addressed by the companies.

Impacts of IFRS 16

The amendments presented by IFRS 16 raise impacts to the companies’ internal processes and influence the balance sheets and income statements. However, its consequences will be proportional to the amount and importance of leasing operations, affecting more severely certain specific sectors, such as airlines and retail, for example.

In view of the new accounting model, the company will recognize in noncurrent asset of the use right corresponding to the total value of the leased asset (there are some exceptions, such as contracts of less than one year or of low value, whose relevance should be evaluated) and, as a counterpart, a lease liability (which should be distributed between current and noncurrent).

In addition, it is important to pay attention to the following items:

• As a noncurrent asset (use right) will be recognized, it will be recorded under the acquisition cost method and may be amortized.
• The amortization will be for the contract term. It is noteworthy that the companies will no longer have a rent expense and will have the registration of the amortization of the use right.
• This change will directly affect the companies' EBITDA, therefore, it is necessary to evaluate the impact on the presented result.
• Liabilities must be recognized at present value. Thus, companies will present a financial income.
• This asset (use right) must pass through the impairment test. The basis for the test will be the lease current market value.

It noteworthy that the treatment for lessors will not change in any relevant way.

Given the impact of the rule, the companies must be prepared. For this, it is necessary to map the lease agreements, reassess the way to disclose the information and deploy adjustments at systems, processes, and internal controls.

The path to compliance

The complexity of international accounting standards, as well as the measures required for its deployment, requires intense and targeted work.

Although applying the IFRS 16 is mandatory only from 2019, the companies should start the adjustment process, since all impacts must be measured in comparative periods, already affecting 2018.

Companies that have not adapted yet to IFRS 15 and are in non-compliance situation should seek its settlement.

Domingues e Pinho Contadores has an up-to-date team with international standards and practices, able to assist businesses of all sizes in verifying the conditions applicable to each segment and in mapping revenues and leases agreements.

DPC experts develop a diagnosis to identify specific customer’s needs, promoting an impact assessment for financial metrics, and indicating the best steps to ensure the project consolidation and its effective compliance.