The Adoption of New Accounting Standards: The Financial Report Users’ Perspective
23 October 2018 at 7:30 am
With Australian financial reporting poised for significant upheaval, Nick Walker, partner in audit and assurance at HLB Mann Judd, explains what the introduction of new accounting standards means from a financial report user’s perspective.
The financial operating results and the balance sheets (statements of financial position) of not-for-profit entities will potentially undergo significant changes for financial reporting periods commencing on or after 1 January 2019 (ie the year ended 30 June 2020 or the year ended 31 December 2019).
While those responsible for the financial reporting of not-for-profit entities will no doubt be aware of the significance of AASB 1058 Income of Not-for-Profit Entities, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases, the concepts that these standards will introduce, and their impact, may still be difficult for executive management and boards/committees and their applicable subcommittees to fully grasp.
This may make it difficult for executive management and boards to effectively communicate the financial operating results and position to members and other key users of the financial statements such as funding bodies and financial institutions.
It can be tempting to explain away such changes as just being due to a change in the accounting standards however, from a financial report user’s perspective, this can place doubt with respect to the reliability and usefulness of a financial report. The question quite rightly may be asked, what makes the new accounting treatment any more accurate or useful than the previous one?
It is possible that some organisations reporting a surplus under the current standards may report a deficit under the new standards (or vice versa). In instances such as this, effective communication will be necessary in cases where key users place a lot of emphasis on the financial report in their decision making, namely funding bodies and financial institutions.
Executive management and boards will need to develop a communication strategy developed with the users’ perspective in mind.
Key considerations may include the following:
- the key differences between the current standards and the new standards that have impacted on the organisation’s financial statements;
- the underlying rationale for these changes in terms of what the new standard is trying to achieve (ie the objective of AASB 16 is to reflect the right to use an asset and the corresponding obligations in the statement of financial position);
- how the change has affected the financial statements with consideration to previous and future reporting periods;
- an outline of the transitional provisions (in other words, how has the new standard been applied retrospectively or prospectively); and
- how the changes may impact the users’ information requirements from the financial report.
With respect to the last bullet point, it will be imperative to obtain an understanding of what information financial report users are seeking when looking at the financial report. For example, a funding body, may be primarily trying to assess an organisation’s solvency. Should the initial application of AASB 16 result in a significant reduction in the operating surplus, it may be useful to discuss how the standard changes the recognition of expenses associated with leases but does not impact projected cash flows.
It is important to note that the above list is not exhaustive and it would be prudent for an not-for-profit organisation to obtain a sound understanding of the financial information needs of the key users of its financial statements.
The best way to communicate the impact of changes to the accounting standards is to quantify the impact as soon as possible to establish the significance of any transitional adjustments and identify any possible concerns users might have. It is recommended that once the accounting treatment has been determined and the impact calculated, confirmation from an expert such as the organisation’s auditors should be obtained.
Once the impact is known, it can be communicated broadly through the financial statements in terms of disclosure of pending accounting standards which is generally found in the summary of significant accounting policies note (commonly, but not always, included in note 1). For key users, however, organisations can be on the front foot to discuss these changes directly so there are no surprises and ample opportunity is available to work through any possible issues.
For more information visit hlb.com.au.