The conversion to IFRS 15 – what was it all for?

CPA Canada has issued Observations on the Implementation of the New Revenue Standard by Canadian Public Companies.

The publication was based on the review of financial statements of 60 Canadian public companies for the first quarter of 2018; 45 listed on the TSX and 15 on the Venture Exchange. Here are the key observations:

  • While the new revenue standard introduced a significantly different accounting model for revenue recognition, for most companies the financial results were not significantly affected. For the first quarter of 2018, 95% of companies (57 companies), disclosed that the net effects of adoption on revenue was either not material or less than 2% of revenue.
  • Sixty-two per cent of the companies (37 companies) declared that the effect of adopting the new revenue standard was not material and did not quantify the effects.
  • For most of the remaining 38% (23 companies) that did quantify the effects, those effects were less than 2% of revenue, net income and opening retained earnings. Only 15% of com­panies (nine companies) disclosed that the effects of adoption exceeded 2% of net income in Q1 2018.
  • Companies in the Communications & Media sector were most impacted, as three of the four companies in this sector quantified the impacts on net income as exceeding 2%.
  • Thirty-eight per cent of the companies (23 companies) provided a greater breakdown of revenue in the notes as a result of adopting the new revenue standard.

(We looked at some real-life impacts in previous blog posts – most recently here).

The publication doesn’t really comment on what we should make of these findings. Some might say: well, what was the point of the whole thing then? But of course, a large number of companies – those for instance who sell relatively simple products, pushing goods out and bringing money in – were never going to be materially affected by the standard. Although IAS 18 was a pretty thin document compared to IFRS 15, it certainly wasn’t nothing, so even for relatively more complex revenue streams, the two might have come to similar conclusions on many issues.

I recall that when Canadian companies adopted IFRS, some found value in the process regardless of the quantitative impact on their financial statements. As recorded in an earlier CPA Canada publication on the impressions of preparers and auditors:

  • Some interviewees (although a minority) talked about the project as an opportunity to address issues not strictly necessary for the conversion. These included reexamining, simplifying or bringing greater consistency to existing processes or to the accounting policies across all group companies, reallocating work within the organization (one interviewee talked about how lower-level staff are now carrying out a greater range of tasks), and implementing a better internal focus on certain project costs. For example, one interviewee described how the IFRS policy of recognizing any new vested past service costs arising on defined benefit plans immediately in income (rather than amortizing them over an estimate of average remaining service lives, as under previous Canadian GAAP) increases the focus of the company’s pension negotiators on the real economic cost of changes to benefit plans. Another talked about how the combination of a change in accounting policy for exploration costs, expensing some amounts that were previously capitalized, and more extensive internal cost allocation to specific projects, has generated broader value for the business by promoting a better focus on the amounts and benefi ts of costs incurred.

Of course, these are side benefits of an accounting conversion, not its raison d’etre, but we can hope that at least some IFRS 15 conversion projects might carry comparable virtues. But the real test, no doubt, lies in whether users would conclude that post-IFRS 15 financial information carries enhanced reliability and decision-relevance. This kind of thing is notoriously hard to assess of course. Even in the absence of any material change to the numbers, some users might feel somewhat more confident, for similar reasons to those cited above (that is, they would assume that the new standard triggered a “scrubbing” of current practices). One can find some instances where the new standard appears to have caused momentary confusion, as for instance in a brief Globe and Mail report on Computer Modelling Group Ltd.:

  • On Wednesday, the Calgary-based computer software technology company, which primarily serves the oil and gas industry, reported quarterly revenue of $16.7-million, missing (analyst Elias) Foscolos’s $19.4-million forecast and the Street’s expectation of $19.2-million. Headline EBITDA of $5.8-million also missed estimates.
  • However, Mr. Foscolos said the results actually fall in line with expectations after factoring in the adoption of IFRS 15 and the timing of revenue recognition.
  • “Once adjusting for the miss in revenue, we estimate EBITDA would have been near our forecasted value,” he said. “

However, it’s not evident whether – once the adjustment was made – the new accounting basis was assessed as being in some way better, or whether it was just another thing to be dealt with. We can only hope for further insight into such matters as the new practices sink in…

The opinions expressed are solely those of the author

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