The International Accounting Standards Board (IASB), which is the independent, accounting setting body of the International Financial Reporting Standard (IFRS) Foundation, regularly develops IFRSs to improve the transparency and accountability of financial markets.

Following the year-ended 2018, entities are currently in the process of issuing their financial statements. In Malta, a Public Listed Company (plc) is obliged to issue its financial statements in-line with IFRSs and to publish them within 4 months of its year-end, which is April 2019 for entities having a 31st December year-end. The two significant changes in IFRSs that are effective from 1 January 2018 are IFRS 15 – Revenue from Contracts with Customers and IFRS 9 – Financial Instruments.

Revenue is arguably the most prominent feature of the Income Statement. Combined with the expenses incurred for the year, revenue will yield the net income, which represents the earnings return for the ordinary shareholder.

For an entity that is involved in the sale of goods, recognising revenue is a straightforward process, as revenue is recognised once the good is conceded to the customer. However, for an entity involved in revenue contracts with multiple elements or complex services, revenue recognition is a controversial issue, which the IASB addressed by issuing IFRS 15.

IFRS 15 will mainly affect entities involved in long-term contracts with multiple elements, for instance telecom operators, software companies and construction companies.

This new standard is based on a five-step model, which will require entities to make distinction between separate elements of a contract, and to recognise revenue for each of them based on separate pricing. Previously this was not necessary; consequently, this will result in entities to experience an increase in data collection and will require a better understanding of the elements involved in revenue contracts.

IFRS 15’s five-step model consists of the following:

* Identify the contract(s) with a customer

* Identify the performance obligations in the contract

* Determine the transaction price

* Allocate the transaction price to the performance obligations in the contract

* Recognise revenue when (or as) the entity satisfies a performance obligation.

Particular importance needs to be given to point two above, identifying the performance obligations in the contract, which refers to the different elements of a contract that was discussed above. An entity can only recognise revenue once the performance obligation is satisfied.

For example, prior to IFRS 15 a construction company recognised revenue on a basis of percentage of completion, however under the new IFRS this does not automatically apply. Moreover, the new IFRS obliges companies to disclose how they have complied with IFRS 15, which should benefit stakeholders and make accounts more transparent.

IFRS 9 – Financial Instruments sets out requirements for recognising and measuring financial instruments. Accordingly, IFRS 9 will mainly affect financial institutions, being banks and insurance companies.

However, the latter will mostly be impacted in 2021, as the IASB will be issuing IFRS 17 Insurance Contracts as a replacement to IFRS 4 Insurance Contracts.

IFRS 9 – Financial Instruments replaces IAS 39 – Financial Instruments and there are several key changes between the two.

* IFRS 9 has three classifications categories amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). Where most financial instruments will be measured at fair value.

* IFRS 9 is more principal based compared to IAS 39.

* The most significant change from IAS 39 is impairment, where IFRS 9 applies a single impairment model to all financial instruments, while IAS 39 had different models for different financial instruments.

Credit losses, which are defined as the difference between all the contractual cash flows that are due to an entity and the cash flows that it actually expects to receive, will be greatly affected by IFRS 9.

In addition to past events and current conditions when determining the amount of impairment (as previously required by IAS 39), under the new standard an entity has to also look at the expected credit loss in arriving at its impairment charge. This means that even if no actual loss events have taken place an entity still needs to impair its financial liabilities with the expected credit losses.

This article was issued by Rowen Bonello, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.