As business practices evolve and transactions become more complex, the world of financial reporting continuously changes to address the increasing needs of the business community. Both the international and local financial reporting standards continue to transform to include, in addition to the fair representation of past events, a high-level depiction of risk management practices and business strategies.
In welcoming 2018, the general purpose financial statements will be repurposed to enhance predictive value and usefulness to various stakeholders. In achieving so, the International Accounting Standards Board introduced two major standards, namely the International Financial Reporting Standards (IFRS) 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, which has veered away from the usual historical cost accounting, requiring the development of business and loss models, the exercise of professional judgment, and more significant estimates. These new standards will change how internal and external stakeholders will view the preparation and use of general purpose financial statements.
For internal stakeholders, the new world of financial reporting requires enhanced interaction and coordination among those charged with governance, senior executives, those involved in line operations, and those involved in staff functions. It requires that management decisions and business strategies are well rounded and communicated to the entire organization, because financial reports in this modern environment will include expectations of the future, resulting from current decisions.
Compared with previous financial reports where credit losses are recognized upon a loss event, the new world of financial reporting through IFRS 9 requires recognizing credit losses based on the probability the loss event will happen.
Furthermore, the new world of financial reporting through IFRS 15 requires a more detailed analysis of contracts with customers, with respect to performance obligations, duration, pricing, and other relevant terms. Such analysis is required because of the recognition of assets and liabilities arising from contracts with customers supplemented with more detailed disclosures on how current contracts will impact future operations.
Corollary to these changes, the new financial reporting framework also allows recognition of gains arising from good business decisions that are dependent on highly probable satisfaction of conditions. Thus, various stakeholders within the organization, from top to bottom, should coordinate properly to secure, to the extent possible, good expectations of the future arising from current business decisions, which will be reflected in the general purpose financial statements.
Similar to the impact on internal stakeholders, the new world of financial reporting requires external stakeholders to exercise critical thinking in reviewing the financial statements. Predictive value has been enhanced, too, as expectations of the future have been incorporated in the general purpose financial statements. External stakeholders will not only see the results of past decisions, but will be able to analyze how current decisions will impact future results, specifically those pertaining to credit losses and contracts with customers. Thus, the business decisions of external stakeholders, as a result of the enhanced requirements of the new financial reporting standards, are more informed of their future risks and returns.
Moreover, the extensive use of professional judgment in applying new standards also provides external stakeholders with high-level information about how corporate governance works, how management thinks, how risks are managed, and how the companies operate. Such judgment reveals how aggressive or conservative management is with respect to their operational, market, and credit risk and, also, how management contracts with their customers. Thus, the general purpose financial statements have been repurposed to be more useful in making business decisions based on carefully analyzing future expectations.
The new world of financial reporting does not only modify how internal and external stakeholders view the financial statements, but has also changed how accountants in all sectors function in today’s contemporary environment. There has been a heightened level of responsibility to analyze and communicate valuable information to various stakeholders.
For private accountants, the new world of financial reporting will not only entail an understanding of the usual reporting process. Private accountants should have an in-depth comprehension of the business and how various decisions will be reflected in the financial statements, thereby becoming a valuable partner in the success of the business.
External auditors, on the other hand, will need to enhance their procedures and capabilities to validate not only the numbers, but also the use of sound judgment in preparing the financial statements. An enhanced level of professional skepticism is required to complement the exercise of sound judgment.
Regulators, too, will have a substantial role in molding this new world of financial reporting. The regulatory supervision in ensuring that the new standards will be implemented consistently and properly across companies and industries is vital to achieving this cause.
Academicians also play a vital role in shaping the new world of financial reporting—being the educator of future private accountants, external auditors, and regulators. Education should also extend beyond numbers and emphasize the importance of holistic analysis of financial reporting (i.e., a result of coordinated effort, from business decisions to end results, of everyone within the organization).
The financial reports for the year ending December 31, 2018 will be different from previous years. While some may think of the new reporting standards as burdensome in terms of implementation, such change is required for better business decisions in the future.
The world of financial reporting has changed; it has evolved. We must be willing to take on the challenge of being more transparent in our financial reports to properly represent the impact of our decisions on future risks and returns. Simply put, past results will not always perfectly guide future performance, but future expectations from current business decisions will provide more valuable insights into how risks can be managed and how returns can be maximized. Now that the general purpose financial statements have been repurposed, are you ready for the new world of financial reporting?
Jamil Saripada is a senior manager of Audit & Assurance, P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory and outsourcing firms in the Philippines, with 21 partners and over 850 staff members. For your comments, please email firstname.lastname@example.org or PAGrantThornton.email@example.com. For more information about P&A Grant Thornton, visit our website www.grantthornton.com.ph.)
As published in The Manila Times, dated 3 January 2018