Picture: istock
Picture: istock

Smaller listed companies are scrambling to meet the new financial reporting standards intended to improve transparency of financial statements, Bruce Mackenzie, MD of W Consulting, said at the Financial Indaba.

Some of the standards that came into effect in 2018 require companies to invest a lot of money into new accounting systems. But these are necessary to bring consistency so that investors can compare different companies better than in the past.

“The big concern is around mid-sized businesses and smaller listed companies. Many have not embraced the fact that these changes are going to impact on them.

“Historically in SA there’s been a lot of reliance on auditors to deal with these requirements at the end of the year. But auditors are now standing back to maintain their independence and a lot of the companies now have to do this by themselves at the last minute,” said Mackenzie.

The two major standards that have to be applied to financial statements from 2018 are IFRS 9, which deals with financial instruments, and IFRS 15 which affects the treatment of revenue that companies receive from contracts with customers.  Other standards that will kick in in 2019 include changes in the tax treatment of leases, insurance contracts and tax planning.

Mackenzie said although companies knew more than three years ago that they would have to comply with these changes, generally only the larger companies are prepared. W Consulting advises companies on international financial reporting and corporate finance, among other things.

“The problem with these standards is that nobody has done them before. We are all feeling in the dark, worldwide. Not just in SA. It’s going to take a year or two as the practice develops and businesses start understanding how things are being interpreted,” he said.

Milan van Wyk, senior lecturer at the University of Johannesburg, said smaller companies in the telecommunications sector will find it harder than others because IFRS 15 in particular requires them to invest in new systems.

“IFRS 15 requires a lot of additional disclosures which were not required by IAS 18. These extensive disclosures require data that some accounting information systems cannot produce, therefore changes in the accounting information systems are also required at an additional cost. Listed telecommunication companies have incurred a lot of costs to ensure effective implementation but smaller companies do not have those kinds of resources,” Van Wyk said.

Companies are already required to disclose in their financial statements how the new standards will affect the statements. But Van Wyk said even for those companies that have made such disclosures, there is no guarantee that they are ready. “From an accounting point of view, one can argue that the companies have applied their mind to the implementation of the new standards if they are providing sufficient disclosure, but you can’t tell if they are really ready from an operational point of view,” he said.

While companies scramble to meet the new standards, the experts said investors will also have their work cut out. One standard that will probably cause a lot of upset is IFRS 16 which will change some operating leases to financial leases and introduce new liabilities to the companies’ balance sheets.

“You may see huge liabilities move to the balance sheet. That may not be any different from the leases the company had last year. Investors are going to have to spend a lot of time educating themselves,” said Mackenzie.