Two new accounting standards will affect financial results in different ways. Companies looking to list should be aware of the impacts as ASIC requires consistent disclosure of financial information.
The overarching principle under ASIC’s Regulatory Guide 228, is that the information contained in a prospectus should be clear and concise. To be so, ASIC requires the financial information to be comparable. To be comparable the financial information must be prepared under the same accounting standards and policies.
The new accounting standards
The new revenue standard, AASB 15 Revenue from Contracts with Customers, applies to reporting periods beginning on or after 1 January 2018, and may have a significant impact on the revenue recognition policies of entities that earn contracted revenues. For most companies affected by the change in the standard, revenue is more difficult to recognise and therefore entities will have more deferred revenue sitting as a liability on their balance sheet and historical retained earnings will be lower.
AASB 16 Leases applies to reporting periods beginning on or after 1 January 2019. All leases (including property rental) will be recognised as liabilities, therefore impacting the balance sheet and gearing of companies. The previous rental expense will be classified as a depreciation charge of the ‘right of use asset’ that is also created when the lease is signed.
What impact will the new accounting standards have on the decision to include forecast information?
A prospectus which paints a picture of future growth and strong returns will often be considered an enticing investment opportunity when compared to a company showing only historical financial information.
ASIC’s RG170 requires that any forecast financial information disclosed in a public document must have “a reasonable basis”. Preparing forecasts based on assumptions that will pass the reasonable basis requirements can be time consuming and costly both for the internal team and the Independent Accountant during an already busy time.
As of 30 November 2018, 25% of the 84 entities which made successful initial public offerings (IPO) on the ASX included forecast financial information within the prospectus.
For forecast financial information prepared for the year ending 30 June 2019, the new revenue standard will apply, which brings with it an issue regarding the comparability to the historical financial information prepared and audited under the old revenue standard. For certain companies the differences between the accounting policies will have a material impact which would likely require the restatement of the historical financial information under the new revenue standard to comply with the requirements of RG228.
The same will occur for the year ending 30 June 2020 with the introduction of the new Lease standard.
These new standards will impact revenue, profit and ratios which may significantly influence investors’ decision-making, as historic profit and loss accounts and balance sheets could look different under the new standards.
While we have discussed the impact of the new standards on the inclusion of forecast financial information in prospectus’, going forward the historical financial information will also no longer be comparable and, subject to any decision made by ASIC in the future, will require restatement. The earlier the conversions, the better. This may fundamentally change the look and feel of the profit and loss and balance sheets included within the prospectus.