Why Revenues May Decrease Under the Latest Rules in IFRS

Fitch Ratings views that the latest standards of reporting that usually update the group accounting rules may result in a material fall for reported revenues, liabilities and assets for some corporate in Europe. Introduced in the year 2013, these rules are expected to affect clients on how they account for, make disclosures in their subsidiaries, associates, joint arrangements and entities that are not structure in a consolidated manner.

The rating agency said that in some instances, these changes will have a huge effect on certain key metrics in financial statement that includes revenue, Earnings Before Interest and Taxes (EBIT), cash flow, debt and gross assets.

There are new consolidation rules found in IFRS 10 that may affect the subsidiary numbers that should be included in the group while on the other hand IFRS 11 prescribes the latest accounting rules for the joint arrangements. It is worth noting that IFRS 11 on Joint Arrangements show the latest accounting rules that forbid consolidation proportionately for the joint ventures. What is now required for the joint operation structures is a method that resembles proportionate consolidation.

A survey by Fitch revealed that out of a population of 24 large non financial organizations found out that 13 of them may have been using proportionate consolidation for purposes of accountability of interest in entities that are jointly controlled. The IFRS 11 will undoubtedly compel companies to make use of the equity method in place of those classified and regarded as ‘joint ventures.’

These changes are capable of affecting the financial statements in all lines. Expenses and revenues, liabilities and gross assets will be reduced by moving from the proportionate consolidation and to the equity method which will be specifically crucial in case debts sit in the joint venture. Nevertheless, profitability may go up for a loss making joint venture since the equity method may prohibit the loss recognition.

As per Fitch’s survey, in most companies IFRS 10 consolidated Financial Statements may not have a huge effect. The introduced changes by the standard targeted those organizational with an off balance sheet structure.

The European Commission has taken upon itself to review on how to use IFRS within the EU so that the EU’s fractious relationship is enhanced with the international body tasked with the responsibility of setting standards in accounting.