Question

Explanation of Management Implications of IFRS

Changes in the GAAP that an organization uses for its financial reporting can impact how and when assets and liabilities are recorded. Sometimes they can cause dramatic shifts in the amount of profit or loss an organization reports. These changes can impact how the financial health of an organization is interpreted.
For example, US GAAP requires that land assets be reported based on the cost to acquire them because there is no objective evidence of their current value. IFRS allows for revaluation of some nonfinancial assets to fair value. Imagine if a piece of land that was purchased for $1 million and recorded, for the last 100 years, on your balance sheet at $1 million was suddenly revalued on the balance sheet at $300 million. Key numbers on the balance sheet, such as total assets, could change dramatically overnight. Also, consider the reverse example. A building on an organization’s balance sheet is revalued from $300 million to $100 million. Revaluation of assets for fair value does not necessarily involve increasing asset values.
Such changes in the numbers could have many impacts. These changes would impact how outsiders view the organization. Numbers that analysts use as benchmarks for strong or weak financial performance would have to be reassessed. Contracts could be affected since contracts often call for certain financial statement relationships to be maintained. For example, when a bond is issued, often the borrower would be required to maintain a minimum amount of assets relative to their liabilities. But changing accounting reporting requirements could cause significant enough changes in reported assets and liabilities to change those relationships. In some cases, this could create default situations. Such contracts would likely need to be renegotiated before the adoption of the new standards. Compensation could also be affected. Many organizations provide some compensation based on the organization’s profits. If the implementation of IFRS reporting rules results in different levels of profit being reported, it will impact compensation. All profit-sharing plans would need to be revisited and possibly revised. This provides just a small sampling of some of the extensive differences between the current US GAAP and IFRS and the implications of a potential shift from US GAAP to IFRS. It is suggested that readers Google “US Adoption of IFRS” to find the latest status of this potential transition.

1. Please list and explain several implications of IFRS on financial reporting by healthcare organizations.

a.

b.

c.

d.

Answer 1

Implication of IFRS on health care organisations :

International accounting standards board has published a new standard Ifrs 15, revenue from contract with customers. The new standars outlines a single comprehensive model of accounting for revenue arising from contract with customers and supercedes current revenue recognition guidance, which is found currently across several standards and interpretations within IFRS.

Some of the implications are as below :

A ) The timing of revenue and profit recognition might affected by new standard

Application new rules may result in significant changes to profile of revenue and in some cases to cost recognition.

This is not merely a financial reporting issue. As well as preparing market and educating analyst on the impact of the new standard, entities will need to consider wider implications.Among others this might include:

1. Changes to key performance indicators and other key metrics,

2. Changes to profile of tax cash payments.

3. availability of profit for distribution

4. Potential non compliance with loan covenants.

B ) Recognition of variable or uncertain revenues

In certain jurisdiction it is not uncommon for health care providers to render patient services, without knowing how much they will ultimately be paid.For example a hospital might provide emergency services prior to knowing the amount that will be ultimately paid by private insurer.It is possible for transaction price be different depending upon who is responsible for payment.Additionaly the amount ultimately paid may be adjusted as a result of negotiation or dispute or as concession or bad debts. In the new standard such that it is only included in the transaction price if it is highly probable that the amount of revenueu recognised would not be subject to significant fututre reversals as a result of subsequent re-estimation

C ) Is it probable that the payment will be received ?

New standard requires that it is probable that the entity will collect the consideration to which iti will be entitled in exchange for good and services that will be transfered to the customer. In certain jurisdictions hospitals provide emergency services to uninsured patients without knowing whether they will be ablt to collect their fees.In such cases assessment will have to be made as to whether they meet the criteria for revenue recognition given this uncertainity.

D ) Which cost relating to contract need to be capitalised ?

The nwe standard introduces specific criteria for determining whether to capitalise certain cost, distinguishing between those cost associated with obtaining a contract and those cost associated with fulfilling a contract.In healthcare sector this may be an issue where significant cost are incurred that are directly attributable to obtaining contract with customers.At present, different entities might treat these costs differently.The new standard requires to capitalise the cost of obtaining a contract which will have an impact on operating profit. In addition new standard requires capitalised contract cost to be amortised on a systematic basis that is consistent with the pattern of transfer of the goods or services. Entities will need to exercise judgement to determine the appropriate basis and time period for this amortisation.