By Karl Jackson, Partner – Audit & Assurance, Crowe Oman
The past four years posed significant challenges for accounting and finance professionals as they had to come to terms with the requirements of a trio of major new accounting standards (IFRS 9, 15 and 16). With the stated objective to promote international consistency and thus comparability, the universal applicability of International Financial Reporting Standards means they must be complied with by all companies, in all sectors and regardless of their size.
Looking back at the eventual impacts on financial statements of companies operating in Oman, we see that they were relatively minor. The real challenge came from simply understanding what the three standards were requiring, as the language used is generic and legalistic in nature. To understand the requirements, companies had to seek assistance from external consultants and refer to industry publications that attempted to demystify the standards.
Taking each in turn, we see that IFRS 9 has placed a burden on many companies that hold unquoted equity investments, as these need to be recorded at fair values. Whilst there are numerous textbook methods to determine such fair values, in practise and in light of the current Oman economy, the reliability of such fair values is questionable. IFRS 9 also necessitated companies to build models to predict expected (no longer just incurred) losses from bad debts. Again, in the current economic environment where debtor payments periods have ballooned, developing such forward-looking models from historic data from the good times of the past is not an easy task. The Banks now have the added task of factoring the implications of the coronavirus into their models.
With IFRS 15, companies were required to apply new rules to the timing of recognition of revenue. As IFRS 15 was essentially an amalgamation of various existing standards, the impact on most Oman companies was relatively light. Some industry segments, such as telecoms, had to make adjustments where they deliver more than one product to customers but within a single combined price.
Finally, IFRS 16 mandated companies to capitalise many rental costs on their balance sheets as right-to-use assets and offsetting lease liabilities. Such rental amounts were previously disclosed in notes towards the rear of the financial statements. Most Oman companies were affected as they lease land from the government and rent properties and motor vehicles. Whilst accounting for leases is nothing new, although it did require the accountants to revisit their old textbooks, the biggest challenge came in deciding which rental agreements qualify. For example, one-year leases are exempt unless they have extension options that are likely to be invoked then they do qualify. This applied particularly to property leases, which in Oman are typically for rolling one-year periods.
The only remaining new accounting standard is IFRS 17, relating to Insurance Contracts. Luckily for the accounting community at large, this can be ignored as it applies only to companies selling insurance products. This time around it will only be the accountants working within the insurance industry that need to take note and be prepared. The implementation of IFRS 17 is being overseen by the CMA who regulates all Insurers. They introduced a three-phase approach. After completing a high-level gap analysis in 2019, Insurers are were gearing up for the final two phases, which required a much more thorough gap analysis and design of an implementation plan, followed by the hard work of implementation itself. However, on 16 March this year (lost amongst the news about the coronavirus) the International Accounting Standards Board decided that matters such as Brexit had taken priority and resources and that the Insurers were not ready, so they have once again delayed the implementation by one more year until 1 January 2023. In Oman, the Insurers are now waiting for a revised implementation timetable from the CMA.
Like the prior trio of new standards, IFRS 17 attempts to be all-inclusive and thus uses complex and legalist language that needs to be interpreted and applied to the operations of the Insurer.
For example, for each insurance product offered, the Insurers need to choose between the building block, premium allocation or variable fee approach, and following which the contractual service margin, risk adjustment, discount rate and expected future cashflows need to be ascertained or computed. For products with lifespans exceeding 12 months this will require significant input from actuaries. For other products, the Standard permits simplified approaches, which will be good news for the Oman Insurers as the majority of their products (i.e. motor and medical) fall into this category.
Like all recent new accounting standards, there will be additional burdens of increased disclosures with disaggregation of cohorts within products. Both the complex computations and additional disclosures will require Insurers to relook at their systems to ensure they can provide the level and qualify of data demanded for the various tasks.
The accounting and finance professionals in the insurance industry have started to undertake training and improving their knowledge, so that they can meaningfully contribute to the implementation efforts and can manage the external consultants to deliver a solution that is fit-for-purpose for their specific company.