October 2016

Finance teams are operating in an increasingly fast moving, complex environment with changes to three key accounting standards at the same time as other reporting changes, such as the need for greater tax transparency and significant regulatory change and economic uncertainty.

The timelines for adopting the new standards for revenue recognition, leases and financial instruments are getting very short. If you don’t start investigating now, you may not be able to take advantage of some of the options because there will not be time to collect the necessary data.

There is a saying that you can wait ages for a bus to arrive, then they all turn up at once. This is certainly how it feels now in the world of accounting. Having listened to many years of deliberations about all leases being on the balance sheet and when revenue should be recognized, organizations now need to implement new standards addressing both these issues in a limited time frame. And, this is before the new standards on accounting for financial instruments is even considered.

Financial Accounting Advisory Services

Revenue recognition 1 January 2018 1 January 2018

Financial instruments 1 January 2018 1 January 2020*

Leases 1 January 2019 1 January 2019

Standard IFRS US GAAP

* Tiered effective dates.The effective dates above apply to calendar-year public entities not electing any options for early adoption.

How can accounting changes mean more than changing your accounting?

2 | How can accounting changes mean more than changing your accounting? October 2016

Helping you manage complexity

Because the transition to the new standards may get complicated, deciding what you are going to adopt and when, will be one of you first important decisions.

At the core of the accounting change challenge is the complexity of taking on big changes at the same time. Organizations need to make a decision whether to take a “big bang approach,” or to address each standard in turn, thereby allowing them to benefit from the lessons learned.

At EY we believe that it is possible to benefit from accounting change, and reduce costly surprises and disruption, by planning a timely and orderly transition. The outcome may deliver more advanced and effective IT systems, processes and controls and perhaps a transformed operating model.

Organizations are facing significant increasing complexity. Internally, they often have to report under a number of reporting standards, using multiple reporting systems, creating a challenging consolidation and close process. At the same time, they need to consider the changes to the revenue recognition, leases and financial instruments standards.

And to put even more pressure on stretched finance teams, these fundamental accounting changes are coming at the same time as other reporting changes and significant regulatory change and uncertainty:

• UK’s decision to “Brexit” from the European Union (EU)

• SEC’s disclosure initiatives, such as its interpretations of the rules on non-GAAP financial measures

• EU auditor rotation rules

• PCAOB’s proposed changes to the auditor’s report

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Focus on leases As you begin to implement the new accounting standard for leases, the diagnostic activities will require involvement from a variety of departments throughout the company.

EY may assist with much of the upfront work around assessing the state of a company’s current lease contract data management (i.e., its systems, policies, processes and controls), including the data required for financial reporting purposes. To satisfy the new financial statement presentation and disclosure requirements, EY can help companies evaluate whether to update their existing systems or to implement a new system. EY may assist companies with updating their policies, procedures and internal controls, as well as providing education and guidance across the organization to promote accurate and consistent policies and processes around areas of judgment and estimate.

We believe that starting early is the best way to reduce the overall cost of implementation and to avoid unwanted surprises and costly mistakes. Let EY bring its multidisciplinary team of accounting, tax, corporate real estate, systems and IT professionals to assist you in assessing what the new leasing standard will mean for you.

Focus on revenue recognition

As companies begin implementing the new revenue standard, many are finding the effort to be greater than anticipated. The changes to systems and controls that may be required have posed significant challenges to companies. EY can help. We have a long history dealing with accounting transformation. We helped companies gear up to comply with Sarbanes-Oxley, and we continue to help guide companies through the thicket of differences when transitioning between various countries’ GAAP and IFRS and vice versa.

To get all this done, many functions, business units and geographies need to be mobilized. EY has resources with the diverse competencies required to address the implementation of the new standard, and we have a proven methodology for diagnostics, design and implementation to help pinpoint where you are now, where you need to be and when you need to get there.

In addition, in some jurisdictions regulatory change is driving the need for GAAP conversions, for example the conversion to IFRS in Saudi Arabia or the requirement for public sector organizations to convert to reporting under IPSAS, or EPSAS if in the EU.

And this is before organizations consider the impacts of digital disruption and shareholders’ increased focus on business value that isn’t even on a company’s balance sheet.

This means planning for and getting accounting change right the first time, and communicated effectively, is critical. Consideration needs to be given to how implementing each of these standards, along with other changes, could impact IT systems and business processes and controls and whether there are synergies that could deliver operating benefits and provide confidence to stakeholders, enhancing the organizations’ reputation.

Focus on financial instruments

The FASB and IASB standards differ significantly — adding complexity for organizations who report under both IFRS and US GAAP. The FASB current expected credit loss (CECL) standard significantly changes how organizations will measure credit loss for most financial assets, and certain other instruments are not measured at fair value through net income. IFRS 9 has a three-stage expected credit loss model. However, under both standards, this means that organizations need to take steps now to prepare for the potentially significant changes they will need to make.

Organizations will need to bridge the knowledge gap between accounting and credit risk model disciplines to develop a practical approach that is consistent with the accounting requirements. The availability of historical data for risk modeling and for addressing forecasts for the future could present a challenge.

Additionally, the new standards will offer companies greater flexibility in how they manage their financial risk, thus providing the opportunity to potentially save costs and decrease income statement volatility during a period of increased market volatility.

EY has been working with a number of organizations in preparing for the new standards. This deep experience can help us help you understand the complexities, challenges and opportunities of implementing the new financial instruments standards across multiple areas, business units and diverse portfolios. We believe business benefits can be gained through the collaboration across the business in areas such as finance, treasury, IT and procurements. Our approach to risk management can help promote stakeholder understanding of the benefits of the new standards and encourage engagement.

Realizing the benefits of change

EY can support your efforts to find the best way to manage these concurrent accounting changes. We can help you design an implementation plan for each new standard, sharing resources and synergies when possible and separately managing the changes for each standard where there is a need for an individual approach.

In addition, we can support these accounting standard changes in the context of other accounting, reporting and regulatory changes that your organization may be facing at the same time.

We also understand how accounting change can affect your business process value chain, and can suggest approaches that not only address technical compliance but also increase the strategic and operational impacts of change, helping you identify operational excellence and cost saving opportunities.

4 | How can accounting changes mean more than changing your accounting? October 2016

How EY can help All senior financial team executives have their part to play in facilitating accounting change and helping the organization gain value from these compliance changes.

EY can assist executives with their efforts as depicted below:

Communicate to stakeholders and instil confidence:

• Explain revised revenue numbers

• Understand the impact of leases on the balance sheet

• Communicate how the change in recognizing credit losses could increase volatility of earnings

• Provide a clear view of the future

• Have a clear view of the costs and business benefits of accounting change

• Understand the impacts on an organization’s valuation

Make the change happen:

• Coordinate the change across the organization, e.g., IT and systems, property and facilities, sales and commercial teams

• Develop the systems and processes to provide data and information to make more informed judgments and provide additional disclosures

• Consider how the implementation fits with the wider finance team priorities

• Responsible for the numbers — need to get it right the first time

Identify the impact on foreign exchange (FX) and financing and hedging strategies:

• Understand the impact of accounting changes on FX hedging strategies (even where cash flows do not change)

• Understand how the timing of recognizing foreign-denominated revenues may change

• Understand how foreign-denominated lease liabilities may create an FX imbalance, which may need to be addressed with hedging

The CFO The financial controller The treasurer

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Why EY EY has a global, multidisciplinary team dedicated to providing clients with the support they need to deal with accounting change. We have over 3,000 individuals who understand the accounting impacts, but importantly understand the practical impacts, too. We work seamlessly from end-to-end with our clients, from the initial diagnostic through to providing the systems and the process change support organizations need.

We understand accounting change complexities and can provide holistic support and a tailored approach. We can guide you and your team to comply with the new standards while operationalizing accounting change, paying special consideration to efficiency, organizational change, cost benefit, operational cost savings and effective reporting.

We also bring digital thinking to our approach. For example, many businesses don’t have sophisticated databases for their leases, and the prospect of plowing through thousands of lease agreements hunting for key terms can be overwhelming. However, we have the ability to use technology to “read” these agreements using AI, thereby speeding up the process very considerably.

If you are currently daunted by what lies before you, please contact us. We’ve seen it before, and will be able to apply that experience. First and foremost we will listen to you, understand your needs and then work with you to help your organization benefit from accounting change. By planning your accounting change program, compliance may become the catalyst for generating added value, positioning your organization to take advantage of new capabilities and insights into your business.

The scope of some of our services may be limited for an audit client and its affiliates in order to comply with applicable independence requirements. Please ask your local EY contact for further information.

Financial Instruments Visual Portfolio and Impairment Analyzer

Revenue Recognition Readiness tool

Lease Navigator tool

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Revenue Recognition Readiness tool

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

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EY contacts:John McGaw Americas Accounting Change Leader john.mcgaw@ey.com +1 312 933 4611

Joon Arn Chiang Asia Pacific FAAS Leader joon-arn.chiang@sg.com +65 6309 6997

Akihiro Miyabayashi Japan Accounting Change Leader miyabayashi-khr@shinnihon.or.jp +81 3 3503 1100

Suzanne Robinson Europe, Middle East, India and Africa Accounting Change Leader srobinson@uk.ey.com +44 113 298 2480

Beatrice BelleEurope, Middle East, India and AfricaAccounting changebeatrice.belle@fr.ey.com+33 1 46 93 82 83

Mathieu Boccanfusomathieu.boccanfuso@fr.ey.com+33 1 58 47 74 36