5 minute read
Financial accounting
A new normal
2021 will usher in an era of change for financial accountants. ScottDietz discusses areas open to significant exposure.
Scott Dietz Director, Regulatory and Accounting Solutions, Moody’s Analytics
What is the outlook for the coming year? Not since the 2008 financial crisis has the answer to this question been so unknown. Any discussion around 2021 must start with how the pandemic will continue to affect – and change – how companies operate.
Covid-19 fallout The impact of the coronavirus on economies will be felt for years to come. Economic forecasts from Moody’s Analytics, published in 2020, noted that for some nations the return to pre-pandemic economic levels may not occur until the middle of this decade.
These impacts will be felt in accounting as 2021 progresses. While many businesses have so far been able to withstand the financial challenges, helped by fiscal policy measures and government stimulus, the expectation is that the severity of business and consumer losses will come more sharply into focus.
This will generate many questions for those in the accounting space around what level of allowances and reserves should be maintained on existing and new loans, as well as investments. That the recovery is now being projected to last for such a long time will only compound the challenges placed upon accountants to justify their allowance estimates.
As an example, for those in the banking and insurance industries there are new questions about what effect the pandemic will have on commercial real estate investments. Both industries have been heavily invested in the commercial real estate market, particularly in urban areas across the globe, as it has been considered a steady and sound investment. However, some expect the commercial real estate market to be the most affected over the long term by the pandemic, including immediate impacts to the values of office, retail, and hotel spaces.
Over the next year, as losses emerge, that long-term picture will begin to get clearer. Decision makers in these industries will need to consider all of their future investment options, including whether to stay in the commercial real estate market.
Any time such changes are considered, it leads to uncertainty and questions from investors which financial accountants will need to address. As collateral values decrease significantly, what will that do to asset values and possible impairments? In the insurance industry, these investments are often tied directly to liability matching. What effect will this have on other asset liability management programmes? Financial reporting and ESG concerns Environmental, social and governance (ESG) considerations are expected to really begin driving change in accounting and financial reporting in 2021. When we look at social factors, such as how a company is working to better its community, investors are asking for disclosures about these plans – as well as updates on how the company is progressing in its ESG efforts.
At the Financial Accounting Standards Board’s (FASB) November Investor Advisory Committee
meeting, investors specifically highlighted the need for additional reporting and disclosures of what companies are doing for ESG and how they are factoring it into their planning. Given that little official guidance exists from standard setters around how ESG reporting must be presented and what those disclosures should look like, financial accountants will be responsible for articulating disclosures to investors. While many organisations have already started to incorporate these risks into their financial reporting, companies will be watching closely how new regulations on climate risk will impact their financial reporting in 2021 and beyond.
Know your customers and suppliers As ESG factors come to the fore for the accounting world, another important change will be the need to know your customers and your supply chain, specifically to identify any associated ESG risk. Similar to other ESG questions, investors are asking companies to demonstrate how they are managing ESG risk in their supply chain, and are expecting organisations to put measures in place to effectively address their know your customer (KYC) requirements in relation to ESG.
An example of how this can affect an accountant in the banking world is to look at loan reserves for large clients. While banks may have a successful history with a particular customer, what happens if they are slow to adopt ESG measures? Not only are there the traditional pressures on measuring risk, but also external pressures that may now present just as much risk.
Remote work to amplify adoption of technology From a technology perspective, as a result of the pandemic, accounting departments were quickly forced to work remotely and operate away from their usual environment – often without their usual tools. Accounting departments had to become more technologically savvy, with many moving away from desktop-based tools and onto cloud-based solutions that can interact with one another more effectively; for example, calculation tools that are capable of connecting to a general ledger system without paper or files that require manual signatures. Technology budget allocation will be under review next year as companies reflect on how things went and consider how they want to operate going forward.
Another challenge, which often gets overlooked, is the accounting process itself. Financial accountants operate within processes that require controls and documentation, which are highly regulated both internally and externally. As the work shifts from the office to a remote environment, these processes must be revisited. New control procedures will be needed and in some cases control frameworks will need to be rethought.
Author bio
Scott Dietz is a Director at Moody’s Analytics, with over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions. Shrinking timelines and looming deadlines There are more traditional accounting changes looming in 2021, perhaps nowhere more than in the insurance industry, which is facing significant adjustments to accounting standards on both sides of the balance sheet.
Internationally, the IFRS 17 and IFRS 9 standards will become effective for insurers in 2023 while in the US, long duration targeted improvements will also take effect for public companies, then alongside current expected credit losses for non-public filers.
For the insurance industry, the clock is ticking on preparing for these changes. 2021 will be a significant year for preparation and testing to ensure they have the right processes and systems in place to efficiently produce financial statements under the new standards. ●
