Key Changes and Impacts of IFRS Adoption in Chile
1. Functional Currency
The introduction of the functional currency concept under IFRS requires companies to record transactions and maintain accounts in the currency that predominantly influences their operations. For instance, the copper mining industry is closely tied to the US dollar, while local retailers primarily operate in Chilean pesos.
Many Chilean companies operating in dollarized sectors have historically maintained accounts in US dollars. Converting these accounts to Chilean pesos under IFRS presents a significant administrative burden. While the numerical impact might be manageable for Chilean-based firms, it can be substantial for foreign affiliates.
2. Consolidation
IFRS emphasizes the economic substance of transactions, leading to differences compared to Chilean GAAP. Certain transactions previously disregarded under Chilean GAAP might now necessitate consolidation in financial statements.
Financing schemes like factoring or securitization, which previously allowed companies to secure funding without impacting debt or liability figures, will now be scrutinized under IFRS. This change impacts solvency indicators and potentially affects covenants with banks.
A significant impact is the requirement to consolidate entities with dissimilar activities, such as banks and insurance companies that are subsidiaries of listed companies. This consolidation will alter capital structure and financial ratios, significantly impacting the overall financial picture of the parent company.
3. Fixed Assets
IFRS offers various alternatives for the recovery of fixed assets, impacting financial figures and comparability across companies. The choice between revaluation and historical cost models can lead to significant asset value increases and affect future depreciation charges.
While the ability to reflect fair value reduces the gap between historical accounting and economic reality, the choice of accounting policy can significantly influence reported figures.
4. Restatement
The principle of “restated cost” accounting is diminishing under IFRS. The monetary correction scheme, relevant in hyperinflationary environments, becomes less applicable in the context of the Chilean economy, which is primarily linked to indexation mechanisms like the UF (Unidad de Fomento).
The removal of financial restatement for accounting purposes while retaining it for tax payments poses challenges, particularly for companies with long-term assets financed by debt indexed to the UF. The growth of UF-denominated debt will no longer be offset by the restatement of assets, potentially leading to uncompensated losses.
5. Revenue Recognition
The timing of revenue recognition is a key area of adjustment for Chilean companies transitioning to IFRS. Revenue recognition under IFRS is tied to the transfer of risks and rewards of ownership, which may not align with billing cycles.
Examples: Customer loyalty programs (miles, points, rewards) are now treated as deferred revenue, recognized at fair value upon consumption, rather than recognizing only the marginal cost.
6. Business Combination
The treatment of acquisitions and mergers under IFRS is complex. The transition will likely involve the elimination of investment securities, increasing assets and potentially lowering depreciation charges in future periods.
7. Stocks (Inventories)
The shift from the direct cost plus monetary correction method to full absorption costing under IFRS requires the inclusion of indirect costs and the elimination of monetary corrections. This change has significant implications for inventory valuation and administrative systems, requiring reconciliation with differing tax requirements.
8. Financial Instruments
IFRS introduces significant complexity in the measurement and accounting of financial assets and liabilities, primarily based on fair value. The use of mathematical models and hedge effectiveness measurement requires specialized expertise within companies.
9. Biological Assets
Industries like forestry, salmon farming, and agriculture will experience significant changes. The growth of biological assets will be measured at fair value, impacting income statements. For example, the growth of a forest will generate annual profit even if the harvest occurs years later.
This change necessitates adjustments to legislation, as distributing profits generated from the growth of biological assets over an extended period without actual cash flow presents unique challenges.
10. Leasing
The distinction between operating and finance leases under IFRS requires the recognition of assets and liabilities, impacting financial indicators. This change also affects covert leases, where transactions that might appear as supply contracts could lead to the recognition of assets and liabilities, potentially impacting debt ratios.