Hello and welcome to Reporting Period – your ultimate IFRS update.
This month’s issue covers:
- New disclosure requirements for supplier finance arrangements.
- Amendments to IAS 12 in light of OECD Pillar Two tax reform.
- Business combination accounting: puzzling gains and counterintuitive cash flows in BMW’s M&A transaction.
- Post-implementation review of IFRS 9 impairment requirements.
- Accounting mishaps at the Pentagon.
- And more!
Let’s dive in.
Note: You’re currently reading an older issue from the archive, so all links have been removed.
IASB amends IAS 7 and IFRS 7 by requiring additional disclosure on supplier finance arrangements
The IASB amended IAS 7 and IFRS 7 to enhance the transparency of supplier finance arrangements and their effects on a company’s liabilities, cash flows and exposure to liquidity risk. Supplier finance arrangements (SFA) are often referred to as ‘supply chain finance’, ‘trade payables finance’, ‘working capital finance’ or ‘reverse factoring arrangements’.
As a result of these amendments, companies must disclose:
- the terms and conditions of SFA;
- the amount of the liabilities that are part of SFA, breaking down the amounts for which the suppliers have already received payment from the finance providers, and stating where the liabilities are presented in the statement of financial position;
- the range of payment due dates; and
- liquidity risk information.
The IASB has decided to fast-track mandatory application of these new disclosure requirements, making them effective for annual reporting periods beginning on or after 1 January 2024. Usually, the IASB allows a period of 12–18 months between the issuance of new requirements and their effective date. However, in this particular case, the IASB decided that an unusually short implementation period is necessary. Fortunately, there is a certain amount of transition relief provided, including relief regarding comparative and interim period information.
These amendments are available to premium subscribers at IFRS.org.
Learn more:
- IASB’s webcast.
- An article by IASB member Zach Gast.
- Deloitte’s technical summary.
IASB confirms temporary relief from deferred tax accounting following OECD Pillar Two tax reform (aka ‘top-up tax’)
In line with expectations laid out in last month’s issue of Reporting Period, the IASB issued amendments to IAS 12 concerning the OECD Pillar Two tax reform.
Background: In December 2021, the OECD published its Pillar Two model rules as part of a two-pillar solution addressing tax challenges arising from the digitalisation of the economy. Over 135 countries and jurisdictions, representing over 90% of global GDP, have agreed to these rules. The Pillar Two model rules:
- aim to ensure large multinational groups pay a minimum tax on income arising in each jurisdiction they operate; and
- achieve this goal by applying a top-up tax system, ensuring the total taxes payable on excess profit in each jurisdiction represent at least a 15% minimum rate.
The amendments to IAS 12 introduce:
- a temporary exception to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules. This will help to ensure consistency in the financial statements while easing the implementation of the rules; and
- targeted disclosure requirements to help investors better understand a company’s exposure to income taxes arising from the reform, particularly before legislation implementing the rules is in effect.
These amendments (available to premium subscribers at IFRS.org) are effective immediately.
Read more:
- Publication by KPMG.
Technical Publications
Business combination accounting: puzzling gains and counterintuitive cash flows
The Footnotes Analyst team offers an interesting insight on puzzling outcomes resulting from BMW’s decision to increase its stake in its Chinese joint venture from 50% to 75%. While BMW’s application of business combination accounting procedures complied with IFRS 3, it led to:
- significant gain in P/L, despite no sale taking place;
- net cash inflow, even though BMW paid cash for the additional investment; and
- recognition of an asset that BMW already owned.
IFRS 17 transition disclosures in 2023 interim financial statements
Insurance companies publishing interim financial statements in accordance with IAS 34 will prepare their first financial statements in compliance with IFRS 17 and, for many of them, IFRS 9 during 2023. Furthermore, as we’ve learned from the previous issue of Reporting Period, IFRS 17 applies to insurance contracts regardless of the issuer, meaning some contracts entered into by non-insurers may fall within the scope of IFRS 17. Consequently, these contracts will need to be accounted for using IFRS 17 requirements.
A publication by EY explores the transition disclosures to be made in interim financial statements by entities impacted by IFRS 17.
Work in Progress at the IASB
Post-implementation review of IFRS 9 impairment requirements
Background: The IASB conducts post-implementation reviews (PIRs) on all major new accounting requirements after they’ve been in use for a minimum of two years. PIRs evaluate whether the impacts of using the new requirements on financial statement users, preparers, auditors and regulators align with the IASB’s intentions during the development of these requirements.
The review of IFRS 9 is being conducted in three parts. The first part, which covered the classification and measurement requirements, concluded in December 2022. The current review is the second part and covers the impairment requirements. The final part, addressing hedge accounting, will be held at a later stage.
Learn more:
- IASB’s press release.
- Deloitte’s summary.
- Register for the live workshop that will be held on 30 June by the IASB and the EFRAG.
Next milestone: PIR is open for comments until 27 September 2023.
Equity method
Background: The equity method is a method of accounting for investments in associates and joint ventures applied primarily in consolidated financial statements. The IASB seeks to clarify several application issues raised with the IFRS Interpretations Committee.
This month’s discussion: The IASB moved this project from the research phase to the standard-setting work plan. This means that the IASB believes it has enough evidence to develop requirements to answer application questions in the project’s scope.
On this occasion, the IASB produced an on-demand webcast to further explain:
- project’s objective and approach;
- tentative decisions reached so far; and
- next steps.
Next milestone: Exposure draft proposing amendments to IAS 28 (expected in 2024).
Primary financial statements
Background: This project aims to improve the comparability and transparency of companies’ performance reporting, focusing on the statement of profit or loss. The main proposals are to:
- Require additional defined subtotals in the statement of profit or loss.
- Require disclosures about management performance measures.
- Strengthen requirements for disaggregating information.
Take a look at this useful project overview prepared by the IASB technical staff.
This month’s discussion:
- Presentation of income and expenses from associates and joint ventures accounted for using the equity method.
- Issues related to management performance measures and IFRS 8.
Read more on the project’s page.
Next milestone: New IFRS Standard replacing IAS 1 (expected in 2024).
Business combinations – disclosures, goodwill and impairment
Background: The IASB is working on amendments to IAS 36 and IFRS 3 with respect to accounting for goodwill and disclosure requirements about business combinations. In late 2022, the IASB decided not to reintroduce amortisation of goodwill. IASB member Rika Suzuki provided rationale for this decision along with a project update in this article.
This month’s discussion:
- Retaining the requirement to perform a quantitative goodwill impairment test annually.
- Suggestions to improve the effectiveness of the impairment test.
Read more on the project’s page.
Next milestone: Exposure draft proposing amendments to IAS 36 and IFRS 3 (expected in 2024).
Subsidiaries without public accountability – disclosures
Background: The IASB plans to issue a new IFRS permitting eligible subsidiaries to apply IFRS Standards with reduced disclosures. This new IFRS will be part of the ‘core set’ of IFRSs, i.e. different from IFRS for SMEs. This snapshot summarises IASB proposals from the exposure draft.
This month’s discussion:
- Refinements to proposed disclosure requirements.
Read more on the project’s page.
Next milestone: New IFRS Standard (expected in 2024).
Financial instruments with characteristics of equity
Background: IAS 32 generally works well for most financial instruments, but presents challenges in determining whether to classify some complex financial instruments as financial liabilities or equity instruments. Additionally, IAS 32 doesn’t always provide a clear rationale for its classification requirements. These challenges in classification have resulted in diversity in accounting practice. This project aims amend IAS 32 to address the most common accounting challenges in this area (see this useful snapshot providing an overview of the discussion paper published in 2018).
This month’s discussion:
- The IASB members confirmed that they were satisfied the IASB has complied with the applicable due process requirements and has undertaken sufficient consultation and analysis to begin the process for balloting the exposure draft.
- The IASB decided to set a comment period of 120 days for the exposure draft.
Read more on the project’s page.
Next milestone: Exposure draft proposing amendments to IAS 1, IAS 32 and IFRS 7 (expected in H2 2023).
Annual improvements to IFRS
Background: Annual improvements are part of the IASB’s process for maintaining IFRS Standards. Amendments made in this process either clarify the wording in an IFRS Standard or correct minor oversights or conflicts between existing requirements. They are grouped together and presented in one document, even though the amendments are unrelated.
Lessee derecognition of lease liabilities (Amendments to IFRS 9)
The IASB was informed about a potential lack of clarity in IFRS 9 about how a lessee is required to account for an extinguished lease liability. This lack of clarity has arisen because paragraph 2.1(b)(ii) of IFRS 9 includes a cross-reference to paragraph 3.3.1, but not to paragraph 3.3.3 of IFRS 9. Consequently, the IASB tentatively decided to:
- propose an amendment to paragraph 2.1(b)(ii) of IFRS 9 to add a cross-reference to paragraph 3.3.3 of IFRS 9; and
- require an entity to apply this proposed amendment prospectively.
Disclosure of deferred difference between fair value and transaction price
The IASB was informed about an inconsistency between paragraph IFRS 7.28 and paragraph IFRS 7.IG14 of accompanying implementation guidance. In 2011 the IASB amended paragraph IFRS 7.28 but did not similarly amend paragraph IFRS 7.IG14.
Consequently, the IASB tentatively decided to propose an amendment to paragraph IFRS 7.IG14 to align it with IFRS 7.28.
Next milestone: Exposure draft with proposed improvements (expected in Q3 2023).
Other topics
The IASB also discussed the following topics:
- Rate-regulated activities. Next milestone: New IFRS standard that will replace IFRS 14 (expected in 2025).
- Dynamic risk management. Next milestone: Exposure draft proposing amendments to IFRS 9 (expected in 2025).
Miscellany
European Single Access Point
EU negotiators have reached a provisional agreement on creating the European Single Access Point (ESAP) which aims to provide free, centralised and digital access to financial and sustainability-related information made public by European companies. ESAP is expected to be available from summer 2027.
Accounting mishaps at the Pentagon
John Hughes investigates the Pentagon’s $3 billion revision to the value of military aid given to Ukraine. This has been largely described as a correction of error, but perhaps we should view it as a change in accounting policy?
Corporate meme of the month…
… because you deserve a treat after bravely navigating through all this IFRS content 😉 Corporate solutions in a nutshell.
That’s all for this month’s issue of Reporting Period. Did you like it? I’d love to hear your feedback! Just hit reply – I read every email.
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Best regards,
Marek