Reporting Period - IFRS Developments in April 2023

Hello! Welcome to Reporting Period – your ultimate IFRS update!

This edition covers:

IASB confirms temporary relief from deferred tax accounting following OECD Pillar Two tax reform (aka ‘top-up tax’).
Free ebook version of EY’s IFRS manual.
Applicability of IFRS 17 to non-insurers.
Financial reporting implications of recent turmoil in the banking sector.
EY cancels plan to separate audit and consulting divisions.
IASB considers targeted improvements to IAS 37 regarding provisions recognition.
…. and more.

Let’s dive in.

Note: You’re currently reading an older issue from the archive, so all links have been removed.

IASB confirms temporary relief from deferred tax accounting following OECD Pillar Two tax reform (aka ‘top-up tax’)

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 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.

In January 2023, the IASB published the Exposure Draft International Tax Reform – Pillar Two Model Rules proposing:

a temporary exception to IAS 12 accounting for deferred taxes due to the Pillar Two model rules implementation; and
targeted disclosure requirements.

April decisions:

The IASB plans to finalise its proposals and issue amendments to IAS 12 in late May 2023, which will:

introduce the temporary exception;
make the temporary exception mandatory;
not specify how long the temporary exception will be in place;
and require entities to disclose information enabling financial statement users to understand the entity’s exposure to Pillar Two income taxes arising from that legislation.

Read more:

IASB’s project page and press release,
EY’s publication,
KPMG publication (providing useful background on OECD tax reform).

Technical publications

Free ebook version of EY’s IFRS manual

Following the release of its renowned IFRS manual International GAAP for free last year, EY now offers an ePub version at no cost.

Applicability of IFRS 17 to non-insurers

IFRS 17 Insurance Contracts 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.

Deloitte’s publication offers guidance on IFRS 17 aspects that non-insurers should consider when assessing whether their issued contracts are within the scope of IFRS 17.

Financial reporting implications of recent turmoil in the banking sector

Recent weeks have been the most challenging for the banking sector since the 2008 financial crisis, including UBS’s takeover of Credit Suisse and the failure of three mid-sized US banks.

Deloitte’s publication addresses key financial reporting implications of these recent events for entities applying IFRS.

Work in progress at the IASB

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 aims to clarify several application issues raised with the IFRS Interpretations Committee. Read more about this project, including a summary of tentative decisions taken so far.

This month’s discussion: The IASB tentatively decided to propose that an investor would account for, and include in the carrying amount of its investment in an associate, a deferred tax asset (or liability) arising from recognising its share of the associate’s net identifiable assets and liabilities at fair value.

The IASB also decided to move the Equity Method research project to its standard-setting work plan.

Read more on the project page.

Next milestone: Exposure draft proposing amendments to IAS 28 (date to be determined).

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 does not always provide a clear rationale for its classification requirements. The challenges in classifying these instruments resulted in diversity in accounting practice. This project aims to make clarifying amendments to 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:

expanding the objective of IFRS 7 to enable users of financial statements to understand how an entity is financed and its current and potential ownership structures,
refining disclosure requirements on terms and conditions,
relocating the disclosure requirement in paragraph 80A of IAS 1 to IFRS 7,
transition requirements.

Read more on the project page.

Next milestone: Exposure draft proposing amendments to IAS 1, IAS 32 and IFRS 7 (date to be determined).

Dynamic risk management

Background: IFRS 9 does not address situations where a company manages certain financial risks ‘dynamically’ – when the risk position being hedged changes frequently and is hedged by an open portfolio of changing assets and liabilities. Consequently, companies (primarily financial institutions) sometimes struggle to adequately reflect their risk management in their financial statements. This project aims to develop an accounting model that will enable investors to understand the effect of a company’s dynamic risk management.

This month’s discussion:

Risk mitigation intention and the construction of benchmark derivatives.
Further considerations on the current net open risk position.

Read more on the project page.

Next milestone: Exposure draft proposing amendments to IFRS 9 (date to be determined).

Rate-regulated activities

Background: Rate regulation determines how much compensation a company can charge customers for goods or services supplied in a period and when the company can include that compensation in the regulated rates charged. In some cases, a difference in timing arises because part of the compensation for goods or services supplied in a period must be included in the regulated rate charged for goods or services supplied in a different period (past or future).

When these timing differences occur, the revenue reported by a company for a period in its statement of financial performance and the assets and liabilities reported in its statement of financial position do not give a complete picture of the compensation that the rate regulation entitles the company to charge for goods or services supplied in that period. Currently, IFRSs do not require companies to inform investors about these timing differences. This incomplete information makes it difficult for investors to make accurate assessments of cash flows that will arise from future revenue and future expenses.

This project aims to introduce a requirement for companies to provide investors with such information by reporting regulatory assets and regulatory liabilities in their statement of financial position, and related regulatory income and regulatory expense in their statement of financial performance. See this useful snapshot providing an overview of the discussion paper published in 2021).

This month’s discussion:

Long-term performance incentives.
Derecognition.

Read more on the project page.

Next milestone: New IFRS standard that will replace IFRS 14.

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.

Provisions – targeted improvements to IAS 37

Background: When developing a revised Conceptual Framework for Financial Reporting (issued in 2018), the IASB addressed the question of whether and, if so, when an obligation conditional on an entity’s own future actions is a ‘present obligation’ and hence a liability. This project aims to apply the concepts set out in the Framework to develop its proposals to amend IAS 37 and potentially replace IFRIC 21 Levies with new application requirements included directly in IAS 37.

This month’s discussion:

Reviewing project’s prospects.

Miscellany

IFRS Foundation publishes 2022 Annual Report

The IFRS Foundation published its annual report and audited financial statements for the year ended 31 December 2022.

FRC publishes conversation starters to boost investor-audit committee engagement

The Financial Reporting Council (FRC), an independent regulator in the UK, published a series of conversation starters structured by topic, with an initial broad question followed by several more detailed follow-up questions. These are aimed at investors wishing to engage with audit committees and companies on assurance-related topics.

More work for audit committees on the horizon? 🙂

EY cancels plan to separate audit and consulting divisions

EY has called off a plan to break up its audit and consulting units, halting a proposed overhaul of its businesses that was meant to address regulatory concerns over potential conflicts of interest.

That’s all for this month’s issue of Reporting Period. I’d love to hear your feedback!

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Best regards,
Marek