Hey everyone,
With February behind us, hopefully the tension of the year-end closing process has eased. Did anyone manage to squeeze in a short trip to the Milano-Cortina Winter Olympics between subsequent versions of financial statements or while switching audit projects?
IFRS 18 managed to dominate this issue of Reporting Period too, but it’s a major change in P&L reporting after all, so let’s give the new standard the attention it deserves. Still, there’s room for other topics like tax incentives and decommissioning liabilities, so hopefully you’re as thrilled as I am 😉
Technical Publications
BDO’s expanded publication on IFRS 18
Last month I tried to give a little nudge to the BDO technical team, calling them out on their promise to add a section on MPMs to their technical publication on IFRS 18. Guess what happened – they did it! OK, I always try not to overestimate my impact on the world, but hey, maybe this time I made a difference? 😉 Anyway, BDO’s latest publication on IFRS 18 now covers MPMs too, and it takes the #1 spot in my personal ranking of IFRS 18 publications, with lots of practical examples and insights.
Translations of IFRS 18 to all EU languages
The EU has now officially endorsed IFRS 18, keeping the original effective date of 1 January 2027. Apart from the obvious importance for preparers in the EU, there’s an added benefit for those of you working in a non-native-English environment: the EU Official Journal now offers IFRS 18 translated into all EU languages, including Spanish and Portuguese (hello to my South American subscribers!). It also has a cool multilingual display feature where you can view each paragraph in up to three languages side by side.
On this occasion, ESMA (the EU regulator) issued a public statement summarising its expectations regarding the implementation of IFRS 18 in the EU.
Before we leave IFRS 18 behind (just for this issue of Reporting Period, of course!), here’s a quick observation I shared on LinkedIn: once IFRS 18 becomes effective, we won’t be able to refer simply to ‘IFRS’ in the statement of compliance in the financial statements. We’ll have to use the more precise term “IFRS Accounting Standards”, as required by para. 6B of the 2027 version of IAS 8 (i.e., IAS 8 amended by IFRS 18). Why? The old-school “IFRS” also covers the sustainability disclosure standards issued under the IFRS umbrella. This won’t affect preparers whose statement of compliance refers to the label adopted by the local jurisdiction, such as preparers in Singapore, where the legal label for IFRS is ‘SFRS’.
And yes, it still makes me want to bang my head against a wall that the IFRS Foundation didn’t come up with a different acronym for the sustainability standards…
IFRS 19 vs. full IFRS in track changes
Another new standard that will reshape financial reporting next year, at least for non-public companies, is IFRS 19. Here, the PwC team did a heroic job preparing a track changes version comparing the disclosure requirements in full IFRS with those in IFRS 19.
Accounting for tax incentives
I still remember the day I was tasked with putting together an accounting policy for an investment tax credit granted by a government. My first thought was IAS 12, but I quickly found that IAS 12.4 specifically excludes such credits from its scope. So I jumped to IAS 20 to see whether government grant accounting applies. But, as it turns out, IAS 20.2(b) excludes them as well. Isn’t that a funny catch-22?
If you ever find yourself in a similar situation, worry not – KPMG’s latest publication discusses how to account for various types of tax incentives, including investment tax credits that are scoped out of IAS 12 and IAS 20.
Work in Progress at the IASB
Fair value option in IAS 28
You may remember from previous issues of Reporting Period that the IASB has been working to address various application questions concerning the equity method. But one way of avoiding equity method procedures altogether is to apply fair value accounting to investments in associates and joint ventures. However, this isn’t a free accounting policy choice. As IAS 28.18-19 puts it, it’s available only to ‘venture capital organisations, mutual funds and similar entities’. In one of the forum topics at IFRS Community, we discussed how many entities apply this fair value option even though you wouldn’t typically consider them to be VC or mutual funds, with the European Investment Bank being a prime example.
The fair value option is available only at initial recognition of the investment. However, IFRS 18 allows entities to also apply that option at the date of its initial application, and the IASB is now looking to fast-track an amendment to IAS 28 to link eligibility for this option with the assessment of whether the entity has a main business activity of investing in particular types of assets under IFRS 18.
This proposal will be disappointing to those who believe the equity method should be ditched altogether and replaced with fair value. They called on the IASB to at least allow a free choice to use fair value for all entities, but the IASB rejected these calls.
The comment period is exceptionally short and closes on 20 April.
Miscellany
Decommissioning liability gap
John Hughes found an interesting publication analysing the recognition and disclosure of decommissioning liabilities by the largest Canadian oil and gas producers. It was prepared by a shareholder advocacy organisation that works to hold Canadian publicly listed companies accountable for their net zero commitments. The report is grounded in IFRS requirements, so it’s definitely worth a read. Huge props to John for digging out this gem!
Lease payments and free cash flow
Under the right-of-use accounting model in IFRS 16, lease repayments, at least the principal portion of lease liabilities, are reported within financing cash flows and therefore do not affect unadjusted free (aka organic) cash flow, an important metric for investors.
Steve and Dennis at Footnotes Analyst explore various methods for incorporating lease cash flows into FCF, and also touch on other aspects of adjusting FCF. As always, their analysis is grounded in a specific company. This time, they unpack Amazon’s free cash flow.
That’s all for this edition of Reporting Period. If you have any comments, just reply – I read every email.
Thanks for reading and see you in the next issue!
Best regards,
Marek