Reporting Period - IFRS Developments in June 2023

Hello!

Welcome to Reporting Period – your ultimate IFRS update!

The June headlines primarily focused on the new sustainability disclosure standards (IFRS S1 and IFRS S2) issued by the International Sustainability Standards Board (ISSB). I would like to take this opportunity to clarify that Reporting Period solely deals with financial reporting issues, as sustainability developments fall outside my area of expertise.

As the business world eases into the summer, so do IFRS developments. Given this, we’re taking a well-earned summer break and the next edition of Reporting Period will hit your inbox in early September. Enjoy your summer – or, if you’re in the southern hemisphere, have a cosy winter! 🙂

Before we head off, though, let’s recap the key developments in June. In this month’s issue:

The FRC examines financial reporting practices regarding fair value measurement.
The IFRS Interpretations Committee tackles accounting issues in power purchase agreements (PPAs) and parent-subsidiary mergers.
The IASB launches post-implementation review of IFRS 15.

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

Technical Publications

Review of financial reporting practices related to fair value measurement

The UK’s Financial Reporting Council recently published a thematic review on IFRS 13 Fair Value Measurement. These findings are based on a sample of focused reviews of company accounts, supplemented with results from wider-scope routine monitoring activities. This insightful publication comes highly recommended, regardless of your geographic location.

IFRS Interpretations Committee Meeting

The IFRS Interpretations Committee met on 6-7 June 2023 and discussed the following issues:

Application of the ‘own use’ exception to power purchase agreements (PPAs)

A Power Purchase Agreement (PPA) is a long-term contract where a business procures electricity directly from a renewable energy generator. In response to global efforts to combat climate change, entities are increasingly engaging in PPAs, which has led to challenges and queries regarding the application of the ‘own use’ exception set out in IFRS 9.2.4.

The technical staff at the IFRS Foundation prepared an insightful technical analysis of this issue ahead of the Committee meeting. The Committee concluded that the principles and requirements in IFRS 9 do not provide an adequate basis for entities to determine the appropriate accounting for PPAs. As a result, the Committee recommended that the IASB consider a narrow-scope standard-setting project addressing the application of IFRS 9.2.4 to PPAs.

Next steps: The IASB will discuss the Committee’s recommendation at a future IASB meeting.

Merger between a parent and its subsidiary in separate financial statements

The Committee received an enquiry about how a parent entity should account for a merger with its subsidiary in its separate financial statements prepared under IAS 27. Research conducted by the Committee suggests little, if any, diversity in accounting for such merger transactions. Therefore, the Committee did not provide any insights in its agenda decision.

However, a staff paper for this meeting indicated that the carrying amount method is the main accounting method for such mergers in a parent entity’s separate financial statements. Advocates argue that the parent obtained control of the subsidiary before the merger, and this parent-subsidiary relationship persists even in the context of separate financial statements. As such, the merger does not fit the ‘business combination’ definition in IFRS 3. According to this view, a parent entity recognises the assets and liabilities of the subsidiary at their previously recognised carrying amounts in its separate financial statements (carrying amount method).

Next steps: None.

Work in Progress at the IASB

Post-implementation review of IFRS 15

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.

In June 2023, the IASB published the Request for Information (RFI) to seek stakeholders’ views on IFRS 15. Learn more in the IASB’s press release.

Next milestone: The RFI is open for comments until 27 October 2023.

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:

Categories and subtotals.
Issues related to IAS 29 and IAS 12.

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. See this summary of the IASB’s tentative decisions taken as of June 2023.