March 2023

Hello!

Welcome to Reporting Period – your ultimate IFRS update!

Phew, March was a busy month in the IFRS world. But don’t worry, I’ve got you covered. In this month’s issue:

  • IASB proposes to amend IFRS 9 and IFRS 7.
  • IASB launches a new project to explore whether and how financial statements can better communicate information about climate-related risks.
  • IASB improves its approach to developing disclosure requirements in IFRS.
  • IFRS Interpretations Committee meets to discuss practical application issues.
  • European Securities and Markets Authority (ESMA) publishes latest extract from its database of enforcement decisions on IFRS financial statements.
  • PWC prepares us for new disclosures on supplier finance arrangements.
  • KPMG explores accounting for issued financial guarantee contracts (which are more common than you think).
  • …. and more.

Let’s dive in.

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

Technical Publications

ESMA’s 27th Extract from Enforcement Decisions

The European Securities and Markets Authority (ESMA) regularly publishes extracts from its confidential database of enforcement decisions on IFRS financial statements. These decisions illustrate practical application issues which are useful for all IFRS preparers.

The ​latest extract​ covers:

  • Sale and leaseback of an asset in a single-asset entity (page 5).
  • Aggregation of several operating segments into one reporting segment (page 6).
  • Recognition of an internally generated intangible asset in a pharmaceutical project (page 8).
  • Exchange of non-monetary assets (page 10).
  • Lease payments disclosures (page 14).
  • Disaggregation of revenue (page 15).
  • Climate risk disclosures in impairment tests (page 17).
  • Climate risk disclosures in financial statements (page 18).
  • Credit risk disclosures for financial instruments (page 20).
  • Reclassification of financial assets (pages 22 and 24).
  • Classification of SPAC warrants (page 26).

New IFRS Disclosures on Supplier Finance Arrangements

The IASB has decided to fast-track mandatory application of the new disclosure requirements for supplier finance arrangements to 2024. The new disclosure requirements are expected to be issued mid-2023, and will be 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.

​This publication by PWC​ aims to prepare us for these upcoming requirements.

Issued Financial Guarantee Contracts

Under a financial guarantee contract, the issuer is required to reimburse a loss incurred by the holder. A common example of a financial guarantee contract is a parent company providing a guarantee over its subsidiary’s borrowings. Because these contracts transfer significant insurance risk, they typically meet the definition of an insurance contract. With the replacement of IFRS 4 by IFRS 17, the accounting for these contracts may change significantly. Companies now need to apply either IFRS 17 or IFRS 9 to these contracts.

​This publication by KPMG​ explores the accounting for issued financial guarantee contracts.

IFRS Considerations for Entities Participating in the Voluntary Carbon Market

There are no accounting standards or IFRS interpretations that directly address the accounting for carbon offsets and related projects. ​This publication by PWC​ considers how the accounting for carbon offset arrangements by the various counterparties can be addressed using current accounting standards and interpretations. This matter was also discussed in Episode 141 of PWC’s IFRS Talks podcast.

Work in Progress at the IASB

Amendments to IFRS 9 and IFRS 7

The IASB has published an exposure draft proposing narrow-scope amendments to the classification and measurement requirements in IFRS 9.

The Exposure Draft proposes amendments to the following requirements:

  • settling financial liabilities using an electronic payment system; and
  • assessing contractual cash flow characteristics of financial assets, including those with ESG-linked features.

The Exposure Draft also proposes amendments or additions to the IFRS 7 disclosure requirements for:

  • investments in equity instruments designated at fair value through other comprehensive income; and
  • financial instruments with contractual terms that could change the timing or amount of contractual cash flows based on the occurrence (or non-occurrence) of a contingent event.

For more details, see this useful ​snapshot from the IASB​ and the following KPMG publications:

  • ​Accounting for electronic payments​.
  • ​Addressing financial asset classification issues​.

Next steps: ​Exposure Draft​ is open for comment until 19 July 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:

  • Require additional defined subtotals in the statement of profit or loss.
  • Require disclosures about management performance measures.
  • Strengthen requirements for disaggregating information.

See this useful ​project overview​ prepared by the IASB technical staff.

This month’s discussion:

  • Disclosure of operating expenses by nature.
  • Management performance measures.
  • Categories in the statement of profit or loss.
  • Entities with specified main business activities.

Read more on the ​project’s page.​

Next milestone: New IFRS Standard replacing IAS 1 (date to be determined).

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 this ​summary of tentative decisions​ taken so far.

This month’s discussion:

  • Purchase of an additional interest in an associate while retaining significant influence.
  • Perceived conflict between IFRS 10 and IAS 28 relating to recognition of gain or loss on transactions with its associate.

Read more on the ​project’s page​.

Next milestone: The IASB will decide the project direction at its April meeting.

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. Rika Suzuki (IASB member) provided rationale for this decision together with project update in this ​article​.

This month’s discussion:

  • Changes to IAS 36 to reduce the cost and complexity of the impairment test (simplifications in estimating value in use and other suggestions).
  • Removal of some disclosure requirements from IFRS 3.

Read more on the ​project’s page​.

Next milestone: Exposure Draft (date to be determined).

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:

  • Clarification of the relationship between the Exposure Draft Subsidiaries without Public Accountability: Disclosures and the IFRS for SMEs.

Next milestone: New IFRS Standard (date to be determined).

Post-implementation Review of IFRS 15

Background: The IASB is required to conduct a Post-implementation Review (PIR) of each new IFRS Accounting Standard or major amendment (new requirement). The objective of a PIR is to assess whether the effects of applying new requirements on users of financial statements, preparers, auditors and regulators are as intended when the IASB developed those new requirements. The PIR of IFRS 15 was launched in September 2022.

This month’s discussion:

  • Findings from Phase 1 of the PIR of IFRS 15, feedback from stakeholders and a review of academic literature.
  • Matters to ask stakeholders about in the request for information.

Read more on the ​project’s page​.

Next milestone: Publication of the request for information in June 2023.

Climate-related Risks in IFRS Financial Statements

Background: The purpose of this project is to explore whether and how financial statements can better communicate information about climate-related risks. Read more in this ​press release​ which includes links to IASB’s useful educational materials on this topic.

This month’s discussion: The project was discussed at the IASB meeting for the first time. The IASB discussed the initial work it will do.

Next milestone: Review of the research in H2 2023.

IASB Improves Its Approach to Developing Disclosure Requirements in IFRS

The IASB concluded its project on improving its approach to developing and drafting disclosure requirements. The improved approach is designed to help the IASB develop IFRS that enable companies to make better judgements about which information is material and should be disclosed, thereby providing more useful information to investors.

The improved approach involves:

  • engaging early with investors to understand their information needs;
  • developing disclosure requirements alongside recognition and measurement requirements;
  • considering the digital reporting implications of new disclosure requirements;
  • using general and specific objectives that describe and explain investors’ information needs; and
  • supporting specific objectives by requiring companies to disclose items of information that would satisfy the objectives in most cases.

See this ​project summary​ for more information and the actual ​guidance ​that the IASB will follow when developing disclosure requirements.

IFRS Taxonomy Update

The IFRS Foundation published the ​IFRS Accounting Taxonomy 2023​. More information can be found in this ​press release​.

IFRS Interpretations Committee Meeting

The IFRS Interpretations Committee met on 14-15 March 2023 and discussed the following agenda decisions:

Homes and Home Loans Provided to Employees

The Committee considered two fact patterns:

  • An entity provides its employee with a house that the entity constructed and owns. In return, the employee has a proportion of his or her base salary deducted every month until the agreed price of the house has been fully repaid.
  • An entity provides its employee with a loan to buy a house, which the employee chooses and purchases and the entity does not own. The entity provides the loan at a below-market rate of interest; the loan is typically interest-free.

However, the Committee concluded that these matters do not have widespread effect and are not expected to have a material effect on those affected. Consequently, no technical guidance has been provided by the Committee.

Next steps: This ​tentative agenda decision​ is open for comment until 22 May 2023.

Guarantee over a Derivative Contract

The Committee received a request about whether, in applying IFRS 9, an entity accounts for a guarantee written over a derivative contract as a financial guarantee contract or a derivative.

The request submitted to the Committee described a guarantee written over a derivative contract between two third parties. Such a guarantee would reimburse the holder of the guarantee for the actual loss incurred – up to the close-out amount – in the event of default by the other party. The close-out amount is determined based on a valuation of the remaining contractual cash flows of the derivative prior to default.

However, the Committee concluded that these matters do not have widespread effect and are not expected to have a material effect on those affected. Consequently, no technical guidance has been provided by the Committee.

Next steps: This ​tentative agenda decision​ is open for comment until 22 May 2023.

Premiums Receivable from an Intermediary

The Committee received requests about how an entity that issues insurance contracts (insurer) applies the requirements in IFRS 17 and IFRS 9 to premiums receivable from an intermediary.

In the fact pattern described in the request, an intermediary acts as a link between an insurer and a policyholder to arrange an insurance contract between them. The policyholder has paid in cash the premiums to the intermediary, but the insurer has not yet received in cash the premiums from the intermediary. The agreement between the insurer and the intermediary allows the intermediary to collect the premiums to the insurer at a later date.

The Committee provided extensive technical analysis of this matter and concluded that an insurer could account for premiums paid by a policyholder and receivable from an intermediary applying either IFRS 17 or IFRS 9. See the ​agenda decision​ for details.

Next steps: This ​tentative agenda decision​ is open for comment until 22 May 2023.

Definition of a Lease – Substitution Rights

The Committee considered feedback on the tentative agenda decision published in 2022 about:

  • the level at which to evaluate whether a contract contains a lease – by considering each asset separately or all assets together – when the contract is for the use of more than one similar asset.
  • how to assess whether a contract contains a lease applying IFRS 16 when the supplier has particular substitution rights – i.e. the supplier:
    • has the practical ability to substitute alternative assets throughout the period of use; but
    • would not benefit economically from the exercise of its right to substitute the asset throughout the period of use.

The ​full text of this agenda decision​ includes Committee’s technical analysis.

Next steps: The Committee concluded its discussions on this agenda decision. The IASB will consider and finalise it at its April 2023 meeting.

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

  • How would you rate the overall quality and usefulness of this newsletter?
  • Were there any sections that you felt were too long / too short?
  • Were there any sections or topics you found redundant or unnecessary?
  • Were there any topics that you felt were missing?
  • What improvements would you suggest for future issues?

Just hit reply – I read every email. Obviously you don’t need to reply to all these questions 😉

Thank you for being a subscriber!

Best regards,
Marek