Hello,
I hope you’re looking forward to the November issue of Reporting Period, your ultimate IFRS update 🙂
In November, we received somewhat disheartening news: the IASB has decided to abandon its project on business combinations under common control (BCUCC). As a result, we’re left without a standardised accounting policy for BCUCCs, potentially indefinitely. But, on the bright side, this might just mean more opportunities for savvy consultants like yours truly 😉
Other IFRS highlights in this issue include:
- EY and KPMG assisting with the preparation of Pillar Two disclosures.
- FRC’s review of IFRS 17 interim disclosures.
- The Interpretations Committee’s deliberation on whether climate-related commitments create a present obligation.
- The IASB’s publication of the Exposure Draft Financial Instruments with Characteristics of Equity and…
- … their new project to refine the recognition of provisions under IAS 37.
Let’s dive in.
Note: You’re currently reading an older issue from the archive, so all links have been removed.
Technical Publications
Pillar Two disclosures
As we approach the 2023 annual reports, EY has released a helpful guide on Pillar Two disclosures, including examples from published IFRS financial statements and sample disclosures by the EY team. KPMG has also contributed with a practical Q&A list and a decision tree. For those needing a recap of the Pillar Two model rules and the related IAS 12 amendments, KPMG’s summary and PWC’s implementation tracker are invaluable resources.
Review of IFRS 17 interim disclosures
The FRC has reviewed interim financial statements of 10 UK-listed insurers, providing examples of best practices and setting expectations for more detailed year-end disclosures.
Insights into fair value measurement
KPMG has updated their comprehensive 173-page handbook on fair value measurement under both IFRS and US GAAP.
IFRS Interpretations Committee Meeting
Below are the key highlights from the IFRS Interpretations Committee meeting held on 28-29 November 2023.
Do climate-related commitments create a present obligation?
Many companies, from large to small, have pledged to contribute to tackling the climate crisis. The Committee explored an interesting question: do these commitments create a present obligation that leads to the recognition of a provision under IAS 37?
The context for this analysis was of a manufacturer who publicly committed to significantly reducing its emissions by a certain year and offsetting the remainder through carbon credits. The Committee’s analysis focused on identifying a constructive obligation per IAS 37, which arises from a company’s actions that create a valid expectation in others that it will discharge certain responsibilities.
If a constructive obligation is established, the Committee considered whether it satisfies the criteria for recognising a provision under IAS 37, which includes a present obligation from a past event, a probable outflow of resources, and a reliable estimate of the amount. The Committee’s conclusion was that an obligation for offsetting emissions becomes a present obligation only when the emissions occur.
The Committee also observed that the entity will not have a present obligation for future modifications to its manufacturing methods, as these costs are incurred for future operations. When the entity eventually purchases resources for these modifications, such as new plant or equipment, it will incur expenses, but it will also receive corresponding resources like property, plant, equipment, energy, product ingredients, or packaging materials. These acquired resources will enable the entity to continue manufacturing and selling its products profitably. This highlights that the costs associated with future modifications are balanced by the acquisition of assets that contribute to the entity’s ongoing profitability.
Learn more:
- Committee’s tentative agenda decision.
- Staff paper prepared for the meeting.
Notably, KPMG has previously explored this topic in their publication on the accounting implications of net-zero commitments.
Next steps: The Committee’s tentative agenda decision is open for comment until 5 February 2024.
Materiality and aggregation in segment reporting
The Committee examined the application of paragraph 23 of IFRS 8, concerning the disclosure of specific amounts related to segment profit or loss in financial reporting. It addressed whether these disclosures are necessary when not reviewed separately by the chief operating decision maker (CODM), and how to define ‘material items’ as per IFRS 8.23(f).
The Committee concluded that paragraph 23 requires entities to disclose specific amounts for each reportable segment if they are part of the profit or loss measure reviewed by the CODM or are routinely provided to the CODM. Furthermore, they clarified that ‘material’ in this context is defined by paragraph 7 of IAS 1, focusing on the significance of information in influencing decisions, and requires considering both qualitative and quantitative aspects.
Learn more:
- Committee’s tentative agenda decision.
- Staff paper prepared for the meeting.
Next steps: The Committee’s tentative agenda decision is open for comment until 5 February 2024.
Work in Progress at the IASB
Financial instruments with characteristics of equity
The IASB has released the Exposure Draft Financial Instruments with Characteristics of Equity with proposed amendments to IAS 32, IFRS 7 and IAS 1, aiming to:
- Clarify the classification principles of IAS 32 to assist companies in distinguishing between debt and equity.
- Require companies to provide disclosures about instruments with both debt and equity features.
- Introduce new presentation requirements for amounts attributable to ordinary shareholders, separate from those attributable to other equity instrument holders.
Learn more:
- A 2-minute video by IASB member Zach Gast explaining the proposals.
- A summary of the Exposure Draft by KPMG.
- The project page.
Next milestone: The comment deadline for the Exposure Draft is set for 29 March 2024.
Business combinations under common control
The IASB has decided to terminate the project on business combinations under common control (BCUCC). Consequently, BCUCC will remain outside the scope of IFRS, leaving companies to devise their own accounting policies under IAS 8. The 2020 Discussion Paper on BCUCC by the IASB will provide valuable guidance in this area.
IASB Chair Andreas Barckow discusses this decision in the IASB’s podcast, highlighting IASB’s assessment that the costs of developing a new IFRS would surpass its benefits.
Next milestone: A project summary is being prepared by the IASB technical team.
Primary financial statements
Background: The upcoming IFRS 18 Presentation and Disclosure in Financial Statements, which supersedes IAS 1, aims to enhance the comparability and transparency of financial reporting, focusing on the statement of profit or loss. Key changes include:
- The introduction of two new subtotals in the P/L statement: ‘operating profit’ and ‘profit before financing and income taxes’.
- A requirement for the reconciliation of management-defined performance measures (also known as ‘non-GAAP’ measures) with those specified by IFRS.
- Refined guidelines for the aggregation and disaggregation of information within the primary financial statements.
- Limited changes to the statement of cash flows, establishing operating profit as a starting point for the indirect method and eliminating options for the classification of interest and dividend cash flows.
Learn more:
- BDO’s publication.
- IASB’s project overview.
This month’s discussion: The IASB technical team is drafting IFRS 18, seeking clarification on several aspects from the IASB. Further details are available on the project’s page.
Next milestone: The release of IFRS 18 is expected in Q2 2024.
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 November 2023.
This month’s discussion:
- Potential improvements to disclosure requirements for investments in joint ventures and subsidiaries;
- Transitional provisions.
Learn more on the project’s page.
Next milestone: Exposure draft proposing amendments to IAS 28 and IFRS 12 (expected in H2 2024).
Classification and measurement of financial instruments
Background: In March 2023, the IASB released an Exposure Draft proposing narrow-scope amendments to the classification and measurement requirements in IFRS 9. These proposed changes include:
- Derecognition requirements for settling financial liabilities using an electronic payment system.
- Assessing contractual cash flow characteristics of financial assets, including those with environmental, social and governance (ESG)-linked features.
Additionally, the Exposure Draft proposes changes and new requirements for IFRS 7 disclosures, focusing on:
- Investments in equity instruments designated at fair value through other comprehensive income.
- Financial instruments with contractual terms that could change the timing or amount of contractual cash flows based on contingent events.
Learn more:
- IASB’s project snapshot.
- KPMG’s publications: Accounting for electronic payments and Addressing financial asset classification issues.
This month’s discussion: Summary of the feedback received (learn more on the project’s page).
Next milestone: Amendments to IFRS 9 and IFRS 7 (expected in H2 2024).
Provisions
Background: While revising the Conceptual Framework for Financial Reporting in 2018, the IASB tackled the issue of determining if and when an obligation contingent upon an entity’s future actions constitutes a ‘present obligation’ and therefore should be considered a liability. The current project on provisions aims to integrate these concepts into IAS 37, potentially replacing IFRIC 21 Levies with new application requirements within IAS 37.
This month’s discussion: The IASB intends to amend IAS 37 to:
- Define how entities should calculate the discount rate for provision measurement.
- Specify the use of a risk-free rate as the discount rate, without adjusting for non-performance risk.
Learn more on the project’s page.
Next milestone: Exposure Draft proposing amendments to IAS 37 and the withdrawal of IFRIC 21 (expected date to be announced).
Post-implementation review of IFRS 9 impairment requirements
Background: The IASB conducts post-implementation reviews (PIRs) on major new accounting requirements after at least two years of application. These reviews assess if the actual impacts of the standards on users, preparers, auditors, and regulators align with the IASB’s original objectives.
The review of IFRS 9 is split into three parts. The first, covering the classification and measurement, concluded in December 2022. The current review is the second part and focuses on the impairment requirements. The final part, addressing hedge accounting, will be held at a later stage.
Learn more:
- Deloitte’s summary.
- Presentation from the EAA–EFRAG–IASB workshop.
This month’s discussion:
- A summary of the feedback received.
- A plan for the next phase of the project.
Learn more on the project’s page.
Next milestone: Project summary (expected in H2 2024).
That concludes this issue of Reporting Period. Did you find it informative? Please share your thoughts by replying to this email.
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Best regards,
Marek