Reporting Period - IFRS Developments in September 2023

Hello!

Welcome to Reporting Period – your ultimate IFRS update!

September has been a reasonably quiet month on the IFRS front (phew!). Even the IFRS Interpretations Committee meeting was light, featuring only a somewhat recycled item. Why not keep the Committee engaged by submitting a challenging scenario of your own? 😉

In this month’s issue:

Streamlining accounting policy disclosures,
Accounting for ‘earn-outs’ in business combinations,
Annual improvements to IFRS,
The IASB extending the scope of its project on climate-related risks in IFRS financial statements
… 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

Disclosure of material accounting policies

In a recent publication, the KPMG team explores the amendments to IAS 1 and IFRS Practice Statement 2 concerning the disclosure of material accounting policies. These amendments, which are effective for annual periods commencing in 2023, present a prime opportunity to streamline your accounting policy disclosures.

IFRS Interpretations Committee Meeting

Below are the key highlights from the IFRS Interpretations Committee meeting held on 12 September 2023.

Payments contingent on continued employment during handover periods (AKA ‘earn-outs’)

The Committee reviewed a request concerning the accounting for payments made to the sellers of an acquired business, contingent on the sellers’ continued employment during a post-acquisition handover period. These arrangements are widely known as ‘earn-outs’. In the scenario submitted to the Committee:

An entity acquires a business and, as part of the acquisition agreement, requires the sellers to remain employees of the acquired business. This condition ensures the seamless transfer of knowledge from the sellers to the new management team.
The sellers receive compensation for their services comparable to that of other management executives. Additionally, the entity agrees to make additional payments to the sellers, contingent upon both the performance of the acquired business and their continued employment to facilitate the handover.
The sellers are eligible for the additional payments if their employment is terminated under specific circumstances—such as death or disability—or with the entity’s consent. Conversely, they forfeit these payments under any other circumstances.

The Committee concluded that its agenda decision, previously published in 2013, remains pertinent to such scenarios. Entities usually account for the payments as compensation for post-combination services, recognising them in post-combination profit or loss, rather than as additional consideration for the acquisition.

KPMG offered a more in-depth analysis of this issue in their technical publication released in 2022.

Work in Progress at the IASB

Annual improvements to IFRS

The IASB has published the Exposure Draft Annual Improvements to IFRS Accounting Standards—Volume 11.

Background: Annual improvements are part of the IASB’s process for maintaining IFRS Standards. Amendments made in this process either clarify the wording in an IFRS Standard or correct minor oversights or conflicts between existing requirements. They are grouped together and presented in one document, even though the amendments are unrelated.

The proposed amendments relate to:

IFRS 1: hedge accounting by a first-time adopter;
IFRS 7: gain or loss on derecognition, disclosure of deferred difference between fair value and transaction price, and credit risk disclosures;
IFRS 9: derecognition of lease liabilities, transaction price;
IFRS 10: determination of a ‘de facto agent’; and
IAS 7: cost method.

For more details, refer to Deloitte’s publication.

Next milestone: The comment letter period remains open until 11 December 2023.

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. IASB member Rika Suzuki provided rationale for this decision along with a project update in this article.

This month’s discussion:

Considerations for transition and first-time adopters.

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 September 2023.

This month’s discussion:

Implications of applying the IASB’s tentative decisions to investments in subsidiaries in separate financial statements and to investments in joint ventures.
Exploration of potential improvements to disclosure requirements for investments in associates.

Climate-related and other uncertainties in the financial statements

Background: The aim of this project is to explore whether and how financial statements can better communicate information about climate-related risks and other uncertainties. Until the IASB finalises its discussions, companies can refer to their educational material, which is designed to assist in assessing climate-related issues during the preparation of financial statements in line with the currently applicable IFRS.

Other recommended resources include EY’s publication and KPMG’s resource hub.

This month’s discussion:

Expansion of the project’s scope to include ‘other uncertainties’, leading to a renaming of the project.
Exploration of potential outcomes of the project.

Read more on the project’s page and in the IASB’s press release.

Next milestone: Determining the project direction.

September 2023

Technical Publications

Disclosure of material accounting policies

IFRS Interpretations Committee Meeting

Payments contingent on continued employment during handover periods (AKA ‘earn-outs’)

Work in Progress at the IASB

Annual improvements to IFRS

Business combinations – disclosures, goodwill and impairment

Equity method

Climate-related and other uncertainties in the financial statements

Other topics