Hey everyone,
I hope you’re all doing well. We’re kicking off the September edition with a look at the exposure draft proposing amendments and clarifications to equity method accounting. The IASB aims to address several application questions and reorganise the drafting of IAS 28 for better clarity.
Other highlights in this issue include:
- The FRC’s thematic review on offsetting in financial statements.
- A review of IFRS 17 annual disclosures.
- Accounting for non-financial guarantees issued (also known as performance bonds).
- …and more.
Let’s dive in.
Note: You’re currently reading an older issue from the archive, so all links have been removed.
Exposure Draft Equity Method of Accounting
As you know, the equity method is used to account for investments in associates and joint ventures, mainly in consolidated financial statements. The IASB has published an exposure draft proposing amendments to IAS 28 to address some common application issues. Given the standard’s age, the IASB is also taking the opportunity to reorganise its structure to improve the consistency and flow of its requirements.
Here are the key proposed changes:
- Measurement of the cost of an associate or joint venture, including treatment of previously held interests and contingent consideration.
- Accounting for changes in ownership interest while maintaining significant influence or joint control.
- Full recognition of gains and losses from transactions with associates and joint ventures.
- An additional requirement in IFRS 12 for a reconciliation between the opening and closing carrying amounts of investments in associates and joint ventures.
Learn more:
- IASB’s snapshot.
- Deloitte’s publication.
Next milestone: The exposure draft is open for comment until 20 January 2025.
Technical Publications
Offsetting in financial statements
The FRC has published a thematic review on the quality of IFRS reporting around offsetting. The report reminds preparers that inappropriate offsetting can obscure the full picture of a company’s risks related to assets, liabilities, income, expenses, and cash flows.
Review of IFRS 17 annual disclosures
The FRC also reviewed the annual financial statements of 10 UK-listed insurers after their first annual reporting period under IFRS 17. While the overall quality of disclosures was good, the FRC did highlight some areas where improvements could be made.
IFRS Interpretations Committee Meeting
At the meeting held on 10 September 2024, the Committee discussed accounting for guarantees issued to third parties for the obligations of other entities. These types of guarantees, common in intra-group arrangements, often occur when a well-established parent company guarantees the obligations of a less-established subsidiary to a third party. The challenge is how to properly reflect these obligations in the parent company’s separate financial statements.
A similar question arises in consolidated financial statements when the parent company guarantees the obligations of a non-consolidated investee, such as a joint venture. We had an interesting discussion on this topic last year in the IFRS Community forums.
The fact patterns submitted to the Committee were very specific, leading to a decision not to conclude on the precise accounting treatment. Instead, the Committee provided a general approach: an entity should first assess whether the guarantee meets the definition of an insurance contract under IFRS 17 or a financial guarantee contract under IFRS 9.
If it doesn’t fit either of these categories, other requirements may apply. For example:
- The guarantee could fall within the scope of IFRS 9 as a loan commitment or a derivative.
- IFRS 15 might apply if the counterparty is a customer.
The Committee also suggested that IAS 37 may apply. Personally, I disagree with this view. Since these guarantees are contractual, I believe they should fall under IFRS 9, IFRS 17, or IFRS 15. In fact, I’ve sent a comment letter to the Committee on this issue.
Learn more:
- The Committee’s tentative agenda decision.
- Staff paper prepared for the meeting.
Next steps: The Committee’s tentative agenda decision is open for comment until 18 November 2024.
Work in Progress at the IASB
Review of IFRS 15 requirements concluded
The IASB has completed its post-implementation review (PIR) of IFRS 15 and found no significant issues. However, they’ve identified three follow-up areas for future consideration:
- Determining whether an entity is the principal or agent in a transaction.
- Accounting for payments made to customers.
- Addressing the relationship between IFRS 15 and other standards, such as accounting for collaborative arrangements (IFRS 11) and assessing whether an asset transfer qualifies as a sale in sale and leaseback transactions (IFRS 16).
Learn more in the project summary.
Statement of cash flows
The IASB has launched a project to review and improve the requirements for the statement of cash flows. This project will focus on areas such as the classification of cash flows into operating, investing and financing categories, as well as disclosures around non-cash effects of transactions.
Next milestone: The IASB plans to review the initial research findings and determine the next steps in early 2025.
Amortised cost accounting
Another new project by the IASB will focus on the requirements for amortised cost measurement under IFRS 9. The key areas of interest are the impact of modifications, derecognition and write-offs.
Next milestone: This project is still in its early stages.
Miscellany
FRC’s corporate reporting review
The FRC has released the findings of its annual corporate reporting review, highlighting key areas for improvement in IFRS reporting. While this review mainly focuses on the UK, many of the insights are widely applicable and can be valuable no matter where you’re based.
That’s all for this edition of Reporting Period. Your feedback is invaluable, so feel free to reply directly to this email with any thoughts and comments.
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Best regards,
Marek