As we prepare for the upcoming reporting season, have you considered communicating the impacts of the International Financial Reporting Standards (IFRS) that were effective in 2022 to your stakeholders?

Although there were minor standard modifications, the year 2022 did not hold much change in IFRS compared to earlier years. However, these current changes in accounting standards provide a number of clarifications or practical simplifications that may be helpful both to the preparer of the financial statements as well as the statement’s users (i.e., investors, stakeholders).

IFRS 3 – Business Combinations: Reference to the Conceptual Framework

The Framework for the Preparation and Presentation of Financial Statements was issued in 1989. In 2010, this was partially revised with the Conceptual Framework for Financial Reporting 2010. Then in 2018, the Conceptual Framework for Financial Reporting 2018 was issued, and that includes the following: (1) revisions on the definition of an asset and a liability; (2) new guidance on measurement and derecognition; and (3) new guidance on presentation and disclosures. Many IFRS standards used to contain references to the previous versions of the framework, and those references were adequately updated in the 2018 to the newest version of the framework with an exception for IFRS 3.

On May 14, 2020, the International Accounting Standards Board (IASB) issued Referenced to the Conceptual Framework (Amendments to IFRS 3) with amendments to IFRS 3, Business Combinations. The amendment updated an outdated reference in IFRS 3 without significantly changing its requirements.

Prior to this amendment, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definition of assets and liabilities in the Framework for the Preparation and Presentation of Financial Statements at the acquisition date. For example, the costs to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs as post-combination expenses in its financial statements in accordance with other IFRS standards.

The amended IFRS 3:11 refers to the 2018 version of the Conceptual Framework for Financial Reporting. The amended IFRS 3 also provides specific requirements for transactions and other events within the scope of International Accounting Standard (IAS) 37¹ or International Financial Reporting Interpretations Committee (IFRIC) 21², including:

1. For a provisions or contingent liability that would be within the scope of IAS 37, the acquirer shall apply IAS 37 to determine whether at the acquisition date, a present obligation exists as a result of past events
2. For a levy that would be within the scope of IFRIC 21, the acquirer shall apply IFRIC 21 to determine whether the obligating event that gives rise to a liability to pay the levy has occurred by the acquisition date
3. The acquirer shall not recognize a contingent asset at the acquisition date

An entity shall apply those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2022. Earlier application is permitted if, at the same time or earlier, an entity also applies all the amendments made by the Amendments to References to the Conceptual Framework in IFRS Standards, issued in March 2018.

IAS 16 – Property, Plant, and Equipment: Proceeds Before Intended Use

Prior to the amendment, IAS 16 provides guidance on what shall be considered as the initial cost of property, plant, and equipment. It provides examples of directly attributable costs, which include costs of testing whether the asset is functioning properly after deducting the net proceeds from selling any items produced while bringing the asset to the location and condition (i.e., samples produced when testing an equipment). This creates differences on entities’ applications of the requirements in practice. Some entities deducted only the proceeds from selling items produced while testing, while others deducted the proceeds of all sales until an asset was finally transferred to the location and condition necessary for such asset to operate in the manner intended by management. For some entities, the proceeds deducted from the cost of an item of property, plant, and equipment could significant – some even exceed the costs of testing.

Under the amended IAS 16, an entity is now prohibited from deducting from the cost of an item of property, plant, and equipment the proceeds from selling items produced before the related asset is made available (proceeds before intended use). This is based on an argument that the proceeds from selling items produced before the assets’ intended use met the definition of income and expenses in the framework and therefore should be included in the statement of profit and loss.

The Board also clarifies the meaning of “testing,” defined as “assessing whether the technical and physical performance of the asset is such that it is capable of being used in the production or supply of goods or services, for rental to others, or for administrative purposes.

Further, the Board clarifies that the “costs of items produced” while bringing an item of property, plant, and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management “shall be measured in accordance with IAS 2.”³

The amended IAS 16 also provides new disclosure requirements: “If not presented separately in the Statement of Comprehensive Income, the financial statements shall also disclose the amounts of proceeds and costs included in profit and loss that relate to items produced that are not an output of the entity’s ordinary activities, and which line item(s) in the statement of comprehensive income include(s) such proceeds and costs.

The amended IAS 16 shall be applied retrospectively, but only to items of property, plant, and equipment that are brought to the location and condition necessary for them to be capable of operating in the manner intended by management on or after the beginning of the earliest period presented in the financial statements in which the entity first applies the amendments. The entity shall recognize the cumulative effect of applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of that earliest period presented. The amendment is effective January 1, 2022, but earlier application is permitted.

IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets: Onerous Contracts – Cost of Fulfilling a Contract

IAS 37 defines an onerous contract as "a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it."

Following the withdrawal of previous revenue standards (IAS 11⁴, IAS 18⁵), entities are required to apply IAS 37 instead of a revenue standard to assess whether a contract is onerous (Note: IFRS 15⁶ also does not regulate this matter). Previously, IAS 11 (but not IAS 37) specified which costs to be included. Accordingly, there are differing views on whether only the incremental costs of fulfilling the contract or all costs that relate directly to the contract shall be included.

Under the Amended IAS 37, the Board concluded that an entity shall include all costs that directly relate to the contract when determining the incremental costs of fulfilling the contract. The Board argued that including all such costs provides more useful information to users of the financial statements. Further, the Board concludes that the benefits of providing that information are likely to outweigh the costs, and that a requirement to include all costs that relate directly to a contract is consistent with other requirements of IAS 37 and the requirements of other IFRS standards.

An entity shall apply those amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments. An entity shall not restate comparative information. Instead, an entity shall recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or another component of equity, as appropriate, at the date of initial applicable.

While the amendments to IAS 37 are effective for annual periods beginning on or after January 1, 2022, early application is permitted.

Annual Improvements 2018-2020

On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018-2020, which includes the following amendments:

The above amendments are effective for annual reporting periods beginning on or after January 1, 2022, but early application is permitted. Detailed discussions of the amendments are as follows:

1. IFRS 1 – First-time Adoption of International Financial Reporting Standards

IFRS 1 requires an entity that is adopting IFRS for the first time to prepare a complete set of financial statements covering its first IFRS period and the preceding year. The entity uses the same accounting policies throughout all periods presented in its IFRS financial statements. Those accounting policies must comply with each standard effective at the end of its first IFRS reporting period. IFRS 1 provides limited exceptions from the requirements to restate prior periods in specified areas in which the cost of complying with them would be likely to exceed the benefits to users of financial statements. It also prohibits retrospective application of IFRS in some areas, particularly when retrospective application would require judgment by management about past conditions after the outcome of a particular transaction is already known. Further, IFRS requires disclosures that explain how the transition from previous GAAP to IFRS affected the entity’s reported financial position, financial performance, and cash flows.

When looking for the overall requirements for financial statements, their structure, minimum requirements for their content, and overriding concerns such as the basis of accounting, the current or non-current distinction, accruals, as well as going concern, we refer to IFRS and IAS 1, Presentation of Financial Statements. The standard requires a complete set of financial statements, comprising of a statement of financial position, a statement of profit and loss and other comprehensive income, a statement of changes in equity, and a statement of cash flows.

On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards 2018-2020, which includes an amendment to IFRS 1, First Time Adoption of International Financial Reporting Standards, with respect to the subsidiary as a first-time adopter. The amendment permits a subsidiary that applies paragraph D16(a) of IFRS 1 to measure cumulative translation differences using the amounts reported by its parent, based on the parent’s date of transition to IFRS. A similar election is available to an associate or joint venture that uses the exemption in paragraph D16(a).

2. IFRS 9 – Financial Instruments, Fees in the 10% Test for Derecognition of Financial Liabilities

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. The standard requires an entity to recognize financial assets or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

IFRS 9 requires an entity to derecognize a financial liability and recognize a new financial liability when there is an exchange between an existing borrower and the lender of debt instruments “with substantially different terms” (including a substantial modification of the terms of an existing financial liability or part of it). The term is substantially different if the discounted present value of the remaining cash flows under the new terms are at least 10% different from the discounted present value of the remaining cash flows of the original financial liability (“10%-test”).

The amendment to IFRS 9 clarifies which fees an entity includes when it applies the 10%-test in paragraph B3.3.6 of IFRS 9 in assessing whether to derecognize a financial liability. An entity includes only fees paid or received between the entity (the borrower) and the lender, including fees paid or received by either the entity or the lender on the other’s behalf.

The amendment shall be applied prospectively to modifications and exchanges that occur on or after the date the entity first applies the amendment.

3. Illustrative Examples to IFRS 16, Leases

Illustrative Example 13 of IFRS 16 includes as part of the fact pattern a reimbursement relating to leasehold improvements. The example, however, does not explain clearly enough the conclusion as to whether the reimbursement would meet the definition of a lease incentive in IFRS 16.

The amendment to Illustrative Example 13 accompanying IFRS 16 removes from the example the illustration of the reimbursement of leasehold improvements by the lessor in order to resolve any potential confusion regarding the treatment of lease incentives that might arise because of how lease incentives are illustrated in that example.

Since the amendment to IFRS 16 only regards an illustrative example (non-obligatory part of IFRS), no effected date has been stated.

4. IAS 41 – Agriculture, Taxation in Fair Value Measurement

In 2008, the IASB removed from IAS 14 the requirement to use a pre-tax discount rate when measuring fair value. However, it did not remove from IAS 41:22 the requirements to use pre-tax cash flows when measuring fair value.

To resolve the conflict, the amendment to IAS 41 removes the requirement in paragraph 22 for entities to exclude taxation cash flows when measuring the fair value of a biological asset using a present value technique. This amendment is intended to ensure consistency with the requirements of IFRS 13, Fair Value Measurement, to use internally consistent cash flows and discount rates and to enable preparers to determine whether to use pre-tax or post-tax cash flows and discount rates for the more appropriate fair value measurement.

The amendment is applied prospectively (i.e., for the fair value measurements on or after the date an entity initially applies the amendment).

¹IAS 37, Provisions, Contingent Liabilities and Contingent Assets

²IFRIC 21, Levies

³IAS 2, Inventories

⁴IAS 11, Construction Contracts

⁴IAS 18, Revenues

⁵IFRS 15, Revenues from Contracts with Customers