A Beginner’s Look at IFRS Updates in 2023: What You Need to Know
A Beginner’s Look at IFRS Updates in 2023: What You Need to Know
As the global economy develops, new markets open, and business models adjust to changing times, accounting standards like the International Financial Reporting Standards evolve in order to maintain effectiveness and relevance to its stakeholders and the international business environment.
What Is IFRS?
The International Financial Reporting Standards (IFRS) are a set of international accounting standards, and they explain how particular types of transactions and other events should be reported in financial statements. They are issued by the International Accounting Standards Board (“IASB”), and they specify exactly how accountants must maintain and report their accounts.
Ultimately, IFRS was established to create a common accounting language so business financial statements can be understood from company to company and country to country. It aims to help companies produce financial statements that can be easily understood by investors, auditors, and decision makers. With IFRS, users or readers of a financial statement should be able to easily understand the statement without requiring a nuanced understanding of the underlying business.
The standards/amendments discussed below are now effective for annual periods beginning on or after January 1, 2023.
IFRS 17, Insurance Contracts
IFRS 17, Insurance Contracts, presents a new comprehensive standard for accounting for insurance contracts. With the implementation of this standard, accounting for contracts will differ significantly between IFRS and U.S. GAAP for insurers, reinsurers, and non-insurers.
Previously, companies had a relatively wide degree of freedom in deciding how to recognize insurance contracts on the balance sheet, but IFRS 17 aims to standardize accounting recognition and reporting of contracts. The standard aims to increase transparency into companies’ financial health while also increasing comparability and reducing diversity in the accounting practices for insurance contracts.
Amendments to IAS 1, Disclosure of Accounting Policies
The amendments to International Accounting Standards (IAS) 1, Disclosure of Accounting Policies, are aimed at helping financial statement preparers discern which of their accounting policies should be disclosed in their financial statements. These amendments are effective for annual periods beginning on or after January 1, 2023, and consist of three significant changes:
- Companies are required to disclose their material accounting policies instead of significant accounting policies. Materiality of information is often seen as the degree to which that information would impact investor decisions.
- Companies are not required to disclose accounting policies related to immaterial transactions, events, or conditions.
- Accounting policies that relate to material transactions, events, or conditions are not themselves automatically considered material.
Amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
The amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, aim at clarifying the difference between changes in accounting policies versus changes in accounting estimates. Per the amendment, accounting policies are procedures that companies use to prepare financial statements, and changes to these policies are applied retrospectively. In contrast, an accounting estimate is a monetary amount in the financial statement, is subject to measurement uncertainty, and is applied prospectively. Amendment estimates are developed in order to achieve the goals desired by the accounting policy.
Amendments to IAS 12, Deferred Tax Related to Assets and Liabilities Arising From a Single Transaction
The amendments to IAS 12, Deferred Tax Related to Assets and Liabilities Arising From a Single Transaction, clarify and standardize best accounting practices for deferred tax on transactions such as leases and decommissioning obligations. Under IAS 12, companies need to recognize both how a transaction/event impacts their tax liability as well as how taxes might be affected in the future by any purchased/leased asset (for example, selling the asset at a lower value than purchased). In most cases, any difference between the two is recognized as a deferred tax liability/asset. The amendments narrow the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize deferred tax assets and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision.
Adopting IFRS
Adopting IFRS can be a challenge, but the right IFRS service provider will be able to discuss and aid with transitioning your financial statements to IFRS.