As IFRS (International Financial Reporting Standards) are evolving fast, we are continuing our focus on the latest IASB’s (International Accounting Standards Board) updates. Since our last blog published in July 2014, the following publications have been issued by the IASB:
IFRS 9 – Financial Instruments
The fourth and final version of IFRS 9 published in July 2014 is the conclusion of a major project started in 2002 to reform financial instruments accounting. For more information about IFRS 9, please consult our dedicated blog here.
Other H2 publications (final standards)
Amendments to IAS 27 (Equity Method in Separate Financial Statements)
These amendments introduce a new option: in separate (local) financial statements, the investments in subsidiaries, joint ventures and associates can now be accounted for using the equity method. It comes in addition to the existing methods, being at cost or in accordance with IFRS 9 (fair value).
Even though these amendments do not affect the consolidated statements, they will have an impact on consolidation software. Indeed, local data as entered in the consolidation database will be affected if the new accounting method is elected. Not only will the carrying amount of the investments change but the underlying accounting schemes will also differ from those currently used.
More analysis will have to be carried out to precisely define the impact on SAP® Financial Consolidation Starter Kits.
Amendments to IFRS 10 and IAS 28 (Sale or Contribution of Assets between an Investor and its Associate or Joint Venture)
These amendments address a conflict between IAS 28 and IFRS 10 regarding transactions between an associate or a joint venture and an investor.
IFRS 10 required full profit or loss recognition when an investor sold or contributed a subsidiary to a joint venture or an associate. In contrast, IAS 28 required that gains or losses resulting from transactions between an entity and its associate or joint venture were recognized only to the extent of unrelated investors’ interests in the associate or joint venture.
The amendments issued in 2014 now precise that the extent of gain or loss recognition should depend on the nature of the asset sold or contributed. If this asset constitutes a business as defined by IFRS 3 (Business Combinations), the gain or loss is recognized in full. In the other cases, the gain or loss is recognized only to the extent of unrelated investors’ in the associate or joint venture.
Even if clearer than the previous versions of IFRS 10 and IAS 28, these new requirements also introduce new complexity as the definition of a business is not straightforward. In particular, when a subsidiary is sold or contributed to an associate or a joint venture, it will be essential to consider whether this subsidiary contains a business (full gain recognition) or is rather a collection of assets (partial gain recognition).
These amendments apply prospectively to transactions occurring from 1 January 2016, earlier application is permitted.
We will carry out a deeper analysis of these amendments to consider starter kit improvements as regards upstream and downstream transactions between an investor and its associates or joint-ventures.
Annual improvements to IFRS – 2012-2014 cycle
The annual improvement process provides a vehicle for making minor, non-urgent amendments to standards. The 2012-2014 cycle brings amendments to the following standards:
- IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations): the amendments clarify that discontinuation of held-for-distribution accounting should be the same as the discontinuation of held-for-sale accounting
- IAS19 (Employee Benefits): the amendments relate to the discount rate to be used in a regional market sharing the same currency (e.g. the Eurozone). The standard now clearly requires that the depth of the market for high quality corporate bonds should be assessed at a currency level in this case (and not at a country level).
- IFRS 7 (Financial Instruments: Disclosures) and IAS 34 (Interim Financial Reporting) have also be modified; the amendments are really minor and do not call for any particular comment.
Update of IASB Work Plan
Compared with the previous version published in our last blog, there are only two major projects left (leases and insurance) as IFRS 9 is now complete.
Regarding the insurance project, no deadline has been announced yet. The leases project should be completed in H2 2015. The other topics currently discussed within the IASB should not result in final standards before 2016.
We will get back to these projects in our next blog. Stay tuned!