As IFRS (International Financial Reporting Standards) are evolving fast, we continue our focus on the latest IASB’s (International Accounting Standards Board) updates. Since our last blog published in July 2019, the following publications have been issued by the IASB:
New amendment to Financial Instruments standards
IFRS 9 (new standard for financial instruments accounting since 2018) allows companies to continue applying the hedge accounting requirements of the old standard IAS 39. This choice has been elected by many preparers, especially among financial institutions. This is the reason why these amendments regarding the interest rate benchmark reform apply to both IAS 39 and IFRS 9.
These amendments arise from the ongoing reform of interest rate benchmarks. The Financial Stability Board has encouraged local jurisdictions to progressively replace current benchmarks, such as IBOR, with alternative nearly risk-free rates. Some hedge accounting requirements may be affected by uncertainties arising from the impact of the reform on the timing and amount of designated future cash flows. The objective of the amendments is to provide temporary exceptions from applying specific hedge accounting requirements during the period of uncertainty arising from the reform. The exceptions will end once the uncertainty is resolved.
Proposed new standard for primary financial statements
The exposure-draft “General Presentation and Disclosure” is the first major step of the “Better Communication in Financial Reporting” project. The Board’s proposals are really innovative and may significantly affect companies’ practices if adopted, especially as regards performance measures.
The new standard would require companies to classify income and expenses into four defined categories (operating / integral associates and joint ventures / investing / financing) and to present the corresponding subtotals between these categories (e.g. operating profit).
Integral associates and joint ventures are defined as those that “do not generate a return individually and largely independently of other company assets”. It means that their activities are closely related to the group’s main business activities. Their impact on the group’s financial statements would be presented separately from non-integral associates and joint-ventures in the statement of profit or loss, in the statement of other comprehensive income, in the statement of financial position and in the statement of cash flows.
Companies that present expenses classified by function in the P&L would be required to disclose in a single note an analysis of their total operating expenses by nature.
Unusual income and expenses, although presented together with “usual” items in their respective categories in the P&L, would be separately identified and disclosed in a single note. Unusual income and expenses are defined as “income and expenses with limited predicted value”. It means that the company does not expect that such items will arise again for several future annual reporting periods.
As regards the balance sheet, companies would be required to present goodwill separately from other intangible assets.
Most companies communicate performance measures defined by management but rarely provide a detailed reconciliation with IFRS figures. The Board proposes to include these measures in the financial statements through a single note. Mandatory disclosures would include a description of how each measure is calculated and a reconciliation between each measure and the most directly comparable subtotal or total specified by IFRS.
The current version of IAS 7 allows companies to choose where interests and dividends, paid or received, are classified (operating, investing, financing). These amendments propose to require presenting interests and dividend paid as financing cash flows whereas interests and dividend received would be classified as investing.
The Board also proposes to require operating profit as the single starting point for the indirect method in the statement of cash flows. This would be a major change for most companies that currently use net profit as a starting point.
This exposure draft is open for comments until 30 June 2020.
Update of the Board’s Work Plan
The latest workplan is available here on the official IFRS website.
New amendment to Financial Instruments standards
IFRS 9 (new standard for financial instruments accounting since 2018) allows companies to continue applying the hedge accounting requirements of the old standard IAS 39. This choice has been elected by many preparers, especially among financial institutions. This is the reason why these amendments regarding the interest rate benchmark reform apply to both IAS 39 and IFRS 9.
These amendments arise from the ongoing reform of interest rate benchmarks. The Financial Stability Board has encouraged local jurisdictions to progressively replace current benchmarks, such as IBOR, with alternative nearly risk-free rates. Some hedge accounting requirements may be affected by uncertainties arising from the impact of the reform on the timing and amount of designated future cash flows. The objective of the amendments is to provide temporary exceptions from applying specific hedge accounting requirements during the period of uncertainty arising from the reform. The exceptions will end once the uncertainty is resolved.
Proposed new standard for primary financial statements
The exposure-draft “General Presentation and Disclosure” is the first major step of the “Better Communication in Financial Reporting” project. The Board’s proposals are really innovative and may significantly affect companies’ practices if adopted, especially as regards performance measures.
- New subtotals in the statement of profit or loss
The new standard would require companies to classify income and expenses into four defined categories (operating / integral associates and joint ventures / investing / financing) and to present the corresponding subtotals between these categories (e.g. operating profit).
- Distinction between integral and non-integral associates and joint-ventures
Integral associates and joint ventures are defined as those that “do not generate a return individually and largely independently of other company assets”. It means that their activities are closely related to the group’s main business activities. Their impact on the group’s financial statements would be presented separately from non-integral associates and joint-ventures in the statement of profit or loss, in the statement of other comprehensive income, in the statement of financial position and in the statement of cash flows.
- New requirements for disaggregating information in a better way
Companies that present expenses classified by function in the P&L would be required to disclose in a single note an analysis of their total operating expenses by nature.
Unusual income and expenses, although presented together with “usual” items in their respective categories in the P&L, would be separately identified and disclosed in a single note. Unusual income and expenses are defined as “income and expenses with limited predicted value”. It means that the company does not expect that such items will arise again for several future annual reporting periods.
As regards the balance sheet, companies would be required to present goodwill separately from other intangible assets.
- More regulation for management performance measures
Most companies communicate performance measures defined by management but rarely provide a detailed reconciliation with IFRS figures. The Board proposes to include these measures in the financial statements through a single note. Mandatory disclosures would include a description of how each measure is calculated and a reconciliation between each measure and the most directly comparable subtotal or total specified by IFRS.
- Less options for cash flow statement presentation
The current version of IAS 7 allows companies to choose where interests and dividends, paid or received, are classified (operating, investing, financing). These amendments propose to require presenting interests and dividend paid as financing cash flows whereas interests and dividend received would be classified as investing.
The Board also proposes to require operating profit as the single starting point for the indirect method in the statement of cash flows. This would be a major change for most companies that currently use net profit as a starting point.
This exposure draft is open for comments until 30 June 2020.
Update of the Board’s Work Plan
The latest workplan is available here on the official IFRS website.
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