Q4 2019 new IFRS® standards and amendments: Are you ready?
Q4 2019 new IFRS® standards and amendments: Are you ready?
Insight

Q4 2019 new IFRS® standards and amendments: Are you ready?

KPMG’s semi-annual outlook helps IFRS Standards preparers in the US keep track of financial reporting changes and assess relevance

From the IFRS Institute – December 6, 2019

So far this year, preparers reporting under IFRS Standards have focused their efforts on implementing the new guidance on leases and uncertain income tax treatments, while also enhancing processes and controls around revenue and financial instruments. But beyond IFRS 16, IFRIC® 23 and a number of incidental amendments that are effective this year, other standards and amendments follow soon after. Meanwhile, the FASB has for nonpublic companies deferred the effective dates of its standards on credit losses, derivatives and leases, increasing the timing gap in adopting new standards for most dual preparers.

The following summaries highlight new authoritative guidance issued by the International Accounting Standards Board (IASB® Board), provide a high-level comparison to US GAAP, and identify resources for further reading. The content is organized by effective dates:

And in On the radar, we shed light on the upcoming amendments impacting the current/noncurrent classification of liabilities and the identification of onerous contracts.

See the IASB Board work plan for other projects that are currently in progress.

Effective January 1, 20191

IFRS 16, Leases

New IFRS Standards requirements Comparison to US GAAP

IFRS 16 eliminates the dual accounting model for lessees, requiring a single, on-balance sheet accounting model that is similar to previous finance lease accounting.

Lessor accounting remains generally similar to previous practice under IAS® 17 – e.g. lessors continue to classify leases as finance or operating leases.

IFRS 16 replaces IAS 17, Leases, and related interpretations. 

ASC 842, Leases, became effective at the same time as IFRS 16 for public companies, but is effective two years later for most other entities.2 Early adoption is permitted.

Like IFRS Standards, lessees will report on-balance sheet an asset and a liability for substantially all leases. Unlike IFRS Standards, lessees will continue to classify their leases between operating and finance. Only finance leases will be treated as financing arrangements from an income statement perspective. The accounting for operating leases will generally continue to produce a straight-line total lease expense.

Other significant differences exist between IFRS 16 and ASC 842, including the low-value item exemption (IFRS 16) and reassessments.

Like IFRS Standards, lessor accounting is generally similar to previous guidance (with the exception of the elimination of leveraged leases) but differences from IFRS Standards exist.

KPMG resources:

 

IFRIC 23, Uncertainty over Income Tax Treatments

New IFRS Standards requirements Comparison to US GAAP

IFRIC 23 introduces new guidance to clarify how to account for income tax when it is unclear whether the taxing authority will accept the entity’s tax treatment.

ASC 740, Income Taxes, and IFRIC 23 appear similar in their approach to income tax uncertainties. However, a deeper analysis reveals important differences that may result in different amounts being recognized in the financial statements – even when the underlying fact pattern appears to be similar.

KPMG resources:

 

Amendments to existing standards

New IFRS Standards requirements Comparison to US GAAP

Prepayment Features with Negative Compensation (Amendments to IFRS 9, Financial Instruments)

Financial assets containing prepayment features with negative compensation may be measured at amortized cost or at fair value through other comprehensive income (OCI) if they meet the other relevant requirements of IFRS 9.

Accounting for financial instruments is an area in which IFRS Standards and US GAAP differ significantly.

Unlike IFRS Standards, embedded derivatives such as prepayment options in financial assets are required to be bifurcated and separately accounted for when certain criteria are met. 

Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28, Investments in Associates and Joint Ventures)

The amendment to IAS 28 deals with the accounting for long-term interests in an associate or joint venture that in-substance forms part of the net investment. It clarifies the interaction between IFRS 9, especially the expected loss impairment model, and IAS 28.

IFRS 9 excludes from its scope only those interests to which the equity method is applied.

The scope and application of the equity method under US GAAP include several differences from IFRS Standards.

Like IFRS Standards, investors must consider interactions between the application of the equity method and the impairment model for financial instruments.

However, the impairment models differ in important respects. The order in which the requirements apply also differs from IFRS Standards.

Plan Amendment, Curtailment or Settlement (Amendment to IAS 19, Employee Benefits)

The amendment to IAS 19 clarifies that on amendment, curtailment or settlement of a defined benefit plan, the current service cost and net interest for the remainder of the annual reporting period are calculated using updated actuarial assumptions – i.e. consistent with the calculation of a gain or loss on the plan amendment, curtailment or settlement.

The amendment clarifies that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognized in profit or loss. The entity then determines the effect of the asset ceiling after plan amendment, curtailment or settlement. Any change in that effect is recognized in OCI and is not reclassified into profit or loss.

The amendment to IAS 19 is applied prospectively to plan amendments, settlements and curtailments that occur after the effective date of January 1, 2019.1

While significant differences exist in the accounting for employee benefits between US GAAP and IFRS Standards, the IAS 19 amendment is largely consistent with existing guidance under US GAAP, except for the fact that US GAAP does not have a concept of an asset ceiling. Also, prior service cost related to a plan amendment is recognized in OCI at the date of the amendment and amortized in future periods.

Annual Improvements to IFRS Standards 2015–2017 Cycle

Amendments to IFRS 3, Business Combinations, and IFRS 11, Joint Arrangements, clarify how an entity accounts for increasing its interest in a joint operation that meets the definition of a business.

  • If a party maintains (or obtains) joint control, the previously held interest is not remeasured.
  • If a party obtains control, the transaction is a business combination achieved in stages and the acquiring party remeasures its previously held interest at fair value.
No equivalent to the principle of ‘joint arrangements’ exists under US GAAP. However, the IFRS 3 / IFRS 11 clarifications made for a business combination achieved in stages for entities that previously qualified as joint arrangements are consistent with existing guidance under US GAAP for joint ventures.

Amendments to IAS 12, Income Taxes, clarify that all income tax consequences of dividends (including payments on financial instruments classified as equity that meet the definition of a dividend) are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, OCI or equity.

The amendments do not change the existing guidance related to withholding taxes on dividends. Taxes remitted by the entity to the tax authorities on behalf of shareholders are recognized directly in equity as part of the dividend distribution.

Unlike IFRS Standards, tax effects of dividends paid to shareholders are recognized in profit or loss.

Additionally, ASC 740 has specific guidance related to withholding taxes on dividends. On meeting certain conditions, withholding taxes can be recognized in equity as part of the dividend distribution.

Unlike IFRS Standards, the analysis does not focus on the source of the distributable profits. This can lead to presentation differences from IFRS Standards.

Amendments to IAS 23, Borrowing Costs, clarify that the general borrowings pool used to calculate eligible borrowing costs excludes only borrowings that specifically finance qualifying assets that are still under development or construction. The IAS 23 clarifications are largely consistent with existing guidance under US GAAP.

KPMG resources:


Effective January 1, 20201

Amendments to existing standards

New IFRS Standards requirements Comparison to US GAAP

Amendments to IFRS 3, Business Combinations, clarify the definition of a business by providing a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

US GAAP requires companies to perform an initial screen test as part of their assessment while this screen test is optional under IFRS Standards.

The amended definitions of a business under IFRS Standards and US GAAP are otherwise substantially converged and expected by the Boards to yield more consistency in practice than the prior definitions.

Amendments to IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, clarify the definition of ‘materiality’ and how it should be applied. The amendments also improve the explanations of the definition and ensure consistency across all IFRS standards. The new definition is: “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” 

Unlike IFRS Standards, materiality is not specifically defined under authoritative US GAAP. However, the FASB Concept Statements, SEC guidance used by management, as well as guidance for auditors all refer to ‘materiality’ and define it as “…if there is a substantial likelihood that the fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available...” and contain both quantitative and qualitative aspects.

Amendments to IFRS 9, Financial Instruments, IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures, provide relief from specific hedge accounting requirements to address potential effects of the uncertainly caused by the IBOR reform. 

The FASB has proposed to provide financial reporting relief, not limited to hedge accounting like IFRS Standards, for companies that have contracts impacted by LIBOR reform. For a limited time, companies would be granted optional expedients to ease the potential burden in accounting for the effect of LIBOR reform. The FASB expects to issue amendments shortly.
KPMG resources:


In March 2018, the IASB Board revised its Conceptual Framework, which it can use immediately in its standard-setting activities. While the effective date for preparers is January 1, 20201, early application is permitted when developing accounting policies where no IFRS standard applies to a particular transaction.

Effective January 1, 20211

IFRS 17, Insurance Contracts

New IFRS Standards requirements Comparison to US GAAP

IFRS 17 provides the first comprehensive guidance to accounting for insurance contracts under IFRS Standards. It aims to increase transparency and to reduce diversity in the accounting for insurance contracts.

The effective date of IFRS 17 is pending a one-year deferral to 2022, to be confirmed by IASB Board mid-2020. Early adoption is permitted. 

Unlike IFRS Standards, the guidance addressing long-duration contracts issued by insurers and reinsurers in US GAAP applies only to insurance entities. The FASB recently made significant changes to the accounting for long-duration contracts.3

With the implementation of IFRS 17, the accounting for insurance contracts will differ significantly between IFRS Standards and US GAAP both for insurers, reinsurers and non-insurers

KPMG resources:


 

On the radar

Amendments to IAS 1 – current or noncurrent classification of liabilities

Since 2015, the IASB Board has been working to improve existing guidance in IAS 1, Presentation of Financial Statements, to classify a liability as current or noncurrent. The IASB Board now expects to issue amendments to IAS 1 in January 2020 for a possible effective date in 2022.

IAS 1 requires a company to classify a liability as current unless, among other things, the company has an unconditional right to defer settlement of the liability for at least 12 months. This requirement has caused confusion for preparers of financial statements and has resulted in different interpretations, making it difficult for investors to understand and compare the financial statements. The proposed amendments intend to clarify the requirement for a right to defer settlement at the end of the reporting period by defining the term ‘settlement’ and providing application guidance.

Although lead time to the effective date seems long, the amendments may change the classification of financial liabilities, including certain convertible debt instruments, and may require companies to revisit covenants and debt agreements. The current/noncurrent classification of liabilities is not converged between IFRS Standards and US GAAP currently. The FASB is rethinking its guidance, but expects that differences will remain post-amendments4, for certain debt arrangements, although likely the nature of those differences will change.

Amendments to IAS 37 – onerous contracts

In 2018, the IASB Board proposed amendments to IAS 375 that could change how companies identify whether a contract is onerous. Notably, the amendments would apply to customer contracts and could be significant for preparers with long-term contracts, unless a full-cost approach is already applied.

IAS 37 defines an onerous contract as a contract in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received. Unavoidable costs are the lower of (1) the cost of fulfilling the contract or (2) any compensation or penalties arising from failure to fulfill the contract.

The proposed amendments would clarify that the cost of fulfilling the contract includes all costs that relate directly to the contract – i.e. a full-cost approach. Such costs would include both the incremental costs of the contract (i.e. costs a company would avoid if it did not have the contract) and an allocation of other costs incurred on activities required to fulfill the contract – e.g. contract management and supervision, depreciation of equipment used in fulfilling the contract.

For companies that have historically only included incremental costs of the contract, the proposed amendments might result in identifying more onerous contracts, recognizing onerous contract costs earlier or recognizing larger provisions. Except for certain specific guidance, US GAAP does not contain guidance on the recognition of onerous contracts and differences from IFRS Standards often exist.

The comment period for the proposed amendments ended in April 2019. In September 2019, the IASB Board tentatively confirmed that the cost of fulfilling a contract for the purpose of assessing whether that contract is onerous includes all costs that relate directly to the contract. Final amendments are expected in the first half of 2020.

 



Contributing authors

Rika Tanaka

Rika Tanaka

Managing Director, Dept. of Professional Practice, KPMG US

+1 212-954-6291
Valerie Boissou

Valerie Boissou

Partner, Audit, Dept. of Professional Practice, KPMG US

+1 212-954-1723

Footnotes

Effective dates are for annual periods beginning on or after the stated date. Early adoption is permitted unless otherwise stated.

ASU 2019-10, Financial Instruments – Credit Losses, Derivatives and Heading, and Leases: Effective Dates

3 ASU 2018-12 is not fully aligned with the requirements of IFRS 17. For SEC filers, excluding those eligible to be ‘smaller reporting companies’, the effective date of the ASU is January 1, 2022. For all other entities, including ‘smaller reporting companies’, the effective date is January 1, 2024. 

4 The FASB issued revised Exposure Draft, Simplifying the Classification of Debt in a Classified Balance Sheet, on September 12, 2019. The Basis for Conclusions states that the proposed amendments should make US GAAP more consistent with IFRS Standards. It goes on to say that, however, differences would still remain between US GAAP and IFRS Standards for classifying debt arrangements with covenant violations. Further decisions made by the amendments to IAS 1 and the FASB on amendments to ASC 470 could ultimately affect consistency between the two standards.

5 IAS 37, Provisions, Contingent Liabilities and Contingent Assets.


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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