Q2 2019 new IFRS standards and amendments: Are you ready?
Q2 2019 new IFRS standards and amendments: Are you ready?
Insight

Q2 2019 new IFRS standards and amendments: Are you ready?

KPMG’s semi-annual outlook helps IFRS preparers in the US keep track of imminent IFRS changes and assess their relevance.

From the IFRS Institute – May 31, 2019

The revenue and financial instruments standards have been implemented, and the focus this year is on leases and uncertain income tax treatments. But beyond IFRS 16, IFRIC 23 and a number of smaller amendments that are effective this year, other standards and amendments follow soon after. KPMG’s semi-annual outlook is a quick aid to help IFRS preparers in the United States keep track of imminent IFRS changes and to assess the relevance to their financial statements.

The following summaries provide an overview of new authoritative guidance issued by the IASB, provide a high-level comparison to US GAAP, and identify resources for further reading. The content is organized by effective dates:

In March 2018, the IASB amended its Conceptual Framework, which it can use immediately in its standard-setting activities. While the effective date for preparers is annual periods beginning on or after January 1, 2020, early application is permitted when developing accounting policies where no IFRS standard applies to a particular transaction.

Effective January 1, 20191

IFRS 16, Leases

New IFRS 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 legacy finance lease accounting.

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

IFRS 16 replaces IAS 17, Leases, and related interpretations. Early adoption is permitted if IFRS 15 is also adopted.

ASC 842, Leases, becomes effective at the same time as IFRS 16 for public companies, but is effective a year later for other entities. Early adoption is permitted.

Like IFRS, lessees will report on-balance sheet an asset and a liability for substantially all leases. Unlike IFRS, 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, lessor accounting is generally similar to previous guidance (with the exception of the elimination of leveraged leases) but differences from IFRS exist.

IFRS resources:


 

IFRIC 23, Uncertainty over Income Tax Treatments

New IFRS 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. At a high level, 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.

IFRS resources:


 

Amendments to existing standards

New IFRS 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 if they meet the other relevant requirements of IFRS 9.

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

Unlike IFRS, 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 form part of the net investment. It clarifies the interaction between IFRS 9, especially the expected loss impairment model, and IAS 28. 

Accordingly, 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 includes several differences from IFRS.

Like IFRS, 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.

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 other comprehensive income (except for amounts included in net interest).

While significant differences exist in the accounting for employee benefits between US GAAP and IFRS, these new IFRS requirements are largely consistent with existing guidance under US GAAP, except for the fact that US GAAP does not have a concept of an asset ceiling.

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 clarifications made for a business combination achieved in stages of 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) are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, other comprehensive income or equity.

Unlike IFRS, tax effects of tax-deductible dividends paid to shareholders are required to be attributed to continuing operations in the income statement.

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

Otherwise the tax is treated as additional income tax expense. Unlike IFRS, the analysis does not focus on the source of the distributable profits. This can lead to presentation differences from IFRS.

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 IFRS clarifications are largely consistent with existing guidance under US GAAP.
IFRS resources:


Effective January 1, 2020

Amendments to existing standards

New IFRS 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 under IFRS this screen test is optional.

The amended IFRS and US GAAP definitions of a business 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 IFRSs. Unlike IFRS, materiality is not specifically defined under authoritative US GAAP. However, the FASB Concept Statements, SEC guidance to be 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.
IFRS resources:


Effective January 1, 20211

IFRS 17, Insurance Contracts

New IFRS requirements Comparison to US GAAP

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

Early adoption is permitted to the extent that IFRS 9 and IFRS 15 are also adopted.

Unlike IFRS, the guidance addressing insurance contracts in US GAAP applies only to insurance entities. The FASB recently made significant changes in the accounting for long-duration contracts, which are not fully aligned with the requirements of IFRS 17 and are effective at a later date for entities that are not ‘public business entities’.

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

IFRS resources:

 

On the radar

In December 2018, the IASB proposed amendments to IAS 372 that could change how companies measure a contract that is onerous. Notably, the amendments would apply to customer contracts and could be significant for preparers with long-term contracts.

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 and (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 or recognizing onerous contract costs earlier. Except for certain specific guidance, US GAAP does not contain guidance on the recognition of onerous contracts and differences from IFRS often exist.

The comment period for the proposed amendments ended in April 2019 and the IASB is currently evaluating the feedback3.

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

2 IAS 37, Provisions, Contingent Liabilities and Contingent Assets
3 IASB work plan for onerous contracts
 
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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