Insight

Q2 2020 new IFRS® Standards and amendments: Are you ready?

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

Kevin Bogle

Kevin Bogle

IFRS Institute Advisory Leader, KPMG US

+1 212-872-5766

From the IFRS Institute – May 29, 2020

IASB® Board acknowledges the COVID-19 related challenges that stakeholders face in effectively implementing new and amended standards. Certain accommodations have been made, such as deferring effective dates, extending project timelines and comment periods and providing relief on accounting for rent concessions by lessees. The FASB has made similar responses to COVID-19 to support stakeholders through the current situation. Although the headline of this quarter is COVID-19, some amendments are effective in 2020 and beyond. Our semi-annual outlook is a quick aid to help IFRS Standards preparers in the US keep track of imminent IFRS Standards changes and to assess the relevance to their financial statements.

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 explain how the IASB Board and FASB are responding to COVID-19.

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

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. The test is optional under IFRS Standards.

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

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...” In addition, this evaluation involves 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 temporary but mandatory relief from specific hedge accounting requirements to address potential effects of the uncertainly in the lead up to IBOR reform (IBOR reform – Phase 1).

New proposals2 have been issued to provide additional relief post-IBOR reform (IBOR reform – Phase 2), including relief related to debt and lease modifications, hedge accounting documentation, and disclosure requirements. The comment period ended on May 25, 2020 and the final amendments are expected in Q3 2020.

The FASB has provided optional relief for a limited time to ease the accounting burden associated with transitioning away from reference rates in the area of contract modifications, hedge accounting and held-to-maturity debt securities.3

Amendments to IFRS 16, Leases, COVID-19-Related Rent Concessions4permit lessees not to assess whether eligible COVID-19 related rent concessions are lease modifications, and account for them as if they were not lease modifications.

Eligible rent concessions are those arising as a ‘direct consequence’ of COVID-19 and for which:

  • the revised consideration for the lease remains ‘substantially the same’ or is less than the consideration for the lease before the concession;
  • any reduced payments were originally due on or before June 30, 2021; and
  • there are no other ‘substantive’ changes to the lease.

For lessees, this is an optional practical expedient to be applied consistently to all lease contracts with similar characteristics and in similar circumstances. The practical expedient is not available to lessors.

FASB staff guidance (hereinafter, the practical expedient) permits a company to forgo an evaluation of the enforceable rights and obligations of the original lease contract. Instead, the company can elect to account for eligible COVID-19 related rent concessions, whatever their form (e.g. rent deferral, forgiveness or other) either:

  • as if they were part of the enforceable rights and obligations of the parties under the existing lease contract; or
  • as a lease modification.

Eligible COVID-19 related concessions are those where the changes to the lease resulting from and accompanying the concession do not result in a substantial increase to the rights of the lessor or the obligations of the lessee – e.g. leases for which the total payments required by the contract will be substantially the same as or less than the total payments required by the contract pre-concession.

Unlike IFRS, the FASB practical expedient applies to lessors as well as lessees; it is more permissive with respect to eligibility. That is, it does not require either (1) that the concession either be a direct consequence of COVID-19 (merely that it is related to COVID-19) or (2) result in reduced payments only through June 30, 2021; and includes specific guidance on acceptable accounting approaches for certain types of concessions (e.g. rent deferrals).

KPMG resources:


In March 2018, the IASB Board revised its Conceptual Framework. The effective date for preparers is annual periods beginning on or after January 1, 2020.1 The Conceptual Framework is typically used by preparers when developing accounting policies where no IFRS Standards apply 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 two-year deferral to 2023, to be confirmed by the 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 has made significant changes to the accounting for long-duration contracts.5

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:


Effective January 1, 20221

Amendments to existing standards  
New IFRS Standards requirements Comparison to US GAAP

Amendments to IAS 1, Presentation of Financial Statements, clarify that the classification of liabilities as current or noncurrent is based solely on a company’s right to defer settlement at the reporting date. The right needs to be unconditional and must have substance. The amendments also clarify that the transfer of a company’s own equity instruments is regarded as settlement of a liability, unless it results from the exercise of a conversion option meeting the definition of an equity instrument.

In response to COVID-19, the effective date is pending a one-year deferral to 2023, to be confirmed by the IASB Board mid-2020. Early adoption is permitted.

The current and noncurrent classification of liabilities is not currently converged between IFRS Standards and US GAAP. Unlike IFRS Standards, US GAAP requires, in certain situations, a likelihood assessment at the reporting date as to whether the creditor will accelerate repayment of the debt (e.g. in the case of subjective acceleration clauses). The FASB issued a revised exposure draft6 in 2019 intended to bring US GAAP and IFRS Standards closer, but differences would remain for classifying debt arrangements.
Amendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets, clarify that when assessing if a contract is onerous, the cost of fulfilling the contract includes all costs that relate directly to the contract – i.e. a full-cost approach. Such costs 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 direct costs incurred on activities required to fulfill the contract – e.g. contract management and supervision, or depreciation of equipment used in fulfilling the contract. Unlike IFRS Standards, US GAAP does not have a general requirement to recognize onerous contracts. Instead, onerous contracts are accounted for under specific Codification topics/subtopics depending on the type of contract involved. These requirements differ from and are narrower than IFRS Standards. 

Further amendments to IFRS 3, Business Combinations, update references in IFRS 3 to the revised 2018 Conceptual Framework. To ensure that this update in referencing does not change which assets and liabilities qualify for recognition in a business combination, or create new Day 2 gains or losses, the amendments introduce new exceptions to the recognition and measurement principles in IFRS 3.

An acquirer should apply the definition of a liability in IAS 37 – rather than the definition in the Conceptual Framework – to determine whether a present obligation exists at the acquisition date as a result of past events. For a levy in the scope of IFRIC 21, the acquirer should apply the criteria in IFRIC 21 to determine whether the obligating event that gives rise to a liability to pay the levy has occurred by the acquisition date. In addition, the amendments clarify that the acquirer should not recognize a contingent asset at the acquisition date.

Unlike IFRS Standards, assets and liabilities that arise from contingencies are generally recognized in the acquisition accounting if they are probable and reasonably estimable.

Amendments to IAS 16, Property, Plant and Equipment (PPE) – Proceeds before Intended Use, introduce new guidance. Proceeds from selling items (e.g. samples) before the related PPE is available for its intended use can no longer be deducted from the cost of PPE. Instead such proceeds should be recognized in profit or loss, together with the costs of producing those items (to which IAS 27 applies). Accordingly, a company will need to distinguish between:

  • costs of producing and selling items before the PPE is available for its intended use; and
  • costs of making the PPE available for its intended use.

Making this allocation of costs may require significant estimation and judgement. Companies in the extractive industry in particular may need to monitor costs at a more granular level.

The amendments apply retrospectively but only for new PPE that reach their intended use on or after the beginning of the earliest period presented in the financial statements in which the entity first applies the amendments. They can be early adopted.

Proceeds from selling items before the related PPE is available for intended use are recognized in profit or loss unless the property is being developed for rental or sale, in which case income (but not a loss) from incidental operations is recognized as a reduction to the cost of the property.

The amendments to IAS 16 therefore better align the accounting for incidental income to that under US GAAP, except for PPE to be rented or sold.

 

Annual Improvements to IFRS Standards 2018–2020 Cycle 
New IFRS Standards requirements Comparison to US GAAP
Amendments to IFRS 1, First-time Adoption of IFRS, simplify the application of IFRS 1 by a subsidiary that becomes a first-time adopter of IFRS Standards later than its parent. If such a subsidiary applies IFRS 1.D16(a), then it may elect to measure cumulative translation differences at amounts included in the consolidated financial statements of the parent, based on the parent’s date of transition to IFRS Standards. No equivalent under US GAAP.
Amendments to IFRS 9, Financial Instruments, clarify which fees to include in the ’10 percent’ test for derecognition of financial liabilities. A borrower includes only fees paid or received between itself and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. Like IFRS Standards, US GAAP applies a ’10 percent’ test for derecognition of financial liabilities, considering fees paid or received between the borrower and the lender. Derecognition and modifications of financial liabilities, however, remains a complex area where other differences between IFRS Standards and US GAAP arise.
Amendments to Illustrative Examples accompanying IFRS 16, remove the illustration of payments from the lessor for lessee-owned leasehold improvements. As previously drafted, this example was not clear about whether the payments meet the definition of a lease incentive. US GAAP does not contain an example of lessor payments for lessee-owned leasehold improvements. Under both IFRS Standards and US GAAP, a lessor payment for lessee-owned leasehold improvements is a lease incentive that should reduce the lease payments.
Amendments to IAS 41 Agriculture, remove the requirement to exclude cash flows for taxation when measuring fair value thereby aligning the fair value measurement requirements in IAS 41 with those in IFRS 138. No equivalent under US GAAP.

KPMG resources:

 

On the radar

Standard setters respond to COVID-19

In response to COVID-19, the IASB Board has made significant changes to its work plan, proposing to extend effective date comment deadlines and project timelines, and taking on new priority projects.

  • The effective date for the amendments for the current versus noncurrent classification of liabilities has been proposed to be extended by one year.
  • The IASB Board has relaxed IFRS 16 requirements for lessees accounting for rent concessions in lease agreements.
  • The comment periods for the following projects have been extended by three months:
    • Exposure Draft, General Presentation and Disclosures, extended to September 30, 2020
    • Discussion Paper, Business Combinations – Disclosures, Goodwill and Impairment, extended to December 31, 2020
  • The IASB Board still intends to advance time-sensitive projects – including IBOR Phase 2 and amendments to IFRS 17 under the original project plans.

As the COVID-19 situation continues, the IASB Board could make additional changes to its work plan, and we encourage you to check our Global IFRS Institute frequently for updates.

Similarly, the FASB has extended effective dates for the following standards, causing a wider gap for dual reporters that are private US companies:

  • The effective date of ASC 606, Revenue from Contracts with Customers, has been extended by one year for all private companies that have not yet adopted the guidance9.
  • The effective date of ASC 842, Leases, for private companies and public not-for-profit entities has been extended by one year9.

The FASB plans to continue its project on reporting of gifts-in-kind by not-for-profit entities in the near term, but will defer issuing any other proposed updates until later in 2020. In addition, other projects that were slated for completion in Q2 2020 will not be completed until later in 2020. We encourage you to closely monitor the FASB’s technical agenda for potential further delays in future standard-setting activities.

Multiple tax consequences of recovering an asset (IAS 12)

In a recent Agenda Decision, the IFRS Interpretations Committee addressed the accounting for deferred tax in a scenario in which the recovery of the carrying amount of an asset results in multiple tax consequences which cannot be offset. This may, for example, apply to an amortizable license acquired through a business combination in a jurisdiction in which no tax deduction may be available for the purposes of the corporate tax while the asset is used, but the full amount may be deductible for the purposes of the capital gains tax when the asset reaches the end of its life, and corporate and capital gains and losses cannot be offset.

Contributing authors

Valerie Boissou

Valerie Boissou

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-1723
Rika Tanaka

Rika Tanaka

Managing Director, Dept. of Professional Practice, KPMG US

+1 212-954-6291

Footnotes

 
  1. Effective dates are for annual periods beginning on or after the stated date. Early adoption is permitted unless otherwise stated.
  2. Exposure Draft, Interest Rate Benchmark Reform – Phase 2: Proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4, and IFRS 16
  3. Our Defining Issues, FASB provides relief to companies for reference rate reform
  4. The amendments to IFRS 16 are effective for annual periods beginning on or after June 1, 2020, with early adoption permitted. A company can therefore apply the amendments in annual periods beginning January 1, 2020 by adopting them early.
  5. 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.
  6. FASB Exposure Draft, Simplifying the Classification of Debt in a Classified Balance Sheet
  7. IAS 2, Inventories
  8. IFRS 13, Fair Value Measurement
  9. Defining Issues, FASB discusses and responds to COVID-19

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

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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