Insight

Q4 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 LLP

+1 212-872-5766

From the IFRS Institute – December 4, 2020

Responding quickly to the challenges of COVID-19, the International Accounting Standards Board (the IASB® Board) deferred the effective dates for certain standards and amendments, and granted relief to lessees in accounting for rent concessions. Regular standard-setting activities have now resumed, with the issuance of the long-awaited amendments to the new insurance standard (IFRS 17), and the Phase 2 amendments related to the interest rate benchmark reform. Our semi-annual outlook is a quick aid to help IFRS Standards preparers in the US keep track of coming changes to IFRS Standards and to assess the relevance to their financial statements.

The following summaries highlight new authoritative guidance issued by the IASB Board, provide a high-level comparison to US GAAP, and identify resources for further reading. The content is organized by effective dates1.

And in On the radar, we provide an overview of the IASB Board and FASB standard-setting activities in continued response to COVID-19. We also highlight rising scrutiny from standard setters and regulators on reverse factoring arrangements, also known as structured payables or supplier finance programs.

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
Definition a Business (Amendments to IFRS 3, Business Combinations), clarify and narrow 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 screen 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.

Definition of Material (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 and the Conceptual Framework. 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, it provides a framework that is consistent with the precedent on ‘materiality’ established by the US Supreme Court, and with the SEC staff’s interpretive guidance that is derived from the Supreme Court precedent. For this reason, we believe that all companies should consider the SEC staff’s interpretive guidance on materiality in conjunction with financial statements preparation by management. The Supreme Court has held that a fact is material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available. This evaluation involves both quantitative and qualitative aspects.

Interest Rate Benchmark Reform (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).

See below (amendments effective in 2021) for more on IBOR Reform – Phase 2.

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.2

COVID-19-Related Rent Concessions (Amendments to IFRS 16, Leases)3, permit 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 is ‘substantially the same’ as or 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. There is no practical expedient for lessors.

FASB staff guidance (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 ones 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 Standards, the FASB practical expedient:

  • applies to lessors as well as lessees;
  • is more permissive with respect to eligibility – 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 Although rare, the Conceptual Framework may be used by preparers when developing accounting policies where no IFRS Standards apply to a particular transaction.

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Effective January 1, 20211

Amendments to existing standards

New IFRS Standards requirements Comparison to US GAAP
Interest Rate Benchmark Reform—Phase 2 (Amendments to IFRS 9, Financial Instruments, IAS 39, Financial Instruments: Recognition and Measurement, IFRS 7, Financial Instruments: Disclosures, IFRS 4, Insurance Contracts, and IFRS 16, Leases), provide a practical expedient for modifying a financial contract or a lease for lessees as a result of IBOR reform (IBOR reform – Phase 2). The amendments also allow a series of exemptions from certain rules around hedge accounting, including the need to discontinue existing hedging relationships as a result of changes to hedging documentation required by IBOR reform.

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.2

KPMG resources:

 

 

Effective January 1, 20221

Amendments to existing standards

New IFRS Standards requirements Comparison to US GAAP
Onerous Contracts—Cost of Fulfilling a Contract (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. Such costs include both the incremental costs of the contract (i.e. costs a company would avoid if it did not have the contract like direct labor and materials) and an allocation of other costs that relate directly to fulfilling 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.

Reference to the Conceptual Framework (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 applies 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 applies 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 does not recognize a contingent asset at the acquisition date.

Unlike IFRS Standards, assets and liabilities that arise from contingencies are recognized in the acquisition accounting only if either of the following applies: if fair value is determinable, the contingency is recognized at its fair value at the acquisition date; if fair value is not determinable, it is recognized at its estimated amount if it is probable4 and reasonably estimable.

Proceeds before Intended Use (Amendments to IAS 16, Property, Plant and Equipment (PPE)), 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 are recognized in profit or loss, together with the costs of producing those items (to which IAS 25 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 the determination and allocation of such costs may require significant estimation and judgment. 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 reaches its intended use on or after the beginning of the earliest period presented in the financial statements in which the company first applies the amendments. They can be early adopted.

Proceeds from selling items before the related PPE is available for its 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 US GAAP, except for PPE to be rented or sold.

 

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Annual Improvements to IFRS Standards 2018–2020 Cycle
New IFRS Standards requirements Comparison to US GAAP
Amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards, 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%’ test for the 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%’ test for the derecognition of financial liabilities, considering fees paid or received between the borrower and the lender. However, derecognition and modifications of financial liabilities 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 reduces 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 136.

No equivalent under US GAAP.

KPMG resources:


Effective January 1, 20231

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 reduce diversity in the accounting for insurance contracts.

Insurers also benefit from a temporary exemption from IFRS 9, Financial Instruments, until IFRS 17 is effective.

Unlike IFRS Standards, the guidance addressing long-duration contracts issued by insurers and reinsurers under US GAAP applies only to insurance companies. The FASB has made significant changes to the accounting for long-duration contracts7.

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

 

Amendments to existing standards
New IFRS Standards requirements Comparison to US GAAP
Classification of Liabilities as Current or Noncurrent (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 exist at the reporting date 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.

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 draftin 2019 to bring US GAAP and IFRS Standards closer, but differences remain for classifying debt arrangements.

KPMG resources:

 

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On the radar

Standard-setting resumes

In response to COVID-19, the IASB Board has made significant changes to its work plan, by granting lessees relief for COVID-19 related rent concessions, and delaying certain projects and effective dates. For example, the effective dates of IFRS 17, the new insurance standard, and the IAS 1 amendments relating to classification of liabilities as current or noncurrent have been extended to 2023.

Further, the IFRS Foundation recently made available a summary on the views expressed by an interdisciplinary panel, Applying IFRS Standards in 2020–impact of COVID-19. The summary discusses the challenges companies face in preparing their financial statements in the current environment, with a highlight on estimates and assumptions used in the process.

However, regular standard-setting activities have now resumed – most notably with the issuance of the long-awaited amendments to IFRS 17, and the Phase 2 amendments related to the interest rate benchmark reform.

Similarly, the FASB has now resumed normal standard-setting activities after pausing to focus on the impacts of COVID-19.

To monitor the respective Boards’ activities, we encourage you to check the following KPMG websites frequently: Global IFRS Institute for updates on IFRS Standards, and Financial Reporting View for updates on US GAAP.

Supply chain financing – reverse factoring

In a reverse factoring arrangement, a financial institution agrees to pay amounts a customer owes to its suppliers and the customer agrees to pay the financial institution at a date later than suppliers are paid. Reverse factoring arrangements have become very popular in recent years. In the absence of specific guidance, presentation and disclosure practices are mixed and diverse.

The IFRS Interpretations Committee (IFRS IC) recently discussed the presentation and disclosure for reverse factoring. In particular, it considered how the customer presents liabilities to pay for goods and services received when the related invoices are part of a reverse factoring arrangement, as well as statement of cash flows and disclosure implications.

The Agenda Decision could be finalized in December 2020, and, if so, companies will need to consider their conclusions in the December 31, 2020 financial statements. Read the KPMG summary of 2020 IFRS IC agenda decisions to understand the latest discussions.

This topic is also of interest in the United States where the FASB recently added a project to develop disclosure requirements that enhance transparency about the use of supplier finance programs involving trade payables. The SEC staff has also encouraged companies to disclose information about these programs.

Contributing authors

Valerie Boissou

Valerie Boissou

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-1723
Eliott Vines

Eliott Vines

Managing Director, Dept. of Professional Practice, KPMG US

+1 214-840-2260

Footnotes

  1. Effective dates are for annual periods beginning on or after the stated date. Early adoption is permitted unless otherwise stated.
  2. ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
  3. 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.
  4. Probable under US GAAP is generally understood as being a higher threshold than probable (more likely than not) under IFRS Standards.
  5. IAS 2, Inventories
  6. IFRS 13, Fair Value Measurement
  7. 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.
  8. Proposed ASU, Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent)


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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