Insight

Q2 2021 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 – June 4, 2021

Standard-setting activities are returning to a normal pace after time spent dealing with the financial reporting challenges of COVID-19. 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. Plus, the IFRS Foundation Trustees are proposing to create a new International Sustainability Standards Board, which would expand the IFRS Foundation’s standard-setting oversight beyond financial reporting.

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 dates1:

And in On the radar, we provide an overview of the IFRS® Foundation and US regulator activities related to environmental, social and governance (ESG) matters.

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

Financial statement preparers may also find our IFRS Standards applicability tool a helpful resource to identify the list of standards to apply for the first time, and those that are available for early adoption.

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

COVID-19-Related Rent Concessions beyond 30 June 2021 (Amendments to IFRS 16, Leases)3extend by one year the relief available to lessees to account for COVID-19 related rent concessions. The original practical expedient only covered rent concessions that reduce lease payments due on or before June 30, 2021.

The practical expedient permits lessees not to assess whether eligible COVID-19 related rent concessions are lease modifications, and to account for them as if they were not lease modifications.

After the amendments, 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, 2022; and
  • there are no other ‘substantive’ changes to the lease.

The practical expedient is optional and must be applied consistently to all lease contracts with similar characteristics and in similar circumstances.

A lessee that chose to apply the original practical expedient must consistently apply the extension to eligible contracts with similar characteristics and in similar circumstances.

This means that a company may be required to reverse previous lease modification accounting for a rent concession that was ineligible for the original version of the practical expedient but becomes eligible under the extension.

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 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 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, 2022; and
  • includes specific guidance on acceptable accounting approaches for certain types of concessions (e.g. rent deferrals).

KPMG resources:

 

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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 related 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 214, 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 probable5 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 cost of producing those items (to which IAS 26 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 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 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), 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 137.

No equivalent under US GAAP.

KPMG resources:

Article: Do you have an onerous contract?

Article: Accounting for proceeds before an asset’s intended use

Article: Annual improvements to IFRS® Standards


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 contracts8.

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 Non-current (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 IFRS Interpretation Committee recently confirmed how the amendments could affect the classification of debt with covenants. This topic will be further discussed by the IASB Board.

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). While the FASB issued a revised exposure draft9 in 2019 intended to bring US GAAP and IFRS Standards closer, the FASB removed the project from its technical agenda in April 2021.

Disclosure of Accounting Policies (Amendments to IAS 1, Presentation of Financial Statements, and IFRS Practice Statement 2, Making Materiality Judgements), continue the IASB Board’s clarifications on applying the concept of materiality. These amendments help companies provide useful accounting policy disclosures, including:

  • requiring companies to disclose their material accounting policies rather than their significant accounting policies;
  • clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and do not need to be disclosed; and
  • clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material.

The IASB Board also amended IFRS Practice Statement 2 to include guidance and examples on the application of materiality to accounting policy disclosures.

US GAAP financial statements must include a description of all significant accounting policies. Assessing which accounting policies are considered ‘significant’ is a matter of management judgment.

Definition of Accounting Estimates (Amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors), clarify how companies distinguish changes in accounting policies from changes in accounting estimates, with a primary focus on the definition of and clarifications on accounting estimates. The distinction between the two is important because changes in accounting policies are applied retrospectively, whereas changes in accounting estimates are applied prospectively.

The amendments clarify that accounting estimates are monetary amounts in the financial statements that are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy.

Like IFRS Standards, US GAAP distinguishes changes in accounting principles (applied retrospectively) from changes in accounting estimates (applied prospectively). However it does not explicitly define accounting principles vs. estimates.

 

Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12, Income Taxes), clarify how companies account for deferred taxes on transactions such as leases and decommissioning obligations, with a focus on reducing diversity in practice.

The amendments narrow the scope of the initial recognition exemption (IRE) so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision.

Unlike IFRS Standards, there is no exemption from recognizing a deferred tax asset or liability for the initial recognition of an asset or liability in a transaction that is not a business combination.

As a result, the amendments to IAS 12 conform the accounting for deferred taxes that arise at inception of a lease or decommissioning provision (asset retirement obligations) with US GAAP.

KPMG resources:

Article: Accounting for insurance contracts under IFRS 17

Article: IFRS Perspectives: IFRS 17: Accelerating implementation while managing costs

Resource page: Insurance (IFRS Standards)

Article: Insurance – IFRS 4 amendments

Article: Amendments to classification of liabilities (IAS 1)

Article: Applying materiality when preparing financial statements

Article: Accounting policy or estimate?

Article: Rent concessions – Lessee relief extended

Article: Recognising deferred tax on leases

 

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On the radar

Sustainability and ESG (environmental, social and governance) reporting.

ESG reporting is gaining momentum with the Trustees of the IFRS Foundation moving forward with the steps required for the formation of a new International Sustainability Standards Board (ISSB). The ISSB’s remit would be to address the demand for sustainability information that is relevant to enterprise value creation and is globally consistent, comparable and reliable. The Trustees have proposed changes to the IFRS Foundation’s constitution as the latest step toward the creation of the ISSB, with comments open until July 29, 2021. Read about the initiative here.

The IFRS Foundation initiative comes amid growing US interest in ESG reporting and SEC developments. Having announced in February a focus on climate-related disclosures, the SEC is seeking public comments on a series of questions primarily related to climate-related disclosures, by June 13, 2021. In addition, the FASB recently released a staff educational paper to highlight how environmental matters might affect financial statements.

As further evidence of the growing significance of ESG reporting, in April 2021 the European Commission proposed a Corporate Sustainability Reporting Directive that would significantly expand ESG reporting for companies operating in the EU.

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 that extend the availability of the practical expedient are effective for annual periods beginning on or after April 1, 2021, with early adoption permitted.
  4. IFRIC 21, Levies
  5. Probable under US GAAP is generally understood as being a higher threshold than probable (more likely than not) under IFRS Standards.
  6. IAS 2, Inventories
  7. IFRS 13, Fair Value Measurement
  8. 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.
  9. Simplifying the Classification of Debt in a Classified Balance Sheet


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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