Q4 2022 new IFRS® Accounting Standards and amendments: Are you ready?

• 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 it).

Unlike IFRS Accounting Standards, US GAAP does not have a general requirement to recognize onerous contracts. Instead, onerous contracts are accounted for under specific Codification (Sub)Topics depending on the type of contract involved. These requirements differ from and are narrower than IFRS Accounting Standards.

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

An acquirer applies the definition of a liability in IAS 37 – not 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 21², 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 as of the acquisition date. In addition, the amendments clarify that the acquirer does not recognize a contingent asset at the acquisition date.

• If fair value is determinable, the contingency is recognized at its fair value at the acquisition date.
• If fair value is not determinable, the contingency is recognized at its estimated amount if an outflow of resources is probable³ and reasonably estimable.

Proceeds before Intended Use (Amendments to IAS 16, Property, Plant and Equipment (PPE)), introduces 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 2⁴ applies). Therefore, 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.

Determining how to characterize 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.

Under US GAAP, 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.

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 Accounting Standards after 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 Accounting Standards.

• Article: Do you have an onerous contract?
• Article: Accounting for proceeds before an asset’s intended use
• Article: Annual improvements to IFRS^® Standards

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

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

Unlike IFRS Accounting 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 contracts.⁶

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

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

• requiring companies to disclose their material accounting policies instead of 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 also amended IFRS Practice Statement 2 to include guidance and examples on applying materiality to accounting policy disclosures.

Definition of Accounting Estimates (Amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors), clarifies 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 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.

Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12, Income Taxes), clarifies 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 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 Accounting Standards, US GAAP does not contain an 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 align 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 Accounting Standards)
• Article: Insurance – IFRS 4 amendments
• Article: Classification of debt with covenants
• Article: Applying materiality when preparing financial statements
• Article: Accounting policy or estimate?
• Article: Recognising deferred tax on leases

Lease Liability in a Sale and Leaseback (Amendments to IFRS 16, Leases) requires a seller-lessee to account for variable lease payments that arise in a sale-and-leaseback transaction as follows:

• On initial recognition, include variable lease payments when measuring a lease liability arising from a sale-and-leaseback transaction.
• After initial recognition, apply the general requirements for subsequent accounting of the lease liability such that no gain or loss relating to the retained right of use is recognized.

Seller-lessees are required to reassess and potentially restate sale-and-leaseback transactions entered into since the implementation of IFRS 16 in 2019.

Unlike IFRS Accounting Standards, US GAAP does not include variable lease payments in the measurement of a lease liability arising from a sale-and-leaseback transaction.

Accounting for sale-and-leaseback transactions under US GAAP overall differs significantly from IFRS Accounting Standards; therefore, dual reporters may need to separately track the accounting for these transactions.

Classification of Liabilities as Current or Non-current, and Non-current Liabilities with Covenants (Amendments to IAS 1, Presentation of Financial Statements) published in 2020 and 2022 respectively, clarify that the classification of liabilities as current or noncurrent is based solely on a company’s right to defer settlement for at least 12 months at the reporting date. The right needs to exist at the reporting date and must have substance.

Only covenants with which a company must comply on or before the reporting date may affect this right. Covenants to be complied with after the reporting date do not affect the classification of a liability as current or noncurrent at the reporting date. However, disclosure about covenants is now required to help users understand the risk that those liabilities could become repayable within 12 months after the reporting date.

The amendments also clarify that the transfer of a company’s own equity instruments is regarded as settlement of a liability. If a liability has any conversion options, then those generally affect its classification as current or noncurrent, unless these conversion options are recognized as equity under IAS 32, Financial Instruments: Presentation.

The current and noncurrent classification of liabilities was not converged between IFRS Accounting Standards and US GAAP before the amendments to IAS 1. We expect differences will still exist once the amendments are effective. In April 2021, the FASB removed from its technical agenda a project intended to bring US GAAP closer to IFRS Accounting Standards.

US GAAP requires disclosure of adverse consequences of expected covenant violation like the IAS 1 amendments.

• Article Lease liability in a sale-and-leaseback
• Article Lease accounting: IFRS^® Standards vs US GAAP
• Article Classifying liabilities as current or noncurrent
• Article Current/noncurrent debt classification: IFRS^® Standards vs US GAAP