Insight

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

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

From the IFRS Institute – December 2, 2022

2022 was relatively quiet in terms of newly effective or issued IFRS Accounting Standards and amendments. Amendments effective in 2022 affect onerous contracts and proceeds received before the intended use of property, plant and equipment. Amendments related to debt with covenants and sale-and-leaseback transactions were issued this year but are effective only in 2024. Preparers should, however, get ready for IFRS 17, Insurance Contracts, which becomes effective in 2023. Our semi-annual outlook is a quick aid to help preparers in the US keep track of coming changes to IFRS Accounting Standards and assess the relevance to their financial statements.

The following summaries highlight new authoritative guidance issued by the International Accounting Standards Board (IASB®), provide a high-level comparison to US GAAP, and identify resources for further reading. The content is organized by effective dates:1

Financial statement preparers may also find our IFRS Accounting 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.

As a reminder, to be in compliance with IFRS Accounting Standards, companies also need to timely implement all IFRS Interpretations Committee Agenda Decisions. Read the KPMG Perspectives article for a summary of 2022 Agenda Decisions.

And in On the radar, we highlight the IASB priorities for the 2022-2026 period, following its latest Agenda Consultation. See also the IFRS Foundation work plan for other projects that are currently in progress.

Effective January 1, 20221

Amendments to existing standards
New IFRS Accounting Standards requirements Comparison to US GAAP
Onerous Contracts—Cost of Fulfilling a Contract (Amendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets), clarifies that when assessing if a contract is onerous, the cost of fulfilling it 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 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.

Unlike IFRS Accounting Standards, US GAAP provides that assets and liabilities arising 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, 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.

 

Annual Improvements to IFRS Accounting Standards 2018–2020 Cycle
New IFRS Accounting 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 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.

No equivalent under US GAAP.
Amendments to IFRS 9, Financial Instruments, clarify which fees to include in the ’10%’ test to determine whether a financial liability has been substantially modified (i.e. the derecognition analysis). 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 Accounting Standards, US GAAP applies a ’10%’ test to determine whether a financial liability has been substantially modified (i.e. the derecognition analysis), considering fees paid or received between the borrower and the lender. However, the analysis of modification of financial liabilities remains a complex area where other differences between IFRS Accounting 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 unclear 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 Accounting 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 of biological assets, thereby aligning the fair value measurement requirements in IAS 41 with those in IFRS 13.5 No equivalent under US GAAP.
KPMG resources:

 

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Effective January 1, 20231

IFRS 17, Insurance Contracts
New IFRS Accounting Standards requirements Comparison to US GAAP  

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.

 

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

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.

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

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.

Like IFRS Accounting 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 versus estimates.

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:

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Effective January 1, 20241

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

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.

KPMG resources:

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On the Radar

IASB publishes Feedback statement: Latest Agenda Consultation

The IFRS Foundation Due Process Handbook requires the IASB to hold public consultation on its activities and its work plan every five years. In March 2021, the IASB launched its Latest Agenda Consultation. Based on the feedback received, the IASB has now set its priorities for 2022 to 2026.

The IASB is prioritizing collaborating with the new International Sustainability Standards Board (ISSB®) and is committed to ensuring connectivity in financial reporting to meets users' needs.

The IASB is not committing to lengthy ‘to-do’ lists on financial reporting matters. Instead, it is limiting its plans to:

  •  a new maintenance pipeline project on climate-related risks, that will address users' concerns about inconsistent application of IFRS Accounting Standards to climate related risk and insufficient disclosures in the financial statements about these risks. This narrow-scope project will research the causes of those concerns and consider whether and, if so, what actions might be needed;
  •  two new research pipeline projects on intangible assets and the statement of cash flows; and
  •  two projects that could be added to the work plan if additional capacity becomes available: operating segments and pollutant pricing mechanisms.

The IASB decided not to address crypto currencies and related transactions or going concern disclosures.

Possible areas of collaboration with the ISSB include the IASB’s current management commentary project and new intangibles project. Collaboration will help ensure that IFRS Accounting Standards and IFRS Sustainability Disclosure Standards complement each other and drive connectivity in financial reporting.

KPMG resources:

Climate change financial resource center – resource center on the financial reporting impacts of climate

Sustainability reporting page – latest standard-setting developments

Key Takeaways: 

Companies should periodically review IFRS IC Updates and the IFRS IC Compilation of Agenda Decisions, in which tentative and final Agenda Decisions are published, to consider the impact of those decisions on their accounting policies. The issues discussed by the IFRS IC are significant, and the impact on the financial statements could be material. Companies are expected to update their accounting policies timely to the extent that their accounting differs from that described in an Agenda Decision. Dual reporters should also consider any differences with US GAAP that might emerge through these Agenda Decisions. 

Footnotes

  1. Effective dates are for annual periods beginning on or after the stated date. Early adoption is permitted unless otherwise stated.
  2. IFRIC 21, Levies
  3. Probable under US GAAP is generally understood as being a higher threshold than probable (more likely than not) under IFRS Accounting Standards.
  4. IAS 2, Inventories
  5. IFRS 13, Fair Value Measurement
  6. 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.

Contributing authors

Valerie Boissou

Valerie Boissou

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-1723
Petre Kotev

Petre Kotev

Senior Manager, Dept. of Professional Practice, KPMG US

+1 212 872-3179

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