Insight

Q2 2022 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 3, 2022

2022 has been quiet so far, in terms of new accounting standards or amendments being issued by the International Accounting Standards Board (IASB® Board) or becoming effective. Newly effective requirements affect onerous contracts and proceeds received before the intended use of property, plant and equipment. Further, preparers should take this as an opportunity to 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 Standards and 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:

  • Effective January 1, 2022
  • Effective January 1, 2023

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.

As a reminder, to be in compliance with IFRS 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.

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), clarifies 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), 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 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 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 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 Standards, US GAAP applies a ’10%’ test to determine whether a financial liability has been substantially modified, 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 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 of biological assets, thereby aligning the fair value measurement requirements in IAS 41 with those in IFRS 135. 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 on accounting for insurance contracts under IFRS 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 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 contracts6.

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), clarifies 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.

To address questions raised about the application of the amendments to debt with covenants, the IASB Board published further proposals, including to defer the effective date of the 2020 amendments to no earlier than January 1, 2024. The comment period closed in March 2022, and the IASB Board is expected to outline next steps in June 2022.

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

Disclosure of Accounting Policies (Amendments to IAS 1, Presentation of Financial Statements, and IFRS Practice Statement 2, Making Materiality Judgements), continues 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 judgement.

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 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 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:

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 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
William Jones

William Jones

Senior Manager, Dept. of Professional Practice, KPMG US

+1 214-840-8232

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