Q2 2023 new IFRS® Accounting Standards and amendments: Are you ready?

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 benefited from a temporary exemption from IFRS 9, Financial Instruments, until IFRS 17 was 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.²

With the implementation of IFRS 17, the accounting for insurance contracts differs 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 by:

• 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 2³ 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.

Further, Concepts Statement No. 8 states that a uniform quantitative threshold for materiality cannot be specified because materiality is an entity-specific aspect of relevance.

When preparing financial statements under both US GAAP and IFRS Accounting Standards, management of SEC registrants as well as their auditors apply guidance in SEC Staff Accounting Bulletin No. 99 – Materiality. This requires consideration of both quantitative and qualitative factors.

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 and guidance 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 certain 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 companies will need to recognize a deferred tax asset and a deferred tax liability arising from transactions that give rise to equal and offsetting temporary differences.

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.

Under US GAAP, GloBE is an alternative minimum tax (AMT) because it is a separate but parallel system for a company to pay a minimum level of tax. Therefore, companies will not record GloBE-specific deferred taxes or remeasure existing deferred taxes under local regular income tax systems to the GloBE rate, like IFRS Accounting Standards.

Unlike IFRS Accounting Standards, additional disclosures related to the GloBE top-up tax are not required under US GAAP.

KPMG resources:

• Resource page: Insurance (IFRS Accounting Standards)
• Article: Are you in scope of IFRS 17?
• Article: Classification of debt with covenants
• Article: Applying materiality when preparing financial statements
• Article: Accounting policy or estimate?
• Article: Recognising deferred tax on leases
• Hot Topic: Global Minimum Tax

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, they 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.

Like IFRS Accounting Standards, US GAAP requires disclosure of information to help users understand the risk that those liabilities could become repayable after the reporting date, e.g. adverse consequences of expected covenant violation. However, unlike the IAS 1 amendments, there is for example no requirement to disclose potential non-compliance with future covenants as if those were to be assessed at the reporting date.

Supplier Finance Arrangements (Amendment to IAS 7, Statement of Cash Flows and IFRS 7, Financial Instruments: Disclosures) requires an entity to disclose qualitative and quantitative information about its supplier finance programs, such as terms and conditions – including, for example, extended payment terms and security or guarantees provided.

Amongst other characteristics, IAS 7 explains that a supplier finance arrangement provides the entity with extended payment terms, or the entity's suppliers with early payment terms, compared to the related invoice payment due date.

Like IFRS Accounting Standards, ASU 2022-04 creates Subtopic 405-50 that requires an entity to disclose qualitative and quantitative information about its supplier finance programs.

Unlike IFRS Accounting Standards, the characteristics required to qualify as a supplier finance program under US GAAP do not include the entity obtaining extended payment terms under the arrangement.

Unlike IFRS Accounting Standards, US GAAP does not require disclosure of:

• the carrying amount of the outstanding financial liabilities that are part of the programs for which suppliers have already received payment from the finance provider or intermediary; or
• the range of payment due dates for both outstanding financial liabilities that are part of the programs and trade payables that are not. 

KPMG resources:

• 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
• Article: Disclosure of supplier finance arrangements
• Podcast: Supplier finance programs