Financial Reporting
1. IFRS 19
On 9 May 2024, the International Accounting Standards Board (IASB) has issued IFRS 19 Subsidiaries without Public Accountability: Disclosures.
IFRS 19’s primary objective is to respond to stakeholder feedback on simplifying the preparation of eligible subsidiaries’ financial statements. Subsidiaries using the IFRS for SMEs Accounting Standards or any local generally accepted accounting principles (GAAP) for their own financial statements often maintain two different sets of accounting records because these requirements differ from those of the parent company under IFRS.
Preparers noted that parent companies reporting under IFRS face a choice between requiring subsidiaries to apply either IFRS or local generally accepted accounting principles (GAAP). Additionally, as discussed by Linda Mezon-Hutter, IASB Vice Chair, preparers often desire subsidiaries to use IFRS Accounting Standards with reduced disclosures which was not possible prior to the introduction of IFRS 19.
IFRS 19 aims to resolve these challenges by:
- Allowing subsidiaries to align their accounting policies with the group and prepare one single set of accounting records;
- Permitting reduced disclosures which are better suited for the users of the subsidiaries’ financial statements; and
- Helping subsidiaries present relevant information to users from these separate financial statements.
Subsidiaries eligible to apply IFRS 19 are those that:
- do not have public accountability; and
- have a parent (intermediate or ultimate) that applies IFRS Accounting Standards in their consolidated financial statements that are available for public use.
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2. IASB Concludes Business Combinations under Common Control
IFRS Accounting Standards issued by the IASB do not specify the accounting methods used for business combinations involving companies controlled by the same party (and hence under common control). This has resulted in different information being disclosed for similar transactions.
A discussion paper Business Combinations under Common Control was published back in November 2020. However, in November 2023, the IASB decided not to develop requirements for reporting BCUCCs.
To assist users’ understanding of this conclusion, the IASB published a project summary in April 2024 which specifies that this decision is based on the significant variation in the information needs of investors in different jurisdictions, making it challenging to develop standardised requirements. For example, nearly all users from China advocated for a book-value approach, while users from other jurisdictions favoured the acquisition method. This discrepancy posed difficulties for the IASB, particularly considering that BCUCCs are very common in China.
Furthermore, feedback received by the IASB indicated that the project was not deemed essential by users and was likely to deliver fewer benefits than originally anticipated in 2020. The decision to step away from the BCUCC project therefore stemmed from the lack of consensus among IASB board members and users regarding the measurement method.
References:
https://cdn.ifrs.org/news-and-events/news/2024/04/iasb-concludes-bcucc-project/
3. IASB - Accounting Treatment of Intangibles
The IASB is considering whether the IAS 38 Intangible Assets requirements remain relevant within today’s financial landscape. As a result, the IASB has launched a comprehensive review of accounting requirements for intangibles. This new project recognises that in the IASB’s third agenda consultation, stakeholders highlighted their concerns on deficiencies in the reporting of intangibles, specifically its scope, recognition and measurement requirements (such as the different accounting treatment of acquired and internally generated intangibles).
This project builds upon the research carried out by national standard setters on the topic, such as the Australian Accounting Standards Board (AASB), European Financial Reporting Advisory Group (EFRAG) and the UK Endorsement Board (UKEB), amongst others. In 2023, the UKEB published ‘Accounting for Intangibles: UK Stakeholders’ Views’, whereby the main concerns noted were that the Standard does not deal with intangibles which are dealt with within the current financial landscape and that IAS 38 is outdated in light of advances in technology and developments in the IASB’s (2018) Conceptual Framework.
Moreover, in May 2024, the UKEB published an ‘Intangibles Survey Report’, whereby the stakeholders acknowledged the relevance of intangibles to companies yet suggested an expectations gap between the importance of intangibles and the usefulness of disclosures in the financial statements.
Further information is yet to be made available by the IASB.
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4. IASB ED - Contracts for Renewable Electricity
Companies continuously utilise Power Purchase Agreements (PPAs) (physical and virtual) to purchase an amount of electricity generated from renewable sources. These PPAs form part of companies’ commitment to mitigate the negative effects of climate change. However, companies (i.e., the purchasers of PPAs) often face challenges in the application of the ‘own-use exemption’ as per paragraph 2.4 of IFRS 9 Financial Instruments as well as with the application of hedge accounting requirements for sellers and purchasers of PPAs.
On 8 May 2024, the IASB published an Exposure Draft (ED) proposing narrow-scope amendments both within IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures, as to ensure that financial statements more accurately reflect the effects that renewable energy contracts have on a company.
The proposals seek to address these challenges by:
- Clarifying how the ‘own use’ requirements would apply;
- Permitting hedge accounting if these contracts are used as hedging instruments; and
- Adding disclosure requirements to enable investors to understand the effects of these contracts on a company’s financial performance and future cash flows.
The proposed amendments would enable a company to apply the ‘own use’ exemption to certain PPAs depending on:
- Their purpose, design, and structure;
- The reasons for past and expected sales of unused electricity; and
- Whether such sales are consistent with the company’s expected purchases or usage requirements.
This is expected to exclude certain PPAs from the scope of IFRS 9, possibly allowing for simpler accounting for entities that enter into such contracts for operational purposes rather than for trading or speculation.
In order to narrow the scope of application of these amendments, the proposed changes are applicable to renewable electricity contracts which meet both of the following characteristics:
- The nature of the underlying source of the electricity is nature dependant (i.e., the supply of electricity cannot be guaranteed for specified times or specified volumes); and
- The contractual provisions expose the purchaser to the risk that the volume of electricity produced and purchased does not align with the purchaser’s demand.
The IASB decided to shorten the comment period within this ED to 90 days due to an expected increase in PPAs due to an increase in demand for renewable electricity. This will enable the IASB to finalise the amendments and make them available for application.
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5. Narrow-scope Amendments to Classification and Measurement Requirements for Financial Instruments
On 30 May 2024, the IASB issued targeted amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures which include new requirements not solely for financial institutions but also for corporates. These targeted amendments respond to feedback from the 2022 Post-Implementation Review of IFRS 9 and will apply from 1 January 2026, with early application permitted.
These amendments mainly relate to:
- Clarifying the classification of financial assets with environmental, social and corporate governance (ESG) and similar features. ESG related features in loans could impact whether they are measured at amortised cost or at fair value.
- Settlement of liabilities through electronic payment systems. The amendments provide an optional exception whereby an entity derecognises a financial liability at an earlier date if the cash transfer takes place through an electronic payment system and specific conditions are met. It is important to note that this exception does not apply to other payment methods, such as cheques.
- New disclosures targeting improvements in transparency for investors, which include disclosure requirements on equity instruments designated at fair value through other comprehensive income as well as disclosure requirements for both borrowers and lenders about financial instruments with contingent features, such as ESG-linked features.
Companies are required to apply these amendments retrospectively. While restating prior periods to reflect the amendments is not mandatory, companies may choose to do so if they can do it without relying on hindsight.
Reference:
https://www.ifrs.org/news-and-events/news/2024/05/iasb-issues-amendments-cmfi-ifrs7-ifrs9/
6. Post Implementation Review of IFRS 9 Impairment Requirements
The post-implementation review of IFRS 9 Financial Instruments is not a standard-setting project but could lead to such if the IASB is presented with evidence that the Standard is not working as intended.
This review was initiated back in 2022 and from February to May 2024, the IASB determined whether further information is required through various research initiatives. The review was concluded following the May meeting held by the IASB, which led to adding a medium priority project on the IASB’s agenda which would explore the possibility of providing targeted improvements towards the credit risk disclosures required by IFRS 7 Financial Instruments: Disclosures through the preparation of a Project Summary.
This Project Summary, which will include a feedback statement with a summary of findings will be published in July 2024.
Reference:
https://www.ifrs.org/projects/work-plan/post-implementation-review-of-ifrs-9-impairment/
7. Financial Instruments with Characteristics of Equity (FIEs)
As part of the Financial Instruments with Characteristics of Equity (FIEs) project, the IASB issued an exposure draft in 2023 focusing on clarifying classification principles in IAS 32 Presentation of Financial Instruments and disclosure requirements in IFRS 7 Financial Instruments: Disclosures. This exposure draft was open for public comments until March 2024. In the official May podcast, the IASB discussed the main points that emerged from stakeholder feedback.
The feedback revolved around the need for additional guidance on distinguishing between financial liabilities and equity instruments as well as support for additional presentation and disclosure requirements to improve understandability and comparability for investors.
The IASB have not yet taken any decisions with regards to this project.
Reference:
https://www.ifrs.org/projects/work-plan/financial-instruments-with-characteristics-of-equity/
8. IAS 37 Provisions Project
The IASB convened on 20 June 2024 to deliberate on proposed amendments to IAS 37 Provisions, Contingent Liabilities, and Contingent Assets. Although stakeholders generally find the Standard effective in practice, specific issues with certain aspects of the Standard have been identified.
One significant issue arises from the apparent conflict with IAS 37’s principles for identifying liabilities, which bring into question whether an obligation contingent on an entity’s future actions constitutes a present obligation and thus a liability. This issue was addressed as part of the Conceptual Framework project conducted in 2018. The first proposed improvement is to align IAS 37 with the revised Conceptual Framework, leading to the timely recognition of provisions.
Another proposed improvement pertains to the measurement of long-term provisions, which seeks to standardise the discount rates entities use to convert cash flows to present value. The proposal recommends that entities use a risk-free rate without adjustments for performance risk, meaning the risk that the entity might fail to settle the provision. Risk-free rates are observable in the market, making them easier to use and resulting in less subjective estimates.
The IASB discussed various details, including transition requirements, and the likely costs and benefits of the proposed amendments. Moreover, the IASB authorised the staff to proceed with the Exposure Draft, which they aim to publish in the fourth quarter of this year, with a 120-day comment period.
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Audit
1. New video series exploring changes to standard governing Fraud
A new four-part series outlining the changes to the fraud standard on ISA 240 has been released. The video series aims to highlight the main changes being proposed to the current fraud standard. Additionally, the video series aims to better clarify the auditor’s roles and responsibilities when it comes to fraud under ISA 240, Revised.
Such series, entitled “Understanding Proposed Changes to the Fraud Auditing Standard Video Series” covers the following key topics:
- Overview of key changes – provides an understanding of the key proposed changes, as well as the reasons for each proposed change.
- Focus on the auditor’s responsibility – clarification on the auditor’s responsibilities relating to fraud in an audit, and how proposed changes make these responsibilities clearer.
- Auditor’s response to fraud or suspected fraud – the video-series addresses how auditors and engagement partners can better enhance their response to fraud or suspected fraud during an audit.
- Enhanced transparency in the auditor’s report – revised changes aim to enhance transparency and better clarify the auditor’s responsibilities and other fraud-related procedures.
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2. New Strategy and Work Plan published by the IAASB
In order to strengthen audit quality and uniformity of global audit and assurance standards, the International Auditing and Assurance Standards Board (IAASB) has issued its new strategy and work plan in April 2024 for the upcoming three calendar years.
Key features of the new strategy and plan include the following:
- Completing priority audit and assurance projects, with particular emphasis on going concern, fraud, and sustainability assurance.
- Commencing new initiatives and projects, such as facilitating the implementation of the extensive standards governing sustainability assurance engagements, creating an IAASB Technology Position, and carrying out post-implementation reviews. Moreover, the new strategy aims to engage in standard setting concerning topics such as materiality, audit evidence and responding to risk, as well as interim financial information reviews.
- Working with key stakeholders within the external reporting ecosystem, including the International Ethics Standards Board for Accountants (IESBA), regulators, and standard-setters.
- Collaborating with regulatory authorities and standard-setting organizations to enhance trust in global markets.
- Continuing to put into action the recommendations put forth by the Monitoring Group to enhance independence and accountability in setting standards.
Further to the above, the IESBA, being the IAASB’s partner board, issued its strategy and work plan covering the same period – “Towards a More Sustainable Future: Advancing the Centrality of Ethics”. This highlights the IESBA’s goal to achieve global recognition and endorsement of the International Code of Ethics for Professional Accountants (Including Independence Standards).
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3. IFAC issues guide on “what to expect” in terms of Sustainability Assurance
IFAC has released a document outlining what stakeholders should expect from sustainability assurance.
The document highlights, among other things, that with several jurisdictions choosing to gradually introduce new reporting and assurance standards for sustainability, this gradual approach considers how prepared organizations are to adopt these new standards and develop the necessary information systems and reporting processes. Depending on local regulations or market practices, users of sustainability reports should anticipate that initial assurance engagements might focus on specific topics, like climate change, and provide a different level of assurance compared to financial statement audits. Initially, these engagements may offer limited assurance and could lead to modified conclusions.
Assurance provided on sustainability engagements may be either limited or reasonable. While limited assurance is based on limited procedures compared to those performed under a reasonable assurance engagement, the conclusion needs to highlight whether anything has come to the practitioner’s attention that causes the practitioner to believe that the sustainability information may be materially misstated.
Meanwhile, in a reasonable assurance engagement, the level of assurance obtained is the same as that in an audit of financial statements, whereby the auditor gathers sufficient and appropriate audit evidence based on procedures designed to obtain reasonable assurance that the sustainability information is free from material misstatement. Reasonable assurance is a high, but not absolute, level of assurance.
The types of modified opinions under a sustainability engagement could be three-fold:
- A qualified conclusion, where the effects, or possible effects, of a misstatement or scope limitation are material but not pervasive.
- A disclaimer of opinion, where a material and pervasive scope limitation exists that precludes the practitioner from obtaining sufficient, appropriate audit evidence to form a conclusion.
- An adverse conclusion, where the sustainability information is misstated, and the misstatement is material and pervasive.
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4. The Committee of European Auditing Oversight Bodies (“CEAOB”) launches public consultation on limited assurance on sustainability reporting
The CEAOB has worked on draft guidelines relating to limited assurance on sustainability reporting, to provide high level assistance and contribute towards a better understanding of some of the key aspects and requirements of a limited assurance engagement, as issued by the CSRD.
The below includes key highlights taken from the guidelines:
- The guidelines do not constitute a standard and should be read together with any national rules applicable to assurance on sustainability reporting.
- The CSRD requires the adoption of limited assurance standards by the European Commission by 1 October 2026 at the latest.
- Until this adoption, there will be a gap period during which there will be no assurance standards adopted at EU level.
The guidelines further cover areas in relation to:
- Ethics, engagement acceptance and quality control
- Objectives of a limited assurance engagement
- Material misstatement for practitioners in the context of an assurance engagement
- Fraud and non-compliance with laws and regulations
- Procedures targeted at risk identification and assessment
- Process carried out and described by the entity
- Responding to risks
- Forward-looking information
- Estimates
- Communication between practitioners and other professionals
- Accumulation and consideration of identified misstatements
- Obtaining an understanding of the processes for determining eligible and aligned activities
- Presentation
- Testing of Article 8 disclosures
- Format and content
- Different types of conclusions
- Representation letter
- Use of experts’ work
- Documentation
- Subsequent events
- Information accompanying the sustainability statements
- Specific provisions – information incorporated by reference
- Specific provisions – group / consolidated information
- Specific provisions – comparative information
- Specific provisions – value-chain information
The draft guidelines may be read through the below link:
Draft_Guidelines_on_Limited_Assurance_June_2024 (1).pdf
Such draft is open for public consultation until 22 July 2024.
Reference:
https://ec.europa.eu/eusurvey/runner/CEAOBGuidelinesLimitedAssuranceSustainabilityReporting
ESG
1. CSDDD Approval by the EP and Council
On 23 February 2022, the Commission submitted to the European Parliament and to the Council a proposal for a directive on corporate sustainability due diligence. Following a lengthy legislative process, Members States (MS) will have two years to implement the Corporate Sustainability Due Diligence Directive (CSDDD) into national laws following formal adoption of this directive by the Council on 24 May 2024.
This Directive creates a legal obligation on EU Companies with respect to environmental and human rights violations within their supply chain, however, to come to a final agreement, the obligations emanating from the CSDDD have been reduced significantly.
It is worth noting that prior to the agreement by the European Council, the CSDDD impacted companies with 500 employees and a turnover of €150 million, which have now been raised to 1,000 employees and a turnover of €450 million. For this Directive to apply, companies must meet these conditions for two consecutive financial years. Furthermore, the ‘high-sector approach’ which emanated from the original CSDDD has also been removed, thereby further reducing its operational scope. Had this approach been agreed upon, the scope would have widened to include companies which do not meet the employee and turnover requirements but operate in industries with a high likelihood of facing environmental and/or human rights issues. Hence, with these changes, the number of impacted companies has been significantly reduced from the original scope within the original Directive agreed upon by the European Parliament and Council in December 2023.
Another change is that corporate governance elements that would have put directors in control of the transition through the CSDDD have been removed, which therefore reduces the incentive for the directors to be involved in the process and drive change within companies.
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2. Interoperability guidance by the ISSB and EFRAG
On 2 May 2024, the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) have jointly published an interoperability guidance designed to reduce complexity for companies applying both the ISSB standards and European Sustainability Reporting Standards (ESRSs), as well as eliminate any duplication. This guidance also serves to illustrate the level of alignment achieved between these two sets of standards, including detailed analysis of the alignment in climate-related disclosures, being the requirements of IFRS S2 and ESRS E1.
The guidance also offers practical support and advice on interoperability concerning broader issues such as the materiality of information, and the presentation and disclosure of sustainability topics, in addition to those related to climate. With respect to materiality, the definition of such was a major difference between these two sets of standards whereby IFRS S1 mainly focused on what is useful for investors to make informed decisions which is hence aligned with the financial materiality included within ESRSs yet ESRSs require the impact materiality as part of the overall double materiality assessment.
This guidance is necessary since a multinational entity may need to adhere to both sets of standards if it has reporting entities in jurisdictions requiring compliance with ESRS and reporting entities in jurisdictions mandating compliance with ISSB Standards.
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3. EFRAG finalises three ESRS IG documents
On 31 May 2024, EFRAG announced the finalisation of its first three ESRS Implementation Guidance documents which were open for public feedback from 11 December 2023 to 2 February 2024 and address some of the most challenging aspects of ESRS implementation, including materiality assessment, the value chain, and ESRS datapoints.
EFRAG aimed to prioritise these documents as to support undertakings and stakeholders in the overall implementation of ESRSs. Here are the details of the finalised documents:
- IG 1 Materiality Assessment Implementation Guidance – This document outlines a practical process for undertakings to conduct materiality assessments, introducing the concept of double materiality assessment through various examples.
- IG 2 Value Chain Implementation Guidance – This document delineates the reporting obligations concerning the value chain, specifying the reporting scope of the undertaking and its value chain for sustainability reporting.
- IG 3 List of ESRS Datapoints – This document translates the comprehensive ESRS S1 requirements into detailed disclosure requirements and associated Application Requirements in an Excel format, facilitating data gap analysis.
Reference:
https://www.efrag.org/News/Public-524/Finalization-of-Three-EFRAG-ESRS-IG-Documents-EFRAG-IG-1-to-3
4. GRI and IFRS Foundation collaboration to deliver full interoperability
The IFRS Foundation and the Global Reporting Initiative (GRI) have announced an expanded collaboration aimed at optimising the combined use of their respective sustainability reporting standards. This initiative builds on an initial agreement established between the two organisations in 2022, which sought to ensure alignment of sustainability-related disclosures. The goal was to reduce the reporting burden on companies complying with multiple standards and to promote the harmonisation of sustainability reporting on an international scale.
This cooperation will be achieved through the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB) jointly identifying and aligning common disclosures that address the information needs within the scope and purpose of their respective standards. It is important to note that while this collaboration is being developed, the ISSB and the GSSB will continue to make decisions independently in accordance with their established standard-setting due processes. This includes public consultations regarding any proposed amendments to their respective standards concerning the alignment of common disclosures.
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