Amendments to IAS 1 and the Impact on the ISAs
The International Auditing and Assurance Standards Board (IAASB) published guidance to help users understand the impact on the International Standards on Auditing (ISAs) as a result of certain narrow-scope amendments which were made to the International Accounting Standard (IAS) 1 ‘Presentation of Financial Statements’ by the International Accounting Standards Board (IASB).
While the IAASB remains framework neutral when developing the ISAs, it considers financial reporting framework developments that may affect the ISAs, such as changes to the International Financial Reporting Standards (IFRS).
The narrow-scope amendments to IAS 1 ‘Presentation of Financial Statements’ require entities to disclose their material accounting policies, instead of their significant accounting policies.
The amendments will be effective for annual reporting periods beginning on or after 1 January 2023, with early application permitted.
Refer to the below link for the IAASB’s guidance in this respect:
IFAC Releases Additional Support for Small Firms on the IAASB’s Quality Management Standards
The International Federation of Accountants (IFAC) released the first publication in a three-part publication series to help small and medium sized practices implement the International Auditing and Assurance Standards Board’s (IAASB) new quality management standards, that were issued in December 2020 and came into effect on 15 December 2022.
‘Instalment One: It is time to get ready for the new quality management standards’ addresses the mindset change that the new standards require and the shift in focus from quality control to quality management. It also includes developing a project implementation plan, an introduction to quality objectives, the risk assessment process, and assigning roles and responsibilities. Helpful meeting agenda templates practitioners can use with their colleagues are also included.
Instalment two will focus on developing a detailed implementation plan and instalment three will address monitoring and remediation.
Quality Management and Group Audits: Highlighting Certain Aspects of Interaction between ISA 220 (Revised) and ISA 600
The International Auditing and Assurance Standards Board (IAASB) published a fact sheet that focuses on the interactions between the International Standard on Auditing (ISA) 220 (Revised) ‘Quality Management for an Audit of Financial Statements’ on quality management at the engagement level and ISA 600 ‘Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)’ on group audits.
This fact sheet highlights:
- The aspects of a group audit that may be affected by ISA 220 (Revised) ‘Quality Management for an Audit of Financial Statements’; and
- The aspects of a group audit that may be affected by the International Standard on Quality Management (ISQM) 1 ‘Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements’.
This includes the revised definition of engagement team and leadership and direction, supervision, and review responsibilities.
This fact sheet is intended to assist in the application of ISA 220 (Revised) ‘Quality Management for an Audit of Financial Statements’ with the extant ISA 600 ‘Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)’, until ISA 600 (revised) becomes effective for audits of financial statements.
Refer to the below link for the fact sheet that was published by the IAASB:
ISA 220 (Revised) ‘Quality Management for an Audit of Financial Statements’ is effective for audits of financial statements for periods beginning on or after 15 December 2022.
ISQM 1 ‘Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements’ is effective from 15 December 2022.
ISA 600 (Revised) is effective for group audits beginning on or after 15 December 2023.
IFAC Releases New Implementation Tool for Auditors on Identifying and Assessing Risks of Material Misstatement
The International Federation of Accountants (IFAC) released a new implementation tool, ‘The Risk Identification and Assessment Process: Tips on Implementing ISA 315 (Revised 2019)’.
The tool helps auditors implement the International Auditing and Assurance Standards Board’s (IAASB) International Standard on Auditing (ISA) 315 (Revised 2019) ‘Identifying and Assessing the Risks of Material Misstatement’, which is effective for audits of financial statements for periods beginning on or after 15 December 2021.
The implementation tool provides an overview of the core concepts and explains new and previously existing requirements. It also includes examples and emphasises the scalability of the standard with a focus on less complex entities.
Refer to the below link for the implementation tool:
IFAC Report Highlights a Lack of Comparability in Corporate Climate Reporting
The International Federation of Accountants (IFAC) released a new report providing insight into climate-related disclosure, ‘Getting to Net Zero: A Global Review of Corporate Disclosures’. This report focuses on corporate emissions reduction reporting.
‘Getting to Net Zero: A Global Review of Corporate Disclosures’ is based on 2020 corporate reporting and provides a useful benchmark for climate disclosures, which are under development by the International Sustainability Standards Board (ISSB), the US Securities and Exchange Commission (SEC), and the European Financial Reporting Advisory Group (EFRAG), among other initiatives.
‘Getting to Net Zero: A Global Review of Corporate Disclosures’ finds that inconsistency and incomparability of target disclosures may pose challenges for investors, regulators, and other stakeholders who require actionable information.
The findings of this report strongly support the movement in global policy towards rapidly enhancing the usefulness of disclosures on climate-related targets and transition plans.
Some of the key points mentioned in ‘Getting to Net Zero: A Global Review of Corporate Disclosures’ include the below matters:
- 66% of the large, exchange-traded companies that IFAC reviewed included some type of emissions reduction target in their corporate disclosures;
- Most companies (90%) who disclose emissions targets also provide a disclosure about how they plan to reach their target; and
- Only 24% of companies with a plan include some past expenditure or future estimate of expenditures to implement plan actions.
Refer to the below link for the ‘Getting to Net Zero: A Global Review of Corporate Disclosures’ report:
IFAC Calls on G20 Leaders to Cooperate to Solve Pressing Long-Term Issues and Pledges Ongoing Support from Accountancy Profession
Following the COVID-19 pandemic, the conflict between Ukraine and Russia and other minor matters that have taken place over the recent years, the International Federation of Accountants (IFAC) believes that:
- There is the substantial need to work together to deliver a sustainable economy and society supported by transparent and accountable governments; and
- The global accountancy profession is committed to do its part by:
- Enabling high quality reporting;
- Enabling integrated financial and sustainability information;
- Fighting corruption and economic crime;
- Supporting public financial management; and
- Helping policymakers make informed decisions.
IFAC’s CEO Kevin Dancey stated that:
“Tremendous interconnectivity is required if we are to make any significant progress toward achieving the United Nation’s Sustainable Development Goals (UN SDG). This is not just within the accountancy profession, but also between the profession and other UN SDG stakeholders. We commend the efforts of the G20*, and also call on G20* leaders to do even more.”
The IFAC published a document with various recommendations in this respect and it calls on G20* leaders to:
- Make Sustainability a Reality, Not Just a Goal;
- Support Public Financial Management and Fight Corruption; and
- Work Together for Collective Prosperity.
Refer to the below link for the above mentioned document with the recommendations:
* The G20 or Group of Twenty is an intergovernmental forum comprising 19 countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Türkiye, United Kingdom and United States) and the European Union. It works to address major issues related to the global economy, such as international financial stability, climate change mitigation, and sustainable development.
The Implementing Procedures Part II for Accountants and Auditors
On 20 December 2022 the Financial Intelligence Analysis Unit (FIAU) issued the ‘Implementing Procedures – Part II’ addressed to accountants and auditors. These procedures were drafted in conjunction with the Malta Institute of Accountants.
The procedures are intended to clarify how particular obligations arising from the below are to be implemented by accounting and auditing professionals:
- Prevention of Money Laundering Act;
- Prevention of the Money Laundering and Funding of Terrorism Regulations; and
- Implementing Procedures – Part I.
‘Implementing Procedures – Part II’ seeks to provide practitioners with sector specific guidance, with a focus on those grey areas which to date gave rise to legal uncertainty. It seeks to assist practitioners in complying with their anti-money laundering obligations on a daily basis by, amongst others, clarifying the type and extent of due diligence which they are expected to carry out when dealing with network firms and the type of documents which they are expected to retain in order to comply with their record-keeping obligations.
The Implementing Procedures become applicable as of 1 April 2023. Until this date, accountants and auditors shall continue implementing their Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) obligations in line with current legislation, i.e. the ‘Implementing Procedures – Part I’ and any other guidance that was provided by the FIAU.
Refer to the below link to access the ‘Implementing Procedures – Part II’:
Classification and Measurement Requirements of Financial Instruments – A PIR.
On the 21st December 2022, the IASB published its project report concluding the PIR of the classification and measurement requirements in IFRS 9: Financial Instruments. Feedback indicates that the requirements set out in IFRS 9 are mainly working as intended, yet the application of the contractual cashflow characteristics assessment was identified to be challenging in certain instances, namely:
- Financial instruments with ESG-linked features: Where the contractual interest rate is adjusted depending on the borrower achieving pre-determined ESG targets; and,
- Contractually linked instruments: Where an issuer prioritises payments to the holders of financial assets using multiple contractually linked instruments, creating a concentration of credit risk.
An exposure draft setting out the proposed amendments is to be published in 2023 Q1. This will also tackle IFRS 9’s derecognition requirements when applied to electronic transfers as settlement of financial assets as well as seek to improve the disclosure requirements on fair value changes relating to equity instruments presented in other comprehensive income.
OECD Pillar Two – Proposed amendments to IAS 12: Income Taxes
The OECD has released the Pillar Two model rules (the Global Anti-Base Erosion Proposal, ‘GloBE’) with the aim of ensuring that large multinational companies pay a minimum amount of tax in each jurisdiction in which they operate. The rules require companies to pay a ‘Top-up’ tax when the tax in jurisdictions represents less than the global minimum of 15% on the profits in that jurisdiction.
Applying these rules and determining the resultant impact on financial statements is expected to pose numerous complex challenges, particularly in the accounting for ‘Top-up’ taxes as well as in the recognition and measurement of deferred taxes. An accelerated standard setting project has been added to the IASB’s agenda given that these rules are expected to be enacted by some jurisdictions during the first half of 2023.
The IASB agreed to the introduction of a temporary exception from accounting for deferred taxes arising from the enactment of OECD’s Pillar Two, as well as to follow up with the exposure draft ‘International Tax Reform—Pillar Two Model Rules’. The IASB tentatively decided to amend IAS 12 with targeted disclosures for the effected companies for periods before the Pillar Two model rules are in effect.
Following up on IFRS 3: Business Combination’s PIR, in November 2022 the IASB has taken a vote to retain the impairment-only approach to accounting for goodwill instead of exploring the re-introduction of the amortisation model for goodwill. This decision was mainly informed from the discussion paper published back in March 2020.
The IASB is currently considering publishing an exposure draft including changes to IFRS 3’s disclosure requirements about the subsequent performance of an acquisition, in request of which the IASB voted in favour of increased disclosures back in September 2022. Before such an exposure draft, the IASB is also finalising details for potential improvements and simplifications to IFRS 3’s impairment test.
Classification of Liabilities
The IASB has issued amendments to IAS 1: Presentation of Financial Statements with the aim of improving the provision of information about long term debt with covenants. Whilst IAS 1 currently states that a liability can only be classified as non-current if it falls due after 12 months from the reporting date, there might still be instances where covenants impact this right of deferring settlement.
Covenants have a bearing on the classification of a liability in instances where an entity is required to comply with conditions on or before the end of the reporting period, reflecting an entity’s ability to defer payment to a period of over 12 months. On the other hand, a covenant will not have an impact on whether a loan is classified as current or non-current if compliance is required only after the reporting date. This might mean that a non-current liability might be called upon before a 12-month period should the company not be able to comply with the stipulated conditions. The amendments therefore require additional disclosure in the latter instances, which include:
- The nature of covenants and a timeline for compliance.
- The carrying amount of liabilities to which the covenant is attached.
- Indicative information should the company have difficulties with complying with the covenants.
The amendments are effective for annual periods beginning on or after 1 January 2024, with earlier application being permitted.
ESG – An Update
Adoption of the CSRD
The new Corporate Sustainability Reporting Directive (CSRD) has been approved by the European council on the 28th November 2022 with the main aim of strengthening and standardising ESG regulation, improving upon the outgoing Non-Financial Reporting Directive (NFRD). Member states now have an 18-month period to transpose the provisions into national law.
The 49,000 companies within the scope of the CSRD will face various sustainability reporting requirements which will initially be subject to a limited level of assurance. Compliance will take a stepped approach, as follows:
|Company Type||Compliance by first reporting period ending in:|
|Large PIEs currently within the scope of the NFRD||2024|
|Large companies not presently subject to the NFRD||2025|
|Listed SMEs||2026 (May opt-out until 2028)|
EUR-Lex – 32022L2464 – EN – EUR-Lex (europa.eu), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464
First Draft ESRS
Companies which fall within the scope of the CSRD will be using a set of new European Sustainability Reporting Standards (ESRS). The European Financial Reporting Advisory Group (EFRAG) submitted the first set of 12 draft ESRS to the European commission on the 22nd November 2022. Additional sector-specific standards are planned for release in due course.
After taking into consideration the input from public consolation on the draft ESRS exposure draft, the EFRAG Sustainability Reporting Board (SRB) acknowledged that the exposure draft’s disclosure requirements were too demanding. This draft set of ESRS includes an approximated 84 disclosure requirements which is considerably less information than what was demanded in the initial exposure draft.
The ISSB’s International Cooperation
The International Sustainability Standards Board (ISSB) is working with the European Commission and EFRAG towards a framework which aligns key standards and disclosures in the interest of establishing a global baseline.
With an emphasis on international collaboration towards a globally implementable set of ISSB baseline standards, the ISSB has launched a new Partnership Framework with over 20 organisations. This is designed to support preparers, investors and other capital market stakeholders as they prepare to use IFRS Sustainability Disclosure Standards.