Financial Reporting & Audit Newsletter – Q1 2023

Feedback from the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment suggested that information currently disclosed on business combinations could be insufficient. The IASB therefore agreed to include this project in its standard-setting program in December 2022, and is currently in the process of drafting proposals for inclusion within an exposure draft.

The project’s objective is to provide users of financial statements with more useful information about the business combinations entities make, at a reasonable cost. As a result of feedback from various stakeholders, the IASB tentatively decided that the following disclosures would be required if the business combination is deemed to be ‘strategically important[1]:

• Synergies expected from the business combination;
• Management’s objectives for the business combination;
• The metrics and targets management are planning to use to monitor the business combination.

Reference:

https://www.ifrs.org/projects/work-plan/goodwill-and-impairment/

[1]A business combination which:

• Meets any one of the three quantitative thresholds: The acquiree’s revenue, the acquiree’s operating profit (to be defined by the Primary Financial Statements project) or the assets recognised (including goodwill) on acquisition, exceed 10% of the acquirer’s equivalent measures; or

• Results in a company entering a new geographical area of operations or a new major line of business.

New disclosure requirements regarding supplier finance arrangements (SFAs) have been under development since the exposure draft Supplier Finance Arrangements was published in November 2021. These discussions were prompted by the understanding that the information required by IAS 7 – Statement of Cashflows and IFRS 7 – Financial Instrument: Disclosures is insufficient to satisfy users’ expectations for such financial liabilities.

The purpose of the new disclosures is to offer information regarding SFAs that enables investors to evaluate their impact on a company’s liabilities, cash flows, and exposure to liquidity risk. These new disclosure requirements are expected to be issued mid-2023.

Reference:

https://www.ifrs.org/projects/work-plan/supplier-finance-arrangements/

On 23 March 2023, the FASB issued the exposure draft Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets as part of its project related to digital assets, which was mainly a result of the 2021 FASB invitation to comment Agenda Consultation.

Under current U.S. GAAP, unless otherwise provided in an industry-specific GAAP, crypto assets are treated as intangible assets with an indefinite useful life under Topic 350 Intangible Assets. These Assets are measured using a historical cost less impairment model under US GAAP, which has led to concerns that this accounting approach does not accurately reflect the economics of such holdings. The exposure draft follows up on such concerns, proposing that crypto assets within its scope should be measured at fair value with movements being recognised in net income for each reporting period.

Apart from additional disclosure requirements, the exposure draft also proposes the following updates to presentation:

• Separate presentation in the balance sheet of crypto assets measured at fair value;
• Separate presentation of the movements in fair value of crypto assets in the income statement.

Furthermore, the FASB also decided to include application guidelines in its proposal to guide entities in determining cash flow classification.

Reference:

https://www.fasb.org/Page/ProjectPage?metadata=fasb-Accounting-for-and-Disclosure-of-Crypto-Assets

The IASB tentatively decided to propose that, when applying IAS 28 Investments in Associates and Joint Ventures, an investor purchasing an additional interest in an associate while retaining significant influence would recognise any difference between the cost of the additional interest and its additional share in the net fair value of the associate’s identifiable assets and liabilities either as goodwill, or as a gain from a bargain purchase. This is the method voted over the alternative approach which would require an investor to measure such an investment as a single asset through remeasuring the asset at the date of purchase.

Reference:

https://www.ifrs.org/projec ts/work-plan/equity-method/

5.1 Guidance on ESRS

The Corporate Sustainability Reporting Directive (CSRD) adopted in November 2022 requires companies within its scope to comply with European Sustainability Reporting Standards (ESRS). As technical adviser to the EU Commission, EFRAG issued the first set of draft ESRS in November 2022, in respect of which the EU Commission has specified the importance of implementation support to the users of such standards.

EFRAG has therefore prioritised the implementation of such a support function made up of timely provision of guidance and education initiatives. EFRAG have in fact released a series of educational videos on the first set of draft ESRS to assist stakeholders in their implementation and understanding. EFRAG have also published the basis for conclusions for the first draft set of ESRS.

References:

https://efrag.org/News/Public-416/European-Commission-calls-on-EFRAG-to-prioritise-implementation-support-for-the-first-Set-of-ESRS

https://www.efrag.org/News/Public-407/EFRAG-releases-a-series-of-educational-videos-on-the-first-set-of-draft-ESRS-

https://www.efrag.org/News/Public-410/EFRAG-issues-the-set-of-Basis-for-conclusions-for-its-first-set-of-draft-ESRS

5.2 ISSB’s progress toward inaugural international sustainability standards

The International Sustainability Standards Board (ISSB), on 16 February 2023, has taken its final decisions on all the technical content of its initial Standards and the ISSB is entering the final stages of its standards development process ahead of its expected issuance targeted for the end of Q2 2023.

The Board agreed that its initial IFRS Sustainability Disclosure Standards, S1 and S2, will become effective starting January 2024. In light of the fact that sustainability disclosure is a new concept for many companies worldwide, the ISSB plans to introduce programmes that will support those applying its Standards, while market infrastructure and capacity is built.

The decision for such standards to become effective in January 2024 was in response to the strong demand from investors for companies worldwide to disclose comprehensive, consistent and comparable sustainability-related information.

Reference:

https://www.ifrs.org/news-and-events/news/2023/02/issb-ramps-up-activities-to-support-global-implementation-ahead-of-issuing-inaugural-standards-end-q2-2023/

The IAASB has published a public consultation for its 2024-2027 proposed strategy and work plan, aiming to develop an overarching standard for assurance on sustainability reporting.

The aim of the proposed strategy is to produce a draft proposal that:

• supports the consistent performance of quality sustainability assurance engagements;
• is suitable across all sustainability topics and reporting frameworks;
• is implementable by all assurance practitioners;
• and creates more agile, innovative ways of working in line with the International Organisation of Securities Commissions (IOSCO) Monitoring Group’s reform vision.

A primary benefit of the new standards is that investors will find it easier to identify companies striving to become more sustainable. Furthermore, such standard will impact on day-to-day behaviour of companies’ management teams.

Reference:

https://www.esginvestor.net/iaasb-begins-work-on-global-standards-for-esg-assurance/

On 24 January 2023, the IAASB opened the public consultation for a group audit-specific section of the proposed auditing standard for less complex entities (LCEs). Group audits were initially not included in the scope of the original Exposure Draft of the ISA for LCE. The proposed section will feature in Part 10, Audits of Group Financial Statements, and is intended to form part of the proposed International Standard on Auditing for Audits of Financial Statements of Less Complex Entities once completed. The exposure draft is open for public comment until May 2, 2023.

With the inclusion of group audits, proposed changes of the new ISA for LCE have been proposed to the Authority by the IAASB.

Reference:

https://www.iaasb.org/news-events/2023-01/iaasb-opens-public-consultation-less-complex-group-audits

On 8 February 2023, the technology consultation group of the IAASB has released material to assist in the investigation of exceptions and the concept of performance materiality when carrying out audit testing using automated tools and techniques (ATT’s). This material was issued through frequently asked questions.

The publication does not amend or override the International Standards on Auditing (ISAs), the texts of which alone are authoritative.

More detail on this will follow through a separate article that will be issued by Zampa Debattista.

Reference:

https://www.iaasb.org/news-events/2023-02/new-technology-focused-faq-now-available-iaasb

https://www.ifac.org/system/files/publications/files/IAASB-Technology-FAQ-Investigating-Exceptions-Materiality.pdf

On 6 March 2023, the IAASB highlighted a ‘Market Scan’ article to be issued every 2-3 months. Such scans will go through exciting trends, new developments, corporate and start-up innovations and noteworthy investments.

The latest market scan highlights digital assets, focusing particularly on recent developments within the cryptocurrency market and how this will impact the audit and assurance ecosystem. Upcoming market scans will continue to build on this area by focusing on related technologies.

More detail on this will follow through a separate article that will be issued by Zampa Debattista.

Reference:

https://www.iaasb.org/news-events/2023-03/iaasb-digital-technology-market-scan-digital-assets

In March 2023, The International Organization of Securities Commissions (IOSCO) issued a report entitled ‘Report on International Work to develop a global assurance framework for sustainability-related corporate reporting’. Such report reflects extensive research and feedback from key stakeholders and raises the importance of the timely development of ethics and assurance standards for sustainability reporting by the IESBA and the IAASB, respectively.

The IESBA and the IAASB have responded to the growing demand for high-quality assurance over sustainability-related information by prioritizing their projects to develop such standards in order to enhance the reliability of corporate reporting. It is the intention of both the IESBA and IAASB to issue public consultations on standards for sustainability ethics and assurance later on in the year. Both boards plan to finalize their respective standards in 2024.

Reference:

https://www.iaasb.org/news-events/2023-03/iesba-and-iaasb-highlight-commitment-deliver-recommendations-new-iosco-report-global-assurance-0

Link to report:

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD729.pdf