We published a post earlier on how to implement IFRS 16 on leases on a sustainable way. As noted there, sustainability includes that the core process provides as much data for disclosure requirements as possible. As underpinned by several comprehensive post-implementation studies, the projects were harder than expected, and the new standard considerably increased workload of annual reporting. The fact that a substantial portion of IT tools applied for lease accounting (almost half of them as per the study quoted above) further contributed to this. It might therefore be useful to have a look on these disclosure requirements now, when the preparation of the first, IFRS 16 compliant annual report preparation is knocking on our doors. We consider lessee aspects, since lessor requirements did not change significantly.
IFRS 16 on leases kicked in the doors from 1 January this year. This standard gave (or should have given) some headache to most companies using IFRS, regardless of the sector or the type of reporting they are required to do. Plenty of information and great advisory materials came out on the accounting methods brought in by IFRS 16 (tip: if it does not deal with lease modification, it is just scratching the surface…), comparing the new and “old” lease accounting, shedding some light on adoption choices (full or modified retrospective) and so on. This post is not something “just another one of those”. What we want to have a deeper look at is how to actually implement IFRS 16, in particular how to make it sustainable. If your IFRS 16 project lacks any of the points we discuss below, it might be worth having a second glance at it to avoid surprises later.
Now we continue our analysis of IFRS 15 with the aim to provide an overview of the main features and requirements of the new revenue standard. Now let’s see the remaining steps of the 5-step model.
In our 2-part post, we intend to summarize the main features of the new revenue standard, by which we would like to assist companies keeping their books in, and/or reporting according to, IFRS in the application of the new standard.
Changes in IFRSs applicable from 2016
As the calendar year is coming to an end, let’s have a detailed look at those IFRS changes which come into effect this year, therefore companies preparing IFRS financial statements for the fiscal year 2016 should pay attention to.
As a summary, changes affecting 2016 are not really material, there are no comprehensive, impact-them-all type of modifications – however, there might be relevant with regards to specific topics or industries. Furthermore, you should keep disclosure initiative on your radar – amendments coming from this project from time to time clarify the content of financial statements, or create additional presentation options. And finally, the three “big guns” must also be mentioned at the end of the post – these new IFRSs are not mandatory for this year or the next, but are certainly high on the to do list of accounting managers…
Materiality, subtotals and disaggregation (a disclosure initiative amendment – IAS 1 Presentation of financial statements)
Primary objective of the disclosure initiative is to gradually rationalize the content of financial statements and the accompanying notes, make them more transparent and understandable for the users.
In this spirit, IAS 1 is amended to have further guidance on determining “materiality”, stating that the company should not hide information that is useful, as well as assess the “homogeneity” of items to be aggregated. On the other hand, no immaterial details should be presented by disaggregating large amount of items.
The modification also details what are the considerations to be made on presenting additional subtotals or disaggregation of lines within the statement of financial position or the statement of profit or loss.
Furthermore, the amendment clarifies that items presented in other comprehensive income relating to associates and joint ventures accounted for using the equity method should be aggregated in single separate lines according to whether those items will be recycled to profit or loss, or not.
Equity method for investments in standalone financial statements (IAS 27 Separate financial statements)
This amendment opens up the option to use the equity method of accounting for investments in subsidiaries, joint ventures or associates. In case an entity uses this option, it must do so according to the requirements of IAS 8 Accounting policies, changes in estimations and errors.
This amendment might be relevant for entities in Hungary entitled to prepare their standalone financial statements according to IFRS – though it would be hard to find reasons why to choose this option.
Consolidation issues with investment entities (IFRS 10 Consolidated financial statements and IAS 28 Investments in associates)
This amendment rules how exemptions from consolidation may be used with respect to investment entities, as follows:
no consolidation is required for an interim parent company which itself is a subsidiary of an investment entity, in case the latter uses fair valuation for its subsidiaries
an investment entity must consolidate its subsidiaries which are not investment entities and the main purpose if which is to provide services for the entity (outsourced activities). If the subsidiary qualifies as an investment entity itself, then the parent investment entity may use the fair valuation option.
a non-investment entity with a joint venture or associate which qualifies as an investment entity has an accounting policy choice when the equity method of accounting is used; it may a) keep the fair valuation used by the joint venture or associate investment entity or b) perform consolidation of the investment entity’s subsidiaries on the level of this entity
An example where this amendment may have an impact are VCs investing in an entity with subsidiaries.
To business or not to business? (IFRS 11 Joint arrangements)
The amendment aims to unify how acquisitions of joint operations qualifying as businesses are accounted for.
The modification states that in such cases IFRS 3 Business Combinations is applicable, both for the initial stake and for acquiring further interest. The amendment also clarifies that no re-measurement to fair value is required for such acquisition of additional interests where joint control remains.
Oil and gas, utility industry might be impacted, as well as joint research and development activities in pharmaceuticals.
No revenue-based DD&A (IAS 16 Property, plant and equipment and IAS 38 Intangible assets)
The amendment intends to clarify what methods are acceptable to calculate depreciation and amortization.
Accordingly, revenue-based depreciation for property, plant and equipment is not acceptable, since there is only an indirect connection between the sales revenue and the economic benefits consumed while operating the assets (revenue stream reflects the economic benefits generated by the business, of which the assets are a part of). As for the intangible assets there are only rare exceptions where revenue-based amortization might be appropriate, supported with adequate documentation.
In practice, media and broadcasting companies might be interested in case amortization of a purchased broadcasting right is intended to be revenue-proportionate.
Plants are machines! (IAS 16 Property, plant and equipment and IAS 41 Agriculture)
The amendment targets to carve out bearer plants from biological assets with regards to accounting, since the sole purpose / activity of bearer plants is to produce growth during their lifecycle, so they are more like property, plant and equipment.
Therefore, amendment places bearer plants under IAS 16. As a result, the earlier measurement on fair value less cost to sell is replaced by an option to use either cost or revaluation model. It is important to note that produce grown by these plants remains under IAS 41, therefore are measured at fair value less cost to sell.
Are pines property, plant and equipment now, in mid-December?
Annual improvements 2012-2014:
IASB groups into review cycles those non-urgent but necessary amendments which intend to clarify, harmonize and simplify currently effective standards.
IFRS 5 Non-current assets held for sale and discontinued operations
The amendment clarifies that a change in the way of disposing assets (sales, transfer) does not make it necessary to reclassify these assets, since the intention to dispose did not change, just the method. IFRS 5 continues to apply.
IFRS 7 Financial instruments: disclosures
In case financial assets are transferred to third parties, the standard requires disclosures of information on any continuing involvement of the transferor subsequent to the transfer, plus any risks associated therewith. The amendment clarifies what qualifies as a continuing involvement with respect to subsequent service agreements connected to transferred assets.
The amendment also make it clear that disclosures required on offsetting agreements are not mandatory for interim financial statements, except where these provide substantial additional information compared to the latest annual report.
IAS 19 Employee benefits
The amendment clarifies that discount rates used to calculate liabilities arising from post-employment benefits should be determined based on the currency, and not the location (country) of the liability. Therefore, upon calculating the applicable rate, it is the market of quality corporate bonds in the respective currency which should be considered, and not the quality corporate bond market of the given country. In case there is no proper market for quality corporate bonds in that currency, government bonds denominated in the same currency should be investigated.
… and the black soup…
… or the worst is still to come, as the Hungarian saying goes. Subsequent to 2016 three new standards will come into effect: IFRS 9 Financial instruments, IFRS 15 Revenues from contracts with customers and IFRS 16 Leases. The first two will be applicable for financial years starting on 1 January 2018 or later, while IFRS 16 applies for financial years starting on 1 January 2019 or later. As a prelude, each of them are complex and bring comprehensive changes, therefore separate articles will be posted 🙂
How to set up an IFRS transition project?
Applying IFRS for statutory reporting is within reach once regulatory environment has been established. Scope of companies affected, as well as the expected benefits and consequences of a transition have been discussed in a previous post. Next, let’s list the phases and tasks of an implementation project. Of course such projects are unique for each company and heavily depends on the extent (if any) of their previous IFRS application experience. Nonetheless, there are some common elements and deliverables in every transition.