Here Are the IFRS Updates That Became Effective This January
Jan. 27, 2023
Last year was quiet for new standards and amendments from the International Accounting Standards Board. But financial statement preparers should start getting ready for some changes that took effect this month, says Stout’s Mhalou Abadiano.
While 2022 was quiet in terms of new accounting standards or amendments being issued by the International Accounting Standards Board, financial statement preparers should start getting ready for some significant changes that became effective on Jan. 1—specifically IFRS 17, Insurance Contracts.
On June 25, 2020, the IASB issued “Amendments to IFRS 17,” which addresses concerns and implementation challenges that were identified after it was published in 2017. IFRS 17 provides the first comprehensive guidance on accounting for insurance contracts under IFRS.
This standard aims to increase transparency and reduce diversity in the accounting for insurance contracts. Certain issuers also benefited from a temporary exemption from IFRS 9, Financial Instruments, until IFRS 17 became effective. IFRS 9 addresses the accounting for financial instruments and is effective for annual reporting periods on or after Jan. 1, 2018.
However, for insurers meeting the eligibility criteria, IFRS 4 provides a temporary exemption that permits them to continue applying IAS 39, Financial Instruments: Recognition and Measurement, rather than implement IFRS 9. This temporary exemption applied to annual reporting periods beginning before Jan. 1, 2021. However, in June 2020, the IASB published an amendment to IFRS 4 to extend the temporary exemption from applying IFRS 9 until annual reporting periods beginning before Jan. 1, 2023. This amendment maintains the alignment of the effective dates of IFRS 9 and IFRS 17.
With the implementation of IFRS 17, the accounting for insurance contracts will differ significantly between IFRS and the US Generally Accepted Accounting Principles for insurers, reinsurers, and non-insurers.
Amendments to IAS 1
Classification of Liabilities
On March 23, 2020, the IASB issued “Classification of Liabilities as Current or Non-current (Amendments to IAS 1).” The amendments originally were effective for annual reporting periods starting on Jan. 1, 2022, but their effective date was delayed to Jan. 1, 2023.
This amendment to IAS 1 clarifies that the classification of liabilities as current or non-current is based solely on a company’s right to defer settlement at the reporting date. Such right needs to exist at the reporting date and must have substance. The amendments also clarify that the transfer of a company’s own equity instruments is regarded as settlement of a liability unless it results from the exercise of a conversion option meeting the definition of an equity instrument.
Disclosure of Accounting Policies
On Feb. 12, 2021, the IASB issued “Disclosures of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)” with amendments that are intended to help preparers decide which accounting policies to disclosure in their financial statements.
The amendments continue to clarifyhow to apply the concept of materiality and help companies to provide useful accounting policy disclosures, including:
Requiring disclosure of the company’s material accounting policies rather than their significant accounting policies;
- Clarifying that accounting policies related to immaterial transactions, events, or conditions that are immaterial do not need to be disclosed; and
- Clarifying that not all accounting policies that related to material transactions, events, or conditions are themselves material.
- IFRS Practice Statement 2 was also amended to include guidance and examples on application of materiality to accounting policy disclosures.
Amendments on IAS 8
Entities apply IAS 8 when selecting and applying accounting policies, accounting for changes in estimates, and/or accounting for corrections of prior period errors. While this standard provides guidance on developing accounting policies for items that result in relevant and reliable information, it first requires entities to comply with any specific IFRS applying to a transaction. The standard also provides that changes in accounting policies and corrections of errors are generally accounted for retrospectively, while changes in accounting estimates are generally accounted for on a prospective basis.
On Feb. 12, 2021, the IASB issued “Definition of Accounting Estimates (Amendments to IAS 8)” to help entities to distinguish between accounting policies and accounting estimates. The amendments clarify how companies distinguish changes in accounting policies from changes in accounting estimates, with a primary focus on the definition of and clarifications on accounting estimates. The distinction between the two is important because changes in accounting policies are applied retrospectively, while changes in accounting estimates are applied prospectively.
The amendments further clarify that accounting estimates are monetary amounts in the financial statements and are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops accounting estimates to achieve the objective set out by an accounting policy.
Amendments to IAS 12
On May 7, 2021, the IASB issued “Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12),” which clarifies how companies shall account for deferred tax on transactions such as leases and decommissioning obligations, with a focus on reducing diversity in practice.
Under IAS 12, a comprehensive balance sheet method of accounting for income taxes is used, whereby both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity’s assets and liabilities are recognized. With limited exceptions, the differences between the carrying amount and the tax base of assets and liabilities and carried-forward tax losses and credits are recognized as deferred tax liabilities or deferred tax assets. Deferred tax assets are also being subject to a “probable-profits” test.
The amendments narrow the scope of the initial recognition exemption so that it doesn’t apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize deferred tax assets and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision.
The amendments to IAS 12 are effective for annual periods starting Jan. 1, 2017, but earlier application is permitted. These amendments align the accounting for deferred taxes that arise at inception of a lease or decommissioning provisions (asset retirement obligations) with US GAAP.
To comply with IFRS, companies also need to timely implement all IFRS Interpretations Committee agenda decisions. Accordingly, we highly suggest the preparers of the financial statements under IFRS also refer to these decisions.