Important Technical Update for audit released on November 2022

I. IFRS

IASB Update - October 2022

This IASB Update highlights the preliminary decisions of the International Accounting Standards Board (IASB) during their October meetings. We present a summary of the most critical decisions made this month, with the caveat that the content of the future standard will not be set in stone until the final standard is published and made public.

All the decisions reached by the IASB in October 2022 are available here.

Post-implementation Review of IFRS 9—Classification and Measurement

Of the three aspects of its post-implementation review of IFRS 9 Financial Instruments, the following feedback will continue to be discussed at its future meeting:

Equity instruments and other comprehensive income

The IASB considered feedback on the requirements in IFRS 9 relating to equity instruments for which an entity has elected to present fair value changes in other comprehensive income (OCI). It decided to make no changes to those requirements. However, the IASB tentatively decided to amend paragraph 11A of IFRS 7 Financial Instruments: Disclosures to require disclosure of:

1. the aggregated fair value of equity investments for which the OCI presentation option is applied at the end of the reporting period; and
2. changes in fair value recognised in OCI during the period.

In addition, the IASB asked the staff to explore whether an illustrative example, such as a reconciliation from the opening balance to the closing balance in OCI, could be provided in the proposed amendments.

Exploring possible narrow-scope amendments for electronic cash transfers

The IASB considered possible standard-setting options to respond to concerns raised about the potential outcomes of applying the derecognition requirements in IFRS 9 to settling a financial asset or a financial liability via electronic cash transfers. The IASB tentatively decided to develop an accounting policy choice to allow an entity to derecognise a financial liability before it delivers cash on the settlement date when specified criteria are met.

Rate-regulated Activities

The IASB redeliberate the proposals in its Exposure Draft Regulatory Assets and Regulatory Liabilities relating to:

• the proposed definition of allowable expense and the treatment of allowable expenses based on benchmarks; and
• the accounting for regulatory assets and regulatory liabilities arising from differences between the regulatory recovery period and the assets’ useful lives.

The proposed definition of allowable expense and treatment of allowable expenses based on benchmarks

The IASB tentatively decided that the Standard:

1. retain the proposed definition of allowable expense;
2. clarify that a regulatory agreement may determine the amount that compensates an entity for an allowable expense using a basis different from the basis the entity uses to measure the expense following IFRS Accounting Standards; and
3. clarify the treatment of allowable expenses based on benchmarks and include examples to help entities identify differences in timing in those cases.

Regulatory assets and regulatory liabilities arising from differences between the regulatory recovery period and the assets’ useful lives

The IASB tentatively decided that the Standard:

1. provide guidance to help an entity determine whether its regulatory capital base and its property, plant and equipment have a direct relationship;
2. retain the proposals for an entity to account for regulatory assets or regulatory liabilities arising from differences between the regulatory recovery period and the assets’ useful lives if the entity has concluded that its regulatory capital base and its property, plant and equipment have a direct relationship; and
3. require an entity that has concluded that its regulatory capital base and its property, plant and equipment have no direct relationship to provide disclosures to enable users of financial statements to understand the reasons for its conclusion.

Disclosure Initiative—Targeted Standards-level Review of Disclosures

The IASB decided on the actions to take on the Targeted Standards-level Review of Disclosures project based on the feedback on the Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach.

The IASB decided:

I.) to use the methods proposed in the Exposure Draft for developing disclosure requirements. Ten of the 11 IASB members agreed with this decision.

II.) to use a ‘middle-ground’ approach to drafting disclosure requirements. All 11 IASB members agreed with this decision.

III.) that the ‘middle-ground’ approach would involve:

1. providing context-setting, non-prescriptive overall disclosure objectives that describe the overall information needs of users of financial statements. All 11 IASB members agreed with this decision.
2. not including a cross-reference to paragraph 31 of IAS 1 Presentation of Financial Statements at the beginning of the disclosure section of each IFRS Accounting Standard. Nine of 11 IASB members agreed with this decision.
3. requiring an entity to comply with specific disclosure objectives that describe                                                     the detailed information needs of users of financial statements. All 11 IASB members agreed with this decision.
4. supporting a specific disclosure objective with explanations of the assessments that users make that rely on information an entity discloses by applying the specific disclosure objective. All 11 IASB members agreed with this decision.
5. using prescriptive language when referring to items of information that an entity is required to disclose to meet a specific disclosure objective, subject to the requirements of paragraph 31 of IAS 1. All 11 IASB members agreed with this decision.

IV.) to document the methods for developing disclosure requirements and the approach to drafting them (Guidance for the Board) and publish the document on the IFRS Foundation website.

Contractual Cash Flow Characteristics of Financial Assets (Amendments to IFRS 9)

The proposed amendments to IFRS 7 add disclosure requirements to complement the clarifying amendments the IASB tentatively decided to make to the requirements in IFRS 9 for assessing the contractual cash flow characteristics of financial assets. The IASB tentatively decided to make the clarifying amendments at its September 2022 meeting.

The IASB tentatively decided to propose adding a requirement to IFRS 7 for entities to disclose each class of financial assets and financial liabilities not measured at fair value:

1. a qualitative description of contractual terms that could change the timing or amount of contractual cash flows, including the nature of any contingent events;
2. quantitative information about the range of changes to contractual cash flows that could result from these contractual terms; and
3. the gross carrying amount of financial assets and amortised cost of financial liabilities subject to these contractual terms.

The IASB also tentatively decided to propose that:

1. an entity should apply the clarifying amendments to IFRS 9 retrospectively following IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except that the entity would not be required to restate comparative information;
2. if, on the initial application of the amendments, an entity changes the classification of a financial asset, the entity should disclose the following:
3. the previous measurement category and the carrying amount determined immediately before applying these amendments; and
4. the new measurement category and the carrying amount determined after applying these amendments.
5. the effective date will be determined after exposure of the proposed amendments; and
6. early application of the amendments is permitted.

The IASB will decide whether to begin the balloting process for the exposure draft.

Redeliberations continue on Goodwill and Impairment project

At its September 2022 meeting, the IASB re-examined the preliminary proposals for improving disclosures on business combinations that were put forward in its Goodwill and Impairment discussion paper (the stage before an exposure draft) and reached several tentative decisions.

The IASB tentatively proposed adding two new disclosure objectives to IFRS 3 – Business Combinations. Thus, an entity should present disclosures that will help users of financial statements to understand:

• the benefits that an entity expects from a business combination at the point when it reaches an agreement on the acquisition price; and
• the extent to which an entity’s objectives for a business combination are being met.

The IASB has tentatively decided to require entities to disclose the “strategic rationale for undertaking the business combination” instead of the “‘primary reasons for the business combination.”

(IFRS 3.B64d) and to disclose quantitative information about the expected synergies in the year of the business combination.

Moreover, for “strategically important” business combinations, the IASB is planning to require disclosures on the following:

• management’s objectives for the business combination;
• the indicators and targets management will use to assess whether these objectives are being met; and
• for subsequent periods, the extent to which management’s objectives are being met, using these indicators, for as long as management is monitoring whether the objectives are being met.

A “strategically important” business combination is defined as one for which failure to meet the objectives would seriously put the entity at risk of achieving its overall business strategy. At present, the Board is proposing that any business combination that meets one of the following thresholds would be classified as “strategically important”:

• the operating profit (or revenue) of the acquired business exceeds 10% of the acquirer’s operating profit before the business combination;
• the assets of the acquired business (including goodwill) exceed more than 10% of the acquirer’s assets before the business combination;
• the business combination involves the entity breaking into a new geographical area of operations or a significant new line of business.

In specific circumstances (yet to be determined), an entity would be exempt from presenting disclosures on:

• management’s objectives for the business combination (only required for “strategically important” business combinations);
• the indicators and targets management will use to assess whether these objectives are being met (only required for “strategically important” business combinations); and
• quantitative information on the expected synergies.

However, this exemption would only apply when disclosing information that would seriously prejudice any of the entity’s objectives for the business combination. Application guidance will be produced to help entities to identify such situations.

In contrast, no exemption will be permitted for:

• the strategic rationale for undertaking the business combination;
• the comparison between the actual performance in subsequent periods and the objectives originally set, based on the indicators used by management (only required for “strategically important” business combinations).

Finally, the IASB has tentatively decided to reject the proposal to specify indicators that all entities would be required to disclose information about, as well as the proposal to only require qualitative disclosures in the year of a business combination.

The next step will be for the Board to decide, by the end of the year, whether the current impairment-only model should be retained or whether it should consider reintroducing amortisation of goodwill.

II. IFRS for SMEs

In January 2020, the International Accounting Standards Board (IASB) published a request for information as part of the second comprehensive review of the IFRS for SMEs Accounting Standard (Standard). The request for information set out the IASB’s proposed approach to aligning the Standard with new and amended IFRS Accounting Standards.

After publishing the request for information, the IASB talked to SMEs’ investors, lenders and creditors. These discussions, together with the comment letters responding to the request for information, helped the IASB develop its proposals in the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard.

This newsletter explains how the IASB has responded to feedback from users of SMEs’ financial statements and describes the proposals the IASB published in the Exposure Draft.

The full text of the Exposure Draft can be found here.

How to update the Standard

In the request for information, the IASB asked for views on whether the Standard should continue to be based on full IFRS Accounting Standards with modifications to reflect the needs of users of SMEs’ financial statements—that is, whether to amend the Standard to align it with new and amended IFRS Accounting Standards.

Respondents generally agreed with the following:

• continuing to align the Standard with full IFRS Accounting Standards; and
• the IASB’s plan to apply three alignment principles when considering potential amendments.

The IASB will apply these three alignment principles to potential amendments in the following order:

• Relevance to SMEs: would the change make a difference to users’ decisions?
• Simplicity: could appropriate simplifications be made?
• Faithful representation: would the outcome faithfully represent the substance of economic phenomena?

Cost-benefit concerns

Although respondents agreed with the alignment principles, some were concerned that the cost of changing accounting policies could be prohibitive for SMEs and might not be justified by the benefits to users. Some respondents also questioned whether the cost-benefit balance might vary in the many jurisdictions in which the Standard is applied.

The IASB has evaluated new and amended IFRS Accounting Standards using the alignment principles and considered the costs and benefits of the consequences. Based on this evaluation, the IASB is proposing amendments to the Standard. The IASB proposes allowing an undue cost or effort exemption in some circumstances to better balance the costs and benefits.

Scope of the second comprehensive review

The IASB considered and is proposing amendments to the IFRS for SMEs Accounting Standard for:

• The Conceptual Framework for Financial Reporting;
• IFRS 3 Business Combinations;
• IFRS 9 Financial Instruments;
• IFRS 10 Consolidated Financial Statements;
• IFRS 11 Joint Arrangements;
• IFRS 13 Fair Value Measurement; and
• IFRS 15 Revenue from Contracts with Customers.

The IASB considered and is not proposing amendments to the IFRS for SMEs Accounting Standard for:

• IFRS 14 Regulatory Deferral Accounts; and
• IFRS 16 Leases.

The IASB also proposes amendments to the IFRS for SMEs Accounting Standards for minor amendments to other IFRS Accounting Standards and IFRIC Interpretations.

Responding to user feedback

As part of the feedback the IASB gathered on the request for information, the IASB published a survey for users of SMEs’ financial statements; the IASB also interviewed users.

The IASB asked users of SMEs’ financial statements what factors they should consider when setting the disclosure requirements for the Standard. Users said they were particularly interested in information about SME’s:

• short-term cash flow;
• ability to repay debt (liquidity information);
• accounting policy choices; and
• risks (including contingent liabilities) to which it is exposed.

Users said cash flow information is important in understanding an SME’s financial health.

Some users of financial statements said that information provided in SMEs’ financial statements could be improved if some information were disaggregated.

In interviews, users of SMEs’ financial statements said that it is important to understand the sustainability of an SME’s business model. However, this comment is outside the scope of this review because it relates to information disclosed outside the financial statements. 

Feedback and how the IASB is proposing to respond

Below we detail specific points of feedback from users and how the IASB is proposing to respond. (References point to paragraphs in the Exposure Draft.)

“Liquidity information is important, including an SME’s ability to repay debt.”

IASB's proposed response: Add a requirement to disclose a reconciliation of changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash flows (see paragraph 7.19A).

“Further disaggregation of other payables and other receivables would improve an SME’s information.”

IASB's proposed response: Clarify the requirements relating to materiality judgements, order of the notes, subtotals, accounting policies and disaggregation (see paragraph 3.15A). Clarify the definition of ‘material’ and how it would be applied (see paragraph 3.16).

Amend the Standard to require the disaggregation of line items in the statement of financial position when such a presentation helps users understand the SME’s financial position (see paragraph 4.3).

“Further detail is necessary to understand an SME’s significant operating expenses.”

IASB's proposed response: Clarify that an analysis of expenses may be either presented in the statement of comprehensive income or disclosed in the notes (see paragraph 5.11).

“Information on revenue is important to understanding an SME’s business.”

IASB's proposed response: Add disclosures to help users understand the amount, timing and uncertainty of revenue and cash flows from customer contracts (see section 23).

“Improved information on an SME’s assumptions for contingent liabilities, pension liabilities, impairment of assets and going concern status would be helpful.”

IASB's proposed response: Amend the Standard to require a more detailed reconciliation of the opening and closing balances of a defined benefit obligation (see paragraph 28.41(e)).

Amend the Standard to require a more detailed reconciliation of the opening and closing balances of plan assets and any recognised reimbursement rights (see paragraph 28.41(f)).

“Disaggregation of loans from an SME’s related parties is important.”

IASB's proposed response: Add a requirement for an SME to disclose amounts it has incurred for the provision of key management personnel services provided by a separate management entity (see paragraph 33.7A).

Clarify the requirement to disclose information about commitments between an SME and its related parties (see paragraph 33.9(b)).

How to have your say

The Exposure Draft is open for comment until 7 March 2023. The Exposure Draft includes an Invitation to Comment (from page 20 onwards), with 15 specific questions for respondents.

Question topics in the Invitation to Comment 

1. Definition of public accountability
2. Concepts and pervasive principles
3. Definition of control
4. Impairment of financial assets
5. Fair value measurement
6. Joint arrangements
7. Business combinations
8. Revenue
9. Employee benefits
10. Transition
11. Other proposed amendments
12. Leases
13. Development costs
14. Offsetting equity instruments
15. Updating paragraph numbers

III. Sustainability

International Sustainability Standards Board Update

At its September meeting, the International Sustainability Standards Board (ISSB) reviewed a summary of the comment letters (available here) that it received in the public consultation on the draft standards IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-related Disclosures, for which the comment period closed at the end of July.

Although the Board was not asked to make any decisions on the content of the standards this month, it set out a plan for redeliberations with a view to establishing a global baseline of recognised international standards used across the world by the end of the year, to be published in early 2023.

The ISSB received more than 700 comment letters on IFRS S1 and slightly fewer on IFRS S2. The summary of responses, prepared by the technical staff, highlighted the following key points:

• broad stakeholder support for the ISSB’s overall purpose, for IFRS S1 as an overarching standard setting out the general principles to be applied to all IFRS Sustainability Standards, and for

IFRS S2 as a standard that would address the urgent need for disclosures on climate-related challenges;

• general support for drawing on the recommendations of the TCFD (Task Force on Climate-related Financial Disclosures) to structure the standards, based on the four pillars of governance, strategy, risk management, and metrics and targets;
• a need for guidance and illustrative examples to enable efficient implementation of the proposals,

e.g. how to identify significant sustainability-related risks and opportunities. Stakeholders also requested clarification of some terms and concepts, particularly the definition and application of the materiality concept;

• the need to permit gradual implementation of the proposals, depending on the capability and preparedness of companies across the world (scalability). At the September meeting, the ISSB began to identify some strategies and mechanisms that would enable progressive implementation of the disclosure requirements set out in the standards;
• the need to work with the IASB to improve the connectivity and consistency of disclosures within and outside the financial statements;
• the need to work closely with jurisdictions around the world that are simultaneously developing local sustainability standards, including the European Union and the United States, in order (among other things) to use identical terminologies where possible and appropriate and to ensure that the global baseline is fully interoperable in practical terms with the requirements of other international standards;
• the need to rework some of the more technical proposals set out in the standard on climate-related disclosures. For example, the minor amendments made by the ISSB to the industry-based standards developed by the Sustainability Accounting Standards Board – which were presented as an appendix to the draft IFRS S2 but which would be mandatory – were generally felt to be insufficient to enable IFRS S2 to be applied efficiently in all jurisdictions (i.e. outside the United States).

ISSB Update November 2022

The ISSB met on 15 November 2022 to discuss feedback on the staff draft of a proposed IFRS Sustainability Disclosure Taxonomy based on IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft S1) and IFRS S2 Climate-related Disclosures (draft S2). This ISSB Update highlights preliminary decisions of the ISSB related to the following:

• topics relating to both IFRS S1 and IFRS S2:
  • scalability of disclosure requirements;
  • current and anticipated effects of sustainability-related and climate-related risks and opportunities on an entity’s financial performance, financial position and cash flows;

• topics relating to IFRS S1:
  • enterprise value;
  • breadth of disclosures required;
  • “significant” sustainability-related risks and opportunities;
  • identifying significant sustainability-related risks and opportunities and disclosures (including using materials prepared by other standard-setters);
  • implementation of the materiality assessment;
  • related information (cf. the principle of connectivity of information); and
  • frequency of sustainability reporting;
• topics relating to IFRS S2:
  • strategy and decision-making, including transition planning;
  • climate resilience;
  • greenhouse gas emissions; and
  • industry-based requirements, including financed and facilitated emissions.

The summary of the redeliberations for this project, including the ISSB’s tentative decisions, can be found here.

Comparative information and updated estimates

The ISSB discussed the proposed requirement in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft S1) for an entity to disclose comparative information that reflects updated estimates.

The ISSB tentatively decided:

A.) to amend the proposed requirement set out in paragraph 64 of draft S1 to limit the requirement to revise comparative information to reflect updated estimates, so it would apply to estimates for the previous reporting period disclosed during that last period and would not apply to forward-looking estimates disclosed in that previous period;

b.) to provide illustrative guidance to help an entity apply the requirement. Such advice may include the following:

1. i. examples of situations in which an entity would be required and would not be required to revise comparative information to reflect updated estimates;
2. examples and explanations of ways to present revised comparative information to reflect updated estimates; and
3.  explanations to distinguish three situations in which an entity would be required to revise comparative information: (1) to reflect updated estimates, (2) to reflect a redefined or replaced metric or target, or (3) to correct errors.

Next steps

The ISSB will consider clarifying the requirement in paragraph 64 of draft S1 by making specific drafting changes and developing guidance to help entities apply the requirement.

Timing of reporting

The ISSB discussed the proposed requirement in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft S1) for an entity to report its sustainability-related financial disclosures simultaneously with its related financial statements.

The ISSB tentatively decided:

1. to confirm the proposed requirement for an entity to report its sustainability-related financial disclosures at the same time as its related financial statements. All 13 ISSB members agreed with this decision.
2. to introduce short-term transitional relief that would permit an entity to report its sustainability-related financial disclosures after its financial statements. Eleven of the 13 ISSB members agreed with this decision.
3. to permit an entity, as part of this transitional relief, to report its annual sustainability-related financial disclosures at the same time as its H1/Q2 earnings reporting. Twelve of 13 ISSB members agreed with this decision.

Next steps

The ISSB will continue to redeliberate the proposed requirement and consider staff recommendations on the following:

1. how to articulate the short-term transitional relief to permit an entity to report its annual sustainability-related financial disclosures at the same time as its H1/Q2 earnings reporting; and
2. how long this relief will be available after the effective date of S1.

Strategy and decision-making and climate-related targets

The ISSB considered feedback from respondents on the proposed requirements in IFRS S2 Climate-related Disclosures (draft S2) for an entity to disclose information about its strategy and decision-making, including its transition plans towards a lower-carbon economy and its climate-related targets.

The ISSB tentatively decided:

A.) to confirm and clarify the proposed requirements in paragraphs 13 and 23 of draft S2 for an entity to disclose how climate-related risks and opportunities affect its strategy and decision-making, its plans to transition towards a lower-carbon economy, and its climate-related targets. All 13 ISSB members agreed with this decision.

B.) to require an entity to disclose its assumptions and the dependencies it identifies in developing its transition plans. All 13 ISSB members agreed with this decision.

C.) not to introduce a requirement for an entity to disclose the implications for its transition plans if its assumptions are not met. Twelve of 13 ISSB members agreed with this decision.

D.) to require an entity to disclose additional information about its climate-related targets, including:

1.  the scope of the entity’s targets. All 13 ISSB members agreed with this decision.
2.  the greenhouse gases and the emission scopes covered by the entity’s emission targets. All 13 ISSB members agreed with this decision.
3.  which international agreement on climate change the entity is referencing when applying the requirements in paragraph 23 of draft S2. All 13 ISSB members agreed with this decision.

Next steps

The ISSB will discuss further the proposed requirement in draft S2 for an entity to compare its climate-related targets to the latest international agreement on climate change.

The ISSB will continue redeliberating the proposals in IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (draft S1) and draft S2.