IFRS 19 only… and still complying with IFRS Accounting Standards?

The IASB heard the public outcry and during 2009 the long-awaited IFRS for SMEs^® Accounting Standard was published. There was a large uptake in many countries, including South Africa. But still the administrative burden for preparers remained in the situations where entities are required to present separate financial statements.

Subsidiaries of listed entities within a larger group were especially frustrated. Many of them are eligible to apply the SMEs Accounting Standard but following that route would involve keeping two sets of accounting records. Why? When the listed parent prepares their consolidated financial statements, they require the subsidiary’s numbers in accordance with IFRS Accounting Standards. If the subsidiary’s separate financial statements are prepared using the SMEs Accounting Standard, recognition and measurement differences become evident.

Again, the preparers of financial statements reached out to the IASB, and the IASB published an exposure draft in 2021. The goal was to produce an IFRS Accounting Standard eligible for voluntary adoption by the subsidiaries of parents that produce consolidated financial statements, available for public use, and that comply with IFRS Accounting Standards. They brought it in with a condition; the subsidiary may not have public accountability. This finally culminated in the publication of IFRS 19 Subsidiaries without Public Accountability: Disclosures on Thursday 9 May 2024.

IFRS 19 allows subsidiary entities in a group to apply the IFRS Accounting Standards for recognition and measurement, but limit the disclosures to only those required in or cross referenced by IFRS 19.

To qualify for IFRS 19’s reduced disclosure framework in the entity’s consolidated, separate or individual financial statements, an entity must, at the end of the reporting period:

1. be a subsidiary;
2. without public accountability; and
3. having an ultimate or intermediate parent that produces consolidated IFRS Accounting Standards financial statements available for public use.

IFRS 19 is unfortunately not available to associates and joint ventures.

What is public accountability?

1. The entity’s debt or equity instruments are traded in a public market, or the entity is in the process of issuing such instruments for trading in a public market; or
2. The entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.

This scope exemption is consistent with that included in the SMEs Accounting Standard.

The requirement for an ultimate or intermediate parent producing IFRS Accounting Standards financial statements available for public use is worded the same as the consolidation exemption requirement included in paragraph 4(a)(iv) of IFRS 10 Consolidated Financial Statements.

An eligible subsidiary may voluntarily choose to apply IFRS 19. It may also revoke that election and then elect to use it again later. This allows an entity to beef up their disclosures when needed, such as when applying for external financing, but then resume their reduced disclosures in future. When electing to apply IFRS 19 one year and not another, the immediate comparatives must be updated (including narrative and descriptive information) based on the current period’s financial statements unless otherwise permitted.

When the IASB drafted IFRS 19, they used the SMEs Accounting Standard as a starting point in compiling the mandatory disclosure requirements. They also considered the IFRS Accounting Standards that are not currently included in the SMEs Accounting Standard and drafted reduced disclosure requirements using the “spirit” of the SMEs Accounting Standard. They applied a similar approach when compiling disclosures where the measurement principles differed between IFRS Accounting Standards and the SMEs Accounting Standard. A small number of cross-references to IFRS Accounting Standards disclosure requirements also remain. ¹

IFRS 19 includes all the relevant disclosure requirements, grouped per IFRS Accounting Standard. Of interest is that all existing IFRS Accounting Standards are included within IFRS 19 except for:

• IFRS 8, IFRS 17 and IAS 33 – if the entity applies these, it must apply those disclosures too.
• IFRS 9, IFRS 10 and IAS 39 – measurement and recognition standards
• IFRS 11, IAS 28 – not applicable to associates and joint arrangements
• IAS 26 – retirement benefit plans may not apply IFRS 19.

IFRS 19 is effective for annual periods beginning on or after 1 January 2027. This doesn’t mean that entities have to wait until 2027 to adopt it though, early adoption is allowed. If early adopted, the fact should be disclosed.

There are two new IFRS Accounting Standards incorporated into IFRS 19, that may cause issues if IFRS 19 is early adopted without adopting those.

1.     IFRS 18 Presentation and Disclosure in Financial Statements: a comprehensive rework of the requirements of IAS 1 Presentation of Financial Statements, which is effective 1 January 2027. If an entity early adopts IFRS 19, but not IFRS 18, the IAS 1 disclosures must be applied as included in Appendix B.

2.     The amendments to IAS 21 The Effect of Changes in Foreign Exchange Rates, for Lack of Exchangeability. If an entity early adopts IFRS 19 but not the IAS 21 amendment (effective date of 1 January 2025), the relevant paragraphs in IFRS 19 must be excluded.

With the issuing of IFRS 19, reporting relief has become available for some entities. This is an exciting opportunity for preparers and auditors to work through the detail in order to save time and money.

^{1 The topics that were debated in detail when drafting IFRS 19 include discontinued operations, exploration and evaluation in mineral companies, financial instruments, especially credit risk, operating segments, investment entities, fair value measurement, revenue recognition, leases, insurance contracts, changes in liabilities and defined benefit plan obligations.}

Authors:

Sonica Schoeman, Director

17 May 2024