Business implications of the new lease accounting standard
Business implications of the new lease accounting standard
Insight

Q4 2018 new IFRS standards and amendments: Are you ready?

KPMG’s biannual outlook helps IFRS preparers in the US keep track of imminent IFRS changes and assess their relevance

From the IFRS Institute - Nov 15, 2018

The last few years have seen most companies very focused on the changes resulting from the revenue, financial instruments and leases standards. However, the IASB’s ongoing standard-setting activities extend far beyond those areas. A number of new IFRS standards, interpretations and amendments just became, or will become effective in the near term. Some of these bring fundamental change for preparers, with varying degrees of convergence with US GAAP.

KPMG’s biannual outlook is a quick aid to help IFRS preparers in the United States keep track of imminent IFRS changes and to assess the relevance to their financial statements.

The following summaries provide an overview of new authoritative guidance issued by the IASB, provide a high level comparison to US GAAP, and identify resources for further reading. The content is organized by effective dates:

In addition, the IASB recently amended its Conceptual Framework, which it can use now for its standard-setting activities. While the effective date for preparers is 2020, early application is permitted when developing accounting policies where no IFRS standard applies to a particular transaction.

Effective January 1, 2018[1]

 

IFRS 9, Financial Instruments

New IFRS requirements

Comparison to US GAAP

IFRS 9 brings fundamental changes to financial instruments accounting that are relevant for both corporates as well as banks and other financial institutions.

The changes revolve around three main areas:

  • recognition and measurement, introducing new financial instruments measurement categories;
  • impairment, introducing an expected loss model; and
  • hedging, introducing a revised and less prescriptive approach to applying hedge accounting intended to align more closely with risk management policies.

IFRS 9 replaces IAS 39, Financial Instruments: Recognition and Measurement, and related interpretations. However, entities can continue to apply IAS 39 hedge accounting even after adopting IFRS 9 and then only adopt IFRS 9 hedge accounting once the IASB has completed its macro hedging project.

Additionally, some insurance entities are permitted to continue applying all of IAS 39 until they adopt IFRS 17, Insurance Contracts (see standards effective January 1, 2021).

The FASB has also made changes to the recognition, measurement and impairment of financial instruments and to hedge accounting.[2] Unlike IFRS 9, not all changes are effective in 2018.

Like IFRS, US GAAP introduces an impairment model based on expected losses. However, the FASB only made targeted improvements to address certain aspects of the recognition and measurement of financial instruments and hedge accounting.

Overall, there are significant differences in recognition and measurement, impairment and hedge accounting when compared to IFRS.

IFRS resources:

 

IFRS 15, Revenue from Contracts with Customers

New IFRS requirements

Comparison to US GAAP

IFRS 15 introduces a five-step model to determine the recognition of revenue when control of, rather than risks and rewards from, the goods or services have been transferred to the customer:

  1. Identify the contract with the customer
  2. Identify the performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when (or as) control transfers

Implementation guidance addresses a number of topics, such as licenses of intellectual property, warranties, returns, up-front fees and principal versus agent analysis.

IFRS 15 also requires contract acquisition and fulfillment costs meeting specified criteria to be capitalized rather than expensed as incurred.

IFRS 15 replaces IAS 18, Revenue, and IAS 11, Construction Contracts, and related interpretations.

ASC 606, Revenue from Contracts with Customers, is largely consistent with IFRS 15 because the new revenue standard was jointly developed by the IASB and the FASB.

However, some differences exist, for example around shipping and handling, presentation of sales taxes, certain contract costs and onerous contracts. The effective date also differs.

IFRS resources:

 

IFRIC 22, Foreign Currency Transactions and Advance Consideration

New IFRS requirements

Comparison to US GAAP

IFRIC 22 deals with the translation of advance payments or receipts made in a foreign currency. It clarifies that the translation should be done using the exchange rate at the date the entity initially recognizes the prepayment or contract liability arising from the advance consideration.

Subsequent to initial recognition, the amount is not remeasured.

Like IFRS, when foreign currency consideration is paid or received in advance of the item to which it relates (e.g. an asset, expense or income), the transaction date is generally the date on which the entity initially recognizes the prepayment or contract liability.

However, unlike IFRS, contract liabilities are considered monetary liabilities that need to be remeasured for changes in foreign currency rates.

IFRS resources:

 

Amendments to existing standards

New IFRS requirements

Comparison to US GAAP

Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2, Share-based Payment)

The IASB issued three amendments to reduce diversity in practice in the classification and measurement of share-based payments. The amendments:

  • clarify the accounting for the effects of vesting conditions on the measurement of a cash-settled transaction;
  • introduce guidance on the classification of awards settled net of tax withholdings; and
  • clarify the accounting for a modification of awards from cash- to equity-settled.

For cash-settled share-based payments, the new IFRS requirements are largely consistent with guidance under US GAAP; they therefore increase the level of convergence for share-based payment accounting.

For awards settled net of withholding taxes, the new IFRS requirements are similar to US GAAP. However, the thresholds for determining if liability classification is required are not identical.

Also, if liability classification is required, the entire award is liability-classified under US GAAP, while under IFRS only the excess shares above the threshold are liability-classified.

Remaining differences are highlighted in KPMG’s IFRS compared to US GAAP, 2017 edition, chapter 4.5 (forthcoming requirements).

Transfers of Investment Property (Amendments to IAS 40, Investment Property)

The IASB amended the requirements in IAS 40 for when an entity should transfer an asset to, or from, investment property. An asset is transferred when, and only when, there is evidence of an actual change in its use. A change in management intention is not itself sufficient to support the transfer.

Unlike IFRS, investment property is generally accounted for as property, plant and equipment, and there are no transfers to or from an ‘investment property’ category.

Annual Improvements to IFRS Standards 2014–2016 Cycle

 

Amendments to IAS 28, Investments in Associates and Joint Ventures

As a reminder, investment entities measure their investments in associates and joint ventures at fair value under IFRS.

When applying the equity method, a non-investment entity that has an interest in an investment entity associate or joint venture can elect to retain the fair value accounting applied by the associate or joint venture to its subsidiaries.

Venture capital and other qualifying organizations can elect to measure investments in associates or joint ventures at fair value through profit or loss instead of applying the equity method.

The amendments clarify that both these elections apply for each investment entity associate or joint venture separately.

Venture capital organizations are typically investment companies under US GAAP. Investment companies account for investments in equity-method investees at fair value through profit or loss and do not have an option to apply the equity-method to those investments.

Unlike IFRS, any non-investment company entity may elect the fair value option to account for equity-method investees as financial assets at fair value through profit or loss; this election is made when significant influence is obtained, is unconditional and irrevocable.

If a non-investment company investor has an interest in an investment company that has subsidiaries, the investor retains the fair value accounting applied by its investment company investee and its subsidiaries. Unlike IFRS, this is not an accounting policy choice.

IFRS resources:


Effective January 1, 2019[1]

 

IFRS 16, Leases

New IFRS requirements

Comparison to US GAAP

IFRS 16 eliminates the dual accounting model for lessees, requiring a single, on-balance sheet accounting model that is similar to current finance lease accounting.

Lessor accounting remains generally similar to current practice – i.e. lessors continue to classify leases as finance or operating leases.

IFRS 16 replaces IAS 17, Leases, and related interpretations. Early adoption is permitted if IFRS 15 is also adopted.

ASC 842, Leases, becomes effective at the same time as IFRS 16 for public companies, but may differ for other entities. Early adoption is permitted.

Like IFRS, lessor accounting is largely unchanged but lessees will report on-balance sheet an asset and a liability for substantially all leases.

Unlike IFRS, lessees will continue to classify their leases between operating and finance. Only finance leases will be treated as financing arrangements from an income statement perspective. The accounting for operating leases will generally continue to produce a straight-line total lease expense.

Other significant differences exist between IFRS 16 and ASC 842, including the low-value item exemption (IFRS 16) and reassessments.

IFRS resources:

 

IFRIC 23, Uncertainty over Income Tax Treatments

New IFRS requirements

Comparison to US GAAP

IFRIC 23 introduces new guidance to clarify how to account for income tax when it is unclear whether the taxing authority will accept the entity’s tax treatment.

IFRIC 23 contains some principles similar to US GAAP in relation to income tax uncertainties. However, the measurement requirements, among other things, differ from those in ASC 740, Income Taxes.

IFRS resources:

 

Amendments to existing standards

New IFRS requirements

Comparison to US GAAP

Prepayment Features with Negative Compensation (Amendments to IFRS 9, Financial Instruments)

Financial assets containing prepayment features with negative compensation may be measured at amortized cost or at fair value through other comprehensive income if they meet the other relevant requirements of IFRS 9.

As noted above, accounting for financial instruments is an area in which IFRS and US GAAP differ significantly.

Unlike IFRS, embedded derivatives such as prepayment options in financial assets are required to be bifurcated and separately accounted for when certain criteria are met.

Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28, Investments in Associates and Joint Ventures)

The amendment to IAS 28 deals with the accounting for long-term interests in an associate or joint venture that in substance form part of the net investment. It clarifies the interaction between IFRS 9, especially the expected loss impairment model, and IAS 28. Accordingly, IFRS 9 excludes from its scope only those interests to which the equity method is applied.

The scope and application of the equity method under US GAAP includes several differences from IFRS.

Like IFRS, investors must consider interactions between the application of the equity method and the impairment model for financial instruments.

However, the impairment models differ in important respects. The order in which the requirements apply also differs from IFRS.

Plan Amendment, Curtailment or Settlement (Amendment to IAS 19, Employee Benefits)

The amendment to IAS 19 clarifies that on amendment, curtailment or settlement of a defined benefit plan, the current service cost and net interest for the remainder of the annual reporting period are calculated using updated actuarial assumptions – i.e. consistent with the calculation of a gain or loss on the plan amendment, curtailment or settlement.

The amendment clarifies that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognized in profit or loss. The entity then determines the effect of the asset ceiling after plan amendment, curtailment or settlement. Any change in that effect is recognized in other comprehensive income (except for amounts included in net interest).

While significant differences exist in the accounting for employee benefits between US GAAP and IFRS, these new IFRS requirements are largely consistent with existing guidance under US GAAP.

Annual Improvements to IFRS Standards 2015–2017 Cycle:

 

Amendments to IFRS 3, Business Combinations, and IFRS 11, Joint Arrangements, clarify how an entity accounts for increasing its interest in a joint operation that meets the definition of a business.

  • If a party maintains (or obtains) joint control, the previously held interest is not remeasured. 
  • If a party obtains control, the transaction is a business combination achieved in stages and the acquiring party remeasures its previously held interest at fair value.

No equivalent to the principle of ‘joint arrangements’ exists under US GAAP. However, the IFRS clarifications made for a business combination achieved in stages of entities that previously qualified as joint arrangements are consistent with existing guidance under US GAAP for joint ventures.

Amendments to IAS 12, Income Taxes, clarify that all income tax consequences of dividends (including payments on financial instruments classified as equity) are recognized consistently with the transactions that generated the distributable profits – i.e. in profit or loss, other comprehensive income or equity.

Unlike IFRS, tax effects of tax-deductible dividends paid to shareholders are required to be allocated to continuing operations in the income statement.

Additionally, ASC 740 has specific guidance related to withholding taxes on dividends. On meeting certain conditions, withholding taxes can be treated in equity as part of the dividend distribution.

Otherwise the tax is treated as additional income tax expense. Unlike IFRS, the analysis does not focus on the source of the distributable profits. This can lead to a presentation different from IFRS.

Amendments to IAS 23, Borrowing Costs, clarify that the general borrowings pool used to calculate eligible borrowing costs excludes only borrowings that specifically finance qualifying assets that are still under development or construction.

The IFRS clarifications are largely consistent with existing guidance under US GAAP.

IFRS resources:

 

Effective January 1, 2020[1]

 

Amendments to existing standards

New IFRS requirements

Comparison to US GAAP

Amendments to IFRS 3, Business Combinations, clarify the definition of a business by providing a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

US GAAP requires companies to perform an initial screen test as part of their assessment while under IFRS this screen test is optional.

The amended IFRS and US GAAP definitions of a business are otherwise substantially converged and expected by the Boards to yield more consistency in practice than the prior definitions.

Amendments to IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, clarify the definition of ‘materiality’ and how it should be applied. The amendments also improve the explanations of the definition and ensure consistency across all IFRSs.

Unlike IFRS, materiality is not specifically defined under authoritative US GAAP. However, the FASB Concept Statements, SEC guidance to be used by management, as well as guidance for auditors all refer to ‘materiality’ and define it as “…if there is a substantial likelihood that the fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available...” and contain both quantitative and qualitative aspects.

IFRS resources:

 

Effective January 1, 2021[1]

 

IFRS 17 Insurance Contracts

New IFRS requirements

Comparison to US GAAP

IFRS 17 requires fundamental changes to how insurance contracts are measured and accounted for. It aims to increase transparency and to reduce diversity in the accounting for insurance contracts.

Early adoption is permitted to the extent that IFRS 9 and IFRS 15 are also adopted.

Unlike IFRS, the guidance addressing insurance contracts in US GAAP applies only to insurance entities. The FASB recently made significant changes in the accounting for long-duration contracts, which are not fully aligned with the requirements of IFRS 17.

With the implementation of IFRS 17, the accounting for insurance contracts will differ significantly between IFRS and US GAAP both for insurers and non-insurers.

IFRS resources:

 

[1] Effective dates are for annual periods beginning on or after the stated date. Early adoption is permitted unless otherwise stated.

[2] ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Measurement of Credit Losses on Financial Instruments; ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities; and ASU 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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