In this article we touch upon amendments to IAS 1, IAS 8 and IAS 12 which are applicable for annual periods beginning on or after 1 January 2023 (with early application permitted) and aim to improve the consistency and transparency of financial reporting.
Amendments to IAS 1: Presentation of Financial Statements
As part of its Disclosure Initiative, the International Accounting Standards Board (the Board) published new amendments to IAS 1 Presentation of Financial Statements on 12 February 2021 which are effective for annual periods beginning on or after 1 January 2023 relating to disclosures in financial standards to aid preparers of financial statements in deciding which accounting policies to disclose in the financial standards to provide more useful information to the users of the standards.
The amendments to IAS 1 require companies to disclose information regarding the material accounting policies i.e., those that are relevant to an understanding of its financial statements, as opposed to the significant accounting policies. An accounting policy is relevant if it relates to material transactions, other events or conditions, or if it involves significant judgements or assumptions.
Additional amendments to IFRS Practice Statement 2 Making Materiality Judgements have been made to provide guidance in applying the concept of materiality when deciding on accounting policy disclosure. An entity should consider the nature and extent of information that users need to understand the transactions, other events or conditions that affect its financial position and performance and should also avoid duplicating information that is already provided by other sources, such as IFRS standards, laws or regulations.
As a consequence of the above amendments, the independent auditor’s reports on financial statements is expected to change as follows:
Opinion:
We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including material accounting policy information.
The amendments are expected to improve the quality and usefulness of accounting policy disclosures by reducing unnecessary or boilerplate information and focusing on the most relevant aspects. Entities should review their existing accounting policies and assess whether they need to revise or delete them based on the amended requirements. Entities should also consider how to present their accounting policies in a user-friendly way, such as using plain language, headings, subheadings and cross-references.
Amendments IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
Separately, in February 2021 as part of the Definition of Accounting Estimates Projects, the Board has also issued amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to clarify how companies should distinguish changes in accounting policies from changes in accounting estimates.
That distinction is important because changes in accounting estimates are applied prospectively only to future transactions and other future events, but changes in accounting policies are generally also applied retrospectively to past transactions and other past events.
The definition of a change in accounting estimates is replaced with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”.
Entities develop accounting estimates if accounting policies require items in financial statements to be measured in a way that involves measurement uncertainty.
The Board clarifies that a change in accounting estimate that results from new information or new developments is not the correction of an error. In addition, the effects of a change in an input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors.
The amendment is expected to provide more clarity and consistency in applying IAS 8 and to reduce the risk of misstatement or restatement of financial statements due to incorrect classification of changes in accounting policies or changes in accounting estimates.
IAS 12: Amendments to deferred tax related to assets and liabilities arising from a single transaction
The Board has amended IAS 12, ‘Income taxes’, to require companies to recognise deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The proposed amendments will typically apply to transactions such as leases for the lessee and decommissioning obligations.
The initial recognition exemption (IRE) is an exception to the requirement to recognize deferred tax assets and liabilities relating to all deductible and taxable temporary differences.
IAS 12 was amended to include an additional condition where the initial recognition exemption is not applied. According to the amended guidance, a temporary difference that arises on initial recognition of an asset or liability is not subject to the initial recognition exemption if that transaction gave rise to equal amounts of taxable and deductible temporary differences.
Finally, there have been some consequential amendments to IFRS 1, ‘First-time Adoption of International Financial Reporting Standards’. Deferred tax related to assets and liabilities arising from a single transaction has been added to the list of the exceptions to the retrospective application of other IFRSs.
These amendments might have a significant impact on the preparation of financial statements by companies that have substantial balances of right-of-use assets, lease liabilities, decommissioning, restoration and similar liabilities. The impact for those affected would be the recognition of additional deferred tax assets and liabilities.
The amendment requires companies, at the beginning of the earliest comparative period presented:
(a) to recognise a deferred tax asset – to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised – and a deferred tax liability for all deductible and taxable temporary differences associated with:
- right-of-use assets and lease liabilities; and
- decommissioning, restoration and similar liabilities, and the corresponding amounts recognised as part of the cost of the related asset; and
(b) to recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date.
This will reflect the opening position, without the need for full retrospective application. The Board concluded that this transition approach would make the amendments easier and less costly to apply than a full retrospective approach, while still achieving their objective.
