Focus definition or best trends in IFRS reporting based on IAS 1

To demonstrate what companies could do to improve the readability of their financial report and make it easier for users to find the information they need, here are some thoughts for changing your financial report. In particular:

  • Information is organised to clearly tell the story of financial performance and make critical information more prominent and easier to find.
  • Additional information is included where it is important for an understanding of the performance of the company.

For example, include a summary of significant transactions and events as the first note to the financial statements even though this is not a required disclosure.

Accounting policies that are significant and specific to the entity are disclosed along with other relevant information, in the section ‘How did we arrive at these numbers?’ While other accounting policies are listed in note 25, this is for completeness purposes. Entities should consider their own individual circumstances and only include policies that are relevant to their financial statements.

The structure of financial reports should reflect the particular circumstances of the company and the likely priorities of its report readers. There is no ‘one size fits all’ approach and companies should engage with their investors to determine what would be most relevant to them. The structure used in this publication is not meant to be used as a template, but to provide you with possible ideas. It will not necessarily be suitable for all companies.

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Landlord Lease modifications

Landlord Lease modifications / Rental modifications

Accounting for lease modifications has become a hot topic due to the COVID-19 pandemic, with many tenants seeking rent concessions and other changes to lease agreements.

Unlike IAS 17, IFRS 16 provides detailed guidance on the lessor accounting for lease modifications, with separate guidance for modifications to finance leases and operating leases.

A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and conditions. Common examples are:

  • decreasing the scope of the lease by removing the right to use one or more underlying assets;
  • decreasing the scope of the lease by shortening the contractual lease term; and
  • changing the consideration in the lease by increasing or decreasing the lease payments.

Changes that result from renegotiations of the original contract are lease modifications.

The exercise of an option included in the original lease contract is not a modification. There is no lease modification when a lessor reassesses the lease term if:

  • the lessee exercises an option not previously included in the lessor’s determination of the lease term;
  • the lessee does not exercise an option previously included in the lessor’s determination of the lease term;
  • an event occurs that contractually obliges the lessee to exercise an option not previously included by the lessor; or
  • an event occurs that contractually prohibits the lessee from exercising an option previously included by the lessor (see Changes in the lease term).

The following diagram summarises the accounting for lease modifications by a lessor/landlord.

Original lease is a finance lease

Change to contractual terms and conditions

Original lease is an operating lease

Increase in scope of lease by adding right of use for one or more underlying assets and at stand-alone price for increase

All other contract modifications.

Classification at inception if modification had been in effect then as:

Operating lease

Finance lease

Separate lease

Not a separate lease

Apply IFRS 9

Modifications to operating leases

Food for thought – When does a lessor account for a lease modification?

Similar to a lessee, a lessor accounts for modifications to operating and finance leases on the effective date of the modification. This is the date when both parties agree to the lease modification. (IFRS 16.79–80, IFRS 16.87)

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Definition of Material – Important changes to IAS 1 and IAS 8

Definition of Material

The Definition of Material (with amendments to IAS 1 and IAS 8) puts the spotlight on:

  • Applying materiality when preparing financial statements, by:

    • Encouriging IFRS reporting specialists to use materiality as a filter
    • Redefining the definition and existing guidance aim to help preparers apply judgement
    • Making amendments on account policy disclosures, and
    • Providing further guidance on disclosures

Materiality as a filter

Making information in financial statements more relevant and less cluttered has been one of the key focus areas for the International Accounting Standards Board (the Board replace by IASB).

Companies make materiality judgements not only when making decisions about recognition and measurement, but also when deciding what information to disclose and how to present it. However, management are often uncertain about how to apply the concept of materiality to disclosure, and find it easier to defer to using the disclosure requirements within the International Financial Reporting Standards as a checklist.

Up to now, the wording of the definition of material in the Conceptual Framework for Financial Reporting differed from the wording used in IAS 1 and IAS 8. The existence of more than one definition of material was potentially confusing, leading to questions over whether the definitions had different meanings or should be applied differently.

These amendments on accounting policy disclosures will enable IFRS reporting specialists documenting the decisions as to which accounting policies have been disclosed in the financial statements.
The focus on company-specific information
should further encourage tailored disclosure.

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IFRS 17 at a glance – Complete best read

IFRS 17 at a glance

IFRS 17 introduces the new measurement model for insurance contracts and will be effective in 2023.

Scope

Similar to IFRS 4 Insurance Contracts with some new requirements, including as to the border with financial instruments accounting.

IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the IASB’s comprehensive project on insurance contracts, the standard provides a temporary exemption from the requirements of some other IFRSs, including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.

IFRS 4 applies to annual periods beginning on or after 1 January 2005. IFRS 4 will be replaced by IFRS 17 as of 1 January 2023.

The general measurement model

IFRS 17 at a glance
Note: Depending on the facts and circumstances, the size and direction of the components could vary.

See also The general-model-in-insurance-contracts

Initial recognition

On initial recognition, the liability of a group of insurance contracts is made up of the following components.

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Sales outside ordinary activities – best way of combining IFRS 15 IAS 16 IAS 38 and IAS 40

Sales outside ordinary activities

Certain aspects of IFRS 15 apply to the sale or transfer of non-financial assets – e.g. intangible assets and property, plant and equipment – that are not an output of the entity’s ordinary activities.

Under IFRS 15, the guidance on measurement and derecognition applies to the transfer of a non-financial asset that is not an output of the entity’s ordinary activities, Sales outside ordinary activitiesincluding:

When an entity sells or transfers a non-financial asset that is not an output of its ordinary activities, it derecognises the asset when control transfers to the recipient, using the guidance on transfer of control in the respective standard IAS 16, IAS 38 or IAS 40 (see Transfer of control).

The resulting gain or loss is the difference between the transaction price measured under IFRS 15 (using the guidance in Step 3 of the model) and the asset’s carrying amount. In determining the transaction price (and any subsequent changes to the transaction price), an entity considers the guidance on measuring variable consideration – including the constraint, the existence of a significant financing component, non-cash consideration and consideration payable to a customer (see Step 3 – Determine the transaction price).

The resulting gain or loss is not presented as revenue. Likewise, any subsequent adjustments to the gain or loss – e.g. as a result of changes in the measurement of variable consideration – are not presented as revenue.

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Natural disasters IFRS accounting

Natural disasters IFRS accounting

In the wake of the recent and devastating flood events in Queensland and Victoria, the destruction caused by Cyclone Yasi in Far North Queensland and the fires that have raged in Western Australia, attention for business has now turned from crisis management and clean up to addressing the longer term financial and business implications.

Business Continuity and Crisis Management

In the immediate aftermath of a disaster, the focus should be on stabilising your business.

Factors to consider include:

  • Cash flow – consider your short term cash flow requirements and evaluate how these needs might be met. This could include sourcing government grant assistance, taking advantage of concessions offered by government agencies to disaster affected business (eg ATO lodgement and payment deferrals), discussing short term financing needs with your bankers, discussions with stakeholders such as shareholders, deferring or re-prioritising (where possible) major items of expenditure and reviewing your commitments to your customers and suppliers.
  • People – employees may have been directly or indirectly impacted by the disasters, and support for staff at this time can be critical to the recovery of your business. Consideration should be given to ensuring staff are able to take an appropriate time off work (both when directly affected and also to participate in voluntary clean-up activities where appropriate), providing support services such as Employee Assistance Programs, and ensuring premises and work sites are safe. Other factors to consider include actively managing your workforce to preserve working capital, ensuring employees are focused on tasks that provide the biggest benefit to your business, and being mindful of potential legal obligations and responsibilities to employees. Above all, it is extremely important to communicate effectively with employees at times of crisis, to ensure that they remain focused on the things that matter to your business, and to ensure that a lack of information is not filled by counter-productive speculation and rumour.
  • Customers and suppliers – businesses should focus on discussing how the disasters have impacted key customers and suppliers, as disruptions to the supply-chain or sales pipeline may have significant adverse impacts on cash flow. Consideration should not just be given to those suppliers and customers directly impacted, but also to the indirect impacts (e.g. suppliers to your supplier / customers of your customer etc).

In the longer term, many businesses will need to consider and perhaps recreate their business continuity plans/crisis management strategies moving forward. Despite many businesses having these plans in place, the “acid test” of true crisis has highlighted that many businesses were not as well prepared as they thought. Many plans had never been properly tested in the past.

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Landlord Lease payments

Landlord Lease payments

Distinguishing between fixed and variable lease payments will impact the profile of a landlord’s earnings.

1. Overview

At commencement, a lessor identifies the lease payments, which include: (IFRS 16.70)

  • fixed payments, including in-substance fixed payments, less any lease incentives;Landlord Lease payments
  • variable lease payments that depend on an index or a rate;
  • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
  • payments of penalties for terminating the lease, if the lease term reflects the assessment that the lessee will exercise an option to terminate the lease; and
  • the full amount (regardless of the likelihood that payment will be due) of any residual value guarantees provided to the lessor by the lessee, by a party related to the lessee or by a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.

Real estate leases will often include some or all of the following:

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Going concern and pandemics

Going concern and pandemics

IAS 1 Presentation of Financial Statements requires management, when preparing financial statements, to make an assessment of an entity’s ability to continue as a going concern, and whether the going concern assumption is appropriate.

Furthermore, disclosures are required when the going concern basis is not used or when management is aware, in making their assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.

Disclosure of significant judgement is also required where the assessment of the existence of a material uncertainty is a significant judgement.

In assessing whether the going concern assumption is appropriate, the standard requires that all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period, should be taken into account.

This assessment needs to be performed up to the date on which the financial statements are issued.

Refer to ‘Current vulnerability due to concentration and liquidity risks‘ below for further discussion on the current vulnerability entities are facing due to concentration and liquidity risks.

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Allocating goodwill to cash-generating units

Allocating goodwill to cash-generating units

On this page we discuss how to allocate goodwill to CGUs.

Identifying CGUs is a critical step in the impairment review and can have a significant impact on its results. That said, the identification of CGUs requires judgement. The identified CGUs may also change due to changes in an entity’s operations and the way it conducts them.

After the entity identifies its CGUs, it must determine which assets belong to which CGUs, or groups of CGUs. The basis of allocation differs for:

The below diagram summarises the different allocation bases for goodwill:

the different allocation bases for goodwil

It is not possible to determine the recoverable amount of goodwill independently from other assets because goodwill does not generate cash flows of its own; rather it contributes to the cash flows of individual CGUs or multiple CGUs.

As such, goodwill must be allocated to individual CGUs (or groups of CGUs) for the purpose of impairment testing. The guidance in IAS 36 requires the goodwill acquired in a business combination to be allocated to each of the acquirer’s CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. Further, the level to which the goodwill is allocated must:

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