The International Sustainability Disclosure Standards – IFRS S1 and IFRS S2 – Best read

05/11/2023 by 75385885

The International Sustainability Disclosure Standards – IFRS S1 and IFRS S2

On 26 June 2023 the International Sustainability Standards Board (ISSB) released its first two International Sustainability Disclosure Standards (IFRS SDS or the Standards) that become effective for periods beginning on or after 1 January 2024. Together they mark the start of a new era of requiring companies to make sustainability-related disclosures.

The ISSB was launched by the IFRS Foundation at COP26 with the aim of improving the consistency and quality of sustainability reporting across the globe, by matching the importance of sustainability reporting with the current regulations around financial reporting. To reinforce this message, the ISSB sits alongside the International Accounting Standards Board (IASB) and is overseen by the trustees of the IFRS Foundation and the Monitoring board.

The ISSB brings together the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), the name behind the Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB) Standards.

Cloud based software in IFRS 15 Revenue

01/11/2023 by 75385885

Cloud based software

Historically, companies acquiring IT and other infrastructure have only faced one decision – buy or lease? From a financial perspective, the choice was simple: lease, because it didn’t require up-front capital and potentially allowed assets to be kept off balance sheet under the old accounting rules. A buy decision meant an up-front investment of capital and a depreciating asset on the balance sheet.

However, with the evolution of technology, a new choice has emerged – cloud services, which can be obtained without buying or leasing. Instead of expensive data centres and IT software licenses, users can choose to simply have a provider host all of their infrastructure and services. No upfront investment is required, just a simple monthly series of payments that can be scaled up, scaled back or cancelled as needed. But what does all of this mean for income statements – and your company’s balance sheet?

Cloud accounting – a different business model

Historically, any company purchasing its IT infrastructure would capitalise the costs and amortise them over time. Under the new leases standard, a company using a lease or hire purchase arrangement to access IT infrastructure would end up with a similar capitalised asset and amortisation charge over time. However, the cloud alternative represents a fundamentally different business model, one where, unlike the legacy purchase model, a user of cloud services does not ever own the underlying assets.

While this isn’t yet another article about the leases standard, it’s useful to step through some of the sensitivities in financial metrics under the leasing standard. While cloud services are likely to result in a differing accounting treatment, the all too familiar concerns in lease accounting are still relevant.

Example accounting policies

21/09/202107/06/2021 by 75385885

Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

The real meaning of Integrated reporting

14/09/2021 by 75385885

The real meaning of integrated reporting

Integrated reporting is more than only aimed at informing interested stakeholders about performance achieved against targets, the vision and strategy adopted to serve the stakeholders’ interests, and other factors that can influence business performance in future.

Clearly regulations require companies to exercise transparency. However, a more fundamental reason for reporting lies in accountability: a company needs to account for the impact it has on the stakeholders it relates to. Not exercising such transparency would impose serious risks, including high financing costs to compensate for a lack of transparency or governance or, ultimately, losing the license to operate. By contrast, a transparent approach would not only improve reputation, but also would bind stakeholders such as employees to the company’s objectives.

The reason for including environmental and social factors in reporting

In today’s world companies play a significant role in shaping the future of society. Awareness of this has risen significantly over the last decades, resulting in changed attitudes towards the role business is expected to play.

It also resulted in changes in the views of business leaders about the role they want to play.

Business these days is seen more than ever as the agent of a wide group of stakeholders. Unlike the old paradigm that ‘the business of business is business’, companies accept wider accountability in current times towards the stakeholders whose interests they impact – no longer can companies focus only on the interests of those with a financial interest.

This wider accountability implies that companies have to fulfil the (information) needs of those who provide them with integrated reporting other economic resources such as labour, space, air or natural resources and those who enter into transactions with the organization such as customers. Therefore a company’s current performance and future ability to continue operations and achieve business growth needs to be evaluated on the basis of a comprehensive set of factors that influence these.

Embedded derivatives best 1 to read

10/09/202114/03/2019 by 75385885

Embedded derivatives are a component of a hybrid contract that also includes a non-derivative host, so some cash flows vary similar to a stand alone derivative

Purchased and originated credit-impaired financial assets – IFRS 9 Best Read

04/09/202126/02/2019 by 75385885

Purchased and originated credit-impaired financial assets

Purchased and originated credit-impaired financial assets are those for which one or more events that have a detrimental impact on the estimated future cash flows have already occurred. If these financial assets had been originated or purchased before becoming credit impaired, they would be in Stage 3 and lifetime expected losses would be recognised.

Purchased and originated credit-impaired financial assets Indicators that an asset is credit-impaired would include observable data about the following events:

Significant financial difficulty of the issuer or the borrower
Breach of contract,
The lender has granted concessions as a result of the borrower’s financial difficulty which the lender would not otherwise consider,
It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation,
The disappearance of an active market for that financial asset because of financial difficulties,
The financial asset is purchased or originated at a deep discount that reflects the incurred credit losses.

It may not be possible to identify a single discrete event. It could be the combined effect of several events may have caused financial assets to become credit-impaired.

Food for thought – Interaction between definitions of ‘credit-impaired’ and ‘default’

The definition of ‘credit-impaired’ under IFRS 9 may differ from the entity’s definition of ‘default’ (see explanation here). However, an entity’s definition of default should be consistent with its credit risk management, and should consider qualitative factors. For example, many financial institutions apply regulatory definitions of default for accounting and regulatory purposes – e.g. those issued by the Basel Committee on Banking Supervision under which a default is considered to have occurred when it is unlikely that the obligor will be able to repay its obligation. The assessment of whether such a definition is met may be based on similar criteria to those used for assessing whether an asset is credit-impaired. In these cases, the asset would be considered to be in default when it is credit-impaired. (IFRS 9.5.5.37)

Example Disclosure financial instruments

05/07/2021 by 75385885

Example Disclosure financial instruments

The guidance for this example disclosure financial instruments is found here.

7 Financial assets and financial liabilities

This note provides information about the group’s financial instruments, including:

an overview of all financial instruments held by the group
specific information about each type of financial instrument
accounting policies
information about determining the fair value of the instruments, including judgements and estimation uncertainty involved.

The group holds the following financial instruments: [IFRS 7.8]

Amounts in CU’000	Notes	2020	2019
Financial assets
Financial assets at amortised cost
– Trade receivables	7(a)	15,662	8,220
– Other financial assets at amortised cost	7(b)	4,598	3,471
– Cash and cash equivalents	7(e)	55,083	30,299
Financial assets at fair value through other comprehensive income (FVOCI)	7(c)	6,782	7,148
Financial assets at fair value through profit or loss (FVPL)	7(d)	13,690	11,895
Derivative financial instruments
– Used for hedging	12(a)	2,162	2,129
		97,975	63,162
Example Disclosure financial instruments
Financial liabilities
Liabilities at amortised cost
– Trade and other payables¹	7(f)	13,700	10,281
– Borrowings	7(g)	97,515	84,595
– Lease liabilities	8(b)	11,501	11,291
Derivative financial instruments
– Used for hedging	12(a)	766	777
– Held for trading at FVPL	12(a)	610	621
		124,092	107,565

The group’s exposure to various risks associated with the financial instruments is discussed in note 12. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. [IFRS 7.36(a), IFRS 7.31, IFRS 7.34(c)]

11 Best fair value measurements under IFRS 13

29/06/202126/03/2020 by 75385885

11 Best fair value measurements under IFRS 13

Several IFRS standards provide guidance regarding the scope and application of the fair value option for assets and liabilities. Here they are from 1 to 11…….

1 Investments in associates and joint ventures

Investments held by venture capital organizations and the like are exempt from IAS 28’s requirements only when they are measured at fair value through profit or loss (FVPL) in accordance with IFRS 9. Changes in the fair value (FV) of such investments are recognized in profit or loss in the period of change.

The IASB acknowledged that FV information is often readily available in venture capital organizations and entities in similar industries, even for start-up and non-listed entities, as the methods and basis for fair value measurement are well established. The IASB also confirmed that the reference to well-established practice is to emphasize that the exemption applies generally to those investments for which fair value is readily available.

2 Intangible assets

Subsequent to initial recognition of intangible assets, an entity may adopt either the cost model or the revaluation model as its accounting policy. The policy should be applied to the whole of a class of intangible assets and not merely to individual assets within a class, unless there is no active market for an individual asset.

The revaluation model may only be adopted if the intangible assets are traded in an active market; hence it is not frequently used. Further, the revaluation model may not be applied to intangible assets that have not previously been recognized as assets. For example, over the years an entity might have accumulated for nominal consideration a number of licenses of a kind that are traded on an active market. 11 Best fair value measurements under IFRS 13

The entity may not have recognized an intangible asset as the licenses were individually immaterial when acquired. If market prices for such licenses significantly increased, the value of the licenses held by the entity would substantially increase. In this case, the entity would be prohibited by IAS 38 from applying the revaluation model to the licenses, because they were not previously recognized as an asset.

Realised cash flows differ from expectations

18/06/202113/07/2019 by 75385885

Realised cash flows differ from expectations – The business model assessment is forward-looking, so cash flows may sometimes be realised in a way that differs in a way that differs from the entity’s expectations at the time of the original assessment.

For example, the entity might sell more assets from the portfolio than had been anticipated at the time of making the original assessment for various reasons. If cash flows are realised in a way that is different from the expectations at the date on which the entity assessed the business model – e.g. if more or fewer financial assets are sold than was expected when the assets were classified – then this does not:

give rise to a prior-period

Software as a service

07/06/2021 by 75385885

What is cloud computing and more specific software as a service?

Cloud computing is essentially a model for delivering information technology services in which resources are retrieved from the internet through web-based tools and applications, rather than a direct connection to a server. Data and software packages are stored in servers. Cloud computing structures allow access to information as long as an electronic device has access to the internet.

This type of system allows employees to work remotely. Cloud computing is so named because the information being accessed is found in the ‘clouds’, and does not require a user to be in a specific place to gain access to it. Companies may find that cloud computing allows them to reduce the cost of information management, since they are not required to own their own servers and can use capacity leased from third parties. Additionally, the cloud-like structure allows companies to upgrade software more quickly.

There are various types of cloud computing arrangements. Cloud services usually fall into one of three service models: infrastructure, platform and software. Here the focus is on software as a service (SaaS).

What is SaaS?

SaaS is a software distribution model in which the customer does not take possession of the supplier’s hardware and application software. Instead, customers accesses the supplier’s hardware and application software from devices over the internet or via a dedicated line. In these types of arrangements, the customer does not manage or control the underlying cloud infrastructure, including the network, servers, operating systems, storage, and even individual application software capabilities, with the possible exception of limited user-specific application software configuration settings, nor is the customer responsible for upgrades to the underlying systems and software.

The key issues

In practice, it is clear that there are various application issues relating to the customer’s accounting in SaaS arrangements. These arrangements may often be bundled with other products and services, such as implementation, data migration, business process mapping, training, and project management.