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

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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 International Sustainability Disclosure Standards – IFRS S1 and IFRS S2

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.

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The Statement of Cash Flows

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Statement of Cash Flows

IAS 7.10 requires an entity to analyse its cash inflows and outflows into three categories:

  • Operating;
  • Investing; and
  • Financing.

IAS 7.6 defines these as follows:

‘Operating activities are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.’

‘Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.’

‘Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.’

1. Operating activities

It is often assumed that this category includes only those cash flows that arise from an entity’s principal revenue producing activities.

However, because cash flows arising from operating activities represents a residual category, which includes any cashStatement of cash flows flows that do not qualify to be recorded within either investing or financing activities, these can include cash flows that may initially not appear to be ‘operating’ in nature.

For example, the acquisition of land would typically be viewed as an investing activity, as land is a long-term asset. However, this classification is dependent on the nature of the entity’s operations and business practices. For example, an entity that acquires land regularly to develop residential housing to be sold would classify land acquisitions as an operating activity, as such cash flows relate to its principal revenue producing activities and therefore meet the definition of an operating cash flow.

2. Investing activities

An entity’s investing activities typically include the purchase and disposal of its intangible assets, property, plant and equipment, and interests in other entities that are not held for trading purposes. However, in an entity’s consolidated financial statements, cash flows from investing activities do not include those arising from changes in ownership interest of subsidiaries that do not result in a change in control, which are classified as arising from financing activities.

It should be noted that cash flows related to the sale of leased assets (when the entity is the lessor) may be classified as operating or investing activities depending on the specific facts and circumstances.

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Ordinary shares issued and EPS

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Ordinary shares issued and EPS

Ordinary shares issued and EPS summarises the effects of three events involving share issued on EPS calculations including comprehensive examples:

Ordinary shares issued to settle liabilities

This chapter deals with ordinary shares issued to fully or partially extinguish a financial or non-financial liability, as a result of a renegotiation of the terms of the liabilities.

This chapter does not deal with:

EPS implications

Generally, ordinary shares issued to settle liabilities impact only basic EPS.

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Operating cash flows under IAS 7

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Operating cash flows

Cash flows must be analysed between operating, investing and financing activities.

For operating cash flows, the direct method of presentation is preferred, but the indirect method is acceptable.

Here are the differences and similarities between the direct and indirect method. Note the subtotals for operating, investing and financing activities are the same amount in both methods!

Indirect method cash flow statement

Direct method cash flow statement

Starts with:

Starts with:
  • Profit before tax
  • Adjustment for:
    • non-cash items
    • depreciation/amortization (add back to profit)
    • gain on disposal of NCA (deduct)
    • loss in disposal of NCA (add back)
    • remove impact of accruals
    • Interest expense (add back)
    • Interest income (deduct and relocate to Investing activities)
  • Movement on working capital items
    • Receivables (deduct increase, add decrease)
    • Payables (add increase, deduct decrease)
    • Inventory (deduct increase, add decrease)
    • Interest paid (deduct)
    • Taxation (including deferred tax movements) (deduct).
  • Acquisition cash flows
  • Receipts from customers
  • Less Payments to:
    • suppliers
    • employees
    • other operating expenses
    • interest charges
    • taxation

Operating cash flows

Cash Flows from Operating activities

Cash Flows from Operating activities
  • purchase of non-current assets
  • sale/disposal of non-current assets
  • acquisition cash flows
  • interest received/dividend received on investment.

Cash Flows from Investing activities

Cash Flows from Investing activities
  • purchase of (treasure) shares
  • cash from shares issued
  • dividend payments to owners
  • take loan/issue bonds
  • acquisition cash flows
  • payments under lease agreements

Cash Flows from Financing activities

Cash Flows from Financing activities

Common cash flow classification errors in practice

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What is initial public offering

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What is initial public offering

An Initial Public Offering (IPO) comprises of a privately owned business that wants access the public capital market through the sale of securities (shares in the before IPO privately owned business). Thereby, the business can raise monies more readily than by the retention of profits in order to also grow through acquiring other businesses. Other possible motivations for an IPO include the prestige of ownership of a public company or the desire of major shareholders to exit the company.

Back-door listings

Another way that entities may list is through a reverse restructure with an existing non-operating listed entity that has few assets or liabilities (i.e. a shell company) or a Special Purpose Acquisition Company (SPAC).

Special Purpose Acquisition Companies (SPACs) are publicly traded companies formed for the sole purpose of raising capital through an IPO and using the IPO proceeds to acquire one or more unspecified businesses in the future.

The management team that forms the SPAC (the “sponsor”) forms the entity and funds the offering expenses in exchange for founder shares. There are various tax considerations and complexities that can have significant implications both during the SPAC formation process and down the road.

Under these circumstances where a private entity is ‘acquired’ by the listed entity, this is commonly referred to as aWhat is initial public offering back-door listing. Since the listed non-operating entity is not a business, the transaction is not a business combination. Normally such transactions are accounted for similar to reverse acquisitions.

However, because the accounting acquiree is not a business the transaction is considered a share-based payment. That is, the private entity is deemed to have issued shares to obtain control of the listed entity and to the extent their fair value exceeds the fair value of the listed entity’s identifiable net assets an expense will arise.

Disclosure of key judgements

Determining the appropriate accounting treatment of a reverse restructure with an existing non-operating listed entity that has few assets or liabilities (i.e. a shell company) or a SPAC often involves judgements. Therefore entities need to ensure that they comply with the disclosure requirements of IAS 1 Presentation of Financial Statements (‘IAS 1’), specifically paragraph 122.

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IFRS 10 Special control approach

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IFRS 10 Special control approach

– determines which entities are consolidated in a parent’s financial statements and therefore affects a group’s reported results, cash flows and financial position – and the activities that are ‘on’ and ‘off’ the group’s balance sheet. Under IFRS, this control assessment is accounted for in accordance with IFRS 10 ‘Consolidated financial statements’.

Some of the challenges of applying the IFRS 10 Special control approach include:

  • identifying the investee’s returns, which in turn involves identifying its assets and liabilities. This may appear straightforward but complications arise when the legal ownership of assets diverges from the accounting depiction (for example, in financial asset transfers that ‘fail’ de-recognition, and in finance leases). In general, the assessment of the investee’s assets and returns should be consistent with the accounting depiction in accordance with IFRS
  • it may not always be clear whether contracts and other arrangements between an investor and an investee
    • create rights or exposure to a variable return from the investee’s performance for the investor; or
    • transfer risk or variability from the investor to the investee IFRS 10 Special control approach
  • the relevant activities of an SPE may not be obvious, especially when its activities have been narrowly specified in its purpose and design IFRS 10 Special control approach
  • the rights to direct those activities might also be difficult to identify, because for example, they arise only in particular circumstances or from contracts that are outside the legal boundary of the SPE (but closely related to its activities).

IFRS 10 Special control approach sets out requirements for how to apply the control principle in less straight forward circumstances, which are detailed below:  IFRS 10 Special control approach

  • when voting rights or similar rights give an investor power, including situations where the investor holds less than a majority of voting rights and in circumstances involving potential voting rights
  • when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements IFRS 10 Special control approach
  • involving agency relationships IFRS 10 Special control approach
  • when the investor has control only over specified assets of an investee
  • franchises. IFRS 10 Special control approach

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IFRS vs US GAAP Employee benefits

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IFRS vs US GAAP Employee benefits

The following discussion captures a number of the more significant GAAP differences under both the impairment standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.

The significant differences and similarities between U.S. GAAP and IFRS related to accounting for investment property are summarized in the following tables.

Standards Reference

US GAAP1

IFRS2

715 Compensation – Retirement benefits

710-10 Compensation- General – Overall

712-10 Compensation – Nonretirement Postemployment Benefits – Overall

IAS 19 Employee Benefits

IFRIC 14 The limit on a defined benefit asset minimum funding requirements and their interaction

Introduction

The guidance under US GAAP and IFRS as it relates to employee benefits contains some significant differences with potentially far-reaching implications.

This narrative deals with employee benefits provided under formal plans and agreements between an entity and its employees, under legislation or through industry arrangements, including those provided under informal practices that give rise to constructive obligations.

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Need for accounting measurement the big 1

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Need for accounting measurement

Need for accounting measurement provides a summary of the measurement bases in use in Financial Reporting
and the concepts behind these measurement bases.
The measurement bases that will be considered here are

All these bases are forms of accrual accounting – that is, they are intended to measure income as it is earned and costs as they are incurred, as opposed to simply recording cash flows. The last four are all forms of current value measurement.

In forming a judgment on the appropriateness of measurement bases, in literature, the overriding tests has been identified to be their cost-effectiveness and fitness for purpose. However, in the absence of direct evidence on these matters, it is usual to argue in terms of various secondary characteristics that ought to be relevant in assessing the quality of information (see the key indicators in What is useful information?).

The most important of these characteristics are generally considered to be relevance and faithful representation / reliability (older term).

For each basis, an outline is given of how it works and the relevance and faithful representation of the resulting measurements. The question of measurement costs is also considered briefly. In reading the analyses that follow, the following comments should be borne in mind.

Bases of measurement in financial reporting are not carved in stone. Different people have different views on how each basis should work, and meanings evolve as practice changes. Some readers may therefore find that the way a particular basis is described does not match how they understand it.

This does not mean either that their understanding is wrong or that the description in the report is wrong; views on these things simply differ.

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1st and best IFRS Accounting for client money

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IFRS Accounting for client money

If an entity holds money on behalf of clients (‘client money’):

  • should the client money be recognised as an asset in the entity’s financial statements?
  • where the client money is recognised as an asset, can it be offset against the corresponding liability to the client on the face of the statement of financial position?

DEFINITION: Client money

“Client money” is used to describe a variety of arrangements in which the reporting entity holds funds on behalf of clients. Client money arrangements are often regulated and more specific definitions of the term are contained in some regulatory pronouncements. The guidance in this alert is not specific to any particular regulatory regime.

Entities may hold money on behalf of clients under many different contractual arrangements, for example:

  • a bank may hold money on deposit in a customer’s bank account;
  • a fund manager or stockbroker may hold money on behalf of a customer as a trustee;
  • an insurance broker may hold premiums paid by policyholders before passing them onto an insurer;
  • a lawyer or accountant may hold money on behalf of a client, often in a separate client bank account where the interest earned is for the client’s benefit.

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Primary users of general purpose financial reports

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primary users of general purpose financial reports that are existing and potential investors, lenders and other creditors who use that to make finance decisions