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Major IFRS Accounting Standard Modifications: A Glimpse into Financial Reporting

Major IFRS Accounting Standard Modifications: A Glimpse into Financial Reporting
Submitted by Sayoojya on

IFRS plays a crucial role in ensuring global consistency in financial reporting and can necessitate significant adjustments to reporting practices.

Although IFRS regulations are implemented for greater transparency, accountability, and comparability in financial reporting, they can also introduce complexities that pose challenges for businesses.

Having specialist finance and accounting experts who can keep abreast of the latest amendments and interpretations is key, especially given the sheer volume and pace of regulatory updates. Furthermore, interpreting the business effects of these changes requires an in-depth understanding of both the specifics of the regulations and the larger dynamics of the market.

2024/2025 Amendments

Enhanced Transparency in Lease Accounting

Clearer Guidelines for Liability Classification

Increased Disclosure of Supplier Finance Arrangements

Addressing Challenges in Foreign Exchange Reporting

The previous landscape- 2023 amendments

The year 2023 witnessed a significant evolution in the world of International Financial Reporting Standards (IFRS). The introduction of IFRS 17 was a revolutionary new standard in the realm of insurance contract accounting. As of January 1, 2023, IFRS 17 replaced the interim IFRS 4 standard, in force since 2004.

Before its implementation, the insurance industry operated under a patchwork of disparate accounting practices, leading to inconsistencies and challenges in comparability across entities. IFRS 17 aimed to address these shortcomings by establishing a single, comprehensive standard for insurance contract accounting.

More than just a change in rules, IFRS 17 introduced a new way of thinking about insurance contract measurement and reporting. It replaced the previous rule-based approach with principles-based requirements, introducing concepts like the contractual service margin (CSM) and risk adjustment. These changes provided a more accurate picture of an insurer's financial health and profitability.

Other IFRS amendments of 2023 include:

1. Clearer Accounting Policy Disclosures

Changes to IAS 1 and IFRS Practice Statement 2 emphasised the importance of disclosing accounting policies in a way that was most helpful to users of financial statements. This meant focusing on the most significant policies (material policies) and explaining how even minor transactions or events were treated (immaterial items). This improved transparency allowed stakeholders to gain a clearer understanding of how a company's financial performance was calculated.

2. Improved Clarity on Accounting Estimates

Amendments to IAS 8 provided a clearer definition of "accounting estimates." This helped companies distinguish between changes in accounting policies (how things are accounted for) and changes in estimates (updating existing numbers based on new information). This distinction ensured consistent and accurate financial reporting across different companies.

3. Consistency in Deferred Taxes: Addressing Specific Transactions

Updates to IAS 12 clarified the accounting treatment of deferred taxes for specific transactions like leases and decommissioning obligations. This reduced variations in how companies handled future tax liabilities, leading to more consistent financial statements.

4. Global Tax Initiatives: Addressing the GloBE Top-up Tax

The introduction of International Tax Reform—Pillar Two Model Rules under IAS 12 reflected efforts towards global tax transparency. While companies were given temporary exceptions for accounting for the GloBE top-up tax (a levy on certain profits), they were required to disclose their potential exposure to this tax. This increased transparency allowed stakeholders to better understand a company's tax obligations.

What’s on the horizon for 2024/2025?

While the 2023 amendments focused on clarity and consistency, the world of IFRS continues to evolve. Starting in January 2024, significant amendments to accounting standards now impact financial reporting practices. The upcoming changes for 2024/2025, such as those related to income taxes and debt with covenants, will further necessitate careful consideration of their implications for your business operations and financial statements.

Enhanced Transparency in Lease Accounting

Effective January 2024, amendments to IFRS 16 (Leases) will now impact how companies account for "sale-and-leaseback transactions" (when an asset is sold and then leased back). These changes aim to improve transparency by requiring companies to consider variable lease payments when reporting lease liabilities.

Clearer Guidelines for Liability Classification

Amendments to IAS 1 (Presentation of Financial Statements) clarify the classification of liabilities as current or non-current. These changes, effective in 2020 and 2022, respectively, ensure consistent reporting by focusing solely on the ability to defer settlement for at least 12 months. This can help improve a company's representation of its financial health by classifying liabilities more accurately.


Increased Disclosure of Supplier Finance Arrangements

Starting this year, companies now need to disclose more details about "supplier finance arrangements" (agreements with suppliers for extended payment terms). This increased transparency (via amendments to IAS 7) will benefit stakeholders by providing insights into potential risks and how these arrangements affect cash flow.

Addressing Challenges in Foreign Exchange Reporting

Looking ahead to January 2025, amendments to IAS 21 (The Effects of Changes in Foreign Exchange Rates) address situations where currencies cannot be readily exchanged. This update ensures greater accuracy and consistency in foreign exchange rate calculations.

These amendments highlight the ongoing commitment to refine accounting standards for improved transparency and financial reporting practices. By staying informed and adapting to these changes, companies can ensure they remain compliant and provide stakeholders with a clear picture of their financial health.

Morgan McKinley: Your Trusted Partner in Finance Reporting

New IFRS standards are here, and they can significantly impact how businesses present their financial statements. Understanding and effectively communicating the impacts of the new financial statements under IFRS is crucial for businesses and their stakeholders. These changes require not only a deep understanding of their implications but also a potentially daunting increase in workload to prepare compliant reports.

Our team of seasoned professionals are equipped to educate senior management and boards about the significance of the changes, ensuring they grasp the implications for profit measurement and business value creation.

By leveraging our expertise and resources, businesses can confidently navigate the transition to the new financial standards, empowering stakeholders with the knowledge and understanding they need to make informed decisions. We are here to provide tailored solutions and support every step of the way, ensuring that our clients remain well-equipped to thrive in an evolving financial landscape.

Here at Morgan McKinley, we understand the concerns of boards who have witnessed the time and resource demands of adapting to new IFRS standards through parallel and dry runs.

We can help you integrate these changes efficiently and cost-effectively. Our team of specialist consultants is here to provide market insights and access to qualified finance contractors at short notice. Their expertise on IFRS and wider accounting regulations and practices can help your organisation be ready to understand the impact of the new standards.

Don't go at it alone – contact us today for expert support in adapting to the evolving IFRS landscape.