IFRS latest developments
and trends
Gábor Balázs
PwC’s Academy
What‘s new in accounting?
So what’s new in accounting?
Not that much …
But the devil is in the details ...
3
What are we going to cover today?
Approved by IASB for application after 1 January 2023
IFRS 17
IFRS 17 Insurance Contracts including Amendments to IFRS 17
EU-2023
IFRS 17
Amendments to IFRS 17 Insurance Contracts – initial application of IFRS 17 and IFRS 9 – comparative information
EU-2023
IAS 1
Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 – a requirement to disclose material information
about accounting policies
EU-2023
IAS 8
Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors – definition of accounting estimates
EU-2023
IAS 12
Amendments to IAS 12 Income Taxes – deferred tax related to assets and liabilities arising from a single transaction
EU-2023
IAS 12
Amendments to IAS 12 Income Taxes – temporary exception from the requirement to recognise and disclose deferred taxes in relation to Pillar 2
EU-?
Approved by IASB for application after 1 January 2024
IFRS 16
Amendments to IFRS 16 Leases – lease liability in a sale and leaseback transactions
EU-?
IAS 1
Amendments to IAS 1 Presentation of Financial Statements – classification of liabilities as current or non-current
EU-?
IAS 7
IFRS 7
Amendments to IAS 7 Statement of cash flows and IFRS 7 Financial instruments: Disclosures – disclosure requirements for supplier finance arrangements
EU-?
+ Power Purchase Agreements
4
POLL question:
Do we need to elaborate the potential impact of the
IFRS 17 ‒ Insurance contracts standard on our
accounting?
A) No, we are not an insurance company
B) Yes, but I am sure we do not have insurance contracts
C) Yes, an analysis is needed
D) No idea. Interesting question
Quarterly IFRS Update
PwC
December 2022
Why does IFRS 17 matter?
Consider a contract where your Client has an
obligation to perform maintenance services for
certain machinery owned by a Customer for the
next 3 years. The Customer is obliged to pay a
fixed amount for each instance of service but
your Client has to render the service even if its
cost is higher than the fixed amount. Your
Client does not have an insurance licence and
the contract was priced such that incurring a
loss is unlikely.
6
What is an insurance contract
IFRS 17 scope
Definition
Insurance contracts issued
Reinsurance contracts issued
Significant insurance risk
Reinsurance contracts held
Issuer
Compensation for adverse effect
of uncertain future event
Policyholder
Insurance contracts held
7
What is an insurance contract
Breaking down the definition
1
2
3
Uncertain future event
(‘insured event’)
Uncertainty over at least one of:
• whether an event will occur (e.g. an accident)
• when it will occur (e.g. death)
• how much it will cost (e.g. cost to rebuild after earthquake)
Adverse effect on
the policyholder
Also known as ‘insurable interest’, excludes:
• gambling contracts
• weather derivatives
Significant
insurance risk
A contract transfers significant insurance risk if:
• compensation for insured event would be significant in
any single scenario (i.e. worst case scenario)
• the issuer has a possibility of making a loss on a present value basis
8
What is an insurance contract
Example
For a pre-agreed fixed price, Entity A (a technology consultancy subsidiary of a TelCo) agrees to repair (or, if necessary,
replace) Customer B’s network equipment sold as part of a larger networked IT project at any time the equipment
malfunctions within the next five years.
Does it meet the definition of an insurance contract?
1
Uncertain future event
(‘insured event’)?
Yes. It is uncertain whether and when the network equipment will malfunction. It may also
be uncertain how much it will cost to pay for repair labour or replacements.
2
Adverse effect on
the policyholder?
Yes. Without the contract, in the event of malfunction Customer B would need to pay to
repair or replace the equipment, or go without it.
3
Significant
insurance risk?
Likely yes. The contract transfers from Customer B to Entity A the risk of malfunction. In a
single (‘worst case’) scenario, the equipment could malfunction many times with high cost
increases.
9
But …
Meeting the definition of an insurance contract does not necessarily mean the contract
(or every component) is accounted for using IFRS 17
Scope
exclusions
Scope
choices
Separating
components
10
POLL question:
Which accounting policies should be presented in the
Financial Statements?
A) Comprehensive accounting policies relating to all the transactions,
events or conditions that occurred or may occur to the entity
B) Material accounting policies only which help users to understand
material information
C) Disclose only the accounting policies in the areas where
IFRSs provide an accounting policy choice
Quarterly IFRS Update
PwC
December 2022
Amendments to IAS 1 Presentation of Financial Statements
and IFRS Practice Statements 2 – Making Materiality Judgements
Example
Description of the case
• The Entity operates within the telecommunications
industry.
• It entered into contracts with retail customers to
deliver mobile phone handsets and data services.
In a typical contract, the Entity provides a
customer with a handset and data services over
three years.
• The Entity applies IFRS 15 Revenue from
Contracts with Customers and has identified two
performance obligations and related
considerations:
− the handset – the customer makes monthly
payments for the handset over three years;
− data – the customer pays a fixed monthly
charge to use a specified monthly amount of
data over three years.
• For the handset – revenue is recognised when it
satisfied the performance obligation
(when it provides the handset to the customer).
• For the provision of data – the Entity concludes
that it should recognise revenue as it satisfies
the performance obligation (as the entity
provides data services to the customer over the
three-year life of the contract).
• The Entity notes that for contracts of this type it
applies separate accounting policies for two
sources of revenue, namely revenue from:
− the sale of handsets;
− the provision of data services.
12
Amendments to IAS 1 Presentation of Financial Statements
and IFRS Practice Statements 2 – Making Materiality Judgements
Example
Explanation of the application of the amended IAS 1
Is the transaction, other event or condition to which the
accounting policy information relates material in size or
nature, or a combination of both?
YES
Revenue from contracts with customers are material to financial statements.
There was no changes of accounting policies in the reporting period.
Policies were not chosen from accounting policy options available in IFRS Standards
and not developed in accordance with IAS 8.
Is the accounting policy information that relates to a material
transaction, other event or condition itself material to the
financial statements
Some of the entity’s revenue recognition accounting policies relate to an area for
which the Entity has made significant judgements in applying accounting policies –
e.g. deciding how to allocate transaction price.
Material accounting policy information would include information about how the entity has applied the requirements of IFRS 15 to its specific circumstances.
The entity, therefore, assesses that accounting policy information about revenue recognition is material and should be disclosed. Such disclosure would include information
about how the entity allocates the transaction price to its performance obligations and when the entity recognises revenue.
13
Amendments to IAS 1 Presentation of Financial Statements
and IFRS Practice Statements 2 – Making Materiality Judgements
Which one do you like more?
VS.
Useful life - range
Weighted avarage
useful life
Buildings – owned
30-40 years
33 years
Buildings – right of use
1-20 years
12 years
Fixture and fitting
8-12 years
9 years
Vehicles
4-6 years
5 years
Machinery and equipment
3-20 years
10 years
Machinery and equipment – right of use
1-15 years
7 years
Other tangible assets
2-20 years
10 years
Machinery and equipment - owned:
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POLL question:
Which treatment applies to deferred taxes arising from
a lease for lessees?
A) No deferred tax is recognised because of “IRE”
B) Deferred tax is recognised on the temporary difference on right of use assets
and lease liability
C) Deferred tax is recognised on the net temporary difference
Quarterly IFRS Update
PwC
December 2022
Amendments to IAS 12 – Income taxes – deferred tax related to assets and
liabilities arising from a single transaction
Which treatment applies under the amendment to IAS 12 Deferred
tax related to assets and liabilities arising from a single
transaction?
On 1.1.202X the entity (Lessee) has entered into the lease contract. On initial
recognition, the tax base of the lease liability is nil because Lessee will receive tax
deductions equal to the carrying amount of the lease liability (CU1000); the tax base of
the related component of the lease asset’s cost is also nil because Lessee will receive no
tax deductions from recovering the carrying amount of that component of the lease
asset’s cost (CU1000).
A) No deferred tax is recognised on right of use asset and lease
liability initially and subsequently because „initial recognition
exemption” applies
B) Deferred tax is recognised on the temporary difference on right of
use assets and lease liability. The net amount of deferred tax (DTA
offset with DTL) is recognised on the statement of financial position
but deferred tax asset and deferred tax liability is presented in the
notes at their gross amounts
The carrying amounts of the right of use assets and lease liability are presented below:
1.1.202X
31.12.202X
Carrying amount of right of use asset
1000
900
Carrying amount of liability
1000
930
0
-30
Net carrying amount
C) Deferred tax is recognised on the net temporary difference (i.e.
difference between right of use asset and lease liability)
A
B
C
1.1.202X
31.12.202X
1.1.202X
31.12.202X
1.1.202X
31.12.202X
Deferred tax liability on taxable temporary differences on right of use asset (at tax rate of 20%)
0
0
200
180
0
0
Deferred tax asset on deductible temporary differences lease liability (at tax rate of 20%)
0
0
200
186
0
0
Deferred tax asset at 20% - net
0
0
0
6
0
6
16
POLL question:
What does GloBE refer to?
A) GloBE refers to a top-up tax mechanism for a global minimum income tax
regime
B) GloBE refers to the hot topic of windfall taxes
C) GloBE refers to Sustainability related taxes
Quarterly IFRS Update
PwC
December 2022
The goal is to identify the top-up tax required.
To achieve this, a set of challenges needs to be mastered.
Covered Taxes
Country ETR < 15%
Local minimum
top-up tax
Substance based
carve-out
Top-Up Tax?
=
GloBE Income
GloBE income is calculated on the basis of the actual / true IFRS
result per country
18
Level 1 and 2: For Pillar 2, new entities become relevant that are not relevant for
the consolidated financial statements today
Overview of Constituent Entities und Process Assignment
Constituent Entities
(CE)
Typical challenges
Group / consolidated
entities
New units for
P2 purposes
Permanent
establishments
(Inbound / Outbound)
Group companies
IFRS
Non-consolidated
entities
Joint Ventures
• In the current group reporting process,
IFRS group reporting packages might not be
available for Permanent establishments and
small entities that are not consolidated so far
due to materiality reasons.
• Special rules to the treatment of Joint Ventures
in the Pillar 2 calculation might require more
detailed information and data streams in the
future.
All other CE
19
Level 3: IFRS result per Constituent Entity already available?
Typical topics that need to be analyzed in the group reporting process
A
Group or consolidation adjustments
B
IFRS compliant IC transactions
Lowered
Materiality
Potential adaption of audit materiality and historically
applied simplifications rules
Leasing
In practice IC leasing contracts are not
fully recorded in accordance with IFRS
in the group reporting packages
“Push down
accounting”
Purchase Price Allocation impacts
(e.g. step ups, brands, goodwill) in the
IFRS package of the entity need to be excluded
Revenue
recognition
Also IC revenue streams might not be
recorded fully in accordance due to
simplified consolidation procedures
Top Side
adjustments
Certain items recorded at group level only
(e.g. pensions, provisions) might need
to be included
Financing &
Hedging
Financing and hedging transactions might
need to be reflected in the IFRS reporting package of
the group entities as well
Inventory
valuation
Simplified valuation for IC transactions
in order to prepare regular intercompany
profit elimination procedures
20
International Tax Reform - Pillar Two Model Rules
IAS 12 amendments issued 23 May 2023
Temporary
exception from the
requirement to
recognise and
disclose deferred
taxes
Targeted disclosure requirements
●
●
●
Application of the exception
Current tax expense related to Pillar
Two
Exposure to Pillar Two income taxes
Who is impacted?
Multinational enterprises that
have consolidated revenues of
€ 750m in at least two out of
the last four years.
Disclosures effective from 1 January 2023
Not required to apply disclosures for interims ending within 2023
21
POLL question:
Can lease payments that are not dependent on an
index or a rate be included in the
measurement of lease liabilities?
A) Never
B) They should be included
C) Only in case of sale and leaseback transactions
Quarterly IFRS Update
PwC
December 2022
Amendments to IFRS 16 Leases – lease liability in a sale and leaseback transactions
IFRS 16
Amendments to IFRS 16 Leases – lease liability in a sale and leaseback transactions
If transfer of the asset is a sale,
seller-lessee shall recognize a Right of use asset and a Lease liability.
How to measure this lease liability?
At the present value of the expected lease payments that are not paid at the commencement
date, discounted using the appropriate rate.
The expected lease payments comprise the following payments:
a) fixed payments (including in-substance fixed payments), less any lease incentives;
b) variable lease payments (regardless of whether they depend on an index or a
rate);
c) amounts expected to be payable by the seller-lessee under residual value guarantees;
and
d) payments of penalties for terminating the lease, if the lease term reflects the sellerlessee exercising an option to terminate the lease.
23
POLL question:
Which statement is true?
A) The classification of a financial liability is affected by expectations about
whether an entity will exercise its right to defer settlement of a liability for at
least twelve months.
B) A liability is non-current only if the entity has an unconditional right, at the
end of the reporting period, to defer settlement for at least twelve months.
C) A liability is classified as current or non-current, depending on the rights
that exist at the end of the reporting period.
Quarterly IFRS Update
PwC
December 2022
Amendments to IAS 1 - Classification of liabilities as current or non-current
IAS 1
Amendments to Classification of liabilities as current or non-current
Classification of Liabilities as Current or Non-current Date (issued on 23 January 2020)
Classification of Liabilities as Current or Non-current - Deferral of Effective Date (issued on 15 July 2020)
Non-current Liabilities with Covenants (issued on 31 October 2022)
25
Amendments to IAS 1 - Classification of liabilities as current or non-current
Amendments to IAS 1
Classification of liabilities as current or non-current (issued in January 2020)
Substantial right of the entity to defer settlement of
the liability for at least 12 months after the balance sheet date.
The right must exist
at the balance sheet date.
Non-current liability
The right may be conditional
(IAS 1.69d new version), but
conditions must be met at the
balance sheet date (IAS 1.72A
new version).
It is irrelevant whether the company
will actually exercise its right.
Non-current liabilities with covenants (issued in October 2022)
• Covenants of loan arrangements which an entity must comply with only after the reporting date would not affect classification of a liability as current or
non-current at the reporting date.
26
Supplier finance arrangements
New disclosure requirements for SFA
Supplier
Amendments to IAS 7 and IFRS 7
Fee?
Mandatory for annual reporting periods
beginning on or after 1 January 2024 (early
adoption permitted)
Bank/Financier
Buyer
Fee?
27
What are the new disclosures for SFAs?
1
Terms and conditions of SFA
2
As at beginning and end of period:
a) carrying amount and associated line items of financial liabilities that are part of a SFA
b) carrying amount and associated line items of financial liabilities in (a) for which suppliers
have received payment
c) range of payment due dates of financial liabilities in (a) and comparable trade payables
that are not part of SFAs
3
SFA is included as an example of liquidity risk for quantitative disclosures of financial instruments
28
Power Purchase Agreements
There are various ways to obtain “green electricity”
Challenges
Strategic options for achieving the sustainability goal
The ideal procurement strategy
depends on the specific situation of
the company:
1
Guarantees
of origin
CO2 neutrality with a focus on guarantees of origin (GoO)
• How much capital is available to
the company?
2
PPA
On-site or off-site physical PPAs and
use of connected GoOs
3
Strategic
cooperation
Cooperation or JV with project developer and / or operator,
renewable energy company
4
Brownfield
Project investment
Acquisition of existing assets or shares in projects
5
Greenfield
Project investment
Acquisition of project rights to construct a facility
6
Company
acquisition
Acquisition of a project developer or
operator of renewable energies
• How quickly are Scope 2
emissions to be offset?
Capital intensity
• Are there plans for more
vertical integration?
30
What is a PPA?
Definition Power Purchase Agreement (PPA)
Power Purchase Agreements are long-term contracts between a buyer (off taker) and a seller (producer) of renewable energy that allow the buyer to
purchase electricity directly or indirectly on a long-term basis at a price level agreed upon by both parties and to receive the associated guarantees of
origin.
Conventional energy procurement process
Main features
Physical
PPA
The seller provides the physical
supply for the buyer (on-site or
off-site). The buyer has the obligation
to purchase the agreed amount of
electricity*.
Financial
(Virtual) PPA
The seller and the buyer enter into a
contract in which one party pays to
the other party, for example, the
difference between the market price
and the contract price.
Electricity + GoO
Producer
PPA
Long term contract
Buyer
Low price
Suppliers
GoO: Guarantees of origin (green electricity certificates)
Renewable energies,
verified through GoO
*This also applies if delivery is made via the general grid. The decisive factor here is that the produced / agreed quantity of electricity from the corresponding plant flows to the buyer and thus physical
settlement takes place.
31
PPA accounting
Sample accounting issues
As a buyer of energy and
certificates, do I have the right
to influence the design and
operation of the plant?
The PPA is net settled.
Is a derivative to be
recognised in profit or loss?
The PPA price is linked to
an inflation index. How does
this affect the accounting?
Green power certificates
are purchased under the PPA.
Is the treatment analogous
to CO2 certificates?
32
Focus on accounting topics
IFRS 10, IFRS 16, IFRS 9 and IAS 37 in interaction
IFRS 10 / IFRS 11
Is the generation asset
housed in a structured
entity (SPV)?
No
IFRS 16
Does the contract contain
a lease of the underlying
asset?
Yes
Controlled entity or
Joint Operation?
No
Yes*
Yes
Are the lease payments
fixed or substantially
fixed?
No
No
IFRS 9 / IAS 37
Are the “own use”
criteria met?
Yes
Asset and financial
liability
Asset and lease
liability
Variable
lease payments are
expensed
Is there an embedded
derivative that needs
to be bifurcated?
Yes*
Executory contract
Yes
No
Derivative
IFRS 9
* Only possible with physical PPA
Volatility unless
Hedge accounting
33
So what’s new in accounting?
Good luck
in applying these changes!
34
Thank you!
Want to learn more?
IFRS Update with PwC’s Academy
When? 11 December 2023 (9:00 - 16:30 CET)
https://www.pwc.com/hu/hu/academy/ifrs/ifrs-mesterkurzusok/ifrs_update_advanced.html
If you would like to learn more about IFRS topics, visit the IFRS e-learning series
developed by PwC’s Academy.
pwc.com/hu/en/academy.html
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