What's new in IFRS in 2023?

1 new standard, amendments to 3 standards

 IFRS 17 Insurance Contracts

 The new standard IFRS 17 Insurance contracts is effective for periods beginning on or after January 1, 2023. Similar to IFRS 4 Insurance contracts, the new standard is aimed at increasing transparency in the accounting of insurance contracts. IFRS 17 sets out principles for the recognition, measurement, presentation and disclosure of information for insurance contracts. This information is used by users of financial statements to assess the effects that insurance contracts have on the company's financial position, financial performance and cash flows.

 A company must apply IFRS 17:

• to insurance contracts issued by it, including reinsurance contracts;

• to reinsurance contracts held by it;

• to investment contracts issued by it with discretionary participation features, provided that the company also issues insurance contracts.

At initial recognition, companies shall measure an insurance contract as the sum of the following:

1.    The fulfillment cash flows for obligations under the contract, which include

• estimates of future cash flows;

• discounting; and

• a risk adjustment for non-financial risk.

2.    The contractual service margin, which represents the unearned profit that the company will recognize as services are provided over the coverage period.

At each reporting date the liability under the insurance contract comprises the sum of the liability of the remaining part of the coverage (fulfillment cash flows for future obligations under the insurance contract and the margin) and the liability for incurred claims (fulfillment cash flows for claims obligations).

A company recognizes income and expenses for the following changes in the amount of the liability:

• changes in the effect of the time value of money and financial risk - in insurance finance income or expenses;

• changes related to past and current liabilities - as part of profit or loss; and

• changes related to future obligations adjust the contractual service margin.

Insurance revenue for each reporting period is generated from the changes in the liability for the remaining coverage obligations related to services for which the company expects to be reimbursed. Investment components and return of premiums are excluded from insurance revenue and insurance service expenses. The result of insurance services for the period is disclosed separately from insurance finance income or expenses.

Companies may choose to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income. The selected accounting policies need to be applied to individual portfolios of insurance contracts.

Amendments to standards

IAS 1 Presentation of Financial Statements

The International Accounting Standards Board (IASB) previously clarified the definition of materiality and issued non-mandatory IFRS Practice Statement 2: Making Materiality Judgments (Practice Statement). Judgment of materiality is required not only for making recognition and measurement decisions, but also for making decisions about what information to disclose and how to present it.

As a final step in improving the concept of materiality, the IASB issued amendments to the application of materiality to disclosures in accounting policies.

The main amendments to IAS 1 include:

• requirement for companies to disclose their material accounting policies rather than their significant accounting policies;

• clarification that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and

• clarification that not all accounting policies related to material transactions, other events or conditions are themselves material to a company's financial statements.

The amendments correspond to the clarified definition of “materiality”:

“Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements”.

The IASB also included guidance and two additional examples on the application of materiality to accounting policy disclosures in IFRS Practice Statement 2: Making Materiality Judgments.

The amendments are effective for periods beginning on or after 1 January 2023.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

The International Accounting Standards Board (IASB) issued amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors explaining how companies need to distinguish changes in accounting policies from changes in accounting estimates.

The distinction between accounting policies and accounting estimates is important because changes in accounting policies are generally applied retrospectively, while changes in accounting estimates are applied prospectively. Thus, the approach chosen can affect both the presentation of the results and trends between periods.

The amendments to IAS 8 also clarify the relationship between accounting policies and accounting estimates, detailing that a company develops an accounting estimate to achieve the objective set by the accounting policy. Thus, the development of an accounting estimate includes:

• selecting a  measurement method (method of valuation) - e.g. a valuation method used to measure the allowance for expected credit losses; and

• choosing the inputs to be used applying the chosen measurement method - e.g. the expected cash outflows for determining the warranty obligations provision.

The consequences of changes in the choice of measurement methods or inputs are changes in accounting estimates.

The amendments are effective for periods beginning on or after 1 January 2023.

IAS 12 Income taxes

According to the amendments to IAS 12 Income taxes, companies need to account for deferred tax on certain transactions - e.g. leases and decommissioning provisions. The issue is that not all companies disclose the future tax consequences of leases in their financial statements.

The amendments narrow the scope of the initial recognition relief so that it does not apply to transactions that give rise to equal and offsetting temporary differences. All companies will now be required to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision.

The amendments clarify that the initial recognition relief applies to transactions such as leases and decommissioning obligations. Such transactions give rise to equal and offsetting temporary differences.

For leases and decommissioning liabilities, the related deferred tax assets and liabilities to be recognized from the beginning of the earliest comparative period presented, with any cumulative effect recognized as an adjustment to retained earnings or other components of equity at that date.

International taxes

In December 2021, as part of the reform of the international corporate tax system, the Organization for Economic Cooperation and Development (OECD) adopted Pillar II model rules. The Pillar II model rules apply to international group companies that had consolidated revenue of €750 million for at least two of the last four years. Such revenue, as defined by the OECD, can include any type of income.

International groups of companies in accordance with the Pillar II model rules:

• must calculate the effective tax rate for each jurisdiction, in which they carry out their activities;

• are required to pay the difference between their effective tax rate in each jurisdiction and the minimum tax rate of 15%.

The parent company of an international group of companies bears the primary responsibility for paying taxes to the minimum in its jurisdiction.

The problem is how to account for these changes under IFRS as jurisdictions prepare to amend their local tax laws to introduce a global top-up tax under the new rules.

To address this issue, the International Accounting Standards Board (IASB) amended IAS 12:

• provide a temporary mandatory exemption from accounting for deferred tax on additional accrued tax liabilities; and

• require companies to provide new information to compensate for the possible loss of information resulting from the use of the exemption.

The exemption takes effect immediately and applies retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. It will apply until the IASB decides to either discontinue it or make it permanent