IFRS: Issued but Not Yet Effective

Below is a brief summary of recently issued standards that will become effective in 2018 and 2019. The adoption of these recently issued standards will involve some complexities and you may wish to contact your D&H Group LLP advisor to provide guidance and clarification.

These recently issued standards, IFRS 9 – Financial Instruments, IFRS 15 – Revenue from Contracts with Customers and IFRS 16 – Leases, have implications for most preparers of International Financial Reporting Standards (“IFRS”)-compliance financial statements.

Effective for annual periods beginning on or after January 1, 2018:

IFRS 9 – Financial Instruments (“IFRS 9”)

IFRS 9 replaces the multiple classification and measurement models in IAS 39 – Financial instruments: recognition and measurement (“IAS 39”) with the following:

  • Financial assets – amortized cost, fair value through profit and loss (FVTPL) or fair value through other comprehensive income (FVTOCI)

    IFRS 9 eliminates the “held to maturity” and “available for sale” categories for financial assets. The classification of financial assets under IFRS 9 is based on two conditions: an entity’s business model and the asset’s contractual cash flow characteristics.

    IFRS 9 also does not require embedded derivatives of financial assets to be accounted for separately.

  • Financial liabilities – amortized cost or FVTPL

    The classification of financial liabilities under IFRS 9 is consistent with IAS 39.

IFRS 9 prohibits reclassifications between categories, except in rare circumstances such as when the entity’s business model changes.

IFRS 9 introduces a new impairment model based on expected credit losses, as opposed to the incurred loss model in IAS 39. Under an expected credit loss approach, impairment losses are recognized when credit losses are anticipated rather than waiting for loss events to factually occur. IAS 39 prohibited impairment losses based on future events, no matter how likely, which was identified as a weakness in IAS 39 after the 2009 financial crisis.

IFRS 9 requires recognition of an allowance which is dependent on the credit risk of the financial instrument since initial recognition:

  • 12 month expected credit losses – credit risk has remained consistent since initial recognition
  • Lifetime expected credit losses – credit risk has increased since initial recognition

Credit risk of a financial instrument is assessed based on the risk of default occurring as at the reporting date compared with the risk of default occurring as at initial recognition.  Also, a simplified impairment approach is included in IFRS 9 for trade receivables.

IFRS 9 is to be applied in conjunction with IFRS 32 – Financial instruments: presentation and IFRS 7 – Financial instruments: disclosures.

IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”)

The new standard will apply to nearly all contracts with customers: the main exceptions are lease contracts, insurance contracts and financial instruments.

The new revenue model in IFRS 15 can be broken down into 5 steps:

  1. Identify the contract with a customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue when the entity satisfies a performance obligation

IFRS 15 significantly expands the disclosure requirements relating to revenue compared with IAS 18 – Revenue. In addition IFRS 15 provides application guidance for a number of topics including: warranties, principal versus agent considerations, non-refundable upfront fees and bill-and-hold arrangements.

Effective for annual periods beginning on or after January 1, 2019:

IFRS 16 – Leases (“IFRS 16”)

IFRS 16 requires lessees to recognize a leased asset and a lease liability for the majority of leases unless the lease term is 12 months or less or the underlying asset value, when new, is less than $5,000. Such low value assets might include tablets, personal computers, small items of office furniture and telephones. IFRS 16 eliminates the distinction between operating and financing leases found in IAS 17.

Financial statement effects resulting from adoption of IFRS 16 include:

  • Statement of financial position – assets and liabilities relating to operating leases will be recognized whereas under IAS 17 – Leases (“IAS 17”) they were off balance sheet rights and obligations. Leased assets and liabilities are presented separately on the statement of financial position or are disclosed in the notes to the financial statements.
  • Statement of comprehensive loss – both depreciation and interest expense will be recognized whereas previously under IAS 17 operating leases were expenses.

IFRS 16 includes additional disclosures requirements relating to leases compared with IAS 17.

Transition to the recently issued standards

The adoption of IFRS 9, IFRS 15 and IFRS 16 can be applied using the retrospective approach in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors or a modified retrospective approach. Under a modified retrospective approach comparative years are not restated as the cumulative effect of applying the new standard is recorded as an adjustment to opening equity at the date of initial application with explanatory disclosures. IFRS 9, IFRS 15 and IFRS 16 each have specific requirements when using the modified retrospective approach.