After the implementation of several major new standards in recent years, including IFRS 9, 15 and 16, there are no new standards effective this year. There are, however, a few amendments to existing IFRS standards that became effective for periods beginning on or after 1 January 2020 and which therefore need to be reflected in June 2020 half year reports. We summarise the key changes below.
Amendments to IFRS 3: Definition of a business
The definition of a business in IFRS 3: Business Combinations has been amended in order to help companies determine whether a transaction should be accounted for as a business combination or as an asset acquisition. This is likely to result in more acquisitions being accounted for as asset acquisitions. The key changes are as follows:
- The new definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others.
- To be considered a business, an acquisition must include, as a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. Additional guidance and illustrative examples are provided for assessing whether substantive processes have been acquired, including for an early stage company that has not yet generated revenue and does not have any outputs. If there are no outputs, then a substantive process will only be present if there is an organised workforce.
- An optional ‘concentration test’ has been introduced to permit a simplified assessment of whether an acquired set of activities and assets is not a business. A transaction will treated as an acquisition of assets (ie not a business) if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or groups of similar identifiable assets. The test could be useful for acquisitions of, for example, investment property holding companies or early stage exploration companies in the natural resources sector.
The amendments are effective for acquisitions that occur in periods beginning on or after 1 January 2020.
Amendments to IAS 1 and IAS 8: Definition of material
The definition of material has been amended in IAS 1: Presentation of Financial Statements and IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and should be considered when deciding what information should be included in financial statements.
The new definition of material is:
“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements”.
The definition includes as a new concept that obscuring information may be relevant in determining whether something is material to the financial statements. The definition has also been narrowed with the focus on “primary users” instead of “users” and the wording “could reasonably be expected to influence”.
Amendments to IAS 39, IFRS 9 and IFRS 7: Interest Rate Benchmark Reform
Phase 1 of the interest rate benchmark (IBOR) reform amendments is now effective and relates to changes to IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures.
As a reminder, IBORs (or interbank offered rates) are interest reference rates, for example LIBOR. They are now to be replaced with risk-free interest rates that are based on transaction data. The replacement of IBORs results in a number of potential accounting complexities for companies so the IASB has been working to introduce reliefs to address these issues. These are split into two phases: phase 1 and phase 2.
Phase 1 of these amendments focus on ‘pre-replacement’ accounting issues specifically related to hedge accounting during the period of uncertainty prior to IBORs being replaced.
A number of reliefs have been introduced which will effectively allow preparers to disregard IBOR reform when evaluating whether hedging relationships should be discontinued under IAS 39 and IFRS 9. It is important to note that any hedge ineffectiveness arising must still be recognised in profit or loss. IFRS 7 has also been amended to include new qualitative disclosures.
For further information, read our previous article on phase 1 of IBOR reform. Phase 2 is currently in progress and further amendments to IFRS are expected to be issued later this year.
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