To start with, International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) to provide a common language for financial reporting. Recent changes to IFRS have significant implications for businesses and emphasize the need for compliance with global accounting standards.
Key Drivers of Recent IFRS Updates:
Globalization and Convergence: The increasing globalization of business and the need for consistent financial reporting across jurisdictions drove the development of new standards.
Technological Advancements: Advances in technology such as cloud computing and digital platforms necessitated the updates to existing standards.
User Needs: The International Accounting Standards Board (IASB) considered the needs of investors, analysts and other users of financial statements when developing recent updates. The aim is to provide more relevant and useful information to users.
Recent IFRS Updates
IFRS 9 Financial Instruments
IFRS 9 introduces a new classification and measurement framework for financial instruments, which aims at providing a more accurate and consistent reflection of an entity’s financial position and performance. IFRS 9, thus provides a single, integrated standard for financial instruments, and provides users with accurate and relevant information.
Key Features:
Classification and Measurement: Financial assets have been classified into three categories:
– Amortized Cost
– Fair Value through Other Comprehensive Income (FVOCI)
– Fair Value through Profit or Loss (FVPL)
Expected Credit Losses (ECL): IFRS 9 introduces a new impairment model based on expected credit losses, replacing the incurred loss model.
Hedge Accounting: IFRS 9 simplifies hedge accounting by aligning it with risk management practices.
De-recognition: IFRS 9 provides guidance on when financial assets and liabilities should be derecognized.
Key Principles
Business Model: Financial assets should be classified based on the entity’s business model for managing financial assets.
SPPI Test: Financial assets must be measured at amortized cost if they meet the Solely Payments of Principal and Interest (SPPI) test.
Expected Credit Losses: ECL must be recognized on financial assets, such as loans and receivables.
IFRS 15 -Revenue from Contracts with Customers
IFRS 15 provides a comprehensive framework for revenue recognition, addressing inconsistencies and weaknesses in existing standards. IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contract with a customer. Revenue is recognized when a company transfers control of a good or service to a customer in exchange for consideration.
Disclosure Requirements
IFRS 15 requires entities to disclose information about their revenue recognition policies, including:
Revenue recognition policies: An entity must disclose its revenue recognition policies, including the methods used to determine the transaction price and allocate it to performance obligations.
Revenue disaggregation: An entity must disaggregate its revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Contract balances: An entity must disclose its contract balances, including the opening and closing balances of contract assets and contract liabilities.
In sum, IFSR requires companies to recognise and present contract assets and liabilities separately on the balance sheet and provide disclosures about these amounts. This will enhance transparency and help users to understand a company’s contractual obligations and rights.
IFRS 16 (Leases): IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions. IFRS 16 provides a single, integrated model for lessees and lessors.
Key Features
Single Lessee Model: Lessees recognize all leases (except for short-term and low-value leases) as assets and liabilities on the balance sheet.
Right-of-Use (ROU) Asset: Lessees recognize a ROU asset, representing the right to use the underlying asset.
Lease Liability: Lessees recognize a lease liability, representing the obligation to make lease payments.
Interest and Depreciation: Lessees recognize interest expense on the lease liability and depreciation expense on the ROU asset.
Key Principles
Definition of a Lease: A lease is a contract that conveys the right to use an underlying asset for a period.
Separation of Lease Components: Lessees separate lease components (e.g., lease payments, non-lease components) from non-lease components.
Measurement of ROU Asset and Lease Liability: Lessees measure the ROU asset and lease liability at the present value of the lease payments.
Disclosure
Lessees provide detailed disclosures about their leasing activities. The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with information provided in the statement of financial position, statement of profit or loss and statement of cash flows gives a basis for users to assess the effect that leases have. Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective. Paragraphs 90 to 97 set out the detailed requirements for lessors.
IFRS 17- Insurance Contracts: IFRS 17 is a standard for insurance contract accounting, replacing IFRS. It provides a comprehensive framework for recognizing, measuring, and disclosing insurance contracts.
Scope and Applicability
IFRS 17 applies to all insurance contracts, including:
- Life Insurance Contracts: Contracts that provide coverage for mortality, morbidity, or longevity risks.
- Non-Life Insurance Contracts: Contracts that provide coverage for property, liability, or other non-life risks.
- Reinsurance Contracts: Contracts that transfer insurance risk from one insurer to another.
Key Features
Contractual Service Margin (CSM): A measure of the unearned profit in an insurance contract, which is recognized over the contract’s duration.
Insurance Revenue: Revenue recognized from insurance contracts, which is determined by the CSM and the release of the CSM over time.
Insurance Contract Liability: A liability that represents the present value of future cash outflows for insurance contracts.
Risk Adjustment: An adjustment made to the insurance contract liability to reflect the uncertainty of future cash flows.
Recognition and Measurement of Insurance Contracts
Initial Recognition: Insurance contracts must be recognized at the date of inception, which is the date when the contract becomes binding.
Measurement: Insurance contracts must be measured at the present value of future cash flows, using a risk-free rate and a risk adjustment.
Subsequent Measurement: Insurance contracts must be re-measured at each reporting date, using updated assumptions and estimates.
Presentation and Disclosure Requirements
Separate Presentation: Insurance contracts are presented separately from other assets and liabilities.
Disclosure of Insurance Contract Liabilities: Entities must disclose the carrying amount of insurance contract liabilities, as well as the risk adjustment and the contractual service margin.
Disclosure of Insurance Revenue: Entities must disclose the amount of insurance revenue recognised during the period.
Objective
IFRS 17 provides for a comprehensive framework for accounting for insurance contracts, reflecting the economic substance of these contracts and providing users with relevant information.
Relevance of IFRS Updates
Improved Financial Reporting: IFRS updates promote transparency, accountability, and consistency in financial reporting, enhancing the credibility of businesses.
Increased Investor Confidence: Adoption of IFRS updates can attract foreign investment, as investors seek transparency and consistency in financial reporting.
Enhanced Comparability: IFRS updates enable comparison of a business’s financial performance with global peers.
Compliance with Global Standards: IFRS updates ensure businesses comply with global accounting standards, facilitating international trade and investment.
Challenges and Opportunities
Implementation Challenges: Companies face challenges in implementing recent updates, particularly in areas such as revenue recognition and lease accounting.
Capacity Building: Businesses face challenges in developing the necessary skills and expertise to implement IFRS updates.
Infrastructure Development: Inadequate infrastructure such as technology and systems can hinder the adoption of IFRS updates.
. Regulatory Frameworks: Weak regulatory frameworks can impede the effective implementation of IFRS updates.
Opportunities for Growth: IFRS updates present opportunities for businesses to improve financial reporting, attract investment and enhance competitiveness.
Effective Date and Transition
- IFRS 9 and IFRS 15 effected for annual periods beginning on or after January 1, 2018.
- IFRS 16 effected for annual periods beginning on or after January 1, 2019.
- IFRS 17 effective for annual periods beginning on or after January 1, 2023.
- Entities requested to apply these standards retrospectively or use a modified retrospective approach.
Conclusion
Recent IFRS updates have significant implications for businesses. While challenges exist, the adoption of IFRS updates promote transparency, accountability and consistency in financial reporting, ultimately enhancing the credibility and competitiveness of businesses.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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