Regulatory updates

A sale and leaseback is a transaction for which a company sells an asset and leases that same asset back for a period of time from the new owner. Currently, IFRS 16, Leases includes requirements on how to account for a sale and leaseback at the date the transaction takes place. However, IFRS 16 did not specify how a company accounts for a sale and leaseback after the date of the transaction. In this regard, the International Accounting Standards Board (IASB), in November 2020 had released an Exposure Draft (ED), Lease Liability in a Sale and Leaseback (Proposed amendment to IFRS 16) .

Consequently, on 22 September 2022, IASB issued final set of amendments to IFRS 16 (Lease liability in a Sale and Leaseback) (amendments), which add to the requirements explaining how a company accounts for a sale and leaseback after the date of the transaction. The amendments would not change the accounting for leases other than those arising in a sale and leaseback transaction.

Currently, as per IFRS 16, a seller should measure the right-ofuse asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right-ofuse retained by the seller-lessee. However, IFRS 16 did not prescribe how a liability arising in a sale and leaseback transaction should be measured.

The amendments have now confirmed the following:

• On initial recognition: On initial recognition, the sellerlessee includes variable lease payments when it measures a lease liability arising from a sale-and-leaseback transaction
• After initial recognition: After initial recognition, the sellerlessee applies the general requirements for subsequent accounting of the lease liability such that it does not recognise any gain or loss relating to the right-of-use it retains.

A seller-lessee may adopt different approaches that satisfy the new requirements on subsequent measurement.

Effective date: The amendments are effective for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted.

A seller-lessee would be required to apply the amendments retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to sale and leaseback transactions entered into after the date of initial application

To access the IFRS project page which discusses the amendment, please click here

In January 2020, the International Accounting Standards Board (IASB) issued amendments to International Accounting Standard (IAS) 1, Presentation of Financial Statements, thereby clarifying how an entity classifies its debt and other financial liabilities as current or non-current in certain circumstances (2020 amendments). This amendment was applicable from 1 January 2023.

However, stakeholders raised concerns regarding 2020 amendments and IASB reviewed those amendments. To improve the information provided by companies regarding a long-term debt (with attached covenants) undertaken by companies, IASB issued additional amendments to IAS 1 in October 2022 (2022 amendments). Some of the key changes introduced in the 2022 amendments include:

a. Liabilities with covenants – Classification criteria: Under the existing requirements of IAS 1, companies classify a liability as current when they do not have an unconditional right to defer settlement for at least 12 months after the reporting date. Through the 2022 amendments, IASB has now removed the requirement for a right to be unconditional, i.e., a liability would be classified as non-current, even if the right to defer settlement is subject to some underlying conditions (covenants).

However, such right must exist at the reporting date and have substance.

It has also been clarified that only such covenants with which a company must comply on or before the reporting date would affect the classification of a liability as current or non-current. Any covenants with which the company must comply after the reporting date (i.e., future covenants) would not affect a liability’s classification at that date. The same can be explained with the help of an example below:

Example: Company ABC Ltd. (the company) has a loan which is repayable in five years. Other facts of the case are:

• Loan is subject to a covenant which requires the company to maintain an EBITDA of at least 10 per cent on 31 December 20X2 and 14 per cent on 30 June 20X3 respectively. The loan becomes repayable on demand if the target EBITDA is not met on any of the specified dates
• The company is preparing its annual financial statements for the year ending 31 December 20X2. The EBITDA is 11 per cent as on 31 December 20X2. Also, the company expects an EBITDA of 12.5 per cent as on 30 June 20X3.

b. Additional disclosure requirements: When non-current liabilities are subject to future covenants, a company would be required to disclose appropriate information for helping the users of financial information understand the risk that those liabilities could become repayable within 12 months after the reporting date

c. Clarification on convertible liability: The amendments have also provided a clarification on classification of a convertible liability – e.g., convertible debt. When a liability comprises of a conversion option, involving transfer of a company’s own equity instruments, the conversion option is recognised as either equity or a liability separately from the host liability under IAS 32, Financial Instruments: Presentation.

In this regard, the IASB has now clarified that when a company classifies the host liability as current or non-current, it can ignore only those conversion options that are recognised as equity. In simple terms, if the conversion option is recognised as a liability under IAS 32, the same would affect current or non-current classification of the host liability.

Effective date: The amendments would apply retrospectively for annual reporting periods beginning on or after 1 January 2024, with early application permitted. They also specify the transition requirements for companies that may have early-adopted the previously issued but not yet effective 2020 amendments.

To access the text of the IASB announcement, please click here

On 8 March 2023, the International Accounting Standards Board (IASB) concluded its project, Disclosure Initiative – Targeted Standards-level Review of Disclosures on improving the approach for developing and drafting disclosure requirements in IFRS Accounting Standards. The improved approach would assist the IASB develop accounting standards which would enable companies in making better judgements regarding which information is material and should be disclosed, thereby providing more useful information to the investors.

The improved approach involves:

• Engaging early with investors to understand their information needs,
• Developing disclosure requirements alongside recognition and measurement requirements,
• Considering the digital reporting implications of new disclosure requirements,
• Using general and specific objectives that describe and explain investors’ information needs, and
• Supporting specific objectives by requiring companies to disclose items of information that would satisfy the objectives in most cases.

To access the text of the project, please click here

In December 2021, the Organisation for Economic Co-operation and Development (OECD) published Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS (the Rules). The Rules were introduced with the objective to address the tax challenges arising from the digitalisation of economy by ensuring that large multinational groups ¹⁰The minimum tax rate of 15 per cent would be applicable to multinational groups having consolidated revenues of EUR750 million or more in at least two of the preceding four years pay a minimum amount of tax (i.e., 15 per cent) on income arising in each jurisdiction in which they operate.

Over time, various concerns were raised by the stakeholders regarding the potential implications of the Rules. In particular, uncertainty over the accounting for deferred taxes arising from the Rules was identified as a key challenge area. Thus, in order to address these concerns, the International Accounting Standards Board (IASB), on 9 January 2023, issued an Exposure Draft (ED), International Tax Reform – Pillar Two Model Rules (Proposed amendments to IAS 12). Based on the feedback and representations received from various stakeholders, recently, IASB issued certain amendments to the International Accounting Standard (IAS) 12, Income Taxes. These include:

• Temporary exception to the accounting for deferred taxes arising from the implementation of the Rules: The amendments specify that an entity should not recognise or disclose information about deferred tax assets and liabilities arising from the implementation of the Rules. However, the entity should disclose the fact that it has applied this exception. The exception¹¹ It is mandatory for the companies to apply this temporary exception would be effective immediately upon issuance of the amendments and retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
• Disclosure requirements: IASB has specified certain disclosures, which includes both quantitative and qualitative information which would enable users of the financial statements understand the company’s exposure to pillar-two income taxes at the reporting date¹² Following disclosures are required in this regard:
  Once tax law is enacted but before top-up tax is effective:
  • Qualitative information: How the company is affected by Pillar Two taxes and in which jurisdictions the exposure arises – for example, where the top-up tax is triggered and where it will need to be paid
  • Quantitative information:The proportion of profits that may be subject to Pillar Two income taxes and the average Effective Tax Rate (ETR) applicable to those profits, or how the average ETR would have changed if Pillar Two legislation had been effective.
  After top-up tax is effective: Only one disclosure is required – i.e., current tax expense related to top-up tax . These would be effective for the annual reporting periods beginning on or after 1 January 2023.

To access the text of the amendments, please click here

On 25 May 2023, the International Accounting Standards Board (IASB) issued certain amendments to IAS 7, Statement of Cash Flows and IFRS 7, Financial Instruments: Disclosures. The amendments have been issued basis the agenda decision issued by the IFRS Interpretations Committee in December 2020 and the subsequent Exposure Draft (ED) on supplier finance arrangement¹³Supplier finance arrangements are also referred to as supply chain finance, trade payables finance or reverse factoring arrangements , issued by the IASB. Some of the key amendments and clarifications introduced are illustrated using the given diagram:

(Source: Foundation for Audit Quality’s analysis, 2023)

Effective date: The amendments are effective for the periods beginning on or after 1 January 2024¹⁴The amendments provide relief from disclosing certain information in the year of initial application, with early application permitted.

As per the provisions of International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates, a company uses a spot exchange rate when translating a foreign currency transaction.

However, in certain cases it may be possible that one currency cannot be exchanged into another currency. Consequently, market participants are unable to buy and sell currency to meet their needs at the official exchange rate and instead resort to unofficial, parallel markets. In this regard, in August 2023, the International Accounting Standards Board (IASB) issued certain amendments to IAS 21. These include:

• Assessing exchangeability: IASB has stated that a currency is exchangeable into another currency, when a company is able to exchange that currency for the other currency at the measurement date and for a specified purpose. However, when a currency is not exchangeable, a company should estimate a spot rate.

• Estimating spot rate: The amendments contain no specific requirements for estimating a spot rate. Thus, when estimating a spot rate, a company can use:

• An observable exchange rate without adjustment, if that rate meets the estimation objective – i.e., it reflects that, at which rate an orderly exchange transaction would take place at the measurement date between market participants under the prevailing economic conditions, or
• Another estimation technique, including using rates from exchange transactions in markets or exchange mechanisms that do not create enforceable rights and obligations. However, the technique used should meet the estimation objective.

• Estimating spot rate: Under the amendments, companies would need to provide certain new disclosures to help users assess the impact of using an estimated exchange rate on the financial statements. These disclosures include:

• Nature and financial impacts of the currency not being exchangeable
• Spot exchange rate used
• The estimation process, and
• Risks to the company because the currency is not exchangeable.

Effective date: The amendments would apply for annual reporting periods beginning on or after 1 January 2025. Earlier application is permitted.

To access the text of the amendments, please click here