Regulatory updates

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 groups¹⁰The 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.