Background

In March 2022, the OECD released technical guidance on its 15% global minimum tax agreed as the second ‘pillar’ of a project to address the tax challenges arising from digitalisation of the economy. This guidance elaborates on the application and operation of the Global Anti-Base Erosion (GloBE) Rules agreed and released in December 2021 which lay out a co-ordinated system to ensure that multinational enterprises with revenues above €750 million pay tax of at least 15% on the income arising in each of the jurisdictions in which they operate.

The IASB took up a maintenance project and released final amendments to IAS 12 to respond to stakeholders’ concerns about the potential implications of the imminent implementation of these rules on the accounting for income taxes.

Subsequently, the IASB came to the conclusion that the pillar two model rules (and the amendments to IAS 12) are also relevant to entities applying the IFRS for SMEs and added to its work plan a narrow-scope standard-setting project to amend Section 29 Income Tax of the IFRS for SMEs. 

Changes

The amendments in International Tax Reform — Pillar Two Model Rules (Amendments to the 'IFRS for SMEs' Standard):

• introduce a temporary exception to the requirements in the IFRS for SMEs that an SME does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes; an SME discloses that it has applied the exception;
• clarify that ‘other events’ in the disclosure objective in section 29 of the standard include enacted or substantively enacted tax rates and tax laws, such as pillar two legislation;
• require an SME to disclose separately its current tax expense (income) related to pillar two income taxes when pillar two legislation is in effect.

Effective date and transition

An SME applies the exception immediately upon issuance of the amendments retrospectively (and discloses immediately that it has done so) and the requirement to disclose separately its current tax expense (income) related to pillar two income taxes for annual reporting periods beginning on or after 1 January 2023.

Additional information

Please click for:

• IASB press release (link to IFRS Foundation website)
• iGAAP in Focus newsletter explaining the amendments
• Our IAS Plus project page on IFRS for SMEs — OECD pillar two model rules

The following topics were discussed:

Work plan: The IASB received an update on its work plan. No decisions were made.

Rate-regulated Activities: The IASB redeliberated the proposals in the Exposure Draft Regulatory Assets and Regulatory Liabilities and made decisions on credit and other risks and the direct (no direct) relationship concept.

Equity Method: The IASB made decisions on the implications of applying its tentative decisions (for investments in associates) to investments in subsidiaries in separate financial statements, and joint ventures. The IASB also decided to propose amendments to improve the disclosure requirements for investments in associates but decided to retain the project’s scope.

Climate-related Risks in Financial Statements: The IASB decided that the objective of the project is to explore whether and, if so, how targeted actions could improve the reporting of financial information about climate-related and other uncertainties in the financial statements. The IASB also decided on the proposed potential actions to help address concerns about reporting the effects of climate-related risks in the financial statements.

Amendments to the Classification and Measurement of Financial Instruments: The IASB discussed the feedback received in response to the Exposure Draft. No decisions were made.

Business Combinations—Disclosures, Goodwill and Impairment: The IASB received a summary of tentative decisions made to date and made decisions about the remaining technical aspects of this project. The IASB also gave permission to ballot an Exposure Draft.

Extractive Activities: The IASB decided not to develop requirements or guidance on the information an entity discloses about its exploration and evaluation expenditure and activities. However, the IASB agreed to remove the temporary nature of the exemption in IFRS 6.

Business Combinations under Common Control: The IASB discussed the project direction and the measurement method to apply to a business combination under common control. No decisions were made.

Second Comprehensive Review of the IFRS for SMEs Standard: The IASB discussed overarching topics, which will assist the IASB in its redeliberations of the proposals in Exposure Draft Third edition of the IFRS for SMEs Accounting Standard. The IASB also discussed specific proposals in the ED with regard to revenue and impairment of financial assets. On impairment, the IASB decided that the problem it addressed in introducing the ECL model in IFRS 9 does not meet its principle of relevance to SMEs because the population of entities eligible to apply the IFRS for SMEs Accounting Standard that have significant exposure to credit risk is expected to be small.

Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures: The IASB decided to propose amending the new Standard to require an eligible subsidiary to disclose the strategic rationale for undertaking a business combination and whether the discount rate used in calculating value in use is pre-tax or post-tax. In addition, the IASB decided to ensure the wording of the disclosure requirement in the new Standard in relation to IFRS 3:B64(i) aligns with the proposals made by the IASB in the project on Business Combinations—Disclosures, Goodwill and Impairment and to amend the new Standard to require an eligible subsidiary to disclose information about the contribution of the acquired business.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

The research, which was conducted in response to an XRB call for research on intangibles, examines the reporting of and disclosures on intangible assets by listed companies and public benefit entities in New Zealand as a mid-sized market. 

Premise of the research was that accounting for intangibles has long been an area of contention and that there is no question that intangibles are not accurately reflected by financial reporting (the ‘missing information gap’). The research approach was then to look at (1) capitalised intangibles, (2) intangible expenses, and (3) unrecognised intangible disclosures:

• The research showed that nearly 90% of companies listed on the New Zealand stock exchange report intangibles, with software costs being the most commonly capitalised intangible, followed by goodwill. Generally, it was observed that there is a large range in terminology in intangible assets reported. 
• On intangible-related expenditures the research showed that donations are the most frequently reported expense followed by advertising, research and development, and IT expenses.
• Looking into unrecognised intangibles, the researchers found in a random sample of 20 companies no instances of the disclosures recommended by EFRAG in 2021 and the AASB in 2022. The researchers then analysed the disclosures on certain intellectual capital activities to gain an understanding about specific unrecognised intangibles. Findings revealed that qualitative disclosures are more prevalent than quantitative.

Generally, the research showed that capitalised intangible assets are viewed as 'useful' by market participants and that companies with greater disclosures on unrecognised intangibles have a stronger association between capitalised intangibles and market value.

Regarding the intangibles disclosures by public benefit entities analysed with the help of a random sample of municipal councils and large charities, the research revealed that the frequency of capitalised intangibles is similar to that of the for-profit sector. However, there are differences in the intangibles capitalised, and they are of less relative economic importance.

The research concludes with some observations and suggestions based on the findings:

• Regarding the large range of terminology in intangible asset reporting one solution could be the use of digital reporting such as Core & More reporting.
• An expense disclosure approach would require mandating specified categories to ensure disclosure.
• Capitalising currently expensed intangible-related activities would reduce but not offset the information gap.
• Aligning intangible asset fair value criteria to IFRS 13 might be a relatively low-cost solution to reduce the information gap.
• Disclosure of unrecognised intangibles would also provide a better understanding of capitalised intangible assets.

As a solution to the current unsatisfying reporting of intangibles two measures were suggested for intangibles with partial markets: Allowing the revaluation model as an accounting policy choice and allowing estimation of fair value under IFRS 13 along with appropriate disclosures of judgments and estimates. To achieve this, the IASB could amend IAS 38 to provide alternative criteria to “active market” such as “freely transferable” and “commonly traded”. The IASB could develop indicators to assist entities in determining whether the revaluation model policy choice was available. A longer term project could be to consider measurement for “unique” intangibles referred to in IAS 38.

The research, which was led by Professor Tom Scott and Zeting Zang of Auckland University of Technology in conjunction with Dr Laura Mehnaz (Massey University), is available on SSRN. 

Highlights of the podcast include discussions on:

• the project on climate-related risks in the financial statements that has been re-calibrated to also include "other uncertainties";
• the conclusion of technical discussions in the project on goodwill and impairment;
• the rate-regulated activities project;
• key takeaways from the equity method project;
• decisions made in the second comprehensive review of the IFRS for SMEs;
• the direction of the project looking at business combinations under common control; and
• decisions on the extractive activities project.

The podcast can be accessed here on the IFRS Foundation website.

An analysis of changes to the work plan resulting from the IASB discussions can be found here.

The event saw a panel discussion with IASB Vice-Chair Linda Mezon-Hutter on connectivity where participants discussed:

• Aspects of connectivity (What does it mean? What are users' needs? What are the roles of EFRAG and the IFRS Foundation?)
• Mechanisms for connectivity and the roles of financial reporting versus sustainability reporting (How does connectivity operate in practice? What is the role of the time horizons? How can technology be used to navigate and process financial and sustainability information?)
• Impact of having different types of users (What is the impact of having different types of users, particularly under a double materiality regime? Would the role of connectivity be different for different user groups?)
• Visions for connectivity for 2030 and expectations from academics.

EFRAG has now published a report summarising the discussions on its website.

The session began with two presentations of recent research on climate-related risks in the financial statements that illustrated the backdrop against which the IASB is pursuing its project.

A representative of the Australian Accounting Standards Board (AASB) presented forthcoming research Climate-related risks disclosures in the notes to financial statements: Descriptive evidence from Australia that examines whether entities have considered the effects of climate-related risks on their financial statement items and developments by comparing 2018 and 2022 financial statements. Findings included an increase in disclosures, disclosures provided in a broader range of industries, more items in the financial statements considered, but also many generic disclosures and much room for improvement. Findings also showed that larger entities are more likely to make detailed disclosures about climate-related risks in their financial statements and some disclosures may be included to mitigate litigation risks. In addition, general AASB research on the topic revealed that users of financial statement bemoan a lack of transparency, consistency in disclosing the issues, disclosures of assumptions and effects, and quantification.

A representative of the UK Endorsement Board (UKEB) presented recent research on the topic, including the two recently published research reports on connectivity. The research revealed a significant increase in the frequency of climate reporting in annual reports, however also concerns with the lack of connectivity within annual reports. Estimates and judgements were identified as a critical area of poor connectivity. In discussing the research findings, the UKEB advisory and working groups did not consider that accounting standards were deficient but noted a disparity between investor expectations and preparer’s ability and willingness to disclose potential impacts of climate in the financial statements. Also, while users accepted that entities cannot determine the full potential impact of climate risks, they expect the next phase of reporting to connect material sustainability disclosures to the financial statements.

Meeting participants were then presented with an overview of the IASB project recently renamed "Climate-related and other uncertainties in the financial statements". The presentation focused especially on the IASB's September 2023 discussions and decisions on the project where Board members concluded that requirements in IFRS Accounting Standards are generally sufficient, that there are some challenges in application, that there is the desire for timely action, and that this is an evolving area particularly with reporting developments from the ISSB and others. The Board decided to explore the development of a package of practical examples, to explore possible targeted amendments to improve disclosures about estimates in the financial statements, to refer some issues to the IFRS Interpretations Committee and to consult with the IFRS IC on others, and to continue to monitor developments in this area.

Following these three presentations, participants were invited to discuss the research findings and whether the IASB decisions would help to address them. Comments included:

• Some participants felt that the IASB's planned actions lacked ambition and called for "brave" decisions. They noted that the IASB should not duck away from more decisive action just because it would be difficult. Others, however, conceded that by exploring targeted improvements regarding estimates and judgements had indeed chosen the most difficult issue.
• While research had revealed that some preparers agree that the requirements especially in IAS 1 are sufficient, some seemed to use that as an excuse to continue not to report in a meaningful manner about climate-related risks or other uncertainties.
• It was noted that messaging was important so that the statement that IFRS accounting requirements are sufficient does not translate into the message that no change is needed. It might also help to clarify what financial statements are meant to achieve.
• Participants agreed that the change needed is behaviour change. It was questioned whether this could be achieved without standard setting or other more decisive actions. It was noted repeatedly that the November 2019 article by Board member Nick Anderson about how existing requirements within IFRSs relate to climate change risks was brilliant and shared often, but had not lead to any discernible change in behaviour.
• Participants supported the re-calibration of the project towards climate-related "and other uncertainties". It was noted that this reflected the IASB's principle-based approach to standard setting and also reflected practice where climate-related risks could not always be isolated from other uncertainties. However, it was also warned that the IASB should not lose sight of the most important issues by looking at too many uncertainties and should also not lose sight of short-term risks.
• While there was general support for the IASB to take action, it was noted that the IASB should not stray into the ISSB's remit, that duplication should be avoided, but also that connectivity should always be kept in mind and that IASB and ISSB should work together to provide missing links. It was noted that language is a very important means of linking sustainability issues with financial reporting requirements.
• On the question what national standard setters could contribute to the needed behaviour change suggestions included monitoring and reviewing developments, publishing results of research and reviews, communicating expectations, highlighting improvements and providing best practice examples, as well as working, where possible, with preparers in reporting lab environments.
• Overall there seemed to be a view that the project might be more complex than the IASB thinks and more decisive action might be needed, but participants also encouraged the IASB to build on the established concepts people already use and not to "throw the baby out with the bathwater".

The new guidance, International Non-Profit Accounting Guidance (INPAG), seeks to improve clarity and consistency of Non-Profit Organisation (NPO) financial reports, resulting in greater credibility and trust in the sector globally.

The exposure draft is the second of three parts, each followed by a 4-6-month consultation period. While ED1 addressed the framing for financial reporting of NPOs, ED2 is devoted to the accounting itself. It covers 12 sections:

1. Section 11 — Financial instruments
2. Section 13 — Inventories
3. Section 21 — Provisions and contingencies
4. Section 23 Part I — Revenue — Grants and donations
5. Section 23 Part II — Revenue — Contracts with customers
6. Section 24 Part I — Expenses — Grants and donations
7. Section 25 — Borrowing costs
8. Section 28 — Employee benefits
9. Section 29 — Income tax
10. Section 30 — Foreign currency translation
11. Section 31 — Hyperinflation
12. Section 32 — Events after the end of the reporting period

The remaining sections will be covered in ED3 expected in the first quarter of 2024. Final guidance will be published in mid-2025.

Please click for access to the ED and supporting material on the IFR4NPO website. Comments on the ED are requested by 15 March 2024.

Below is an analysis of all changes made to the work plan since our last analysis on 28 July 2023.

Standard-setting projects

• Disclosure Initiative — Subsidiaries without public accountability: Disclosures — A final standard is now expected in H1 2024 (previously 2024)
• Financial instruments with characteristics of equity — An exposure draft is now expected in November 2023 (previously Q4 2023)
• Management commentary — A decision on the project’s direction is now expected in H1 2024 (previously Q4 2023)
• Second comprehensive review of the IFRS for SMEs — A final standard is now expected in 2024 (previously 2025)

Maintenance projects

• Amendments to the classification and measurement of financial instruments — The next project step is now the publication of final amendments in H1 2024
• Amendments to the IFRS for SMEs — International tax reform — The next project step is now the publication of final amendments in September 2023
• Annual improvements to IFRS Accounting Standards — After the publication of the exposure draft in September 2023, feedback will discussed in Q1 2024; the following projects are included:
  • Cost Method (Amendments to IAS 7)
  • Credit Risk Disclosures (Amendments to Illustrative Examples accompanying IFRS 7)
  • Determination of a ‘De Facto Agent’ (Amendments to IFRS 10)
  • Disclosure of Deferred Difference Between Fair Value and Transaction Price (Amendments to Illustrative Guidance accompanying IFRS 7)
  • Gain or Loss on Derecognition (Amendments to IFRS 7)
  • Hedge Accounting by a First-time Adopter (Amendments to IFRS 1
  • Lessee Derecognition of Lease Liabilities (Amendments to IFRS 9)
  • Transaction Price (Amendments to IFRS 9)
• Climate-related and other uncertainties in the financial statements — The project has been renamed; the next project step is now a decision on the project direction expected in H1 2024
• Lack of exchangeability — The project has been removed from the work plan as final amendments were published in August 2023
• Power purchase agreements — A project newly added to the work plan; a decision on the project direction is expected in H1 2024

Research projects

• Business combinations under common control — A decision on the project direction is expect in November 2023 (previously September 2023)
• Extractive activities — The next project step is now the publication of a project summary expected in Q4 2023
• Post-implementation review of IFRS 15 — The feedback received will now be discussed in Q1 2024 (previously H1 2024)
• Post-implementation review of IFRS 9 (Impairment) — The feedback received will now be discussed in November 2023 (previously Q4 2023)

Other projects

• IFRS Accounting Taxonomy Update — Amendments to IAS 12, IAS 21, IAS 7 and IFRS 7 — The proposed IFRS Taxonomy update is expected in October 2023 (previously September 2023)
• IFRS Accounting Taxonomy Update — Common practice (Financial instruments) and general improvements — The proposed IFRS Taxonomy update is expected in November 2023 (previously Q4 2023)

The above is a faithful comparison of the IASB and ISSB work plan at 28 July 2023 and 26 September 2023. For access to the current work plan at any time, please click here.

The last consolidated text included international accounting standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB) until 15 October 2008. The new consolidated text now includes the standards and the related interpretations issued or adopted by the IASB and adopted by the Commission until 8 September 2022.

Please click to access the new consolidated text in the Official Journal. Please note that this link offers access to the text in all languages of the European Union.

At the end of day one of the meeting, the IASB aired a short video that visualised the path travelled together with messages from past and present IASC and IASB Chairs and Members as well as representatives of national standard setters.

Please click to access the video (six minutes) on YouTube.

Earlier today the IASB Chair had already delivered the opening address at the WSS meeting also focusing on the successful cooperation with the national standard setters.