A whirlwind tour of IFRS changes

in Industry Insights, 07.01.2014

CFOs have a tendency to fret over any new changes to accounting standards, especially when they relate to IFRS. In this era of over-regulation, new standards are synonymous with increased complexity and – dare I say it – sleep-inducing reads. For many, the news that IFRS has been updated once again inspires little excitement. If we’re honest and open, most people merely desire to find out what the new changes will mean for them and what the overall impact will be. If you’re one of these people, read on for our high level overview of the most recent round of IFRS updates.

IAS 19 Employee Benefits: keep your shareholders in the loop

The new changes to IAS 19 are going to hurt in terms of equity if you used the corridor method for actuarial gains and losses. To cut a long story short, the profit and loss statement will be impacted by new compulsory rules on the presentation of other comprehensive income (OCI). The definition of long and short-term employee benefits has been modified and consequently this may trigger changes in classification. The updates will affect the presentation of total actuarial gains and losses, therefore potentially having a significant impact on equity. Shareholders will need to be warned in advance of these coming changes, otherwise the difference in equity may be met with surprise.

IFRS 10 Consolidated Financial Statements: good news?

A change close to many of our hearts in Luxembourg is the introduction of consolidation relief for investment funds. From January 2014, companies, including Private Equity funds, which meet certain criteria may be classified as ‘investment entities’ and will no longer be required to consolidate their financial reports under IFRS. It remains to be seen whether this will be a good enough argument to make those using Lux GAAP jump ship to IFRS in the future.

Another key change introduced by IFRS 10 is the new control model, which requires careful consideration and in some cases judgment.

IFRS 11 Joint arrangements: No more proportionate consolidation

A big hit to all financial statements lines is the abolishment of proportionate consolidation for joint ventures. Under IFRS 11 joint ventures will be treated as equity investment, so they will be shown in one line in the balance sheet and in the income statement. Furthermore, it will be more complex to decide whether the joint arrangement is a joint venture or joint operation. If it is a joint operation, then a new model will apply.

IFRS 12 Interest in other entities: a ‘show more’ philosophy

In addition to disclosing subsidiaries, associates and joint ventures, companies will also have to disclose their interests in other entities (unconsolidated structure entities, sponsorship), all in the name of greater transparency. For those involved in funds, such disclosures may prove difficult, as many funds don’t yet include all the information necessary in their systems. Nonetheless, the new philosophy is ‘show more’.

IFRS 13: Single standard on Fair value measurement

Finally we have a single standard for fair value measurement. It deals with all aspects of fair value measurement. The highest and best use concept is introduced also which is applicable for non-financial assets. It is an important concept for the real estate industry – it deals with how to value properties. Becoming compliant may not be as simple as making a few tweaks here and there – for some, it may even involve changes to processes and systems.  The reaction of the Swatch group in Switzerland has been to turn their back on IFRS and look to their national Swiss GAAP. So, do we really need to drop IFRS? I don’t think so, it is a great advantage for financial statements to be understood by investors from all around the world because they have been prepared under a common accounting framework: IFRS.

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