Subsidiaries prepare for reporting change

The 100m sprint is often seen as the ‘blue riband’ event of the Olympics, being the barometer for measuring who the fastest person in the world is. My own sprinting career sadly ended with a disappointing seventh in the final of the school sports day, aged 16.

If someone were to ask who the fastest person in the world was currently, many would say Usain Bolt, even though he retired in 2017. Since his retirement, a number of contenders have been vying to take on his mantle but none have really got the same recognition.

Such is the situation with IFRS Standards (often referred to as the 100m final of accounting in the Deller household). Since the huge standards relating to revenue and leases were produced as IFRS 15 and IFRS 16, there is relatively little interest, in the wider community, in the next standard to come.

As mentioned in previous articles, there are three projects currently listed in the International Accounting Standards Board's (IASB) work plan contending for the mantle of the next IFRS Standard. They are:

• subsidiaries without public accountability: disclosures
• primary financial statements
• rate-regulated activities.

Let’s take a brief look at the principles of the ‘subsidiaries without public accountability’ project. The IASB is developing a new IFRS Standard with reduced disclosures, which can be applied by subsidiaries without public accountability. These entities could also choose to apply IFRS for SMEs but they may often choose not to.

More arduous

The accounting for leases is one of the major areas where entities may wish to apply the new standard rather than the IFRS for SMEs, which maintains the classifications of finance leases and operating leases for lessee accounting. Applying IFRS for SMEs in an entity that leases many items would involve dual record-keeping and a more arduous process when the consolidated financial statements are compiled under the full IFRS Standards.

Under the proposals for leases in the exposure draft released in 2021, entities would still be required to disclose the key elements of items such as the carrying amount and depreciation in respect of leased assets, the interest expense and the amount of lease liabilities. Any short-term or low-value leases would also have to be disclosed. While IFRS 16, Leases, covers many more elements, attempting to provide guidance for many different situations, the proposals are really focused on the core elements that users will need.

This is echoed across the proposals. For example, under IFRS 2, Share-based payment, a company must give information about the models used, the inputs to these models and volatility. Under the proposed standard, the requirement simply requires entities to disclose how equity-settled and cash-settled schemes have been valued and is much less prescriptive for preparers.

Offering choice

Many of the disclosure differences have this aim: to put elements of choice back to the preparer in terms of disclosures rather than trying to prescribe a large list of items that must be disclosed. At times this isn’t particularly easy, and the disclosure section relating to financial instruments is particularly lengthy, which will probably surprise approximately no one.

There are a few small notable surprises in there, however. For example, an entity with an asset that is classified as held for sale or has been sold would not necessarily have to disclose the gain or loss on that disposal. This is also the case for sale and leasebacks, where there is no requirement to disclose any gain or loss on these.

Who is eligible?

Under the current proposals, this new standard will be only for entities with parent companies that prepare consolidated financial statements under IFRS Standards. This has proved the most debated part of the project, with many commenters suggesting that the scope could be widened, even as far as all SMEs. So far, there is no intention to widen the scope, despite these comments.

Overall, while this may be the next IFRS Standard issued, it’s actually unlikely to have a significant impact on preparers. Many of the core disclosures will remain, but it may mean that preparers can delete a few paragraphs from their notes. The standard is not one that will lead to wholesale changes, unlike the proposal for Primary Financial Statements, which we will discuss next time.