Notes on the consolidated financial statements
Required disclosures in the notes on the legal status of IFRS
The notes to IFRS consolidated financial statements prepared in the EU must contain disclosures on newly adopted standards and interpretations (IAS 8.28) as well as on standards and interpretations that have been issued but not yet adopted (IAS 8.30). The following provides an overview of the current status of the standards and interpretations issued by the IASB that have to be reported on pursuant to IAS 8.28 and IAS 8.30 in IFRS consolidated financial statements prepared in the EU as of 31 December 2017.
Effects of new or amended standards and interpretations (IAS 8.28)
IAS 8.28 requires the disclosure of new and amended standards and interpretations when their initial application has an effect on the reporting period or any prior period. The scope of application of IAS 8.28 therefore extends to all changes in accounting policies that result from the initial application of a new or amended standard or interpretation. For example, the disclosures in the notes must then include the following in relation to the new standard or interpretation:
- Title of the standard or interpretation
- When applicable, a description of the transitional provisions
- Nature and change in accounting policy
- Amount of the adjustment for each financial statement line item affected (including earnings per share) for the beginning of the prior year, for the prior year and for the year, where practicable.
It must also be noted that the disclosures pursuant to IAS 8.28 are also required in the case of early voluntary adoption of new standards or interpretations.
Note: The following table provides an overview of rules under IAS 8.28 that potentially require disclosure in IFRS consolidated financial statements prepared in the EU as of 31 December 2017 as well as a general assessment in terms of their effect on accounting practice. It is not necessary to list all of the regulations. If necessary, a general wording can be included after the explanation of the new standards and interpretations as well as of their effects which states for example that the other standards and interpretations subject to mandatory adoption in the EU for the first time as of 1 January 2017 do not have any material effect on the consolidated financial statements.
Amendments to IAS 7 “Statement of Cash Flows”
The amendments aim to ensure that entities provide disclosures that enable users of financial statements to better evaluate changes in liabilities arising from financing activities.
The IASB states that one way to fulfill the disclosure requirement is by providing a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities. Based on the example presented below, the reconciliation should be prepared such that it provides sufficient information to enable users of the financial statements to link items included in the reconciliation to the statement of financial position and the statement of cash flows.
Example: Reconciliation from the opening balance to the closing balance
Amendments to IAS 12 “Recognition of Deferred Tax Assets for Unrealised Losses”
The amendments serve to clarify various questions concerning the recognition of deferred tax assets.
One of those questions related to the recognition of deferred tax assets for unrealized losses on (available-for-sale) debt instruments measured at fair value. The amendments to IAS 12 clarify that an unrealized loss from such a debt instrument leads to a deductible temporary difference if the tax base of the debt instrument is its cost. This applies regardless of whether the holder expects to hold the instrument to maturity in order to recover the nominal value or to sell the instrument.
IAS 12 also contains further clarification on the determination and recognition of deferred tax assets:
- In principle, an overall assessment is required for all temporary differences to determine whether sufficient taxable profits are expected to be available in future in order to realize the temporary differences and thus whether recognition of deferred tax assets is justified. However, this is only the case if the applicable tax law does not restrict the offsetting of tax losses. If tax law distinguishes between different types of taxable profits, a separate assessment of whether a deferred tax asset can be recognized must be performed for each part of the taxable profit.
- Under the newly introduced IAS 12.29A, a company can assume when estimating future taxable profit that an asset can be realized at above its carrying amount, provided that such realization is probable.
- The taxable profit against which a company examines the recognition of a deferred tax asset is the taxable income before reversal of deductible temporary differences (see IAS 12.29 (a) (i)), as otherwise items would be recorded twice.
New or amended standards and interpretations not applied (IAS 8.30)
According to IAS 8.30, standards or interpretations already issued by the IASB must be disclosed if they are not yet subject to mandatory application in the reporting period and were not early adopted.
For example, the following disclosures are required in the notes:
- Title of the new standard or new interpretation
- Nature of the impending change in accounting policy
- Date by which application of the standard or interpretation is required
- Date as at which the company plans to apply the standard or interpretation
- Expected impact on the financial statements or, if that impact is not known or reasonably estimable, a statement to that effect.
Note: The following table provides an overview of rules under IAS 8.30 that potentially require disclosure in IFRS consolidated financial statements prepared in the EU as of 31 December 2017. A distinction is made between standards that have been endorsed in the EU (if applicable by means of early voluntary adoption) and those that have not yet been endorsed in the EU. In addition, a general assessment in terms of their effect on accounting practice is provided. Standards and interpretations of fundamental significance as well as those that are expected to have an impact on the financial statements should be discussed in the notes. It is not necessary to provide a full presentation of the new or amended standards and interpretations not applied.
If several new standards or new interpretations will not have a material effect on a company, a wording can be used that neither describes nor lists the corresponding standards and interpretations without a material effect. For example this could take the form of a general statement that, apart from the standards and interpretations described in detail, the other standards and interpretations issued by the IASB are not expected to have a material effect on the consolidated financial statements. In addition, the company can make a general statement when applying the standard or interpretation that early adoption of the new standard or interpretation is not planned.
IFRS 9 “Financial Instruments”
In July 2014, the IASB completed its project to replace IAS 39 “Financial Instruments: Recognition and Measurement” by publishing the final version of IFRS 9 “Financial Instruments”. IFRS 9 introduces a uniform approach for classifying and measuring financial assets. The subsequent measurement of financial assets will in future be based on three categories with different value measures and a different recognition of changes in value. Assets are categorized depending on the contractual cash flows of the instrument as well as the business model in which the instrument is held. For financial liabilities, by contrast, the existing categorization requirements in IAS 39 were largely carried over into IFRS 9. IFRS 9 also provides a new impairment model that is based on the expected credit defaults.
IFRS 9 also contains new regulations on the application of hedge accounting in order to better present the risk management activities of an entity, in particular with regard to the management of non-financial risks. Furthermore, additional disclosures are required in the notes as a result of IFRS 9.
Note: Information concerning the amendments issued on 12 October 2017 to IFRS 9 “Financial Instruments” in relation to prepayment features can be found below on p. xx “IASB publishes amendments to IFRS 9”.
IFRS 15 “Revenue from Contracts with Customers” and Clarifications to IFRS 15
The new IFRS 15 replaces IAS 18 “Revenue” and IAS 11 “Construction Contracts” as well as the associated interpretations. IFRS 15 sets a comprehensive framework to determine whether, at what amount and at what time revenue is recognized. The core principle of IFRS 15 is that an entity should recognize revenue if the goods have been delivered or service has been provided. In the standard, this core principle is implemented using a five-step model. Firstly, the relevant contracts with the customer and the performance obligations therein have to be identified. Revenue is then recognized at the amount of the expected counterperformance for each separate performance obligation at a point in time or over time. In addition, IFRS 15 contains detailed application guidance on a large number of individual topics (e.g. contract amendments, sales with a right of return, treatment of contract costs, extension options, licensing, principal versus agent relationships, bill-and-hold arrangements, consignment arrangements). The scope of disclosures in the notes is also extended. The aim of the new disclosure requirements is to provide information about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.
Clarifications to IFRS 15 “Revenue from Contracts with Customers”
On 12 April 2016, amendments to IFRS 15 were issued by the IASB and are applicable – like the standard itself – to annual periods commencing on or after 1 January 2018. Early adoption is permitted. The amendments serve to clarify the key principles of the standard and relate to the identification of distinguishable performance obligations of a contract, determining whether a company is the principal or agent in a transaction, determining whether income from granting licenses is recognized over time or at a point in time, as well as expedients for the transition rules for modified and completed contracts.
Note: For further details in relation to the clarifications to IFRS 15, we refer to earlier IFRS Link October 2016.
Amendments to IFRS 4: Application of IFRS 9 “Financial Instruments” together with IFRS 4 “Insurance Contracts”
The IASB amendments to IFRS 4 from 12 September 2016 aim to remove any uncertainty surrounding the different timings of the date of first-time application for IFRS 4 “Insurance Contracts” and IFRS 9 “Financial Instruments” and are applicable for the first time as of 1 January 2018.
Companies that issue insurance contracts that fall within the scope of IFRS 4 have been granted two options.
In accordance with the overlay approach, companies adopting IFRS 9 for the first time can reclassify part of the income and expenses resulting from qualifying assets from the income statement to other comprehensive income. This allows the companies not to show in the income statement any temporary volatilities resulting from the application of IFRS 9 before applying IFRS 17.
The second option applies to companies predominantly engaged in issuing insurance contracts that fall within the scope of IFRS 4. These companies can postpone the adoption of IFRS 9 until no later than 1 January 2021 and can continue to apply IAS 39 until that date (temporary exemption approach).
IFRS 16 “Leases”
Under IFRS 16, the distinction made up to now between operating leases and finance leases will no longer apply with respect to the lessee. For all leases, the lessee recognizes a right of use to an asset and a lease liability. The right of use is amortized over the contractual term in line with the rules for intangible assets. The lease liability is recognized in accordance with the rule for financial instruments pursuant to IAS 39 (or IFRS 9 in future). Write-downs on the asset and interest on the liability are presented separately in the income statement. There are exemptions when accounting for short-term leases and low-value leased assets.
The disclosures in the notes to the financial statements will be extended and should provide a basis for users to assess the amount, timing as well as uncertainties in relation to leases.
For lessors, however, the rules in the new standard are similar to the previous rules in IAS 17. They will continue to classify leases either as a finance lease or an operating lease.
Annual Improvements to IFRSs (2014-2016 Cycle) – Amendments to IFRS 1, IFRS 12 and IAS 28
On 8 December 2016, the IASB issued the Annual Improvements to IFRSs (2014-2016 Cycle). The amendments relate to three IFRS standards:
IFRS 1 “First-time Adoption of International Financial Reporting Standards”:
Essentially, the short-term exemptions for first-time adopters were deleted, because these have become obsolete over time.
IFRS 12: “Disclosure of Interests in Other Entities”:
Due to the interaction of the disclosure requirements of IFRS 5 and IFRS 12, there was uncertainty regarding whether the disclosure requirements of IFRS 12 also apply to interests that are classified as held for sale, as held for distribution to owners or as discontinued operations. Clarification followed that the disclosure requirements of IFRS 12 also apply to interests covered by the scope of IFRS 5. The only exception is for investments in subsidiaries, joint ventures and associates classified as held for sale pursuant to IFRS 5. These disclosures pursuant to IFRS 12 do not have to be made for such companies.
IAS 28: “Investments in Associates and Joint Ventures”:
IAS 28 provides an option regarding the measurement of certain investments. According to that option, investments can be measured using the equity method or at fair value through profit or loss (FVTPL). In the past it was unclear whether the fair value option should be based on the respective investment (investment-by-investment choice) or on a consistent policy choice. The proposed amendment now clarifies that the option to measure an investment in an associate or joint venture held by a venture capital organization or other qualifying entity can be elected on an investment-by-investment basis.
Note: The amendments to IFRS 12 are effective for reporting periods beginning on or after 1 January 2017. By contrast, the amendments to IFRS 1 and IAS 28 are not subject to mandatory adoption until reporting periods beginning on or after 1 January 2018.
Amendments to IFRS 2 “Clarifications of Classification and Measurement of Share-based Payment Transactions”
In response to the scope for interpretation arising on account of a lack of specific rules in IFRS 2, the IASB published amendments to IFRS 2 “Share-based Payment” on 20 June 2016. These relate to three specific areas:
- Inclusion of guidelines on the effect of vesting conditions on the fair value of cash-settled share-based payments –
Financial reporting in line with equity-settled share-based payment transactions
- Classification of share-based payment transactions with a net settlement feature as equity instruments if a corresponding share-based payment transaction without a net settlement feature would also have to be classified as an equity instrument
- Inclusion of guidelines on accounting for a reclassification of cash-settled share-based payments to equity-settled share-based payment transactions
– Derecognition of the liability originally to be settled in cash
– Recognition of the liability to be settled in equity instruments at the proportionate fair value
– Recognition of any difference from the carrying amount in the net profit or loss for the period.
IFRIC 22 “Foreign Currency Transactions and Advance Consideration”
On 8 December 2016, the IASB issued IFRIC 22 “Foreign Currency Transactions and Advance Consideration”. The draft provides guidelines for determining the exchange rate in foreign currency transactions pursuant to IAS 21 “The Effects of Changes in Foreign Exchange Rates” and for foreign currency transactions where advance consideration is paid (non-monetary items).
The draft interpretation states that the relevant date for determining the exchange rate for payments in advance received or made is the earlier of the following two dates:
- Date of initial recognition of the non-monetary prepayment asset or non-monetary deferred income liability (advance payment)
- Date that the asset, expense or income (or part of it) is recognized in the statement of financial position or income statement.
Currency translation differences between the date of payment and the date on which the performance obligation is fulfilled must be recognized as an exchange gain/loss.
Note: IFRIC 22 is relevant for the construction industry in particular, as regular advance payments are made in that industry for long-term construction contracts.
Amendments to IAS 40 “Classification of Property Under Construction”
On 8 December 2016, the IASB issued amendments to IAS 40 “Investment Property”.
The reason for the amendment was the definitive list included in IAS 40 to date of circumstances where a reclassification to or from investment properties is permissible. Based on the wording of the standard, reclassification was only permissible in the cases explicitly listed, meaning that it was not clear for example whether a property under construction or under development could be reclassified from inventories (IAS 2 “Inventories”) to investment properties if there was evidence of a change of use. The clarifications provided mean that the list which was exhaustive in the past is now a non-exhaustive list of examples.
This means that reclassification must take place if there is corresponding evidence (e.g. conclusion of a rental agreement).
Note: A change of use exists only if the property no longer meets the definition of an investment property. A mere change in the intentions of management in relation to the use of the property is not sufficient.
IFRIC 23 “Uncertainty over Income Tax Treatments”
On 7 June 2017, the IASB published IFRIC 23 “Uncertainty over Income Tax Treatments” developed by the IFRS Interpretations Committee.
IFRIC 23 sets out how to account for uncertainty in determining the taxable profit or tax loss, tax bases, unused tax losses, unused tax credits and tax rates.
The interpretation provides the following guidelines for income tax treatment pursuant to IAS 12:
- A reporting entity can use its discretion to determine whether to consider uncertain tax treatments (e.g. regarding tax-allowed depreciation and/or tax-free income) separately or jointly. This decision should be based on its expected acceptance by the tax authorities
- When determining the relevant income tax parameters, the entity must assess whether it is probable that the corresponding tax authorities will accept the respective tax treatment the entity has used or plans to use in the income tax returns.
- If it is probable that the tax treatment will not be accepted, the most likely amount or the expected value must be recognized, depending on which method better predicts the resolution of the uncertainty.
Note: The scope of IFRIC 23 is limited to the area of income taxes in this regard. Taking into account uncertainties for other tax types is still covered by the rules in IAS 37.
Amendments to IFRS 9 “Prepayment Features with Negative Compensation”
On 12 October 2017, the IASB issued amendments to IFRS 9 “Prepayment Features with Negative Compensation”. The amendments concern limited adjustments to assessing the classification of financial assets with particular prepayment features and are to take effect as of 1 January 2019.
Note: Further information concerning the amendments to IFRS 9 can be found on p. xx “IASB publishes amendments to IFRS 9”.
Annual Improvements to IFRSs (2015-2017 Cycle) – Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23
IFRS 3 “Business Combinations” and IFRS 11 “Joint Arrangements”
The amendments relate to the measurement of interests held in a business. According to IFRS 3, when an entity obtains control of a business that is a joint operation, it must remeasure previously held interests in that business. By contrast, according to IFRS 11 when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.
IAS 12 “Income Taxes”
The amendments clarify that all income tax consequences of dividends must be reported in the operating result. This presentation takes place regardless of how the taxes are incurred.
IAS 23 “Borrowing Costs”
The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally. The prerequisite is that the debt capital must have originally been borrowed specifically for the procurement of the qualifying asset.
IAS 28 “Long-term Interests in Associates and Joint Ventures”
On 12 October 2017, the IASB published amendments to IAS 28 that contain clarifications regarding which investments fall within the scope of IFRS 9 “Financial Instruments”.
Note: Further information concerning the amendments to IAS 28 can be found on p. xx “IASB finalizes amendments to IAS 28”.
IFRS 17 “Insurance Contracts”
On 18 May 2017, the IASB published IFRS 17 “Insurance Contracts”, which is to replace IFRS 4 “Insurance Contracts”. The objective of the new standard is, by means of consistent and principles-based financial reporting, to provide relevant information for users of financial statements and to ensure uniform presentation and measurement of insurance contracts. The new recognition, measurement and presentation rules must be applied by companies with:
- insurance contracts and reinsurance contracts it issues,
- reinsurance contracts it holds, and
- investment contracts with discretionary participation features that a company issues, provided the company also issues insurance contracts.
If the primary purpose of a contract that meets the definition of an insurance contract under IFRS 17 is the provision of services for a fixed fee, IFRS 15 “Revenue from Contracts with Customers” can be used for the financial reporting instead of IFRS 17.