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Practice Aid on the Accounting Policies Disclosures (Amendments to IAS 1)
Publication date: 14 Oct 2022
gx Practice aid IAS 1
On 12 February 2021, the International Accounting Standards Board (‘the Board’) issued narrow-scope amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements.
The Board amended IAS 1 Presentation of Financial Statements to require companies to disclose their material accounting policy information rather than their significant accounting policies. Paragraph 117 of the amendment provides the following definition of material accounting policy information:
“Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.”
The amendment also clarifies that accounting policy information is expected to be material if, without it, the users of the financial statements would be unable to understand other material information in the financial statements. Paragraph 117B of the amendment provides illustrative examples of accounting policy information that is likely to be considered material to the entity’s financial statements.
Further, the amendment to IAS 1 clarifies that immaterial accounting policy information need not be disclosed. However, if it is disclosed, it should not obscure material accounting policy information.
To support this amendment, the Board also amended IFRS Practice Statement 2, Making Materiality Judgements, to provide guidance on how to apply the concept of materiality to accounting policy disclosures.
The amendments are effective for annual reporting periods beginning on or after 1 January 2023. Earlier application is permitted (subject to any local endorsement process).
For more details see the In brief INT2021-02 Narrow-scope amendments to IAS 1, IFRS Practice Statement 2 and IAS 8 and the following FAQs in the MoA Chapter 4 paragraph 4.150:
- FAQ 4.150.2 – What accounting policy information is likely to be material to an entity’s financial statements?
- FAQ 4.150.3 – How should an entity determine if particular accounting policy information should be disclosed?
- EX 4.151.1 – Determining whether accounting policy information is material.
This Practice Aid provides guidance on the disclosures of the accounting policies in the light of the narrow-scope amendments to IAS 1 and includes the following examples:
- Disclosures of the accounting policies for cryptocurrency investments;
- Disclosures of the accounting policies about defined benefit obligation schemes;
- Disclosures of the accounting policies for the cap and trade schemes;
- Disclosures of the accounting policies about leasing activities by a lessee;
- Disclosures of the accounting policies for fixed-fee services contracts; and
- Disclosures of the accounting policies on revenue recognition.
The list of examples is not exhaustive and the same conclusions might not always be reached in different fact patterns.
If management has used significant judgments and assumptions in developing and/or applying the accounting policies, an entity would need to consider disclosing these as required by paragraphs 122 and 125 of IAS 1.
1. Disclosures of the accounting policies for cryptocurrency investments
Background information
In March 20X2, the Board of Directors (BoD) of Entity A, an investment entity, decided to modify its investment strategy, and allocate a portion of the assets under management (AUM) to cryptocurrencies.
The BoD decided, as a first step, to immediately allocate 2.5% of AUM into cryptocurrencies. The revised strategy further dictates an increase in the cryptocurrency portion of AUM to 5% before year-end 20X3, before converting into a permanent level of 5–10% share of AUM.
Historically, the AUM is measured and classified at fair value through profit or loss in its entirety.
When the BoD’s decision was made, the total AUM was CU200, hence Entity A purchased cryptocurrencies for an amount of CU5 (2.5%).
Entity A accounts for its cryptocurrency assets as intangible assets and chooses to subsequently measure them at revalued amounts, following the requirements in paragraph 75 of IAS 38.
At the 20X2 year-end, the total AUM at Entity A had a fair value of CU220, out of which the cryptocurrency position counts for CU7 (3.2% of AUM).
Entity A concludes that the cryptocurrency position is material in terms of amounts as of 31 December 20X2, and will also be material when reaching a 5% portion of AUM.
Question
Should Entity A provide accounting policy information for its cryptocurrency investments in the financial statements for the year ending 31 December 20X2?
Answer
Entity A observes that there are observable market prices available for the cryptocurrencies. However, Entity A further observes that:
- the cryptocurrency position is determined to be material at year-end of 20X2;
- accounting principles for cryptocurrency activities are not explicitly described under IFRS. The accounting principles are derived from paragraphs 10–12 of IAS 8;
- an accounting policy choice was available to Entity A for subsequent measurement;
- the observable market prices for cryptocurrencies are associated with a significant degree of volatility;
- the cryptocurrencies are a new category of investments for Entity A in 20X2 and the remeasurements are presented in OCI whereas all the other AUM remeasurements are presented in profit and loss;
- Entity A plans to increase the cryptocurrency share of AUM in coming years.
Considering all facts and circumstances presented, Entity A is likely to conclude that accounting policy information about its cryptocurrency activities is material for a user’s understanding of its financial statements in this case. Entity A would disclose accounting policy information about its accounting for cryptocurrency activities.
2. Disclosures of the accounting policies about defined benefit obligation schemes
Background information
Entity B operates in a jurisdiction with a retirement age of 67. Entity B has two post-employment benefit schemes for its employees:
- a defined benefit scheme with two active employees, both aged 65. This scheme is closed for new entrants; and
- a defined contribution plan covering the remaining 255 of its employees.
In its previous years’ financial statements, Entity B disclosed the following information regarding its defined benefit scheme:
“The liability or asset recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method.
The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. In countries where there is no deep market in such bonds, the market rates on government bonds are used.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the statement of profit or loss.
Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, directly in other comprehensive income. They are included in retained earnings in the statement of changes in equity and in the balance sheet.
Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognised immediately in profit or loss as past service costs.”
Entity B concludes that the amounts of both its net and gross defined benefit obligation, and the related expenses in the statement of comprehensive income, are immaterial for its financial statements, both for the current period and for the comparable period presented.
Question
Should Entity B provide accounting policy information about its defined benefit obligation scheme in the financial statements for the year ending 31 December 20X2?
Answer
Calculations of gross defined benefit obligations are, in general, complex, requiring significant judgements and assumptions to be made, in addition to actuary expertise. However, Entity B observes that:
- the defined benefit obligation amounts are immaterial both in the current period and in the comparable period presented;
- the defined benefit scheme is closed for new entrants. The two active members are near their retirement age, and the gross obligations are substantially covered by plan assets. Entity B therefore concludes that the risk of a material adjustment in the next financial year due to estimation uncertainty for the net obligation as per year-end 20X2 is remote;
- the accounting policies were unchanged during the year; and
- accounting policies for post-employment benefits are described under IFRS, and not derived by Entity B from paragraphs 10–12 of IAS 8.
From the fact pattern presented, Entity B is likely to conclude that accounting policy information for the defined benefit obligation scheme is not material for an understanding of its financial statements for the year ending 31 December 20X2.
By disclosing such information, Entity B could risk obscuring information that is material for its primary users’ understanding of the financial statements.
Hence the accounting policy information for the defined benefit scheme is not required to be given.
3. Disclosures of the accounting policies for the cap and trade schemes
Background information
Entity C, an oil extraction company, operates 20 oil extraction platforms spread across different jurisdictions in the Atlantic Ocean.
As per the licence agreements in one of the jurisdictions, Entity C is obligated to comply with a “cap and trade” scheme the government has introduced to cut gas emissions. Under the scheme, companies will be allocated a limited number of allowances at the beginning of the year, where one allowance equals 1 tonne of carbon dioxide.
A market with observable prices and active trading of allowances exists, so any entity with insufficient allowances is able and allowed to purchase complementary allowances from an entity with a surplus of such.
At the end of each calendar year, entities are required to have sufficient allowances to cover the volume of emissions they have made throughout that particular year.
For the calendar year 20X1, which corresponds to Entity C’s reporting period, Entity C is allocated an allowance for 2,000 tonnes of carbon dioxide. In each of the previous three calendar years, Entity C has emitted carbon dioxide in the region of 2,500–3,000 tonnes, and it expects emissions at approximately the same level in 20X1, necessitating the entity to purchase allowances in the market.
There are currently several acceptable accounting approaches to dealing with this type of cap and trade scheme. IFRIC 3 dealt with the accounting for cap and trade schemes. Even though IFRIC 3 was withdrawn by the IASB in 2005, it is still considered valid guidance on the accounting for such schemes under IFRS.
Entity C accounts for the cap and trade scheme based on IFRIC 3. For a detailed description of the accounting for emissions obligations, see EX 16.85.9.
Question
Should Entity C disclose accounting policy information for the cap and trade scheme for 20X1?
Answer
Entity C observes that:
- accounting for cap and trade schemes is not explicitly described under IFRS. Consequently, the accounting policies are derived from paragraphs 10–12 of IAS 8;
- the accounting policies applied are complex and not easy to understand for users;
- there is diversity in practice in how cap and trade schemes are accounted for; and
- the cap and trade scheme is fundamental to Entity C’s business and licence to operate.
Consequently, Entity C is likely to conclude that accounting policy information about its cap and trade scheme is material for an understanding of its financial statements for the year ending 31 December 20X1. Entity C would disclose accounting policy information about its accounting for the cap and trade scheme.
4. Disclosures of the accounting policies about leasing activities by a lessee
Background information
Entity D, an investment property entity, owns 15 investment properties in the high-end area of its jurisdiction’s capital.
The properties are leased out for periods up to, and never exceeding, ten years. Entity D has concluded that substantially all of the risk and rewards of the properties are retained, and has consequently classified them as operating leases in accordance with paragraph 62 of IFRS 16.
Entity D has outsourced the property management services for the entire portfolio of properties, and only a small administration is employed. Entity D is head-quartered at the 10th floor of one of its own properties. The headquarters are classified as owner-occupied property in the balance sheet, and measured at a revalued amount in accordance with paragraph 31 of IAS 16.
Entity D has rented two cars for use by their CEO and CFO as part of their respective remuneration packages. The original lease term on both contracts when entered into two years ago was five years.
In its previous financial statements, Entity D disclosed the following information about its leasing activities, when acting as a lessee:
”The entity leases vehicles for fixed periods of three to five years, usually without extension options. None of the entity’s contracts are determined to contain any non-lease components.
Lease terms are negotiated on an individual basis and contain different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the entity, the incremental borrowing rate is used, being the rate that the entity would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
To determine the incremental borrowing rate, the entity:
- where possible, uses recent third-party financing received by the entity as a starting point, adjusted to reflect changes in financing conditions since third-party financing was received;
- uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by Entity D, which does not have recent third-party financing; and
- makes adjustments specific to the lease, e.g. term and security.
If a readily observable amortising loan rate is available to the entity (through recent financing or market data) which has a similar payment profile to the lease, then the entity uses that rate as a starting point to determine the incremental borrowing rate.
The entity is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the entity is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. While the entity revalues its owned property, plant and equipment, it has chosen not to do so for the right-of-use assets held by the entity.
Payments associated with short-term leases of equipment and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less without a purchase option. Low-value assets comprise IT equipment and small items of office furniture.”
When preparing its financial statements for 20X1, Entity D observes that, in terms of amounts, its leasing activities when acting as the lessee are clearly immaterial.
Question
Should Entity D disclose accounting policy information for its leasing activities, acting as a lessee, in its financial statements for the year ending 31 December 20X1?
Answer
Lease accounting, in general, requires significant judgements and assumptions to be made; for example, when identifying a lease, identifying any non-lease components, calculating the discount rate, deciding on the accounting for any variable lease payments and assessing the probability for execution of any purchase options or extension options.
However, Entity D observes that:
- the financial statements figures in respect of their leasing activities, acting as the lessee, are immaterial;
- Entity D did not change its accounting policies during 20X1;
- accounting policies for leases are described under IFRS, and not derived by Entity D from paragraphs 10–12 of IAS 8; and
- leasing of the cars for Entity D is relatively uncomplicated from an accounting perspective.
Based on the fact pattern presented, Entity D is likely to conclude that accounting policy information for the leasing activities, when acting as a lessee, is not material for a user’s understanding of its financial statements for the year 20X1.
The entity could risk obscuring material information in its financial statements if accounting policy information on leasing activities as a lessee is disclosed.
Consequently, the accounting policy information related to the entity’s activities as a lessee would not be required to be disclosed. Entity D would need to separately assess whether it should include accounting policy disclosure for its activities as a lessor.
In addition, Entity D should consider which disclosures should be made in accordance with IFRS 16 (in its activities as lessee) and IAS 24 (regarding the transactions with the CEO and CFO as related parties).
5. Disclosures of the accounting policies for fixed-fee services contracts
Background information
Entity E, an insurer, owns a portfolio of investment properties as part of its investment strategy. Entity E has established a subsidiary, Entity F, a property management company, to conduct the daily operating activities (for example maintenance and repairs) on the Group’s investment properties.
As the market’s demand for property management services has increased, Entity F has expanded its business to provide property management services to external customers through fixed-fee service contracts. The contracts are for periods of 3–5 years and cover property management and repair work. Entity F is responsible for keeping the properties at a pre-defined standard, and all necessary repair and maintenance work is covered by Entity F as part of the fixed-fee contract.
The customers themselves are responsible for excessive repair work which does not arise from normal wear and tear, e.g. fire, or natural disasters such as flood or storm.
The contract fee agreed at inception is based on standard price factors such as the property’s age, size and area of location. Entity F does not conduct a specific assessment of the property’s condition.
Entity F concludes that its contracts with external customers meet the definition of an insurance contract. However, it can choose to account for the contracts applying IFRS 15 instead of IFRS 17 as per paragraph 8 of IFRS 17, because they are fixed-fee service contracts and:
- the specific risk of particular customers is not assessed;
- the customers are compensated by Entity F providing services only; and
- the insurance risk transferred to Entity F consists primarily of variability in the customer’s use of the services, rather than from the costs of those services.
Entity F has chosen, as an accounting policy choice, to account for the fixed-fee service contracts in accordance with IFRS 17 and did so in the comparative period as well.
At year-end 20X1, management of Entity F concluded that, in terms of value, its fixed-fee service contracts could be determined material for its financial statements.
Question
Should Entity F disclose accounting policy information for its fixed-fee service contracts in its financial statements for the year ending 31 December 20X1?
Answer
Entity F observes that:
- the accounting policies were unchanged during the year; and
- the accounting policies are described in IFRS, and not derived by Entity F from paragraph 10–12 of IAS 8.
However, Entity F further observes that:
- the fixed-fee service contracts could be determined material;
- the accounting policies were chosen from a set of alternatives (IFRS 15 or IFRS 17);
- the measurement requirements in IFRS 17 are complex, requiring significant judgements and assumptions to be made; and
- the liability for remaining coverage is associated with a high degree of estimation uncertainty.
Considering all facts and circumstances presented, based on the fact that the accounting policy relates to material transactions, there is an accounting policy choice available and the level of complexity and judgement required, Entity F is likely to conclude that accounting policy information about its fixed-fee service contracts is material for an understanding of its financial statements for the year ending 31 December 20X1.
Entity F would disclose accounting policy information about its accounting for fixed-fee service contracts. Further, the disclosure requirements in IFRS 17 will apply.
6.Disclosures of the accounting policies on revenue recognition
Background information
Entity G is a retailer of new cars. According to local law, Entity G is required to repair any damages to the car up until 12 months after delivery, to the extent that the damage relates to defects existing at delivery date (“assurance warranty”). Each car sold also includes an obligation for Entity G to perform specific services beyond the mandatory warranty requirements for a period of three years (“the service plan”). Entity G does not sell similar service plans separately, but the sales contracts for the cars explicitly identify which services are included. Entity G’s competitors do not bundle such service plans into their sale of cars by default, but offer similar service plans as an optional add-on for an extra fee. After consideration of all facts and circumstances, Entity G has concluded that the service plan meets the IFRS 15 definition of a service-type warranty.
Customers are charged the total contract price upon delivery of the car, i.e. for the car itself and the service plan.
Entity G recognises revenue when, or as, it satisfies its performance obligations. It has identified two performance obligations in the contracts: (1) the car and (2) the service plan.
Consequently, Entity G allocates the transaction price to each performance obligation and recognises revenue, separately, as it satisfies each performance obligation.
Entity G determines that its performance obligation for a car is satisfied at the point in time when the car key is delivered to the customer (and at the same time recognises an obligation for the mandatory warranty). The performance obligation for the service plan is satisfied over the three-year service period.
At year-end 31 December 20x1, Entity G concluded that revenues from both car sales and service plans are material in its financial statements.
Question
Entity G is preparing its financial statements for the year ending 31 December 20X1. Should accounting policy information on revenue recognition be disclosed?
Answer
Entity G observes that:
- the accounting policies were unchanged during the year;
- the accounting policies applied are not chosen from an available set of alternatives;
- accounting policies for revenue recognition are described in IFRS, and not derived by Entity G from paragraphs 10–12 of IAS 8; and
- the accounting policies are not very complex.
However, Entity G observes that the revenue amounts are material to the financial statements and that judgement has been used in applying the accounting policies, for example in:
- identification of performance obligations, in particular concluding that its service plans are distinct from the sale of the car even though they are not sold separately;
- determining if any significant financing component exists in the prepaid service plan;
- allocating the contract price to the performance obligations; and
- determination of when the performance obligation for the service plans is satisfied.
Consequently, to sufficiently understand the amounts presented, primary users of Entity G’s financial statements might need information about how the accounting policies for revenue recognition have been applied by Entity G.
Hence, entity-specific information about accounting policies for revenue recognition would likely be disclosed, in addition to the disclosures of significant judgements made in the application of paragraphs 123–125 of IFRS 15 and other relevant disclosure requirements in IFRS 15.
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