Current Issues and Emerging Standards

The IASB publishes its WORK PLAN regularly, indicating active projects and timeframes. Understanding active projects helps anticipate future changes.

Major recent issuances (2023-2024):

Active major projects on IASB work plan:

• Rate-regulated activities: long-running; new model proposed
• Dynamic risk management: macro hedging for banks
• Management Commentary: revised Practice Statement
• Equity method (IAS 28): targeted improvements
• Goodwill and impairment: post-implementation review of IFRS 3
• Disclosure project: targeted standards-level review

Post-implementation reviews (PIRs):

• IFRS 9 PIR completed 2022 — refinements being considered (classification, ECL)
• IFRS 15 PIR completed 2024 — mostly working well; clarifying licence accounting
• IFRS 16 PIR underway (2024-2026)
• IFRS 3 (Business Combinations) ongoing — focus on goodwill

IFRS 18 Presentation and Disclosure (effective 2027) — major change:

• Replaces IAS 1 entirely
• NEW SOPL CATEGORIES: Operating, Investing, Financing
• SUBTOTALS required: Operating profit; Profit before financing and tax
• MANAGEMENT-DEFINED PERFORMANCE MEASURES (MPMs): if used in public communications, must be DISCLOSED with reconciliation, definition, why used
• Aimed at improving comparability and reducing diversity in presentation
• SIGNIFICANT impact — preparers will need to reclassify many income/expense items
• "Operating" includes most P&L items by default; specific items moved to investing or financing

IFRS 18 SOPL structure (illustrative):

• Operating: revenue, cost of sales, operating expenses (most P&L items here)
• Operating PROFIT subtotal
• Investing: gains/losses on investments; share of associates' profit; income from cash and cash equivalents
• Profit BEFORE FINANCING AND TAX subtotal
• Financing: interest expense; finance leases; foreign exchange on debt
• Profit BEFORE TAX
• Income tax
• Profit for the period

IFRS 19 Subsidiaries (effective 2027):

• Reduced disclosures for ELIGIBLE SUBSIDIARIES — subsidiaries that are (1) not publicly accountable and (2) have an ultimate parent producing IFRS-compliant consolidated accounts
• Apply IFRS recognition and measurement; disclose less
• Reduces "double-disclosure" burden
• Optional; subsidiary can choose to apply
• Significantly reduces compliance cost for many group subsidiaries

Discussion papers and exposure drafts in pipeline:

• Various amendments to existing standards
• Targeted improvements (e.g., share-based payment, intangible assets)
• Cryptocurrency project (potentially)

Rate regulation is a regulatory framework where prices charged to customers for goods/services are subject to government or independent rate-setter approval. Common in utilities (electricity, gas, water).

The accounting issue:

• Under rate regulation: TIMING of recognition of costs differs from when costs are incurred OR when revenue is collected
• Examples: deferred costs to be recovered in future rates; over-recoveries to be returned to customers via lower future rates
• These create economic rights and obligations not captured by current IFRS

Current state:

• NO specific IFRS standard for rate regulation
• IFRS 14 Regulatory Deferral Accounts: PERMITS first-time adopters to continue using their previous GAAP for rate-regulated activities — INTERIM solution
• But IFRS 14 doesn't address ongoing accounting for entities already using IFRS
• Result: significant DIVERSITY in practice — utilities under different GAAPs report differently

IASB project:

• Long-running project to develop comprehensive standard
• EXPOSURE DRAFT issued January 2021 (Regulatory Assets and Regulatory Liabilities)
• Proposes:
  • "REGULATORY ASSET" — entity's right to add to future rates (recoveries deferred)
  • "REGULATORY LIABILITY" — entity's obligation to deduct from future rates (over-recoveries)
  • Recognise these as ADDITIONAL ASSETS / LIABILITIES on balance sheet
  • Income and expense items in P&L
• Significant feedback received
• IASB redeliberating; final standard date uncertain

Worked example (under proposed model):

Utility incurs unexpected £10m of repair costs that the regulator allows to be recovered in customer rates over the NEXT 5 YEARS.

Under proposed model:

• Year 1: incur £10m costs (P&L expense); RECOGNISE REGULATORY ASSET £10m + corresponding INCOME £10m (offset)
• Net P&L impact Year 1: £0 (matches the timing of rate recovery)
• Years 2-6: as £2m additional revenue collected each year, derecognise £2m regulatory asset (no further P&L)

Under current IFRS (without specific standard): may not recognise the regulatory asset → £10m loss in Year 1 even though will be recovered.

Industries affected:

• Electricity transmission and distribution
• Gas distribution
• Water and sewerage
• Some telecommunications
• Some renewable energy

Implications when standard issued:

• Significant change for utility sector
• Better matching of revenue and cost recognition
• More transparent regulatory accounting
• Increased balance sheet items (regulatory assets/liabilities)
• Potential impact on debt covenants, regulatory ratios

Management Commentary is a narrative report accompanying financial statements, providing management's analysis and insights. Often called "MD&A" (US), "Operating and Financial Review" or "Strategic Report" (UK).

IFRS Practice Statement 1 (revised draft):

• NOT MANDATORY in itself
• Provides framework for high-quality management commentary
• Original PS1 issued 2010; revised draft issued 2021
• Final revised standard expected (timing uncertain)

Revised PS1 — content elements:

1. Business model: how entity creates value; sources of revenue; cost structure
2. Strategy and resource allocation: long-term objectives; how strategy is implemented
3. External environment: PESTEL factors; industry dynamics; competition; regulation; sustainability
4. Risks and opportunities: principal risks; mitigation; emerging opportunities
5. Financial performance: key financial measures; trends; APMs (with reconciliation)
6. Forward-looking information: prospects; key assumptions; scenarios
7. Sustainability matters: link to sustainability reporting (ISSB)

UK Strategic Report (Companies Act 2006 s.414C):

• MANDATORY for UK companies (except small companies)
• Content requirements:
  • Fair review of company's business
  • Description of principal risks and uncertainties
  • Analysis using KPIs (financial and non-financial — for medium and large)
  • Information about employees, environment, social, community matters (for large companies)
  • Climate-related financial disclosures (large companies)
  • Statement under s.172 (directors' duty to promote success considering stakeholders)
• Penalties for failure to provide

Quality concerns identified by FRC:

• "Boilerplate" content that lacks entity specificity
• Excessive length without commensurate insight
• Inadequate forward-looking discussion
• Lack of integration with financial statements
• Climate disclosures often inadequate

Best practice:

• Tell the entity's OWN STORY, not generic statements
• Connect narrative with figures in financial statements
• Use clear language; avoid jargon
• Highlight YEAR-ON-YEAR changes
• Discuss management's view of risks (not just compliance)
• Forward-looking scenarios where useful
• Sustainability integrated, not appended

Connection with sustainability reporting:

• ISSB IFRS S1 expects connectivity between sustainability disclosures and management commentary
• Sustainability matters increasingly central to management's narrative
• Climate disclosures (TCFD, IFRS S2) often integrated into management commentary

Digital financial reporting uses STRUCTURED DATA formats so that financial information is machine-readable. Enables automated analysis, consistency checks, and broader accessibility.

XBRL (eXtensible Business Reporting Language):

• Open standard for tagging financial data
• Each data point linked to a "tag" from a TAXONOMY (e.g., revenue, cost of sales)
• Allows software to read financial reports automatically
• Enables cross-company comparison, regulatory analysis, market research

iXBRL (Inline XBRL):

• HUMAN-READABLE document with EMBEDDED machine-readable tags
• Looks like a normal report; but tags hidden in HTML
• Best of both worlds — readable + processable

UK requirements:

• UK Companies House: iXBRL mandatory for most entities since 2011
• HMRC: iXBRL for corporation tax returns (CT600)
• UK GAAP and IFRS taxonomies maintained

EU ESEF (European Single Electronic Format):

• FCA requirement for UK listed companies' annual financial reports
• iXBRL with EU IFRS Taxonomy
• Detailed tagging of primary statements (SoFP, SoPL, SoCE, SoCF)
• Specific blocks tagged in notes (since 2022 onwards)
• Implementation has been challenging — significant cost

IFRS Taxonomy:

• Maintained by IFRS Foundation
• Updated annually to reflect new standards and amendments
• Used for IFRS-based digital reporting globally

Benefits of digital reporting:

• Automated extraction and analysis of financial data
• Cross-company comparisons made easier
• Regulatory monitoring more efficient
• Investors can analyse larger volumes of data
• Reduces reporting errors (consistency checks built in)

Challenges:

• Implementation cost (software, training, processes)
• Tagging judgement — choosing the most appropriate tag
• Custom tags needed for entity-specific items
• Quality control — incorrect tagging undermines benefits
• Block tagging of notes: relatively new and complex

Future developments:

• Increased use of digital reporting globally
• Expansion to sustainability reporting (ISSB Taxonomy under development)
• Integration with AI/ML for automated analysis
• Real-time reporting (vs. periodic) being explored

Cryptocurrencies (Bitcoin, Ethereum, etc.) and other DIGITAL ASSETS have grown significantly. There is NO SPECIFIC IFRS STANDARD addressing them. Current practice applies existing standards by analogy.

Most common classification under current IFRS:

• IAS 38 Intangible Assets — most common. Cryptocurrencies meet definition: identifiable, non-monetary, no physical substance.
• Measured at COST OR REVALUATION model:
  • Cost model: cost less impairment (no amortisation as indefinite life). Common.
  • Revaluation model: requires ACTIVE MARKET. Bitcoin and major coins arguably meet this; revaluation gains to OCI; impairments to P&L.

Other classifications in specific cases:

• IAS 2 Inventories: if held for SALE in ordinary course (e.g., crypto exchange or broker holds for trading)
• IFRS 9 Financial Asset: NOT applicable — crypto isn't a financial instrument (no contractual right to cash)
• Cash and cash equivalents: NOT — too volatile, not generally accepted as exchange medium

IFRS Interpretations Committee (IFRIC) decision (June 2019):

• Holding cryptocurrency:
  • Intangible asset (IAS 38) — default
  • Inventory (IAS 2) — if held for sale in ordinary course
• Issued no new standard but provided clarification

Limitations of current treatment:

• IAS 38 cost model: no upward revaluation through P&L (cost less impairment only)
• If crypto value rises 10x: NO P&L gain (just a CONTINGENT asset)
• If crypto value falls: IMPAIRMENT loss to P&L
• ASYMMETRIC — gains not recognised; losses recognised. Often criticised.
• Revaluation model: gains in OCI (not P&L) — still doesn't hit P&L

FASB (US) update (2023):

• FASB issued ASU 2023-08 — fair value measurement for crypto held by NON-TRADERS
• FV gains and losses through P&L
• Effective for fiscal years beginning after 15 December 2024
• Significant change — eliminates the asymmetric treatment

IFRS likely future direction:

• IFRS likely to consider similar approach
• Pressure from preparers and investors
• Currently no firm timeline; not yet on IASB active work plan
• May be addressed via amendments to IAS 38 or new specific standard

Other digital assets:

• Stablecoins: fiat-backed (e.g., USDC) — could be financial instrument if backed by claim on underlying
• NFTs (Non-Fungible Tokens): unique digital items; IAS 38 by analogy; valuation often subjective
• Tokenised securities: digital versions of regular securities — apply normal IFRS 9 / equity rules
• Cryptocurrencies received as REVENUE: apply IFRS 15; consider SPPI test if held subsequently
• Mining: revenue at FV when received (under IFRS 15 if fee for service); inventory if held for sale

Disclosure considerations (current best practice):

• Carrying amount of cryptocurrencies
• Classification (intangible, inventory)
• Measurement basis
• FV at reporting date (even if not used for measurement)
• Risks (price volatility, custody, regulatory)
• Strategy/intentions for holdings

Issuer accounting (initial coin offerings, security tokens):

• Complex — depends on rights/obligations of token
• Liability if creates contractual cash obligations
• Equity if represents residual interest
• Performance obligation under IFRS 15 if represents future goods/services

Climate-related disclosures have become a major focus globally. Multiple frameworks coexist; ISSB IFRS S2 brings global consistency for investor-focused climate reporting.

IFRS S2 Climate-Related Disclosures (effective 2024):

• Issued by ISSB; aligned with TCFD framework
• Covers both PHYSICAL and TRANSITION risks
• Four-pillar structure (TCFD-aligned):
  1. Governance
  2. Strategy
  3. Risk management
  4. Metrics and targets

Physical risks:

• ACUTE: severe weather events (storms, floods, wildfires)
• CHRONIC: long-term shifts (sea level rise, sustained higher temperatures)
• Affect operations, supply chains, asset values

Transition risks:

• POLICY AND LEGAL: carbon taxes, emissions limits, litigation
• TECHNOLOGY: substitution by lower-carbon alternatives
• MARKET: changes in customer preferences, supply/demand for high-carbon products
• REPUTATION: stakeholder perception

Required disclosures under IFRS S2:

1. Governance: board oversight; management role; processes
2. Strategy:
   • Climate-related risks and opportunities
   • Effects on business model and value chain
   • Effects on strategy and decision-making
   • Effects on financial position, performance, cash flows
   • Climate scenario analysis
   • TRANSITION PLANS (key requirement)
3. Risk management: processes for identifying, assessing, managing, prioritising
4. Metrics and targets:
   • GHG emissions: SCOPE 1 (direct); SCOPE 2 (purchased energy); SCOPE 3 (other indirect — supply chain, customer use)
   • Climate-related opportunities
   • Capital deployment for climate
   • Internal carbon prices
   • Remuneration linked to climate
   • Industry-specific metrics

Scope 3 emissions challenge:

• Most challenging — covers SUPPLY CHAIN and PRODUCT USE emissions
• Often 70-90% of total emissions for many sectors
• Difficult to measure (requires data from suppliers and customers)
• IFRS S2 requires disclosure but recognises practical challenges

Climate scenario analysis:

• Test resilience under different climate scenarios (e.g., 1.5°C warming; business-as-usual)
• Quantitative or qualitative
• Helps stakeholders understand strategic resilience
• Time horizons: short, medium, long-term

UK climate disclosure requirements:

• SECR (Streamlined Energy and Carbon Reporting): mandatory for large UK companies since 2019. Energy use + GHG emissions in directors' report.
• TCFD-aligned disclosures: mandatory for premium listed (since 2021); extended to large UK companies and LLPs (since April 2022)
• UK SDR (Sustainability Disclosure Requirements): being implemented for FCA-regulated firms (asset managers, investment products) — labelling regime + disclosure
• Future UK SDS (Sustainability Disclosure Standards): expected to broadly endorse IFRS S1/S2

Connection to financial statements:

• Climate matters affecting financial statements:
  • Asset impairments (high-carbon assets at risk)
  • Useful life of assets (transition may shorten)
  • Provisions (decommissioning, environmental obligations)
  • Recoverability of deferred tax assets
  • Going concern (climate-impacted business models)
• IFRS S1 emphasises CONNECTIVITY between sustainability disclosures and financial statements

EU CSRD comparison:

• EU CSRD: more comprehensive than ISSB; uses ESRS (European Sustainability Reporting Standards)
• DOUBLE MATERIALITY: financial materiality (impact on enterprise value, like ISSB) AND impact materiality (impact on environment/society)
• Mandatory for large EU companies and EU subsidiaries of non-EU groups
• Multinationals may need both ISSB and CSRD compliance

Dynamic Risk Management (DRM) is a long-running IASB project addressing the accounting for INTEREST RATE RISK MANAGEMENT in BANKS' BANKING BOOKS.

The issue:

• Banks manage interest rate risk on a PORTFOLIO basis (assets and liabilities together)
• "Dynamic" because positions change as new loans, deposits, derivatives added/removed
• Existing IFRS 9 hedge accounting designed for individual or static groups of items
• Doesn't fit how banks actually manage risk
• Result: artificial P&L volatility from derivatives that economically hedge the portfolio

Current practice:

• Banks often use FAIR VALUE OPTION extensively to designate items at FVTPL
• Or apply HEDGE ACCOUNTING under IAS 39 (still permitted for macro hedging) instead of IFRS 9
• Or accept P&L volatility
• None of these reflects economic reality well

IASB DRM project:

• Long-running (over a decade)
• "PORTFOLIO REVALUATION APPROACH" considered earlier; abandoned due to complexity
• Currently exploring "DYNAMIC RISK MANAGEMENT MODEL"
• Conceptually: account for the bank's asset/liability mismatch and its hedging derivatives in an integrated way
• Key challenges:
  • Define the "current net open risk position"
  • Account for designations and de-designations as position changes
  • Avoid OUR (own credit risk) issues
  • Decision usefulness for users
• Final standard timing uncertain — currently no exposure draft for new DRM model

OTHER CURRENT ISSUES:

1. Pillar Two (global minimum tax) and deferred tax:

• OECD Pillar Two — 15% global minimum tax for MNCs ≥ €750m
• UK adopted via Multinational Top-up Tax + Domestic Top-up Tax (FA 2023; effective AP from 31 Dec 2023)
• IAS 12 amendment (2023): TEMPORARY MANDATORY EXCEPTION from recognising DTA/DTL for Pillar Two top-up taxes
• Significant complexity if standard tax accounting applied
• Disclosure requirements added — known and probable Pillar Two impact

2. Supply chain finance disclosures (IAS 7 amendment, effective 2024):

• Supply chain finance arrangements (e.g., reverse factoring) increasingly common
• Buyer arranges with bank to pay supplier early; buyer pays bank later
• Question: is the buyer's obligation TRADE PAYABLE (operating) or DEBT (financing)?
• Entity must DISCLOSE: terms; carrying amounts (trade payable vs financial liability); range of payment due dates; reconciliation
• Helps users understand entity's financing arrangements

3. Convergence with US GAAP — limited progress:

• Major convergence projects mostly completed (revenue, leases, financial instruments)
• BUT some major differences remain:
  • Goodwill (IFRS impairment-only; US GAAP impairment-only but with optional amortisation)
  • Inventory (IFRS no LIFO; US GAAP allows LIFO)
  • R&D (IFRS conditional capitalisation; US GAAP usually expense)
  • Cryptocurrency (US recently moved to FV; IFRS has not)
• FASB and IASB now operate more independently
• Long-term goal: convergence remains aspirational but not actively pursued

4. Goodwill and impairment (IFRS 3 PIR):

• IASB has been considering whether to reintroduce GOODWILL AMORTISATION
• Discussion paper in 2020; significant feedback
• IASB decided in 2022 to RETAIN IMPAIRMENT-ONLY MODEL
• Focus on improving impairment test (more transparent, less subjective)
• Disclosure improvements being considered

5. Equity method (IAS 28) targeted improvements:

• IASB project to address application questions
• E.g., investments in associates that are loss-making (when to stop recognising losses)
• Transactions between investor and associate
• Targeted improvements rather than overhaul

6. Targeted disclosure improvements:

• IASB exploring "disclosure principles" approach
• Aim: more useful disclosures, less boilerplate
• Materiality emphasised
• Standards-level review of existing disclosure requirements

Implications for preparers and auditors:

• Need to monitor ACTIVE PROJECTS for emerging requirements
• Prepare for IFRS 18 (2027) — significant presentation change
• Consider IFRS 19 (2027) — opportunity for reduced disclosure if eligible
• Sustainability reporting becoming central
• Climate disclosures expanding rapidly
• Pillar Two adds significant complexity for large groups