CH 20. Current Issues

Question 1

What are cryptocurrencies? and how should they be accounted for?

Answer 1

What is a cryptocurrency?

Cryptocurrencies are virtual currencies that provide the holder with various rights.

They are not issued by a central authority and so exist outside of governmental control.

Cryptocurrencies, such as Bitcoin, can be used to purchase some goods and services although they are not yet widely accepted.

The market value is extremely volatile and some investors make high returns through short-term trade.

The accounting treatment of cryptocurrency is not clear cut.

Recognition:

Is it Cash? - No because

• Crypto’s is not ‘cash’ because they cannot be readily exchanged for goods/services.
• do not qualify as a ‘cash equivalent’ because they are subject to a significant risk of a change in value.

Is it a financial asset:- No

• An investment in cryptocurrency does not represent an investment in the equity of another entity or a contractual right to receive cash, and so does not meet the definition of a financial asset as per IAS 32 Financial Instruments: Presentation.

Intangible asset? - Yes

• The most applicable accounting standard would appear to be IAS 38 Intangible Assets because cryptocurrency is an identifiable non-monetary asset without physical substance.

Measurement bases:

Although cryptocurrencies most likely fall within the scope of IAS 38, the measurement models in that standard do not seem appropriate.

• A cost-based model is unlikely as F.V of cryptocurrency is volatile is unlikely to provide relevant information.
• Revaluation model in IAS 38 initially seems more appropriate,
  
  • but this requires remeasurement to F.V to be presented in OCI.
  • Many entities invest in crypto’s to benefit from short-term changes in F.V and short-term investments are normally recorded in profit or loss (e.g. assets inside the scope of IFRS 9 Financial Instruments).

In the absence of an appropriate accounting standard, preparers of financial statements should refer to the principles in existing IFRS Standards as well as the Conceptual Framework in order to develop an accounting policy.

• Treated as an intangible asset,
  
  • but FVTPL due to profitability and if it is likely to be traded quickly.
  • If kept for longer periods, FVOCI

Question 2

How can Natural disasters affect financial reports?

Answer 2

Natural disasters include: volcanic eruptions, earthquakes, droughts, tsunamis, floods and hurricanes. Many of these have become more prevalent, most likely as a result of climate change.

Natural disasters devastate communities, and the process of recovery can last for years. Companies affected by natural disasters will also have to consider the financial reporting consequences. Some of these are considered below.

Impairments, Additional Liabilities, Insurance payments, Going Concern

Impairments
A natural disaster is likely to trigger an impairment review –

• Particularly in relation to property, plant and equipment (PPE). with IAS 36 Impairment of Assets, there are likely to be indicators of impairment. This may be because individual assets are damaged, or the disaster triggers a decline in customer demand. If PPE is destroyed, then it should be derecognised rather than impaired.
• Disasters may lead to inventory damage. Alternatively, the economic consequences of the disaster may mean that inventory must be sold at a reduced price. As per IAS 2 Inventories, some inventory may need to be remeasured from its cost to its net realisable value.
• In line with IFRS 9 Financial Instruments, entities that lend money will need to assess whether credit risk associated with the financial asset has increased, A natural disaster is likely to lead to a higher default rate, so some financial assets will become credit-impaired.

Insurance

• It is likely that entities affected by natural disasters will need to account for insurance claims. This can be a difficult area because of uncertainty regarding the nature of the claim, the type of coverage provided by the insurance, and the timing and amount of any proceeds recoverable.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets only allow the recognition of an asset from an insurance claim if receipt is virtually certain. This is a high threshold of probability and so recognition is unlikely. However, if an insurance pay-out is deemed probable then a contingent asset can be disclosed.

Additional liabilities

• As a result of a natural disaster, an entity may decide to sell or terminate a line of business, or to save costs by reducing employee headcount.
• In accordance with IAS 37, a provision. An obligation only exists if a restructuring plan has been implemented or if a detailed plan has been publicly announced. When measuring the provision, only the direct costs from the restructuring, such as employee redundancies, should be included.
• Provisions may be required if there is an obligation to repair environmental damage. Moreover, decommissioning provisions (when an entity is obliged to decommission an asset at the end of its life and restore the land) will require review because the natural disaster may alter the timing or amount of the required cash flows.

Going concern

• Natural disasters will lead to changes in the economic environment, as well as business interruption and additional costs. If there are material uncertainties relating to going concern, then these must be disclosed in accordance with IAS 1 Presentation of Financial Statements. If the going concern assumption is not appropriate then the financial statements must be prepared on an alternative basis and this fact must be disclosed.

Question 3

What are the main types of Crowdfunding and how are they dealt with?

Answer 3

Main types of Crowdfunding:-

• Equity-based crowdfunding: Shares issued for Cash Consideration - Accounted under IFRS 9
• Debt-based crowdfunding: Crowd issue a loan note to the company in return for repayments of Principal and Interest. - Accounted under IFRS 9
• Reward-based crowdfunding: This involves promising specific items (rewards) to contributors before the launch of a new project, product, or business.
• A reward-based campaign isn’t generally targeted at contributors who are looking to profit from their investment but those who want to own a new product. - Accounted for under IFRS 15 - Revenue Contracts
• Donation-based crowdfunding: Contributors make ‘donations’ to a project or company and may receive existing ‘rewards’ in return. Some forms of donation-based crowdfunding don’t involve any sort of reward as donors wish to contribute to further a particular cause. - IFRS 15 - Revenue Contracts

Question 4

What are the recent developments in Sustainable Development Goals?

- Climate-related disclosures and investor focus

Answer 4

Climate-related disclosures and investor focus

• IFRS have no specific standards to deal with climate-related risks and opportunities, but investors are increasingly seeking more clarity on climate-related issues.
• Climate change-related issues must also be considered in accounting, eg impact of new government legislation or impact of the natural environment on business elements and the sustainability/going concerns of future profits

Some of the information that investors may require is set out below:

• arrangements and strategy for assessing and considering climate-related issues
• metrics used to monitor climate-related goals and targets
• opportunities and risks concerning climate-related issues which are most relevant and material to the company’s business model and strategy
• potential effects on the company’s profitability, net assets, products, customers, suppliers etc of different climate scenarios
• risks and opportunities reflected in the financial statements, for example, the effect of assumptions used in impairment testing, depreciation rates, decommissioning etc
• assessment of the company’s viability over the long term taking into account climate-related issues and the company’s business and business model.

Question 5

Name some Sustainable development goals reporting initiatives?

Answer 5

 The United Nations Global Compact (UNGC) - Progress (COP) report is an initiative to support UN goals. It encourages entities to produce an annual Communication in Progress (COP) report, in which they describe the practical actions taken to implement UN principles in respect of human rights, labour, the environment, and anti-corruption.

 The Global Reporting Initiative (GRI) publishes the most widely used standards on sustainability reporting and disclosure. Using the GRI standards should mean that entities produce balanced reports that represent their positive and negative economic, environmental and social impacts. GRI principles encourage stakeholder engagement in order to ensure that their information needs are met.

 The International Integrated Reporting Council

Question 6

What are the recent developments in Sustainable Development Goals?

- The Sustainable Development Goals (SDGs)

Answer 6

The Sustainable Development Goals (SDGs) are 17 goals tackling major world issues agreed by 193 UN member states to be achieved by 2030.

There is increasing interest by the investors in understanding how businesses are developing SDGs.

There are several reasons why companies should focus on sustainable business practices, and they include:

• increased future government focus on sustainable business
• such business practices often improve performance as they lower operational, reputational and regulatory risk
• there are significant business growth opportunities in products and services that address the SDG challenges
• the fact that short term, profit-based models are reducing in relevance. Companies and their stakeholders are changing how they measure success and this is becoming more than just about profit.

What the Public/Government hope to achieve with SDGs:

• There is an assumption that the disclosure of ESG factors will ultimately affect the cost of capital; lowering it for sustainable businesses and increasing it for non-sustainable ones.
• It may also affect cash flow forecasts, business valuations and growth rates.

1. (1) No Poverty,
2. (2) Zero Hunger,
3. (3) Good Health and Well-being,
4. (4) Quality Education,
5. (5) Gender Equality,
6. (6) Clean Water and Sanitation,
7. (7) Affordable and Clean Energy,
8. (8) Decent Work and Economic Growth,
9. (9) Industry, Innovation and Infrastructure,
10. (10) Reducing Inequality,
11. (11) Sustainable Cities and Communities,
12. (12) Responsible Consumption and Production,
13. (13) Climate Action,
14. (14) Life Below Water,
15. (15) Life On Land,
16. (16) Peace, Justice, and Strong Institutions,
17. (17) Partnerships for the Goals.

Question 7

What are the current Board issues regarding accounting policy changes?

• The Standard
• The Problem
• The proposal

Answer 7

The accounting treatment

• Following IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an entity should only change an accounting policy if:
  
  • Required by an IFRS Standard, or
  • Results in more reliable and relevant information for financial statement users.
• Change is required by an IFRS Standard, then the standard normally specifies transitional provisions.
• Change is not required by an IFRS Standard then it is implemented retrospectively unless it is impractical to do so.
• In contrast, a change in accounting estimate is dealt with prospectively. Unlike with a policy change, this will impact the statement of profit or loss in the current year only.

The problem:

• Calculating the prior year impact of accounting policy changes is costly, The Board is concerned that retrospective application dissuades from voluntarily changing accounting policies, even though the change would benefit users.
• The Board is particularly concerned about policy changes because of agenda decisions made by the IFRS Interpretations Committee As a result an entity may wish to change an accounting policy but be deterred by the time and cost involved in the retrospective application.

The proposal
The Board has issued an Exposure Draft ED/2018/1 Accounting Policy Changes. In this, the Board proposes that an accounting policy change resulting from an agenda decision should be implemented retrospectively unless:

• it is impracticable to do so (due to a lack of data), or
• the cost of working out the effect of the change exceeds the benefits to the users of the financial statements.

When considering the benefits to users of the retrospective application, the Board proposes that entities consider:

• the magnitude of the change
• the pervasiveness of the change across the financial statements
• the effect on trend information.

Question 8

Define Materiality? and the proposed expansion on the definition?

Answer 8

The Current definition of materiality is:

“That an item is material if its omission or misstatement would influence the economic decisions of financial statement users.”

The Board are proposing to expand this definition:

“an item is also material if obscuring it would influence the economic decisions of financial statement users”

Question 9

What are the concerns of the board when considering materiality?

• Background and Problem
• The solution
• Key contents
  
  • ​Definitions
  • Materiality Judgments
  • Users
  • Process

Answer 9

Background & Problem

• Materiality as a concept is used widely in financial reporting. However, the Board accepts that further guidance is needed on how to apply it in preparing financial statements.

The Board have issued a Practice Statement called Making Materiality Judgements.

• Provides non-mandatory guidance that may help when applying IFRS Standards.

The key contents:

Definitions and objectives
The current definition of materiality:-

• ” is that an item is material if its omission or misstatement would influence the economic decisions of financial statement users”
• Proposing to expand this definition to say “that an item is also material if obscuring it would influence the economic decisions of financial statement users”

Prepares must make materiality judgments

When assessing whether the information is material, an entity should consider:

• Quantitative factors – measures of revenue, profit, assets, and cash flows
• Qualitative factors – related party transactions, unusual transactions, geography, and wider economic uncertainty.

Materiality judgements are relevant to recognition, measurement, presentation and disclosure decisions.

• Recognition and measurement:- An entity only needs to apply the recognition and measurement criteria in an IFRS Standard when the effects are material.
• Presentation and disclosure:- only needs to apply the disclosure requirements in an IFRS Standard if the resulting information is material.
  • may need to provide additional information, not required by an IFRS Standard, if necessary to help financial statement users understand the financial impact of its transactions

Users

• Materiality judgements must be based on the needs of the primary users of financial statements. The primary users are current and potential investors, lenders and creditors.
  
  • Financial statements cannot meet all of the information needs of the primary users.
  • However, preparers should aim to meet common information needs for each group of primary users (e.g. investors, lenders, other creditors).
• Process*
• *The Board recommends a systematic process when making materiality judgements**
• Step 1 - Identify information that could be material
• Step 2 - Assess whether the info is material
• Step 3 - Organise info in draft F.S
• Step 4 - Review Draft F.S

Question 10

What is the issue regarding the disclosure of accounting policies?

Answer 10

• *Background**
• *IAS 1 requires entities to disclose ‘significant accounting policies.**

Disclosure of accounting policies are full of standardised (rather than entity-specific) information and does little more than summarise or duplicate the content of IFRS Standards.

Problem

As such, it is not useful. In fact, it arguably adds clutter to the financial statements, obscuring information that is useful.

Proposal:-

In the Exposure Draft ED 2019/6 Disclosure of Accounting Policies, the Board has proposed amendments to IAS 1 and the Practice Statement Making Materiality Judgements

in order to help preparers apply the concept of materiality to accounting policy disclosures.

• Terminology*
• *IAS 1 currently requires entities to disclose ‘significant accounting policies.**
• propose to amend this to ‘material accounting policies.

The Board wish to clarify that disclosure of an accounting policy is material if, when taken with the information in the rest of the financial statements, it could influence the economic decisions of the financial statement users.

Accounting policies relating to immaterial transactions do not need to be disclosed.

Guidance - Not all accounting policies relating to material transactions are, in themselves, material. The Board noted that an:

The accounting policy is likely to be material to the financial statements if it relates to a material transaction and: (MUST LEARN)

• Changed during the period
• Chosen from one or more alternatives
• Developed in the absence of an IFRS Standard that explicitly applies
• Relates to an area where the entity has to make significant judgements or
  assumptions
• Applies the requirements of an IFRS Standard in a way that is entity-specific.

Question 11

What are the problems with?

and the planned amendments?

to IAS19 defined benefit plan amendments, curtailments and settlements

Answer 11

• The problem*
• *If there is a plan amendment, settlement or curtailment (PASC) then the effect of this is calculated by comparing the** net defined benefit deficit before and after the event.

Even though the reporting entity remeasures the defined benefit deficit in the event of a PASC, IAS 19 did not previously require the use of updated assumptions to determine current service cost and net interest for the period after the PASC.

The Board argued that ignoring updated assumptions is inappropriate because these are likely to provide a more faithful representation of the impact of the entity’s defined benefit pension plan during the reporting period.

• Amendments*
• *The Board amended IAS 19 to clarify that the reporting entity must determine:**
• The current service cost for the remainder of the reporting period after the PASC using the actuarial assumptions used to remeasure the net defined benefit liability.
• Net interest for the remainder of the reporting period after the PASC using the remeasured defined benefit deficit and the discount rate used to remeasure the defined benefit deficit.

Question 12

developments in sustainability reporting

Question 13

What are the current issues regarding debt and equity?

Answer 13

The problem with debt and equity
The distinction between financial liabilities and equity is important.

Not only are liabilities perceived as riskier than equity, but changes in the carrying amount of a liability impact profit or loss. E.g

A contract that obliges an entity to deliver a variable number of its own shares is classified as a financial liability.

• However, there is no clear rationale for why this is the case.
• Moreover, a contract that obliges an entity to deliver a variable number of its own shares does not appear to meet the definition of a liability.

The lack of rationale has resulted in diversity in practice when entities account for instruments not explicitly covered by IAS 32 – such as put options on a non-controlling interest.

Proposals - The Board propose that a financial instrument should be classified as a liability if it exhibits one of the following characteristics:

• ‘An unavoidable contractual obligation to transfer cash or another financial asset at a specified time other than liquidation.
• An unavoidable contractual obligation for an amount independent of the entity’s available economic resources’

Impact of the proposal

Loan Notes/Debentures/Bonds - No change

Ordinary Share - No Change

Obligation to issue shares worth $30 million in 5 years’ time.
There is no contractual obligation to transfer cash or another financial asset
However, there is an unavoidable obligation to transfer an amount independent of the entity’s available resources.

Although the entity’s shares may have minimal value in 5 years’ time, the obligation to transfer shares worth $30 million remains and the entity must fulfil it.

would still be classified as a financial liability. - But the definition is better suited.

Irredeemable fixed-rate cumulative preference shares - terms of these shares state that

• unpaid dividends accumulate.
• Unpaid dividends are payable at the entity’s discretion or on liquidation.
• There is no contractual obligation to transfer cash except at liquidation.
• However, the amount payable on liquidation is independent of the entity’s available resources. This is because the dividends accumulate over time.

At liquidation, the entity may have insufficient resources to pay these accumulated dividends.

Currently Treated IAS 32 - this financial instrument is classified as equity.

Under the new proposals - it would be classified as a financial liability.

Question 14

deferred tax

Answer 14

tbc

Question 15

What are the key Current Issues?

Answer 15

1 Key current issues
Current issues:

• accounting in the current business environment
  
  • ​Cryptocurrencies
  • Natural disasters
  • Crowdfunding
  • Climate-related disclosures and investor focus
  • Bin the clutter
  • IAS 21 - amending
  • Definition and Disclosure of Capital
  • Sustainable Development Goals
• accounting policy changes
• materiality
• disclosure of accounting policies
• defined benefit plan amendments, curtailments and settlements
• management commentary
• developments in sustainability reporting
• debt and equity
• deferred tax

Question 16

IAS 21 - amending

Question 17

Definition and Disclosure of Capital

Answer 17

tbc