IASB issued exposure draft on proposed amendments In IFRS for SMEs Accounting Standard (part 2 of 3)
Background
This update is prepared for proposed amendments in IASB’s second comprehensive review. It is in continuance of part 1 of 3 issued on December 15, 2022. In this update, the proposed amendments related to Section 11 and Section 9 & 14 have been discussed for better understanding of the users.
Proposed Amendments
Section 11 – Financial Instruments (Corresponding IFRS 9 – Financial Instruments):
- This section deals with recognition, derecognition, measurement and disclosure of the financial instruments (financial assets and liabilities).
- Earlier the framework was such that Section 11 dealt with the basic financial instruments such as Cash, debt instruments etc., while the Section 12 dealt with more complex financial instruments such as hedge accounting. Further, SMEs had a choice of accounting policy on recognition and measurement of financial instruments between Section 11 – 12 and IAS 39 – Financial Instruments: Recognition and Measurement.
- Now, Section 12 of the standard has been considered as part II of Section 11 while the choice to apply the recognition and measurement principles of IAS 39 have been removed. This shall enhance comparability of reporting among different SMEs.
- Impairment on the basis of expected credit loss model has been introduced in line with the full IFRS 9 which is a probability-weighted estimate of credit losses, except for the trade receivables and contract assets, which shall continue to be impaired in accordance with the incurred loss model.
- Financial Guarantee Contract – Proposed amendment is to specifically take the Financial Guarantee contracts under the purview of part 1 of section 11 which deals with Basic Financial Instruments. Definition – A contract requiring the issuer to pay to the holder in case the debtor fails to make the payment due in accordance with the original or modified terms of the debt instrument. Initial Recognition- Shall be recognized at the premiums initially received plus the present value of the premium receivable. Subsequent Recognition – Shall be recognized at the higher of:
- Expected credit losses, and
- Amount initially recognized, amortized on straight line basis over the life of the guarantee.
Section 9 – Consolidated and Separate Financial Statements and Section 14 – Investments in Associates:
- A major shift has been noticed in the definition of control, where the focus has shifted from investor governing the financial and operating policies of the investee to investor’s ability to affect the returns through its power over the investee.
- Accordingly, the principle related to joint control over an entity has also been clarified, whereby if two or more investors have unilateral rights to direct the activities of the investee, the one with the current ability to direct its activities that most significantly affect its returns has the power over investee.
- Scope of net-investment in associate has been broadened whereby, the net-investment now includes any investment in the financial instruments for which settlement is neither planned, nor likely to occur in the foreseeable future.
SW’s Remarks:
In the afore-mentioned update, we have covered the proposed amendments made in Section 11 and Section 9 and 14. Leftover amendments proposed in Section 15 will be covered in the upcoming Part 3/3.
Meanwhile, the exposure draft is still open for comments till March 7, 2023 at “ifrs.org”.
Nitin, Audit Associate, SW India
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