A summary of 2022 IFRIC activity and comparison to US GAAP.
IFRS Interpretations Committee (IC) Agenda Decisions play a key role in forming accounting positions under IFRS® Accounting Standards, and companies need to apply them on a timely basis. In 2022, the IFRS IC has discussed obligations for low emission vehicle credits, government grants, insurance contracts, lessor accounting, SPACs, demand deposits, financial instruments, and software revenue. In this article, we summarize these Agenda Decisions and shed light on how they compare to US GAAP.
The IFRS IC is the interpretative body of the International Accounting Standards Board (the IASB®). It supports the consistent application of IFRS Accounting Standards and helps improve financial reporting through the timely resolution of financial reporting issues. When presented with an application issue, the IFRS IC often concludes that no standard-setting is needed. It then explains its rationale in Agenda Decisions, which provide key interpretive guidance for companies to use, as they apply IFRS Accounting Standards. Agenda Decisions are only finalized if the IASB does not object to them. This year, two issues considered by the IFRS IC were escalated to standard-setting. Read the related KPMG articles: Classification of debt with covenants as current or noncurrent, and Accounting for electronic payments.
The following agenda items were discussed by the IFRS IC in 2022. For a refresher on 2021 Agenda Decisions, read KPMG IFRS Perspectives article here.
— Revenue — Leases |
The current status of each 2022 agenda item is indicated in the following table.
Issues | Status1 | Discussion |
Classification of public shares as financial liabilities or equity (IAS 32, Financial Instruments: Presentation) | Final: June 2022 | Does a special purpose acquisition company (SPAC) classify public shares it issues as a financial liability or equity? A SPAC is a listed shell company formed to acquire a target operating company. See KPMG Perspectives article, SPACs: What GAAP applies? In the fact pattern discussed by the IFRS IC, a SPAC issues two classes of shares (A and B). Class B shareholders:
IAS 32 is silent about how to assess whether the shareholders’ contractual right to extend the SPAC’s life indefinitely gives the SPAC the unconditional right to avoid paying cash to settle a contractual obligation – i.e. whether a decision of shareholders is treated as a decision of the entity. The IFRS IC concluded that the request was too narrow to be addressed in isolation and noted that the IASB will consider such issues in its Financial Instruments with Characteristics of Equity (FICE) project. However, the IFRS IC noted the importance of financial statement disclosures around classification of public shares. Like IFRS Accounting Standards, conclusions around classification of temporary equity under US GAAP frequently involve significant judgment and depend heavily on the specific facts and circumstances. However, because the accounting requirements under IAS 32, IFRS 2, and IFRS 9 significantly differ from the corresponding US GAAP requirements, we have observed significant differences between US GAAP and IFRS Accounting Standards in practice. |
Accounting for warrants at acquisition (IAS 32, Financial Instruments: Presentation and IFRS 2, Share-based Payment) | Final: September 2022 | How does a company account for warrants on acquiring a SPAC? In the fact pattern discussed by the IFRS IC, a SPAC that is not a business and with cash as its sole asset identifies a target operating company for acquisition. However, the operating company acquires the SPAC by issuing shares and warrants to the SPAC’s shareholders in exchange for the shares and legal cancellation of the warrants of the SPAC. The SPAC shareholders are not SPAC employees, nor will they provide services to the company after the acquisition. The IFRS IC concluded that the company accounts for the acquisition of the SPAC by recognizing the individual assets acquired, the stock exchange listing service acquired, the liabilities assumed in the transaction, and cash. Based on the facts and circumstances, the company needs to determine whether or not it has assumed the SPAC warrants as part of the acquisition because this affects the accounting for the newly issued warrants. The Agenda Decision further explores the accounting when SPAC warrants are assumed, noting that:
Although not addressed in the fact pattern discussed by the IFRS IC, in the United States, warrants are also often issued to PIPE (Private Investment in Public Equity) investors, which makes this Agenda Decision applicable to those warrants as well. Because of the different requirements, we have observed significant differences between US GAAP and IFRS Accounting Standards in practice, when accounting for warrants in SPAC acquisitions. |
Companies should periodically review the IFRS IC Updates and IFRS IC Compilation of Agenda Decisions, in which tentative and final Agenda Decisions are published, to consider the impact of those decisions on their accounting policies. The issues discussed by the IFRS IC are significant, and the impact on the financial statements could be material. Companies are expected to update their accounting policies timely to the extent that their accounting differs from that described in an Agenda Decision. Dual reporters should also consider the differences with US GAAP, if any, which might emerge through these updates.
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