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As we know, amendments to Ind AS follow amendments to IFRSs (International Financial Reporting Standards). IASB (International Accounting Standards Board) has issued a few amendments to IFRS which are effective from 2020. Accordingly, it is expected that these amendments will be incorporated in Ind AS this year by Ministry of Corporate Affairs (MCA) by issuing Companies (Indian Accounting Standards) Amendment Rules.

Amendments to IFRS are as follows:

IFRS 3, Business Combinations (IFRS 3)

IASB has amended the definition of “business” and related guidance included in the standard for the purposes of identifying where an acquisition is a business to apply business combination accounting. These amendments are effective from accounting periods beginning on or after 1 January 2020 with earlier application permitted.

Previous definition of business included in IFRS 3 is as follows:

“An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants”.

The amended definition of business is as follows:

“An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generate other income from ordinary activities”.

Key change is that the definition of business is narrowed to focus on providing goods or services to customers, generating investment income or generate other income from ordinary activities instead of the earlier wider focus of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

Earlier the standard also provided that a business need not include all of the inputs and processes that the seller used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own inputs and processes. This requirement is now deleted. Instead, the amended guidance requires that to be considered a business, an integrated set of activities and assets, must include at a minimum, an input and a substantive process that together contribute to the ability to create output. Further, to be a business without outputs, there will now need to be an organised workforce for it to constitute a business.

Further, the amended guidance provides that if an acquired set of activities and assets has outputs, continuation of revenue does not on its own indicate that both an input and a substantive process have been acquired. Additional guidance has been provided to assess whether a process is substantive or not.

The standard earlier also provided that if a particular set of activities and assets included goodwill, then such set of activities and assets was presumed to be a business. This presumption has now been deleted.

The amendment also provides that an entity can apply a ‘concentration test’ that, if met, eliminates the need for further assessment. Under this optional test, where substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. The amended standard provides detailed guidance in this respect.

The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate, pharmaceutical, and oil and gas.

IFRS 9, Financial Instruments (IFRS 9)

IASB has amended the hedge accounting requirements included in IFRS 9 to provide limited relief to financial statement preparers from the effects of the forthcoming IBOR (Interbank Offered Rate) reform. These amendments are effective from accounting periods beginning on or after 1 January 2020 with earlier application permitted.

For details on IBOR reform and its business and accounting consequences please read my or on my blog post at https://joy-consulting.in/2020/06/15/ibor-reform-what-in-the-heavens-is-that/  or my linkedin post at https://www.linkedin.com/feed/update/urn:li:activity:6678171533095108608/.

IFRS 16, Leases (IFRS 16)

IASB has amended IFRS 16 to provide limited relief to lessees in respect of rent concessions arising due to Covid-19 pandemic. No relief has been allowed to the lessors. These amendments are effective from accounting periods beginning on or after 1 June 2020 with earlier application permitted.

The amendments provide a practical expedient that lessess may elect to not treat any rent concessions, provided by lessors as a direct consequence of Covid-19 pandemic, as lease modifications. However, to be eligible for this relief,

1. the revised consideration for the lease should be less than or equal to the lease consideration immediately before the change,
2. the rent concession should be for a period that does not extend beyond 30 June 2021, and
3. there is no substantial modification to the other terms and conditions of the lease.

This means that such rent concessions can be taken by the lessees directly to the statement of profit and loss. However, the lessees will have to continue to account for interest expense and depreciation on right-of-use assets as before.

Lessees are also required to provide disclosures about application of the practical expedient and its impact on profit or loss.

IAS 1, Presentation of Financial Statements (IAS 1) and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8)  

IASB has amended the definition of “materiality” and related guidance. The amendment is effective for accounting periods beginning on or after 1 January 2020. Early application is permitted.

Previous definition of materiality included in IAS 1 and IAS 8 is as follows:

“Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor”.

The amended definition of materiality is as follows:

“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity”.

The amendments clarify that the information is obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The amendments also state that an entity assesses materiality in the context of the financial statements as a whole.

The amendments also clarify the meaning of ‘primary users of general purpose financial statements’ to whom those financial statements are directed, by defining them as ‘existing and potential investors, lenders and other creditors’ that must rely on general purpose financial statements for much of the financial information they need.

Ind AS 7, Statement of Cash Flows (Ind AS 1)

It appears that an inadvertent error has crept into Ind AS 7 consequent to the amendments made by Ind AS 116, Leases (Ind AS 116). 

Paragraph 17 of Ind AS 7 provides examples of cash flows arising from financing activities.

Instead of replacing paragraph 17(e) “Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease”, paragraph 17(c) “Cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short-term and long-term borrowings” has been replaced by “Cash payments by a lessee for the reduction of the outstanding liability relating to a lease”.

Consequently, an important element of financing activities has been removed as an example from IAS 7 and instead we have two examples relating to leases of which one i.e 17(e) is no longer applicable since, consequent to the issuance of Ind AS 116,  there is no concept of a finance lease with respect to a lessee. Members of NFRA (National Financial Reporting Authority) are cognizant of this error and it is expected that MCA will correct this error at the earliest.