On 12 February 2021, the International Accounting Standards Board (IASB) issued amendments to IAS 1 ‘Presentation of Financial Statements’ (IAS 1) to make the accounting policies published in annual financial statements more useful and relevant. The amendments, once endorsed, will be applicable for accounting periods beginning on or after 1 January 2023, with early application permitted.
The previous requirements of IAS 1 to disclose ‘significant accounting policies’, including details of the ‘measurement basis (or bases) used in preparing the financial statements’, often led to the inclusion of accounting policies which dealt with material balances, but were effectively just copies of the requirements of the relevant IFRS for those issues.
Most users of the financial statements, as well as the IASB, agree that these ‘boilerplate’ disclosures added nothing other than length to the financial statements, and could obscure policies which are far more useful to users – those involving choices or complexity.
Key changes to IAS 1
The purpose of the amendments is to make it clear that policies governing material balances are not necessarily themselves material. If the policy doesn’t add useful information (as defined in the amended IAS 1), the policy doesn’t need to be included in the accounts.
Accounting policies will only need to be included in the financial statements where the policy itself is material, such as:
- where the relevant standard allows more than one possible accounting treatment and management have made an accounting policy choice;
- where the accounting treatments adopted are complex (particularly where they involve the interaction of more than one applicable standard);
- where the application of the standard involves management judgement, for example, the specific application of the five steps of IFRS 15 ‘Revenue from Contracts with Customers’;
- accounting policies developed in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ in the absence of an IFRS that specifically applies;
- accounting policies (even ‘boilerplate’ ones) whose specific application is discussed in the financial statements, for example, under the requirement to disclose critical judgements and key sources of estimation uncertainties; and
- accounting policies including the measurement basis (or bases) used for financial instruments.
Applying this will require some initial work going through existing policies to determine and document which policies are considered immaterial, and of course, this should be discussed with your auditors.
We hope that the amendment will make financial statements more concise and easier to understand for the user of the accounts.
Adoption of the amendments to IAS 1
Once approved for adoption, users of IFRS as adopted by the UK will be required to adopt these amendments for accounting periods beginning on or after 1 January 2023, with earlier application permitted.
Under UK Law, IFRS as adopted in the European Union (EU-IFRS), was frozen following the UK’s formal departure from the European Union at 11pm on 31 December 2020. For UK corporates producing financial statements under international accounting standards, these changes cannot be adopted until they transfer over to IFRS as adopted in the United Kingdom (UK-IFRS). Adoption of UK-IFRS is:
- not possible for accounting periods ending on or before 31 December 2020;
- mandatory for UK corporates who adopt international accounting standards for accounting periods starting on or after 1 January 2021; and
- has special provisions for accounting periods which straddle 31 December 2020, discussed here.
Whether an entity should make use of the special provisions for accounting periods straddling 31 December 2020 is a management decision, and we would expect that this amendment to the standards will be taken into consideration when management make that decision.
If you would like any further information please speak to Paul Merris.