International GAAP 2020

Book Preface

The 2020 edition of International GAAP® has been fully revised and updated in order to:
• Continue to investigate the many implementation issues arising as entities adopt
IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers).
• Explore in more depth the complex implementation issues arising as entities adopt
IFRS 16 (Leases).
• Include an updated chapter on the new insurance contracts standard IFRS 17
(Insurance Contracts) which reflects the recent Exposure Draft issued by the
International Accounting Standards Board (IASB) proposing various amendments
to the standard. The chapter also covers the recent discussions of the IASB’s

Transition Resource Group on implementation issues raised. It also explores other
matters arising as insurers prepare for the adoption of the standard.
• Discuss the new interpretations and agenda decisions issued by the IFRS
Interpretations Committee since the preparation of the 2019 edition.
• Address the amended standards and the many other initiatives that are currently
being discussed by the IASB and the potential consequential changes to
accounting requirements.
• Provide insight on the many issues relating to the practical application of IFRS, based
on the extensive experience of the book’s authors in dealing with current issues.

The book is published in three volumes. The 56 chapters – listed on pages ix to xi – are
split between the three volumes as follows:
• Volume 1 – Chapters 1 to 22,
• Volume 2 – Chapters 23 to 43,
• Volume 3 – Chapters 44 to 56.
Each chapter includes a detailed list of contents and list of illustrative examples.
Each of the three volumes contains the following indexes covering all three volumes:
• an index of extracts from financial statements,
• an index of references to standards and interpretations,
• a general index.

The IASB reported, in 2018, that 144 of the 166 jurisdictions they have researched
require the use of IFRS for all or most domestic publicly accountable entities (listed
companies and financial institutions) in their capital markets, and a further 12
jurisdictions permit the use of IFRS. Several large economies such as China, India and
Japan do not require IFRS for all or most of their listed companies, but they have made
considerable progress to move towards or to converge with IFRS. The United States is
the only major economy that is unlikely to allow publicly listed domestic companies to
apply IFRS in the near term.

Maintaining the current degree of international convergence of accounting standards
requires an ongoing commitment on the part of all jurisdictions involved. This cannot
be taken for granted given the increasing desire around the world to bring back control
from the international to the national or regional level. In this context it is positive to
note, for example, that the Summary Report of the Public Consultation on the Fitness
Check on the EU framework for public reporting by companies found that ‘[a] majority
of respondents supported the status quo as regards the EU IFRS endorsement process,
and cautioned against “EU carve-ins” that could lead to “EU-IFRSs”, a situation that
could be detrimental to EU companies active globally and to foreign investments into
the EU.’ However, there is a minority that argues in favour of the ability to selectively
modify standards as they believe this would increase the ability to influence the IASB’s
standard-setting process. In our view, allowing IFRS to devolve into local flavours, in
the hope of broader acceptance, would reduce the existing benefits in terms of cost,
quality and clarity of international financial reporting in exchange for an uncertain
future without a clear mechanism for longer-term convergence.

New standards

IFRS 9 – Financial Instruments – and IFRS 15 – Revenue from Contracts with Customers,
which became effective in 2018, have improved the quality of financial reporting, but their
requirements are at times complex. In the past two years, the IFRS Interpretations
Committee has published more than a dozen agenda decisions on these standards and, at
the time of writing, are considering several more.
IFRS 16 – Leases is effective from 1 January 2019 and its interactions with other standards

has given rise to a number of challenging implementation questions that are now being
addressed. The IASB has published an exposure draft that deals with the application of
IAS 12 – Income Taxes – to right-of-use assets and lease liabilities, while the IFRS
Interpretations Committee has published several agenda decisions on the application of
IFRS 16 and also its interaction with IFRS 11 – Joint Arrangements. While still early, it is clear that, for many entities, IFRS 16 has a significant impact on the presentation of their statement of financial position and statement of profit or loss.
IFRS 17 – Insurance Contracts was published in June 2017, with an effective date of
2021. The standard will have a profound impact on the accounting for insurance
contracts and is also expected to have a significant operational impact on entities issuing
those contracts. In June 2019, the IASB published an exposure draft with proposed
amendments to IFRS 17 in response to matters of concern regarding the concepts and
practical implementation of the standard that were raised by stakeholders, mainly from
the European Union as part of its IFRS endorsement process, but also from other
regions. As IFRS 17 will affect many stakeholders, including preparers, users, auditors
and regulators, we agree with the IASB that a careful consideration of these concerns
was warranted and the proposal to defer the mandatory effective date of IFRS 17 to
annual reporting periods beginning on or after 1 January 2022.

Current work plan

While the IASB is starting to prepare for its 2020 Agenda Consultation, it is currently
working on the projects in its work plan for the period from 2017 until 2021. The work
plan can be divided into three elements: the standard-setting and maintenance projects,
the research projects, and the Better Communication in Financial Reporting initiative.
Constituents will welcome the fact that a period of relative calm has arrived once they
have adopted IFRS 16; the IASB’s standard-setting and maintenance agenda is not
dominated by a series of ambitious and major new standards, but almost exclusively
focuses on narrow scope projects that address certain aspects of existing standards. The
rate-regulated activities project, which aims to develop a new accounting model that deals
with a company’s incremental rights and obligations arising from its rate-regulated
activities, is a more comprehensive project but limited in impact as it is industry-specific.
As part of its active research agenda, the IASB’s core model for dynamic risk management
is expected in late 2019, while the discussion papers on business combinations under
common control, and goodwill and impairment are now expected in 2020. The IASB has
also received feedback on last year’s discussion paper on financial instruments with
characteristics of equity and is currently considering the future direction of the project.
We encourage the IASB to continue its work on these technically complex but important
projects as they deal with issues that have been the source of many accounting questions.
In particular, any improvements and simplifications that may follow from the project on
goodwill and impairment would be appreciated by preparers, users and auditors alike.
The IASB continues to work on the various aspects of its Better Communication in
Financial Reporting initiative, such as the primary financial statements, management
commentary and the taxonomy. The project to update the Management Commentary
Practice Statement is especially important as the IASB sees this as the cornerstone of
the notion of ‘broader financial information’.

Erkki Liikanen, the Chair of the IFRS Foundation Trustees, noted in a speech in
January 2019 that ‘…we need to ensure that IFRS Standards remain relevant in a changing
world. IFRS is the de facto global standard in financial reporting. However, investors are
not only interested in the pure financial statements. They also want to know about non-financial information – the company’s sustainability and environmental impact – what sort of risks these companies face in the long term.’ Similarly, the Embankment
Project for Inclusive Capitalism noted, upon the release of its report to drive sustainable
and inclusive growth, that ‘…a company’s value is increasingly reflected not just in its
short-term financial performance, but also by intangible assets such as intellectual
property, talent, brand and innovation, as well as impacts on society and the environment
that are not fully captured by traditional financial statements.’
Many of the non-financial issues that interest investors can be characterised as
externalities, which are commonly defined as consequences of an industrial or commercial
activity that affect other parties without being reflected in market prices. Legislators in
some jurisdictions have already taken steps to ensure a minimum level of communication
about such issues. For example, the European Union Directive 2014/95/EU requires large
companies to publish reports on their policies regarding environmental protection, social
responsibility and treatment of employees, respect for human rights, anti-corruption and
bribery, and diversity on company boards. In addition, there are a large number of
corporate sustainable standards initiatives across many sectors.
In April 2019, Hans Hoogervorst, the Chairman of the IASB, noted in a speech on
sustainability reporting that ‘In an ideal world, there would be no need for sustainability
reporting. Negative externalities, such as pollution, would be adequately taxed so that
the price of a product would reflect the cost it imposes on the environment. A realistic
carbon tax would cause the financial statements of smokestack industries to reflect the
true costs of their products. Should these costs make an economic activity unfeasible,
the financial statements would show the impairment of its related assets. Financial
reporting and sustainability reporting would be one and the same.’ However, the IASB
does not have the breadth of expertise that would allow it to cover the entire field of
non-financial reporting and its resources are limited. Also, when it comes to corporate
behaviour, financial incentives are a much stronger driver than transparency and
disclosure requirements. Nevertheless, we encourage the IASB to take an active role
when it comes to the efforts to improve the broader financial report, as non-financial
reporting provides important information that allows users to put the financial
statements in context and helps them in assessing future risks and opportunities.
Therefore, we believe it is helpful for the IASB to participate in initiatives such as, for
example, the Corporate Reporting Dialogue, which strives to strengthen cooperation,
coordination and alignment between key standard setters and framework developers
that have a significant international influence on the corporate reporting landscape.

This edition of International GAAP® covers the many interpretations, practices and solutions
that have now been developed based on our work with clients, and discussions with
regulators, standard-setters and other professionals. We believe that International GAAP®,
now in its fifteenth edition, plays an important role in ensuring consistent application and
helping companies as they address emerging issues (e.g. interest rate benchmark reform,
application of IFRS 16 and implementation of IFRS 17). These issues are complex and give
rise to many practical questions about the recognition, measurement, presentation and
disclosure requirements.

Our team of authors and reviewers hails from all parts of the world and includes not
only our global technical experts but also senior client-facing staff. This gives us an indepth knowledge of practice in many different countries and industry sectors, enabling us to go beyond mere recitation of the requirements of standards to explaining their
application in many varied situations.

We are deeply indebted to many of our colleagues within the global organisation of EY
for their selfless assistance and support in the publication of this book. It has been a
truly international effort, with valuable contributions from EY people around the globe.
Our thanks go particularly to those who reviewed, edited and assisted in the preparation
of drafts, most notably: Elisa Alfieri, John Alton, Danielle Austin, Mark Barton, Christian
Baur, Paul Beswick, Silke Blaschke, Wan Yi Cao, Larissa Clark, Tony Clifford, Angela
Covic, Tai Danmola, Laney Doyle, Peter Gittens, Paul Hebditch, Guy Jones, Steinar
Kvifte, Michiel van der Lof, James Luke, Keri Madden, Fernando Marticorena, John
Offenbacher, John O’Grady, Christiana Panayidou, Pierre Phan van phi, George
Prieksaitis, Gerard van Santen, Nicola Sawaki, Alison Spivey, Leo van der Tas, Meredith
Taylor, Hans van der Veen, Arne Weber, Clare Wong and Luci Wright.
Our thanks also go to everyone who directly or indirectly contributed to the book’s
creation, including the following members of the Financial Reporting Group in the UK:
Denise Brand, Lennart Hoogerwaard, Ayesha Moosa and Mqondisi Ndlovu.
We also thank Jeremy Gugenheim for his assistance with the production technology
throughout the period of writing