Navigating the Nuances of New IFRS Accounting Standards for 2024 Financial Statements

As businesses finalize their financial statements for the fiscal year ending December 31, 2024, they must consider the latest updates to International Financial Reporting Standards (IFRS). These changes, which impact liability classification, lease accounting, supplier finance arrangements, and sustainability reporting, require a careful and thoughtful approach to ensure compliance and maintain transparency. This article provides an in-depth exploration of the nuances of these updates and the best practices for addressing them in financial reporting.

Understanding the Implications of IFRS Changes

Accounting standards are continuously evolving to provide better transparency and comparability among financial statements across industries and regions. The IFRS updates for 2024 bring significant refinements in key areas of financial reporting that accountants, financial managers, and auditors must integrate into their financial preparation process.

Notably, the new and amended standards focus on liability classification, lease liability measurement in sale and leaseback transactions, enhanced disclosures in supplier finance arrangements, and an increasing emphasis on sustainability reporting. Failure to apply these changes appropriately can result in misstatements, regulatory scrutiny, and possible reputational damage.

Revised Liability Classification under IAS 1 (Presentation of Financial Statements)

One of the key updates is the amendment to IAS 1, which clarifies how entities should classify liabilities as current or non-current. The standard now requires companies to assess whether they have the right to defer settlement for at least 12 months from the reporting date. This shift means that management’s expectations about refinancing or restructuring do not influence classification. Instead, only rights that exist at the reporting date are considered.

Entities must also pay close attention to loan covenants. If a covenant breach occurs after the reporting date but the entity was compliant as of that date, the liability remains non-current. This underscores the importance of reviewing debt agreements in advance and ensuring compliance with financial covenants to avoid unnecessary reclassification of liabilities.

To implement these changes effectively, businesses should:

• Carefully examine all loan agreements and related covenants.

• Ensure financial reporting teams understand the updated classification rules.

• Provide additional disclosures around loan terms and compliance status.

• Document assessments of covenant compliance at each reporting date.

Failure to correctly classify liabilities can impact financial ratios, affect debt covenant compliance, and misrepresent a company’s financial health to investors and regulators. Additionally, the standard emphasizes the importance of appropriate disclosures around the timing and conditions of settlement rights. A company must provide sufficient narrative disclosures to help users of financial statements understand the implications of its classification decisions.

Lease Liability Adjustments in Sale and Leaseback Transactions (IFRS 16 Amendments)

IFRS 16 now provides clearer guidance on how to measure lease liabilities in sale and leaseback transactions. Under the amendments, lease liabilities should be recognized at the present value of future lease payments, discounted at the implicit lease rate. Furthermore, when lease payments are adjusted, corresponding changes must be reflected in the right-of-use asset, ensuring consistency in financial reporting.

Sale and leaseback transactions are often used to generate liquidity while retaining operational use of the asset. However, under the new guidance, entities must carefully evaluate whether they are truly transferring control of the asset and whether the leaseback terms align with IFRS 16’s measurement requirements.

For entities engaging in sale and leaseback transactions, it is crucial to:

• Ensure the leaseback is properly structured so that the gain on sale is correctly recognized.

• Reassess the right-of-use asset whenever lease terms are modified.

• Maintain clear documentation of the discount rates applied.

• Properly disclose the nature and financial impact of such transactions.

It is recommended that companies engage in early discussions with auditors and financial advisors to ensure proper treatment of sale and leaseback transactions under the new framework. Misclassifications can lead to restatements and impact debt covenant calculations.

Supplier Finance Arrangements and Enhanced Transparency (IAS 7 & IFRS 7 Amendments)

The amendments to IAS 7 (Statement of Cash Flows) and IFRS 7 (Financial Instruments: Disclosures) place a greater emphasis on transparency regarding supplier finance arrangements. These amendments aim to ensure that stakeholders understand the impact of such financing mechanisms on liquidity and working capital.

Entities must now disclose:

• Terms and conditions of supplier finance arrangements.

• The amounts of obligations outstanding at the reporting date.

• The classification of related cash flows in the statement of cash flows.

• The impact on the company’s liquidity position and working capital.

Supplier finance arrangements can have significant implications for a company’s balance sheet presentation and liquidity management. Investors and lenders require clear, transparent reporting to assess the financial risks associated with these arrangements.

To align with these disclosure requirements, companies should:

• Conduct a comprehensive review of supplier financing programs.

• Clearly present related financial obligations in the balance sheet and cash flow statement.

• Develop narrative disclosures that effectively communicate the financial implications.

Incorporating well-structured disclosures in financial statements ensures that stakeholders fully understand the business’s financial position and liquidity risks associated with supplier finance arrangements.

Sustainability Reporting: Preparing for IFRS S1 & S2 (ISSB Standards)

With the increasing importance of sustainability in financial reporting, IFRS S1 and IFRS S2 introduce new disclosure requirements related to sustainability risks and climate-related financial disclosures. These standards, developed by the International Sustainability Standards Board (ISSB), set the foundation for consistent and comparable sustainability reporting across industries.

• IFRS S1 focuses on the disclosure of sustainability-related risks and opportunities that could impact financial performance.

• IFRS S2 specifically addresses climate-related disclosures, including:

  • Greenhouse gas (GHG) emissions

  • Transition plans to mitigate climate risks

  • Governance and risk management frameworks for sustainability

Companies must integrate sustainability into their corporate reporting processes, ensuring robust data collection and transparent disclosures. As investors and regulators continue to prioritize environmental, social, and governance (ESG) factors, businesses must align their financial reporting strategies with sustainability objectives.

The 2024 IFRS changes reflect the evolving complexity of financial reporting and the increasing demand for transparency and comparability. Companies that proactively address these changes will ensure compliance, avoid audit risks, and enhance investor confidence.

To navigate the transition effectively:

• Update accounting policies to reflect the latest IFRS amendments.

• Train finance and reporting teams on the implications of the new rules.

• Engage auditors early to validate compliance and disclosure approaches.

• Ensure that internal controls and financial systems are updated to accommodate these changes.

• Provide robust narrative disclosures to improve stakeholder understanding of financial statement impacts.

By taking a structured approach, companies can ensure their financial statements accurately reflect these new requirements while maintaining clarity and reliability for stakeholders. As the regulatory landscape continues to evolve, a proactive, well-documented financial reporting strategy will be key to long-term success.