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Financial reporting – recent significant developments 26 October 2023

Supplier Finance Arrangements - Proposed amendments to Ind AS 7 and Ind AS 107

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Scope – What Is A Supplier Finance Arrangement Financial institutions

Company agrees to pay according to the arrangement

Financial institutions offer to pay amounts a company owes its supplier

Scope excludes: • arrangements that finance receivables or inventory

Company

Supplier

• arrangements that are solely credit enhancements or used to settle directly with a supplier the amounts owed

These arrangements provide the company with extended payment terms, or the company’s suppliers with early payment terms, compared to the related invoice payment due date

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What is the issue?* How does a company present liabilities to which supplier finance arrangements relate?

What information about supplier finance arrangements is a company required to disclose in the financial statements?

Current standards allow for a variety of treatments on balance sheet depending on circumstances

• Current disclosures around liquidity risk and non-cash transfers on cash flow statement

• Targeted project on improving disclosures

 Balance sheet adjustments for effects of such arrangements Investors’ information requirements

 Impact on liquidity risk  Adjustments to operating cash flows

* Based on IASB activities

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Proposed disclosures Objective: To enable users to assess the effects of supplier finance arrangements on the entity’s liabilities and cash flows and on the entity’s exposure to liquidity risk

Entity required to disclose in aggregate for its supplier finance arrangements: (a) the terms and conditions of each supplier finance arrangement (separate disclosure of arrangements that have dissimilar terms and conditions)

(b) as at the beginning and end of the reporting period; i) the carrying amount of financial liabilities recognised in the entity’s balance sheet that are part of a supplier finance arrangement and the line item(s) in which they are presented; ii) the carrying amount of the financial liabilities, and associated line items, disclosed under i) for which suppliers have already received payment from these finance providers; iii) the range of payment due dates of financial liabilities disclosed under i); and iv) the range of payment due dates of trade payables that do not form part of a supplier finance arrangement (c) the type and effect of non-cash changes in the carrying amounts of the financial liabilities disclosed under (b)(i).

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Illustrative example – disclosure requirements*

Level of aggregation Aggregate disclosure for all supplier arrangements but this aggregate if required information about • terms and conditions • range of payment due dates and • non-cash changes

This example is provided for illustrative purposes only. The example is simplified and reflects assumptions that may not apply in all circumstances

* Source: IASB webcast 6

Effective date and transition Assume a company with 31 March and will reporting date and 30 June as interim reporting date

An entity is not required to disclose comparative information for any periods presented before 1 April 2024

An entity is not required to disclose amount suppliers have been paid by finance providers and ranges of payment due dates at 1 April 2024

An entity is not required to disclose the information required by the amendments for any interim periods in 2024-25

First annual reporting an entity applies the amendments

Periods before 1 April 2024

1 April 2024 Effective date

30 June 2024 Interim period

31 March 2025 First annual period

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Pillar two taxes – Proposed amendment to Ind AS 12

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Pillar Two – Overview About OECD Pillar Two OECD Applicability Pillar 2 rules apply to multinational group With global revenues exceeding €750 million threshold in any 2 fiscal years out of prior 4 fiscal years Global Minimum Tax Rate at 15%

Key OECD Rules Income inclusion rule Main rule

Large multinational groups pay a minimum level of tax in each country in which they operate

Backstop rule

Undertaxed payments rule

Domestic Top-Up Tax

Qualified Domestic Minimum Top-up Tax

All rules operate as a ‘top up’ to a minimum rate

Group revenues of €750 million + 15% rate

Domestic law

High-Level Calculation Mechanism Key Steps Multinational Entities shall perform to determine its liability under Pillar 2 Rules Step 1: Entities within scope Entities In scope

Entities/Income Not In Scope Taxpayers with no foreign presence or having less than EUR 750m in consolidated revenue

Government entities International organizations MNE’s with consolidated revenue of EUR 750m and more

Non-profit organizations Entities that are Excluded Entities are not subject to GloBE rules Entities with definition of pension, investment or real estate fund - these are excluded even if the MNE group subject to the globe rules control these entities

Identify groups within scope and the location of each constituent entity within the group Step 2: GloBE Income Determine Income of each Constituent Entity Step 3: Covered Taxes Determine tax attributable to Income of Constituent Entity Step 4: Effective Tax Rate and Top Up Tax Calculate the Effective Tax Rate of all Constituent Entities located in same jurisdiction and determine resulting top up tax Step 5: IIR and UTPR Impose Top-up tax under IIR or UTPR in accordance with agreed rule order

Step 6: Additional rules (mergers/acquisition, transition rules etc.)

Qualifying shipping income

Additional rules to be applied if its applicable

Computation of Top-up Tax Amount of top-up tax of each LTCE post aggregating its net income and adjusted covered taxes with those of other constituent entity located in the same jurisdiction to determine the ETR and Top-up Tax Percentage for each jurisdiction Top-up Tax (for a jurisdiction)

Top-up Tax Percentage

15% (minimum rate) - ETR

Excess Profits

Additional Current Top-up Tax

Net GloBE Income – Substance-based income exclusion

Additional top-up tax in respect of a prior period

Domestic Topup Tax

Amount payable domestically

Substance-based income exclusion of a fixed return on Payroll

Payroll: 10% (to be reduced to 5% over the years). Includes salaries, health insurance, pension contributions, employment taxes and employer social security contributions. Eligible employees include independent contractors.

*Net Book Value of Tangible assets

Tangible assets: 8% (to be reduced to 5%). Includes property, plant and equipment, and natural resources

* Net Book Value of Tangible Assets means the average of the beginning and end values of Tangible Assets after considering accumulated depreciation, depletion, and impairment, as recorded in the financial statements.

Adjusted Covered Taxes for all Constituent Entities in the jurisdiction (Covered Taxes)

Jurisdictional ETR Net GloBE Income for all Constituent Entities in the jurisdiction (GloBE Income)

Safe Harbours and Penalty Relief During the transition period the Top-up Tax in a jurisdiction for a Fiscal Year shall be deemed to be zero where one of the following tests are satisfied:

A. De minimis test: If the MNE Group reports Total Revenue of less than EUR 10 million and Profit (Loss) before Income Tax of less than EUR 1 million in such jurisdiction on its Qualified CbC Report for the Fiscal Year; or B. ETR test: If the MNE Group has a Simplified ETR that is equal to or greater than the Transition Rate in such jurisdiction for the Fiscal Year; or C. Routine profits test: If the MNE Group’s Profit (Loss) before Income Tax in such jurisdiction is equal to or less than the Substance-based Income Exclusion amount, for constituent entities resident in that jurisdiction under the CbCR, as calculated under the GloBE Rules.

The terms set out above have the following definitions: • Transition Period: The safe harbour is also limited to a transitional period that applies to Fiscal Years beginning on or before 31/12/2026 but not including a Fiscal Year that ends after 30/6/2028.

• Simplified ETR is calculated by dividing the jurisdiction’s Simplified Covered Taxes by its Profit (Loss) before Income Tax as reported on the MNE Group’s Qualified CbC Report • Simplified Covered Taxes is a jurisdiction’s income tax expense as reported on the MNE Group’s Qualified Financial Statements, after eliminating any taxes that are not Covered Taxes and uncertain tax positions reported in the MNE Group’s Qualified Financial Statements • Transition Period covers all of the Fiscal Years beginning on or before 31/12/2026 but not including a Fiscal Year that ends after 30/6/2028 • Transition Rate means: a. 15% for Fiscal Years beginning in 2023 and 2024; b. 16% for Fiscal Years beginning in 2025; and c. 17% for Fiscal Years beginning in 2026.

Pillar two taxes – Proposed relief under Ind AS 12 Pillar Two Model Rules - Accounting challenges

Mandatory relief from deferred tax accounting

• Is top-up tax in the scope of Ind AS 12 Income Taxes?

To address the accounting concerns, Ind AS 12 is proposed to be amended:

• Do the rules create additional temporary differences?

• If yes  How to account for its deferred tax impacts?  Do the existing temporary differences in relation to deferred tax recognised require remeasurement?

• provide a temporary mandatory relief from deferred tax accounting for top-up tax;

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entity should neither recognise nor disclose information about deferred tax related to top-up tax

• require a disclosure that the relief has been applied; and • require new disclosures compensating for the potential loss of information resulting from the relief.

 What should be the rate for measuring the deferred tax impacts?

The relief will be effective immediately and apply retrospectively in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors It will apply until it is either removed or made permanent 13

Pillar Two Taxes – Proposed New Disclosures Once tax law is enacted or substantively enacted but before top-up tax is effective • Information that is known or can be reasonably estimated and that helps users of its financial statements to understand its exposure to Pillar Two income taxes at the reporting date • Information does not need to reflect all the specific requirements in the legislation – entities can provide an indicative range

After top-up tax is effective • Current tax expense related to top-up tax

 Qualitative information: How the entity is affected by Pillar Two legislation and the main jurisdictions in which exposure might exist

• Disclosure requirements (other than the disclosure on applying the relief) will apply for annual reporting periods beginning on or after 1 April 2023

 Quantitative information: The proportion of profits that may be subject to Pillar Two income taxes and the average effective tax rate applicable to those profits, or how the average effective tax rate would have changed if Pillar Two legislation had been in effect

• No disclosures (other than the disclosure on applying the relief) will be required in interim periods ending on or before 31 March 2024

• Disclosures may include quantitative and qualitative information

• If information is not known or reasonably estimable at the reporting date, then an entity discloses a statement to that effect and information about its progress in assessing its exposure

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Amendments in Ind AS

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Amendments in Ind AS effective for Annual reporting periods beginning on or after 1 April 2023 • Disclosure of Accounting Policies • Definition of Accounting Estimates • Deferred Tax related to Assets and Liabilities arising from a Single Transaction

• Editorial Corrections in Ind AS

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Amendments to Ind AS 1 and Ind AS 8

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Ind AS 1 – Disclosure of Accounting Policies Amendments to Ind AS 1 Presentation of Financial Statements Intended to help preparers in deciding which accounting policies to disclose in their financial statements by: • Requiring companies to disclose their material accounting policies rather than their significant accounting policies

Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements

• Adding guidance on how entities apply the concept of materiality in making decisions about accounting policy disclosures  Accounting policy information related to immaterial transactions, other events or conditions is itself immaterial and as such need not be disclosed

• Converged with corresponding amendments to IAS 1 issued by IASB

 Accounting policy information may be material because of its nature, even if the related amounts are immaterial

• IASB also amended IFRS Practice Statement 2 by including guidance and two additional examples to explain and demonstrate the application of the ‘four-step materiality process’ to accounting policy information

 Not all accounting policy information relating to material transactions, other events or conditions is itself material  Accounting policy information is material if users would need it to understand other material information in the financial statements  If an entity discloses immaterial accounting policy information, such information should not obscure material accounting policy information  Conclusion that accounting policy information is immaterial does not affect the related disclosure requirements in other standards

Amendments apply to annual reporting periods beginning on or after 1 April 2023 Consequential amendments made to other Ind ASs 18

Ind AS 1 – Disclosure of Accounting Policies Examples of circumstances in which an entity is likely to consider accounting policy information to be material • A change of accounting policy results in a material change to the information in the financial statements • A choice of accounting policy is permitted by Ind AS • An entity develops an accounting policy in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors in the absence of an Ind AS that specifically applies • Application of accounting policy requires significant judgements or assumptions (disclosed in accordance with paragraphs 122 and 125) • It is difficult to understand material transactions, other events or conditions because they require complex accounting, e.g., when more than one Ind AS is applied to a class of material transactions

The list of examples is not exhaustive, but can help an entity to determine whether accounting policy information is material or not

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Amendments to Ind AS 8 - Accounting Estimate Gets A Definition Accounting Estimate Definition of a change in accounting estimates deleted and definition of accounting estimates introduced • Amendments clarify relationship between accounting policies and accounting estimates by specifying that a company develops an accounting estimate to achieve the objective set out by an accounting policy • An entity uses measurement techniques and inputs to develop an accounting estimate • Not all estimates will meet the definition of an accounting estimate, but rather may refer to inputs used in developing accounting estimates

Clarifications on accounting estimates • Change in accounting estimate that results from new information or new developments is not correction of an error • The effects of a change in an input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors

Accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”

The definition together with clarifications will help in addressing gap and reducing diversity • Applicable for annual reporting periods beginning on or after 1 April 2023 • Apply the amendments to changes in accounting estimates and changes in accounting policies that occur on or after the beginning of the first annual reporting period in which it applies the amendments • Converged with corresponding amendments to IAS 8 issued by IASB

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