Changes planned to the Estonian Financial Reporting Standard

At the beginning of 2025, the International Accounting Standards Board (IASB) adopted an updated consolidated text of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). This standard forms the basis for the Estonian Financial Reporting Standard (EFS), which is set out in the guidelines of the Accounting Standards Board (RTJ). The updated IFRS for SMEs therefore necessitates a review and update of the EFS and the RTJ guidelines.

The planned changes are not extensive and are mainly technical in nature. They will enter into force for reporting periods beginning in 2027 or later. The Accounting Standards Board guidelines are available on its website. The Accounting Standards Board is accepting feedback on the updated guidelines until the end of February.

No need for amendments was identified in RTJ 13 “Liquidation and final financial statements” and RTJ 14 “Non-profit organisations and foundations”, and these guidelines are planned to remain in force in their current form.

The amendments to RTJ 1 “General principles for the preparation of annual financial statements”, RTJ 2 “Presentation of information in annual financial statements”, RTJ 3 “Financial instruments”, RTJ 5 “Property, plant and equipment and intangible assets”, RTJ 6 “Investment property”, RTJ 8 “Provisions, contingent liabilities and contingent assets”, RTJ 9 “Lease accounting”, RTJ 12 “Government grants”, RTJ 15 “Information disclosed in the notes” and RTJ 16 “Service concession arrangements” are technical and clarifying in nature.

More substantive changes have been made to RTJ 4, 7, 10 and 11.

In RTJ 4 “Inventories”, a significant change relates to the accounting treatment of sales of goods with a right of return. In practice, this is likely to have the greatest impact on the accounting of B2C retailers operating online. Where a customer has a contractual right to return goods within a specified period, the seller recognises, at the time of sale, the goods expected to be returned as return assets (with a corresponding adjustment to cost of goods sold). Return assets are presented within inventories on the balance sheet and are measured at the carrying amount of the asset prior to sale, less any expected costs related to the return of the goods (including any potential reduction in the value of the returned goods). At the end of each reporting period, the estimate of the likelihood of returns is reassessed, and any changes result in corresponding adjustments to both the refund liability and the carrying amount of the return asset. Changes in the refund liability are recognised in revenue, while changes in the return asset are recognised as cost of goods sold in the income statement. See also the related amendment to revenue recognition in RTJ 10.

RTJ 7, which addresses biological assets, includes a number of clarifying amendments intended to facilitate more effective application of the guideline. When applying RTJ 7, particular attention should be paid to the illustrative examples provided at the end of the guideline, as the accounting treatment of certain transactions involving biological assets will change compared to previous practice.

RTJ 10 “Revenue recognition” includes a significant amendment for entities that sell goods with a right of return. Under the current RTJ 10, the seller was required to recognise revenue in full and create an estimated provision for potential returns. After the planned amendment enters into force, when selling goods with a right of return, the seller should recognise:

• revenue only to the extent that returns of goods are not expected (i.e. no longer the full amount of the sale),
• a refund liability for the amount of consideration received or receivable for goods expected to be returned, and
• a return asset (with a corresponding adjustment to cost of goods sold) for goods expected to be returned, measured at the carrying amount of the asset prior to sale, less any expected costs of recovering the goods (including any potential reduction in the value of the returned goods).

The new accounting treatment is illustrated by a separate example at the end of RTJ 10. See also the related amendment to the accounting treatment of inventories in RTJ 4.

RTJ 11 “Business combinations and accounting for subsidiaries and associates” includes a couple of important amendments relating to the determination of the acquisition cost of an acquired interest.

Specifically:

• acquisition-related direct costs (such as advisory fees, due diligence fees, notary fees, state fees and other expenditures without which the transaction would likely not have occurred) are no longer included in the acquisition cost of the acquired interest, but are instead recognised as expenses in the income statement in the period in which they are incurred;
• where the consideration payable for the acquisition of an interest is contingent on certain conditions, subsequent purchase price adjustments are no longer recognised as adjustments to the acquisition cost of the acquired interest, but instead are recognised in the income statement, or in equity in the case of consideration settled through the issuance of equity instruments.