2017 Critical financial reporting update

Financial Reporting Update

April 2017Presented by:

Carmen Ridley Bentleys National Audit &

Accounting Technical Director

Accountants AdvisorsAuditors Accountants AdvisorsAuditors

Disclaimer© Australian Financial Reporting Solutions – April 2017– all rights reserved

This presentation is intended for instruction. It is general information only, and is not specific business advice or financial advice and no person should rely on the contents without first obtaining advice from a qualified professional person acting in that role or reference to source materials such as accounting standards.

Nevertheless, all care has been taken in preparing this information to the time of its distribution at the training event. Australian Financial Reporting Solutions, related entities, officers and employees do not accept any contractual, tortuous or other form of liability for this content or for any consequence arising from its use or for omissions or errors, including responsibility to any person by reason of negligence.


Agenda • New standards for 30 June 2017• Overview of the ‘Big 3’:

• AASB 9 Financial Instruments • AASB 15 Revenue from Contracts with Customers• AASB 16 Leases

• ASIC activity • Focus areas• Restatements

• NFP issues• Changes to auditor reporting


New standards effective for 30 June 2017


New accounting standards effective for the first time at 30 June 2017

AASB 14 Regulatory Deferral Accounts / AASB 2014-1 Amendments to Australian Accounting StandardsAASB 1057 Application of Australian Accounting Standards / AASB 2015-9 Amendments to Australian Accounting Standards – Scope and Application paragraphs

AASB 2014 – 3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations [AASB 1 and AASB 11]

AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and AmortisationAASB 2014-6 Amendments to AASB 116 and AASB 141 for bearer plantsAASB 2014-9 Equity method in separate financial statements (Amendments to AASB 127)


New accounting standards effective for the first time at 30 June 2017

AASB 2015 – 1 Annual improvements (2012 – 2014 cycle)AASB 2015-2 Disclosure Initiative – Amendment to AASB 101AASB 2015-5 Investment Entities: Applying the Consolidation ExceptionAASB 2015 – 6 Amendments to Australian Accounting Standards – Extending Related Party Disclosures to Not-for-Profit Public Sector EntitiesAASB 2015 -10 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 (Sale or contribution of assets between an investor and its associate or joint venture)AASB 1056 Superannuation Entities


Timeline for new standards

30 June 2017

30 June 2019

Leases

Revenue (NFP)

30 June 2020

30 June 2018

Financial instruments

Revenue (FP)


Photo by crackdog - Creative Commons Attribution License https://www.flickr.com/photos/88645472@N00 Created with Haiku DeckAASB 9 Financial Instruments


AASB 9 Financial Instruments

• Initial recognition and measurement• when the entity becomes party to the instrument• at fair value • +/- transaction cost for instruments other that those measured at fair value through

profit or loss• All financial assets and liabilities to be included on the statement of financial position• All equity instruments are to be carried at fair value there is no ‘cost’ exception for

unlisted investments • Impairment model is only required for financial assets carried at amortised cost


AASB 9 Financial Instruments Classification of assets

Amortised cost if

held within a business model whose objective is to hold assets to collect contractual cash flows

contractual terms give rise to cash flows that are solely

payments of principal and interest +

Fair value through P&L otherwise

2 exemptionsFair Value Option Fair Value through OCI Option


AASB 9 measurement requirements• Measured at fair value • Changes in value / gains on sale

through profit or loss

Equity instrument not

designated through OCI

(held for trading)

• Measured at fair value • Changes in value / gains on sale

through OCI• Dividends through profit or loss

Equity instrument designated

through OCI


Hedge accounting

Qualifying criteria for hedge accounting

Only eligible hedging instruments and

hedged items

Formal designation and documentation

Meets the hedge effectiveness requirements

Economic relationship between the hedged item and the hedging

instrument exists

Effect of credit risk does not dominate the

value changes

Hedge ratio results from the quantity of

hedged item and hedging used to hedge

Hedge accounting is elective

All 3 criteria to be met


Overview of impairment modelStage 1 –

Performing asset

• Initial recognition • Instruments that have not had a significant increase in credit risk since initial recognition or those with

low credit risk at reporting date• 12 months expected credit losses being default events that are possible within 12 months.• Recognise entire credit loss on asset weighted by the probability of default event.

Stage 2 – underperforming

asset

• Assets with significant increase in credit risk since initial recognition)• Recognise lifetime expected credit losses

Stage 3 – non-performing assets

• Credit impaired assets• Recognise lifetime expected credit lossesCh

ange

in c

redi

t qua

ify si

nce

initi

al re

cogn

ition


AASB 9 – consider…

• Do you have the following transactions?• Equity investments held at cost• Available for sale financial assets• Significant receivables / loans balances• Derivatives • Insurance entities – delay implementation?

• Internal champion • Training and communication


Questions


Revenue AASB 15


AASB 15 Revenue from Contracts with Customers

• Effective for annual reporting periods beginning on or after 1 January 2018

• Model for revenue recognition which focuses on control• Significantly increased disclosure requirements• Replaces AASB 111, AASB 118 and certain interpretations


Overall principle – what?

Recognise revenue in a way that shows the transfer of goods/services promised to customers in an amount reflecting the expected consideration in return for those goods or services.

1. Identify the contract with the customer

5. Recognise revenue as the performance

4. Allocate the transaction price to the performance obligations

2. Identify the performance obligations

3. Determine the transaction price

The 5 step path to revenue recognition


Customer must be able to benefit

from the good / service either on its own or with other readily

available resources

The good / service is separately

identifiable from other goods / services in the

contract

Performance obligations – Distinct


Non-refundable up-front fees

• Does the non-refundable up-front fee relate to a separate performance obligation – transfer of promised goods / services?

• Activities that must be undertaken to fulfil a contract but do not result in transfer of goods / services to a customer are not performance obligations.

• Advance payment for future goods / services is not a performance obligation.

• Consider:• Joining fees• Activation fees in utilities• Set-up / registration fees


Need to consider

Transaction price reflects the effects of:• Variable consideration (including constraining estimates)• Non-cash consideration• A significant financing component• Upfront accounting for refund liabilities (consideration payable to a

customer)

The more significant judgement and estimates involved, the more challenging it is to determine the transaction price


Transfer of control

Control is transferred over time

Yes

Yes

No

Control is transferred over a point in time

Does customer control the assets as it is created or enhanced?

Does customer receive and consume the benefits as the entity performs?

Does the asset have an alternative use to the entity?

No

No

Yes

Does entity have the enforceable right to receive payment for work to date and expect to fulfil the contract as

promised?

No

Yes


Contract costsCosts to obtain a contract• Costs which would not have been incurred if the contract has not been won• Recognised as an asset if they are expected to be recovered• If expected period is less than 12 months then expense as a practical expedient

Costs to fulfill a contract • If these costs are within the scope of other standards (e.g. AASB 102, AASB 116 or AASB 138) -

treatment is in accordance with appropriate standard• If not, then you should capitalise them only if certain criteria are met


Costs to fulfil a contractAre the costs incurred within the scope

of another standard?

Are the costs expected to be recovered?

Do the costs generate of enhance resources that will be used to satisfy

performance obligations?

Do the costs relate directly to a contract?

No

Yes

Yes

Yes

Yes

No

No

No

Capitalise costs(subject to amortisation and impairment)

Expense costs as incurred

Account for costs in accordance with relevant

standard


Action items

1. Acknowledge – AASB 15 is complicated 2. Determine your time-line – to be sooner rather than later3. Project champion4. Knowledge transfer to staff5. Involvement of non-finance staff6. Changes to contracts / bank covenants7. Quantify impact on reported numbers8. Stakeholder communication 9. Audit requirements 10.Don’t stick your head in the sand


Leases


What was broken?• Leases are a significant part of an entity’s financing strategy – listed

companies using IFRS or US GAAP are estimated to have around

US$3.3 trillion of leasing commitments.

Over 85% of the commitments do not appear on today’s balance sheets

•AASB 16 effective for annual reporting periods beginning on or after 1 January 2019


What is a lease?

A lease conveys the right to control the use of an identified asset for a period of time in

exchange for consideration.


AASB 16 Fundamental Principle

All leases on statement of financial position (balance sheet)Two exceptions

Income statement

Interest and depreciation

expense

Impairment of right-of-use asset

Variable lease payment not

dependent on an index

Balance sheet

Right to use asset

(tangible)

Lease liability


Two exceptions• A lease that at commencement date has a lease

term of ≤ 12 months• Excludes leases with purchase options • Lease term is non-cancellable period plus options

which are reasonably certain• Lease modification or change in lease term

considered a new lease

Short term

leases• Value assessed on new asset• Management assessment• BC notes US$5,000• Examples – laptops, tablets, small office

furniture

Low value assets


Income statement

1 2 3 4 5 6 70

0.5

1

1.5

2

2.5

3

3.5

4

4.5

AASB 16 AASB 117 Cash rents


Measurement of lease liability

Include

• Fixed payments (includes inflation linked)

• Optional payments is reasonably certain

• Residual value guarantee

Exclude

• Variable lease payments linked to sales or use

• Optional payments NOT reasonably certain


Initial measurement of the right of use assetLease liability

Initial direct costs

Prepaid lease payments

Estimated costs to dismantle, remove or restore

Lease incentives received


What to do?

• What leases are in place?• What are the current terms and conditions?• Do either of the exemptions apply?• Do bank covenants, bonus schemes etc need to be renegotiated?• Are appropriate processes in place to account for leases on balance

sheet?


ASIC Activity • Focus areas

• Restated financials


ASIC financial reporting surveillance

• Focus areas released and no changes• Headline:

ASIC has called on companies to provide information for users of financial reports that is useful and meaningful ahead of the preparation of reports for the period

ended 31 December 2016.

In particular, companies should adopt realistic valuations for asset values, appropriate accounting policies and provide more effective communication of that

information


Impairment testing and asset values• Recoverability of the carrying amount of assets such as goodwill, other intangibles

and property, plant and equipment.

• Directors and auditors should ensure:• Cash flows and assumptions are reasonable• Fair values are based on observable inputs• Value in use calculations do not use increasing cash flows after 5 years that exceed long

term average growth rates nor cash flows from improvements to the asset• Cash flows used are matched to carrying values of all assets that generate those cash flows• Discount rates are matched to the specific risks in the assets• CGUs are not grouped at a higher level than the operating segments• Corporate costs and assets are allocated to CGU’s on an appropriate basis.


Accounting policy choicesOff balance-sheet arrangements• Treatment of off-balance sheet arrangements, accounting for joint

arrangements and disclosures relating to structured entities.

Revenue recognition• Ensure revenue is recorded in accordance with the substance of the transaction• Have services been performed?• Have risks and rewards been transferred?• Has revenue been recognised at the correct time?• Financial instrument revenue recognised on an appropriate basis?


Accounting policy choicesExpense deferral • Expenses should only be deferred when:

• There is an asset as defined in the conceptual framework• It is probable that economic benefits will arise• The requirements of AASB 138 Intangible assets are met

• Expenses to be taken through profit and loss unless accounting standards specifically permit movement through OCI.

Tax effect accounting• Preparers of financial statements need to understand:

• Tax and accounting treatments of transactions and the impact of differences between them• Impact of recent changes in legislation• Deferred tax assets are recoverable.


Key disclosuresEstimates and accounting policy judgements• Disclosures should be specific and useful to the users• Include key assumptions and sensitivity analysis• Consider relationship with key audit matters.

Impact of new accounting standards• Disclose the impact of standards issued not yet effective – in

particularly the ‘big three’ – revenue, financial instruments and leases.


Melbourne IT Limited

Amended presentation of fair value of embedded derivative relating

to convertible notes through profit or loss rather than

other comprehensive

income

Energy Resources Australia

Impairment loss $161m relating to non-current assets

on the Ranger Mine. Following ASIC

review there was a continued decline in uranium oxide price and other external

and business-specific factors.

Hillgrove Resources

LtdImpairment charge of $67.1m relating

to copper mine and $19.2m write-off of deferred tax assets.

ASIC concerns regarding lack of

observable inputs for fair value,

exclusion of costs of disposal and current

copper price forecasts not used.


Evolution Mining Ltd

Impairment of $77.3m in relation to

the mine assets based on binding offers for

the assets and subsequent sale.

Frontier Capital Group

Ltd

Goodwill impaired following ASIC review.

Expense relating to goodwill impairment

was previously presented in other

comprehensive income. Amended to

show expense as a component of net

loss.

Kalina Power Limited

December 2014 – sold shares in investment –

holding was 49.27% (from 61.5%). 2 out of 5 directors

=> loss of control – deconsolidated.

July 2015 – conversion of $14.8m receivable to equity

– holding increased to 75.62%. Control obtained therefore accounted for

under AASB 3. Assets and liabilities were fair valued –

recognised of $4m intangible.


MMA Resources• Write down of property, plant and equipment relating to vessels by $254m in half year

ended 31 December 2016


Spotless • ASIC media release - Write down of goodwill in its resources business by $99.2m


Spotless


Spotless (from interim financial report)


Pacific Star Network

ASIC media release• An impairment charge of $4.5 million on publishing mastheads and goodwill

arising from the acquisition of Morrison Media.• Concerned that the assumptions used in the impairment models for the

publishing business were too optimistic.

Pacific Star interim report


Nine Entertainment Co

• Write down goodwill relating to the Nine Network by $260 million in its financial report for the half-year ended 31 December 2016


Seven West Media Limited

• Write down its investment in Yahoo7 by $75.5 million in its financial report for the half-year ended 24 December 2016


Seven West Media Limited


Cabcharge Australia Limited• An impairment charge of $20.7 million on its 49% stake in UK-based

CityFleet Network (CFN) and $7.9 million on its portfolio of taxi licence plates.

• Cabcharge’s announcement indicated that the impairment made against the taxi licence plates was required because taxi plate income is continuing to adjust following regulatory reforms announced by some States during 2016. Cabcharge also said that it had increased the risk weighted discount rate for its portfolio of taxi plate licences to reflect this continuing uncertainty on future income levels in those States. The impairment of its investment in CFN was said to reflect deterioration in CFN's trading profit in the period since August 2016.


Future of the financial reporting framework

• General purpose v special purpose• Publicly available• Role of Reduced Disclosure Framework (RDR)• Watch this space ….


Questions


Not for Profit issues - Changes to legislation - Revenue for NFP


Revenue for NFP entities

• Standards released in December 2016:• AASB 1058 Income of Not-for-Profit Entities• AASB 2016-7 Deferral of AASB 15 for NFP Entities• AASB 2016-8 - Australian implementation guidance for not-for-profit entities

• Application date has been deferred to 1 January 2019


Considerations for NFPs

• What would be the accounting treatment for existing grants?• Do grant agreements need to be changed?

• Are there any peppercorn leases in place?• What resources are needed to implement this standard?• What communication is needed with stakeholders?• Systems changes• Development of accounting policies• Bank covenants• Internal budgets and management accounts


Changes for Incorporated Associations

• The Associations Incorporation Act 2015 commenced 1 July 2016• Associations are required to review and update their rules in the

areas of:• financial reporting,• governance,• privacy,• the rules, • becoming incorporated and• membership of incorporated associations.


Financial reporting changes• A three–tiered system of financial reporting has been introduced.

• Associations are still required to provide their financial reports to members; however the reports will not be required to be provided to the Commissioner.

• ACNC transitional relief in place.

Tier 1 associations (revenue of less than $250,000)

can elect to prepare basic financial statements with no independent review or audit.

Tier 2 associations (revenue of $250,000 or more, but less than $1,000,000)

must prepare financial reports that give a true and fair view of the financial position of the association in accordance with Australian Accounting Standards. Financial report is subject to a review.

Tier 3 associations (revenue of $1,000,000 or more).

must prepare financial reports that give a true and fair view of the financial position of the association in accordance with Australian Accounting Standards. Financial report is subject to audit.


New auditor reports


Changes to Auditor Reporting • Audit reports will be different for years ending on or after 15

December 2016• Structural changes

• Opinion first

• Additional information • Management responsibilities• Auditor responsibilities• Other information section

• Going concern• Key audit matters


Going concern – whose responsibility?Auditor’s

responsibilities section

Conclude on the appropriateness of

management’s use of the going concern basis of

accounting, and based on the audit evidence

obtained, whether a material uncertainty exists

related to events or conditions that may cast doubt on the ability to

continue as a going concern.

Management responsibilities

section

Assessing the entity’s ability to continue as a going concern and whether the use of the going concern

basis is appropriate and disclosing

relevant matters relating to going

concern


Reading and considering the Other Information• Read the other information and consider whether is a material

inconsistency• Basis for consideration• Compare to financial statements

• Use of audit based knowledge• Remain alert while reading may be materially misstated


Key Audit Matters (KAM)“Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial report of the current period.

Key audit matters are selected from matters communicated with those charged with governance”.


Tawana Resources NL


Tawana Resources NL


Sumatra Copper and Gold

• Carrying value of Tembang Mine • Accounting estimates involving mining assets• Accounting for the amendment of the Senior Secured Debt Facility• Going concern• Revenue recognition • Forward contract hedging instrument• Recoverability of deferred tax asset


Omni Market Tide Limited (software)


Final Questions / thoughts

Carmen Ridley Bentleys National Audit & Accounting Technical Director

[email protected]

0438 029867

mailto:[email protected]

Business

2017 Critical financial reporting update