Financial Reporting Update
April 2017Presented by:
Carmen Ridley Bentleys National Audit &
Accounting Technical Director
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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.
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AASB 9 Financial
Instruments
AASB 15 Revenue from Contracts with Customers
AASB 16 Leases
ASIC focus areas
Changes to auditor
reporting
Agenda
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Timeline for new standards
30 June 2017 30 June 2019
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 Deck
AASB 9 Financial Instruments
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AASB 9 Financial InstrumentsEffective for annual reporting periods beginning on or after 1 January 2018Changes in relation to:
Classification of financial assetsAmortised cost or fair value Equity through OCIAll equity instruments at fair value;
Hedging;Impairment
Expected loss v incurred loss.
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AASB 9 measurement requirements
Equity instrument not designated
through OCI (held for trading)
•Measured at fair value •Changes in value / gains on sale through profit or loss
Equity instrument designated
through OCI
•Measured at fair value •Changes in value / gains on sale through OCI•Dividends through profit or loss
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AASB 9 – consider…Do you have the following transactions?
Equity investments held at costAvailable for sale financial assetsSignificant receivables / loans balancesDerivatives Insurance entities – delay implementation?
Internal champion Training and communication
Revenue AASB 15
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AASB 15 Revenue from Contracts with Customers
Effective for annual reporting periods beginning on or after 1 January 2018Core principle:
“Recognise revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”
Model for revenue recognition which focuses on controlSignificantly increased disclosure requirementsReplaces AASB 111, AASB 118 and certain interpretations
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
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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
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Contract costsCosts to obtain a contract
Costs which would not have been incurred if the contract has not been wonRecognised as an asset if they are expected to be recoveredIf 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 standardIf not, then you should capitalise them only if certain criteria are met
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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
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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
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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
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Two exceptions
Short term leases
• 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
Low value assets
•Value assessed on new asset•Management assessment•BC notes US$5,000•Examples – laptops, tablets, small office furniture
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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
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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?
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ASIC Focus Areas
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ASIC financial reporting surveillance
Focus areas released and no changesHeadline:
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
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ASIC focus areas
Impairment testing and asset valuesAccounting policy choice:
Off balance sheet arrangementsRevenue recognition Expense deferralTax accounting
Estimates and accounting policy judgementsImpact of new accounting standards.
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Future of the financial reporting framework
General purpose v special purposePublicly availableRole of Reduced Disclosure Framework (RDR)Watch this space ….
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Potential Impact on Loan Covenants
Delays in revenue recognition
Recognition of operating leases on the balance sheet
Effect of operating leases on EBITDA
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QUESTIONS?
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Practical Forecasting3 Way model
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Impact of changes
Forecast Revenue impact on results and EBITDARecognition of Operating leases on balance sheet Establish reporting ratios for loan covenants and KPI’sOur solution: Develop a 3 way forecast and make a plan based on the projections
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Business best practice
By understanding the financial impact of these changes:Make informed strategies to improve your business and Review the impact that changes to key drivers have on your profit, cash flow and the balance sheet
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Why is a 3-way forecast needed?
Don’t drive your business blindfoldedMaintain the relationship with your lender and keep abreast of your lending covenants eg:
Debt to EquityInterest coverWorking capital position
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Profitability KPI’s
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3-way forecasting
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3-way forecasting
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3-way forecasting
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KPI Dashboard
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Bentleys Mentoring
Understand impact to your numbersMake informed decisions including scenario planning and sensitively analysisDesign a better future for your businessInspire, guide and give advice
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Final Questions / thoughts