2017 Critical financial reporting update

Financial Reporting
Update
April 2017
Presented 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 Standards
AASB 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 Amortisation
AASB 2014-6 Amendments to AASB 116 and AASB 141 for bearer plants
AASB 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 101
AASB 2015-5 Investment Entities: Applying the Consolidation Exception
AASB 2015 – 6 Amendments to Australian Accounting Standards – Extending
Related Party Disclosures to Not-for-Profit Public Sector Entities
AASB 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 Deck
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

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 exemptions
Fair 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 model
Stage 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 losses
Changeincreditquaifysinceinitialrecognition

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

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 costs
Costs 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 contract
Are 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 later
3. Project champion
4. Knowledge transfer to staff
5. Involvement of non-finance staff
6. Changes to contracts / bank covenants
7. Quantify impact on reported numbers
8. Stakeholder communication
9. Audit requirements
10.Don’t stick your head in the sand

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
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7
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 asset
Lease 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 choices
Off 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 choices
Expense 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 disclosures
Estimates 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
Ltd
Impairment 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.
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.
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

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
cridley@afrs.com.au
0438 029867

2017 Critical financial reporting update

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to 2017 Critical financial reporting update

Similar to 2017 Critical financial reporting update (20)

More from Bentleys (WA) Pty Ltd

More from Bentleys (WA) Pty Ltd (20)

Recently uploaded

Recently uploaded (20)

2017 Critical financial reporting update

Editor's Notes