Bentleys is proud to offer you the slides from our Financial Reporting Bootcamp 2015, for all financial statement preparers, designed specifically to address the current hot issues & new developments facing our profession.
The Bootcamp will provide you with practical solutions, tools and skills that will make the preparation of your financial statements easier.
If you are a Finance Director, Chief Financial Officer or a Financial Controller then this slide page will be for you.
What You will Learn
Insight into the changes in financial reporting requirements
Highlighting current hot topics
Providing you with practical application of these changes
Showing you how to address these issues holistically in the “real-world” context
Learn through practical workshop sessions
Discuss the issues in the context of relevant case studies
Keep up to date & improve your reporting skills
3. Financial Reporting:
ASIC Areas of Focus – 31 December 2014
Refer ASIC 14-294MR: Focuses for 31 December 2014 financial report *
Impairment
Accounting Policy Choices
Material Disclosures
Role of the Directors
Key Themes
4. ASIC – Top 10 8 Problem Areas
Refer ASIC 14-294MR: Focuses for 31 December 2014 financial reports
Income Statement Statement of
Financial Position
Disclosures Other information
Revenue
recognition
Expense deferral Going concern Operating and
financial review
Impairment testing and
asset values
Estimates and accounting
policy judgements
Non-IFRS
disclosures
Amortisation of
intangible assets
Off-balance sheet
arrangements
Related parties
Financial instrument
values
Financial instruments New accounting
standards
(New revenue
standard)
Accounting for taxation
6. ACNC and NFP
Charity reporting issues
New WA Associations legislation
Accounting standards issues
7. Charities: Financial Reporting -
TiersCategory Criteria Annual reporting requirement
Small Consolidated gross revenue up to $250,000 &
not a Deductible Gift Recipient
Annual information statement
Medium
Deductible Gift Recipient - consolidated gross
revenue of up to $1 million
Non-DGR – Consolidated gross income
between $250,000 & $1 million
Annual information statement
Audited or reviewed financial statement
Large Consolidated gross revenue greater than $1
million
Annual information statement
Audited financial statement (audit by
registered company auditor)
8. Transitional relief: dual-lodgers
Charities with a
legislative
requirement to
lodge a financial
report with a State
or Territory regulator
•Associations, co-
operatives, fundraising
licence
2014: ACNC
accepted that same
report as satisfying
ACNC financial
report requirement
Relief extended to
June 2015
obligations
9. Relief: Non-government schools
Transitional exemption for 2014 and 2015
If submit to ACNC the financial data
provided to Department of Education &
Training, then:
No response needed to financial questions
on Annual Information Statement
No financial statements prepared under
ACNC Act
10. Charities: tax concessions
eligibility
Revocations for failure to lodge
Revocations for failing to meet conditions for charity
1 July 2015 deadline to update charity subtype
ACNC draft guidelines – Health Promotion Charities
Federal Government legislative reform
11. ACNC Guides
Company limited by
guarantee – template
constitution
Guides for boards /
governance
Annual Information Statement
review checklist
12. Incorporated associations -
Tiers
Tier Criteria
Annual reporting within 6 months of
year-end
Auditor or reviewer
1 Revenue up to $250,000 Cash or accrual financial statements Only if voted by majority of members
2 Revenue between
$250,000 & $1 million
Financial statements - Australian
Accounting Standards
Review - member of professional
accounting body
3 Revenue of $1 million or
more
Financial statements - Australian
Accounting Standards
Audit - professional practice certificate
holder
Revenue calculated in accordance with Australian Accounting Standards
Financial statements go to members but are not lodged with Government
Associations Incorporation Bill 2014
13. Relief from fair value
disclosures
Not-for-profit public sector entities
Likely amendment effective for June 2015
Line items of unrealised gains and losses
Valuation inputs – significant but unobservable
Sensitivity analysis on those valuation inputs
14. AASB 10, 11 and 12 for NFP’s
2014 2015 2016 2017 2018
Public sector – top levels
Public sector – structuring arrangements
Large private NFPs – e.g. national charities, institutions
Small entities where small $ can be material
16. Interaction between AASB 10,11,12, and AASB 128
Control alone?
Significant influence?
Joint arrangement – AASB 11
Joint control?Consolidation – AASB 10
Disclosures in accordance with
AASB 12
AASB 139 / 9
Disclosures in accordance with
AASB 12
Yes
Yes
Yes No
No
No
AASB 128
Disclosures in accordance
with AASB 12
17. Consolidation: new definition of control
Consistent definition – target is off-balance
sheet structures
Significant judgement required
Assess 3 necessary for elements
Relevant activities
Power to direct those activities
Variable returns from those activities
Investment entity exception
18. 18
Purchase of an Asset Business Combination
• Not a business therefore AASB 3 does
not apply
• Account for the transaction or other
event as an asset acquisition
• An integrated set of activities and assets
that is capable of being conducted and
managed for the purpose of providing a
return to investors
• Licence to explore, on its own, is just an
asset.
• Producing field or mine is likely to be a
business
Business Combinations: AASB 3
Inputs Processes Outputs
19. 19
Area Business Combinations Asset or Group of Assets
Measurement of assets and
liability
Recorded at fair value Recorded at cost; cost is allocated over
the group of assets based on relative fair
value
Transaction costs Expense as incurred Capitalised as part of the cost
Contingent liability Recognised if represents present
obligation that arises from past events
and its fair value can be measured reliably
with subsequent changes to profit or loss
Not recognised; subject to IAAS 37
Goodwill May be recognised Not recognised
Deferred taxes Deferred taxes and liabilities, related to
any temporary differences, tax carry-
forwards and uncertain tax positions and
recorded
Initial recognition exemption applies;
deferred tax assets and liabilities for
temporary differences are not recognised
Business Combinations: AASB 3
20. Determination Framework
Are there sufficient inputs and
processes to produce outputs?
Process:
Are there any inherent processes attached to
the inputs?
What is (are) the missing inputs and/or processes to
produce/achieve the output? Assets2Business
Step 2:
Assess capability of
the group to
produce outputs
Input:
What did the acquirer buy?
Output:
What did the acquirer get and want to get out of this
acquisition?
Process:
Is there any existing process(es) transferred to the acquirer to produce the output?
Step 1:
Identify elements
in the acquired
group
Are market participants capable of continuing to produce
outputs?
Business Assets
Step 3:
Market
participant's ability
to produce output
21. Identify the acquirer – Reverse takeovers
List Co
Shareholders
Priv Co
Shareholders
List Co Ltd
Priv Co Pty Ltd
Acquiree
Acquirer
1.5 million
Issued shares
(60%)
One million
Issued shares
(40%)
600,000
Issued shares
(100%)
Although List Co is legal owner of Priv
Co, Priv Co is deemed to be acquirer for
accounting purposes under AASB 3, as
it exerts control over the financial and
operating policies of List Co
22. Reverse takeovers
The net assets of the acquirer (Priv Co) are not
restated at fair values
The net assets of the acquiree (List Co) are restated at
fair values
But the consolidated financial report will be in the name
of the parent (List Co)
Goodwill is based on the excess of purchase price over
the fair value of net assets acquired (List Co)
24. Corporate Governance Principles and
Recommendations – 3rd Edition
Released March 2014
Applicable from 1 July 2014
Significant changes
Still ‘if not, why not’
But need to be more thorough on information and
“why not” aspect in Corporate Governance Statement
(CGS)
25. Corporate Governance Principles and
Recommendations – 3rd Edition
CGS now must be dated and approved by the board
CGS doesn’t need to be in annual report, but needs to
be lodged at same time as annual report
Also need to lodge new Appendix 4G
26. Principle 1: Lay Solid Foundations for
management oversight
Directors:
Appointments
Info in NOMs
New Co Sec requirements
Diversity Policy
Executive and Board evaluations
27. Principle 2: Structure Board
to add value
Nomination committee changes
Board Skills Matrix
Independence of board members
Induction program and professional
development
28. Principle 4: Safety Integrity
in corporate reporting
Audit Committee
CEO/CFO declaration
Auditors to attend AGM
29. Principle 6: Respect the rights of
security holders
Company to provide information on itself and its
Corporate Governance to investors
Require Investor Relations programs
Policy to encourage investor participation at AGMs
Options for security holders to receive all
communications electronically
30. Principle 7: Recognise and
Manage Risk
Greater focus on risk
Risk Committee
Review Risk Management Framework
Annually
Internal Audit Function
Economic/Environmental/Social sustainability
risks
31. Principle 8: Remunerate Fairly
and Responsibly
Remuneration Committee
Executive and Non-Executive Directors
Disclosure on equity based remuneration
schemes.
34. Revenue – fundamental rewrite
Identify contract
with customer
Identify separate
performance
obligations
Determine
transaction price
Allocate
transaction price
to the
performance
obligations
Recognise revenue
when each
performance
obligation satisfied
Changes to timing – linked to
performance obligations
Changes to amounts –consideration to
which the entity expects to be entitled
35. Revenue – fundamental rewrite
AASB 15 – revenue from contracts with customers
Also replaces rules on Constructions contracts,
incentive schemes
Separate standard coming: Income from
Transactions of NFP Entities to replace AASB 1004
Contributions
36. Revenue example
Social club membership non-refundable joining fee $4,000
Annual membership fee is $2,000
2 free day hires of meeting rooms in first 24 months (normally $500 a
day)
Average length of membership 10 yearsExisting AASB 118
Y1 Y2 Y3 Etc.
Join 4,000 - - -
Annual 2,000 2,000 2,000 2,000
Room hire - - - -
AASB 15
Y1 Y2 Y3 Etc.
Join 400 400 400 400
Annual 2,000 2,000 2,000 2,000
Room hire 1,000 1,000 - -
37. AASB 15
Revenue is recognised as an entity transfers goods or services to a
customer with the amount of consideration they expect to be entitled in
exchange
Identify contract(s)
with customer
Identify separate
performance
obligations
Determine
transaction price
Allocate
transaction price
Recognise revenue
when a
performance
obligation satisfied
2018 start BUT
many NFPs
should assess
early adoption
38. Income of NFPs based on 15
Identify contract(s)
with customer
Identify separate
performance
obligations
Determine
transaction price
Allocate
transaction price
Recognise revenue
when a
performance
obligation satisfied
Reciprocal / non-
reciprocal no
longer a factor
Focus on obligations
will mean more
deferred recognition
“Contracts” approach will
emphasise enforceability and
sufficient specification
39. Some proposed NFP variations
AASB 15 Income of NFP Entities
Contracts with Customers Expand to agreements / arrangement
Commercial substance Economic substance
Performance obligation Stipulation that is sufficiently specific regarding transferred goods and
services to identify how obligation is satisfied
• Nature or type of good or service
• One or more of:
• Cost or value of good or service
• Volume of goods or services
• Period over which they are to be provided
•(the time stipulation alone is insufficient)
Enforceable rights and
obligations
Another party has the right to enforce specific performance
A mechanism with legal authority to require G&S transfer
Enforceable return obligation or ability to impose severe penalty for
non-performance
40. Some proposed NFP variations
AASB 15 Income of NFP Entities
Measurement of performance
obligations
Components that do not give rise to liabilities are treated as
immediate income
(e.g measure performance obligations at their fair value, difference to
transaction price is immediate income or expense)
Residual approach Not to be used if it prevents a donation element to be recognised
(that is, not all of the fair value / transaction price above may be
related to the performance obligation)
Disclosures Numerous variations to take account of NFP-type transactions
42. Session Objectives
Implications of current economic and
market conditions
Going concern assumption
Regulatory requirements
Liquidity vs. Insolvency - Indicators
Going Concern Risk Factors
43. Current Conditions
Massive interest rate reductions
Plunging commodity prices
Weaker AUD
Slowing global growth
Asset sales and falling valuations
44. Going Concern
Fundamental principle in the preparation
of financial statements
Assumes continued trading for the
foreseeable future
Financial statements prepared on the
basis of able to realise its assets and
discharge liabilities in the normal course
of business
No fire sales!!
45. Going Concern
Going concern assumption assumes:
Pay debts as and when they fall due
Continue in operation without any
intention or necessity to liquidate or
otherwise wind up its operations
46. Going Concern
If not considered a going concern the financial report
to be prepared on liquidation basis.
Liquidation basis:
Write down assets to recoverable amount
Reclassify fixed assets and long term liabilities to
current assets and liabilities
Make provisions for additional costs e.g.
redundancies
47. Regulatory
Requirement
Corporations Act 2001 – s.295(4)(c)
Directors’ statement
ASIC Regulatory Guide 22 - Directors’
statement as to solvency
“Will be able to pay debts as and when fall due”
49. Regulatory
RequirementDirectors’ Declaration
Obligation to form opinion as to ability to pay
debts as and when fall due. (s. 301(5))
Qualify where material uncertainties
Qualified statement does not operate to limit
directors’ liability or proper discharge of
responsibilities re trading whilst insolvent
To be appropriate, negotiations to be underway
and reasonable likelihood of refinance
51. Regulatory
Requirement
Qualified and Negative Directors’
Statement Requirements
Clearly worded and in detail to
comprehend
Identify item that is subject to material
uncertainty
Disclose monetary details where
possible
52. Regulatory
RequirementImplications for Auditors
The auditor’s duty is to form an opinion
on whether the directors’ declaration is in
accordance with the Law.
The auditor is obliged to consider the
solvency statement and to provide such
a description where there is reason to
believe that a defect or irregularity exists.
53. Liquidity & Solvency
Liquidity
The ability to convert an asset to cash
quickly.
OR
The degree to which an asset or security can
be bought or sold in the market without
affecting the asset's price. Liquidity is
characterised by a high level of trading
activity.
54. Liquidity & Solvency
Indicators
Accumulating debt and excess liabilities
over assets
Default on loan or interest payments
Increased monitoring and/or involvement
of financier
Accounts payable ageing deterioration
55. Liquidity & Solvency
Indicators
Judgment debts received
Significant unpaid tax and
superannuation liabilities
Loss of key management personnel
Difficulties in obtaining finance or
refinance
No obvious source of funding
56. Going Concern Risk Factors
Experienced difficulties in past obtaining
financing
Breach of covenants (CRITICAL THAT
AUDITORS REVIEW THESE !!)
Finance facilities due for renewal in next
year, not yet renewed
Mgt has no alternate plans should current
facilities not be extended
57. Going Concern Risk Factors
Terms of renewed facilities have changed,
making compliance more difficult
Financing is secured on assets that have
declined in value, below the amount of the
facility
THE AGE OF EASY CREDIT IS OVER !!
LOCK IN FACILITIES RATHER THAN ROLL
OVER BANK FACILITIES
58. Going Concern Risk Factors
Management plans to overcome financing
difficulties include asset disposals
Entity provides significant loans or
guarantees
Entity dependent on guarantees provided by
another party
Future cash flows uncertain or volatile,
customers taking longer to pay
59. Management Responsibilities
Regulatory requirement to assess solvency and
sign directors statement
Management shall make an assessment of
entity’s ability to continue as a going
concern. (AASB 101) :
Management’s use of going concern
assumption is appropriate for approximately
12 months from the audit report date
60. Management Responsibilities
Whether there are material uncertainties
about the ability of entity to continue as
going concern. If so, disclosure
requirement.
The accounts to be true and fair.
61. Auditors’
ResponsibilitiesObtain assurance the accounts are true and
fair
Assess whether going concern assumption
is appropriate for next 12 months from DATE
OF SIGNING REPORTS NOT BALANCE
DATE !!
If significant doubt exists, include
appropriate disclosures in notes to the
accounts
62. Summary
AASB 101 requires management to assess the
entity’s ability to continue as a going concern when
preparing the financial report. In making
assessment, management considers all available
information.
If material uncertainties exist that may cast doubt on
ability to continue as going concern, these must be
disclosed.
Assessment to have regard to reduced liquidity,
ability to refinance debt or raise new funds,
compliance with debt covenants.
65. AUS 702 The Audit report
on GPFR
AUS 406 The auditor’s
procedures in response to
assessed risks *
AUS 512 Analytical
Procedures
*The auditing standards above have since been superseded
by updated standards
Have you had financial statements
with an impairment loss on PPE,
Intangibles, Goodwill or other
physical assets?
(Type “Yes” or “No” in the Questions panel)
66. I’m sure there must be a section 294(4)
in here somewhere
67. I’m sure there must be a section 294(4)
in here somewhere
(4) The directors shall take reasonable steps:
(a) to find out whether the value of any non-current asset is shown in the company's
accounting records at an amount that, having regard to the asset's value to the
company as a going concern, exceeds the amount that it would have been
reasonable for the company to spend to acquire the asset as at the end of the
financial year; and
(b) unless adequate provision for writing down the value of that asset is made-to
cause to be included in the accounts such information and explanations as
will prevent the accounts from being misleading because of the overstatement of
the value of that asset.
68. Impairment testing
Calculate Recoverable Amount
Allocations / sequence
Any corporate assets? Any unallocated goodwill?
When
Mandatory (eg goodwill) Indicator of impairment
Level
Asset CGU
69. Identifying recoverable amount
Recoverable
amount
Asset UseEntity purpose
Not-for-Profit
Does not generate
cash flow and would
be replaced?
Depreciated
replacement cost
Generates cash flow
Present value of
estimated cash flows
For Profit
Present value of
estimated cash flows
70. Disclosures
Loss recognised
or reversed
Amounts
Segment
Details for individual
asset or CGU
FVLCTS details
Indefinite
useful lives
CGU allocation
Key assumptions
Growth and discount rate
Discount rate
Sensitivity to change
No impairment
or indefinite life
Is there any
disclosure
required?
71. Who has identified problems?
ASIC – 6 monthly surveillance reports
International equivalents
• USA Securities and Exchange Commission (e.g. staff observations)
• UK Financial Reporting Council (eg Oct 2008 on goodwill)
• Deutsche Prüfstelle Für Rechnungslegung Oct 2012
• European Securities and Markets Authority Jan 2013
Independent analysts
Quality control review programs
72. Discount rates
Pre or post-tax
Source
Disclosure – disaggregation for CGUs,
segments
What is impact on reader of disclosing an
average?
73. Disclosure: Other key
assumptionsMost sensitive
Management’s approach to determining
Past experience, other
Changes from prior period
Entity specific
Value assigned to key assumptions
if reasonably possible change will cause
impairment
74. Terminal values
Just an extension of existing 1-5 year forecast
What other changes might occur?
Is long-term growth rate reflective of current
environment?
Expected growth based on industry
Need to analyse how entity differs from industry
average
75. Inconsistencies
Range of forward-looking information
• Impairment calculation
• Budget
• Tax projections
• Business restructuring
Assumptions: reasonable and justifiable
• Past performance differs to forecast
• Forecast not updated for latest results
Basis of allocation differs to test
• Goodwill allocated to CGUs on basis of revenues
• An intangible (eg trade mark) then tested on a stand-alone basis
76. Common oversights – market approach
(DCF)
Double counting or omitting cash flows
Uncertainty in cash flow forecast – insufficient allowance
Mismatch of cash flows and discount rates, e.g.:
FCFE at WACC, or FCFF at cost of equity capital
Currency of cash flows differ to currency of discount rate
inputs
77. Common oversights – market approach
(DCF)
Inconsistency in risks in cash flow and discount rate
Terminal value growth rates too high
Perpetuity approach used where revenue has limited life
(eg. contracts, concentrated renewal risks)
Inappropriate risk-free rates
80. General & Special Purpose
2014 2015 2016 2017 2018
General purpose from 1 July 2013 - AASB 1053
(Tiers of Accounting Standards)
Special purpose financial reports
Who
Entities in Tier 1 of AAS Entities in Tier 2 of AAS
(Reduced Disclosure
Requirements)
Regulated – e.g. companies
lodging with ASIC
Unregulated entities
What
All recognition,
measurement,
presentation and
disclosure
requirements of
Australian Accounting
Standards (AAS)
As for Tier 1, but fewer
disclosure requirements
Apply all AAS recognition and
measurement requirements
(ASIC RG 85)
May be required to apply
specific standards (e.g. AASB
101, 107, 108, 1031, 1048, 1053,
1054)
Apply and disclose
own accounting
policies (APES 205)
81. Findings of AASB Research Report
2014 2015 2016 2017 2018
Misapplication of
reporting entity
concept
Different
interpretations in
practice
Majority of lodged
financial
statements are
special purpose
Inconsistent or
incomplete
disclosures
82. Discount rates – debate
Commonwealth
government rate
1.25
Corporate bond
rate
4.5?
• Use government bond rate in absence of deep
market in high quality corporate bonds
• What is the position in Australia?
83. Some changes to 31 Dec 2014
•Out of notes, into remuneration report
•No longer required for trusts
Individual Key Management
Personnel Disclosure
•Recoverable amount based on fair value less costs to sell - now
same disclosure as recoverable amount by value in use
Impairment loss disclosures
expanded
•Clarifies meaning of current legal right of set-off
Offsetting financial assets
and liabilities
•Clarifies when to recognise a liability to pay a government levyInterpretation 21 Levies
2014 2015 2016 2017 2018
84. Fair value
Consistent definitions through the standards
Additional disclosures for non-financial assets
Fair value basis assessed as Level 1, 2 or 3
AASB reviewing disclosures for NFP public
sector entities
2014 2015 2016 2017 2018
85. Materiality – consider needs of user
2014 2015 2016 2017 2018
“The Board also discussed the role of materiality in assessing
the extent of disclosures required, and noted that this
assessment is separate from assessment of the materiality of
an asset’s fair value.”
AASB Action Alert 167
5 September 2014
86. 3 ways to spot AASB 13 laggards
References to “arms-length willing buyer and
seller”
No sign of fair value level 1/2/3 for physical
assets
Fair values that must be Level 3
No disclosure of significant unobservable
inputs
87. AASB 2013-8 Guidance:
Control for NFP’s
2014 2015 2016 2017 2018
Element NFP context
Control Financial interest not necessary – it is about the relationship
Power To deploy assets or incur liabilities
Providing goods & services to investor/other parties
Might arise from legislation
Acting as agent or principal?
Rights Policy directions
Veto rights over budget
No need for day-to-day responsibility
Exposure Financial and non-financial
Direct and indirect
Furtherance of investors objectives
88. Some other 2015 changes
•Management services provided by an entity are now related party
transactions not key management personnel compensation
Related party
disclosures
•Disclose judgements made when aggregating segments
•Reconciliation of reportable segment assets to entity total assets
limited to when it is provided to chief operating decision maker
Segment
reporting
•How to calculate proportionate restatement of accumulated
depreciation of PPE and intangiblesRevaluations
•Clarifies that investment property acquisitions still need to be assessed
as purchase of an asset or of a business to which AASB 3 Business
Combinations applies
Investment
property
2014 2015 2016 2017 2018
89. Current period issues
2014 2015 2016 2017 2018
Change of tax rate
1 July 2015
Deferred tax
balances restated
Exchange rate
and commodity
price fluctuations
Average balances
may be
inappropriate
Losses,
Impairment
issues
90. Disclosure initiative
Materiality –preparers use judgement
Immaterial information may detract
Applies to the whole of the financial statements
Applies to each disclosure requirement
AASB 101 changes
Words on order of notes removed
Location of accounting policy disclosure is flexible
2014 2015 2016 2017 2018
91. Some other 2016 changes
• Clarifies that revenue-based methods are not appropriate (rebuttable for
intangibles)
Acceptable methods of
depreciation and amortisation
• Accounted for under AASB 116 Property, Plant and Equipment
• Choice of cost or fair value model for measurement
Agricultural bearer plants
• AASB 14 applies if price of goods or services is subject to rate regulation. Only
applies to some first-time adopters.Regulatory deferral accounts
• If the interest in a joint operation acquired meets the definition f a business,
the AASB 3 Business Combinations principles should still be applied
Acquisitions of Interests in
Joint Arrangements
2014 2015 2016 2017 2018
92. Some other 2016 changes
•Replaces AAS 25, requires greater use of fair value accountingSuperannuation Entities
•Addresses accounting when control of a subsidiary is lost to an
associate or joint venture
Transactions between Investor
and its Associate or Joint Venture
•No longer restricted to the cost or fair value bases
Equity method in separate
financial statements
•Small amendments or clarifications to AASB 5, AASB 7, AASB 119
and AASB 134
2012-14 Improvements
•Amendments to the requirements for investment entities
Investment entity – consolidation
exception
2014 2015 2016 2017 2018
93. Financial instruments
• Business model drives use of cost or fair value
• Simpler recognition in profit or loss; only equity
instrument items in other comprehensive income
Classification and
measurement
• 80-125% range gone from effectiveness test
• More flexibility in identifying what is a hedge
Hedge accounting
easier to achieve
and apply
• Trade receivables < 12 months – lifetime expected loss
• “3 stage” model for financial institutions
• Trade and lease receivables longer than 12 months –
choice of the above
Impairment on a
lifetime expected
credit loss model
2014 2015 2016 2017 2018
94. Leases – exposure draft
Leases > 12 months: liability in balance sheet
– amortised cost using effective interest rate
Asset accounting still being debated
– Interest expense plus amortisation expense
– Short-term lease exception – expense only
– Possible “small-ticket” exception – expense only
2014 2015 2016 2017 2018
Hinweis der Redaktion
The ACNC has now had its first reporting period for which financial statements need to be prepared and lodged with it by registered charities in the Medium and Large category.
Those accounts were uploaded by the ACNC in the first few months of 2015 onto the publicly searchable register. If a charity knows it must lodge financial statements, checking the ACNC website is one way to know that the process is complete and its financial statements have been successfully lodged.
Several other changes have occurred in this compliance area, so let’s take a look at those. [NEXT SLIDE]
There was relief from producing two sets of accounts provided last year for a large number of charities that are set up as associations and co-operatives under State legislation. Where that legislation requires production of financial statements, the ACNC relief means it will accept lodgement of that set of financial statements with it, instead of a set produced to meet ACNC reporting requirements. The relief has been extended for the 2014-15 year.
Another avenue of relief from duplicated reporting has opened up for non-government schools. These entities provide significant amounts of financial information to the Commonwealth Department of Education & Training. The ACNC has accepted that the provision of this information and DET oversight satisfies public accountability objectives, so separate lodgement with the ACNC of financial information is an unnecessary burden on those schools for the time being.
The ACNC will do the administrative legwork and collect the information from financial questionnaires submitted to the Department. This means non-government schools will not need to complete the financial information section of an Annual Information Statement.
The ACNC continues to work on its “one stop shop” lodgement portal which may operate in the future. Meanwhile, the ACNC will try to set up arrangements that extend this relief into the forseeable future beyond 2015.
One thing to check is whether there is an exact overlap between the entity that is a registered charity, and the school that reports to DET. If, for example, there are more activities in the charity than just the school, it may be necessary to talk with the ACNC about the application of the relief.
The Federal Government, under both Labor and Liberal, have explored reforms to taxation laws to reduce the income lost to the government by allowing taxation concessions to charities and other not-for-profit entities.
One of the features of the first two years of the operation of the ACNC has been the reduction in the number of registered charities. Many thousands of entities that were notionally entitled to tax-exempt status have been removed from the lists. This has been done just on the basis of deregistering those who fail to reply to correspondence, who those who fail to lodge an information statement for two years in a row and are not replying satisfactorily to correspondence. The main reason would have to be entities that are no longer (or never were) functioning. A second reason would be lost contact. Over 2000 charities had their status revoked in the latest move in May, following about 1,300 a few months earlier. [CLICK FOR NEXT POINT]
Revocation – Conditions
There are a much more limited number of examples (9) of the ACNC revoking charity status of clearly functioning organisations. Cases have included a review of the operations of the body showing that it does not meet the criteria for being a charity, and cases of mismanagement or misappropriation of funds. [CLICK FOR NEXT POINT]
Subtype
When the ACNC legislation was passed, it included new definitions of the types of charitable purposes (Health, religion etc), reorganised in a list given two digit codes and also 14 subtypes (the 12 charitable purposes as set out in the Charities Act 2013 (Cth), as well as public benevolent institutions and health promotion charities.) Under the previous tax office administered regime, some of the categories of charity were identified from case law as well as those set out in legislation. The ACNC determines the appropriate charity code based on information submitted on application to be a charity. However, for entities that were transferred across from the ATO lists at the beginning of the ACNC regime, self-assessment through the ACNC website portal of the appropriate subtype may be needed and can occur up until 1 July 2015. Charities need to make sure the code recorded matches the type of activity they undertake (it is possible to have more than one) and that it is clearly set out in their objectives, or risk revocation of status for conducting activity outside of their registered types. Most charities should already have the correct code, but as it is a vital administrative step if tax-exempt status is to be retained, it is one worth checking. [CLICK FOR NEXT POINT]
Draft guidelines
What is charitable activity is always going to have grey areas. The ACNC has released for consultation the first set of guidelines setting out its views covering what does qualify as a Health Promotion Charity. Anyone operating in an area addressed by the ACNC would be wise to review what the regulator thinks. [CLICK FOR NEXT POINT]
Legislative reform
Although the draft legislation addressing tax-exempt status when a NFP conducted commercial activity has not come into effect, the reform of eligibility for tax concessional status remains on the government’s agenda. It affects NFPs as well as charities. There is a current limited inquiry on certain types of purposes, such as environmental lobbying. However a broader change remains likely, with options canvassed in the final report of the Not-for-profit Sector Tax Concession Working Group. In terms of immediate financial reporting, it is always appropriate to ensure there is a note to the accounts that identifies the entity believes it is not subject to income tax under application of current law – leaving the reader alert to the possibility of future change.
It is worth keeping an eye on the ACNC website for useful publications and guides that help with financial reporting and a broader range of administrative matters.
For example, the ACNC have published a template of a constitution of a company that is both limited by guarantee and a charity.
WA incorporated associations have not previously been obliged to prepare financial statements or have audits.
Legislation is now going through the WA Parliament that will change this.
The bill passed the lower house in March 2015 and is currently in the Legislative Council. A start date is therefore unknown.
As well as introducing requirements for financial reporting / audit for the first time to WA associations, there are a range of changes on duties of committee members, model rules, member rights to privacy, dispute resolution, administration and winding up.
There are about 17,000 associations and over 90% are expected to fit into Tier 1. Of the more than 1500 associations that will have mandatory financial reporting, there must be a reasonable number that are already required to produce financial information, though the fact that Australian Accounting Standards will be mandatory for both Tier 2 and Tier 3 will increase the reporting effort.
Because the reports will not be lodged with the State Government, this change will not make the reports available to the general public – the bill focusses on information going to members of the association.
Following concern from bodies like local government, who might have 11 classes of assets such as roads, bridges, kerbs and footpaths, drains, heritage assets et, the AASB has decided that the costs outweigh the benefits of providing these disclosures and they are moving to amend the standards effective for 30 June 2015 reports.
These NFP public sector bodies still need to calculate fair value, but do not have to show the same extent of information in their reports.
It is worth thinking about materiality of disclosures – does the user need the information. Materiality of disclosures is a different judgement to materiality of the amount of an item. Just because an item is large in the context of your financial statements doesn’t mean all the disclosures listed in an accounting standards will be material to users.
Today we hope to give you a little more detail and highlight some of the issues that have been identified to date. We by no means will be able to provide answers to everything because these are principle-based standards and most of the big accounting firms are still debating how to apply the principles to specific situations.
Before we go and talk about some of the specific requirements of the consolidations and joint arrangements standards, let’s see how all the new and amended standards that impact consolidations and joint arrangements fit together.
On 12 May 2011 the IASB issued a suite of five new/amended standards dealing with consolidations, joint arrangements and equity accounting and related disclosures. The equivalent Australian standards were only released by the AASB in September this year.
Where an entity has outright control, AASB 10 will apply, together with related disclosures in AASB 12.
Let’s start by looking at AASB 10, the new consolidation standard.
Where an entity does not have control by itself, we look at whether it has joint control. If it does, AASB 11 will apply, together with related disclosures in AASB 12. If it does not have joint control, we look at whether there is significant influence. If there is, then AASB 128 is applied (no changes to measurement and recognition requirements there, disclosures merely moved out into AASB 12). If there is no significant influence then the interest is accounted for under AASB 9 – the financial instruments standard (note AASB 12 disclosures do NOT apply to AASB 9, AASB 7 disclosures will apply).
The distinction between an asset purchase and a business combination is an important one because:
• Any goodwill recognised on acquisition is not amortised.
• Deferred tax is generally not recognised for an asset acquisition (because of the “initial
recognition” exemption contained in AASB 112) but is for a business combination.
In most cases, a producing field or mine is likely to be a business whilst a licence to explore, on its own, is just an asset. However, projects that lie in development terms between the two are likely to be more difficult to judge and the variety of different structures used (e.g. incorporation, unincorporated joint venture etc) can add complexity to the accounting.
Some assert that goodwill should not arise in the mining sector because the acquisition cost should be allocated to mineral properties and/or exploration projects instead. However, there will be situations where goodwill might well arise – for
example, where an acquisition is expected synergies with an existing mine. Therefore, mining companies cannot simply assume that goodwill never arises. Where goodwill does arise, companies are not allowed to amortise it – even
where the goodwill is linked to a mine, which is clearly a wasting asset. Rather, the goodwill has to be tested for impairment on a regular basis – in the expectation that impairment charges will be needed over the life of the mine to which the goodwill is
allocated. Some in the industry believe it would make more sense for the goodwill to be amortised on the same basis as the mine to which it relates. Calculating the fair value of a licence or mineral property, in situations where the uplift is not
attributed to goodwill, is not straightforward – bearing in mind that deferred tax has to be recognised on the fair value adjustment. Many mining entities use simultaneous equations to determine the value of the licence/mineral property,
and associated deferred tax liability, to arrive at the appropriate net balance.
The distinction between an asset purchase and a business combination is an important one because:
• Any goodwill recognised on acquisition is not amortised.
• Deferred tax is generally not recognised for an asset acquisition (because of the “initial
recognition” exemption contained in AASB 112) but is for a business combination.
In most cases, a producing field or mine is likely to be a business whilst a licence to explore, on its own, is just an asset. However, projects that lie in development terms between the two are likely to be more difficult to judge and the variety of different structures used (e.g. incorporation, unincorporated joint venture etc) can add complexity to the accounting.
Some assert that goodwill should not arise in the mining sector because the acquisition cost should be allocated to mineral properties and/or exploration projects instead. However, there will be situations where goodwill might well arise – for
example, where an acquisition is expected synergies with an existing mine. Therefore, mining companies cannot simply assume that goodwill never arises. Where goodwill does arise, companies are not allowed to amortise it – even
where the goodwill is linked to a mine, which is clearly a wasting asset. Rather, the goodwill has to be tested for impairment on a regular basis – in the expectation that impairment charges will be needed over the life of the mine to which the goodwill is
allocated. Some in the industry believe it would make more sense for the goodwill to be amortised on the same basis as the mine to which it relates. Calculating the fair value of a licence or mineral property, in situations where the uplift is not
attributed to goodwill, is not straightforward – bearing in mind that deferred tax has to be recognised on the fair value adjustment. Many mining entities use simultaneous equations to determine the value of the licence/mineral property,
and associated deferred tax liability, to arrive at the appropriate net balance.
Identifying contracts involves a wider application of combining contracts that are interdependent (near the same time with same customer, single commercial objective, consideration is interdependent, goods and services are inter-related in terms of design, technology or function
Identifying separate performance obligations involves looking at whether goods and services are distinct or bundled.
Identifying contracts involves a wider application of combining contracts that are interdependent (near the same time with same customer, single commercial objective, consideration is interdependent, goods and services are inter-related in terms of design, technology or function
Identifying separate performance obligations involves looking at whether goods and services are distinct or bundled.
Solvency is a different concept from profitability, which refers to the ability to earn a profit. Businesses can be profitable without being solvent (e.g. when they are expanding rapidly).
Solvency is a different concept from profitability, which refers to the ability to earn a profit. Businesses can be profitable without being solvent (e.g. when they are expanding rapidly).
Increased importance in current economic environment
Inappropriate selection of comparable company peers.
Using the multiples extracted from transactions entered into over a very long period of time during which market conditions have changed significantly
Using the average of transactions multiples that have a wide dispersion without confirming the reasonableness of this in relation to the investee.
Deriving the equity multiple by using an EV valuation basis (for example P/EBITDA).
Performance measures used (both from comparable company peers and from the investee being valued) have not been appropriately normalised.
Mismatch between the multiple and the investee‘s performance measure used (eg use of historical earnings multiples on forward-looking earnings).
Application of post-tax multiples to pre-tax performance measures.
Omission of adjustments affecting the valuation multiples based on differences between the investee and its comparable company peers (eg insufficient consideration to different accounting policies).
Omission of other adjustments (eg insufficient consideration given to non-operating assets in the investee or in the comparable company peers, discount for the lack of liquidity etc).
Inappropriate selection of comparable company peers.
Using the multiples extracted from transactions entered into over a very long period of time during which market conditions have changed significantly
Using the average of transactions multiples that have a wide dispersion without confirming the reasonableness of this in relation to the investee.
Deriving the equity multiple by using an EV valuation basis (for example P/EBITDA).
Performance measures used (both from comparable company peers and from the investee being valued) have not been appropriately normalised.
Mismatch between the multiple and the investee‘s performance measure used (eg use of historical earnings multiples on forward-looking earnings).
Application of post-tax multiples to pre-tax performance measures.
Omission of adjustments affecting the valuation multiples based on differences between the investee and its comparable company peers (eg insufficient consideration to different accounting policies).
Omission of other adjustments (eg insufficient consideration given to non-operating assets in the investee or in the comparable company peers, discount for the lack of liquidity etc).
AA rating seems to be the consensus view of high quality corporate bonds – there are very few in Australia achieve that rating. So despite the protests of lobbyists like the Group of 100 who want to avoid having lower discount rates and thus higher liabilities, it is hard to see how entities with an Australian labour force can avoid using a government bond rate when applying discounting under AASB 119.
However, the standard just says “a” government bond rate – representing a risk-free rate – not “the” government bond rate. There are differences between rates of the strongest to weakest government. Any change in the rate selected should be justifiable and disclosed if material.