Bentleys Financial Reporting Bootcamp May 2015

ASIC Concerns

Financial Reporting: ASIC Areas of Focus – 31 December 2014Refer ASIC 14-294MR: Focuses for 31 December 2014 financial report *

Impairment

Accounting Policy Choices

Material Disclosures

Role of the Directors

Key Themes

ASIC – Top 10 8 Problem AreasRefer 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

ACNC and NFP – the

Latest

ACNC and NFP

Charity reporting issues

New WA Associations legislation

Accounting standards issues

Charities: Financial Reporting - TiersCategory Criteria Annual reporting requirement

Small Consolidated gross revenue up to $250,000 & not a Deductible Gift Recipient Annual information statement

MediumDeductible 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)

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

Relief: Non-government schools

Transitional exemption for 2014 and 2015If submit to ACNC the financial data provided to Department of Education & Training, then:

No response needed to financial questions on Annual Information StatementNo financial statements prepared under ACNC Act

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

ACNC GuidesCompany limited by guarantee – template constitutionGuides for boards / governanceAnnual Information Statement review checklist

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

Relief from fair value disclosures

Not-for-profit public sector entitiesLikely amendment effective for June 2015

Line items of unrealised gains and lossesValuation inputs – significant but unobservableSensitivity analysis on those valuation inputs

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

Business Combinatio

ns – Reverse

Acquisitions

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


Yes

Yes

Yes No

No

No

AASB 128


Consolidation: new definition of control

Consistent definition – target is off-balance sheet structuresSignificant judgement requiredAssess 3 necessary for elements

Relevant activitiesPower to direct those activitiesVariable returns from those activities

Investment entity exception

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

Area Business Combinations Asset or Group of AssetsMeasurement 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

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? Assets2 Business

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

Identify the acquirer – Reverse takeovers

List CoShareholders

Priv CoShareholders

List Co Ltd

Priv Co Pty Ltd

Acquiree

Acquirer

1.5 millionIssued shares

(60%)

One millionIssued 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

Reverse takeoversThe net assets of the acquirer (Priv Co) are not restated at fair valuesThe net assets of the acquiree (List Co) are restated at fair valuesBut 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)

Corporate Governanc

e 2015

Corporate Governance Principles and Recommendations – 3rd Edition

Released March 2014 Applicable from 1 July 2014Significant changesStill ‘if not, why not’But need to be more thorough on information and “why not” aspect in Corporate Governance Statement (CGS)

Corporate Governance Principles and Recommendations – 3rd Edition

CGS now must be dated and approved by the boardCGS doesn’t need to be in annual report, but needs to be lodged at same time as annual reportAlso need to lodge new Appendix 4G

Principle 1: Lay Solid Foundations for management oversight

Directors: Appointments Info in NOMs

New Co Sec requirementsDiversity PolicyExecutive and Board evaluations

Principle 2: Structure Board to add value

Nomination committee changesBoard Skills MatrixIndependence of board membersInduction program and professional development

Principle 4: Safety Integrity in corporate reporting

Audit Committee CEO/CFO declaration Auditors to attend AGM

Principle 6: Respect the rights of security holders

Company to provide information on itself and its Corporate Governance to investorsRequire Investor Relations programsPolicy to encourage investor participation at AGMsOptions for security holders to receive all communications electronically

Principle 7: Recognise and Manage Risk

Greater focus on riskRisk CommitteeReview Risk Management Framework AnnuallyInternal Audit FunctionEconomic/Environmental/Social sustainability risks

Principle 8: Remunerate Fairly and Responsibly

Remuneration CommitteeExecutive and Non-Executive DirectorsDisclosure on equity based remuneration schemes.

Helpful Resources

ASX Corporate Governance Principles and Recommendations – 3rd EditionGuidance Note 9 – Disclosure of Corporate Governance Practices

www.asx.com.au/regulation/corporate-goverance -council.htm

http://www.asx.com.au/regulation/corporate-goverance%20-council.htm

Revenue – Contracts

with Customers

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

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

Revenue exampleSocial club membership non-refundable joining fee $4,000Annual membership fee is $2,0002 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 - -

AASB 15Revenue 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



Allocate transaction price

Recognise revenue when a

performance obligation satisfied

2018 start BUTmany NFPs

should assess early adoption

Income of NFPs based on 15

Identify contract(s) with customer



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

Some proposed NFP variationsAASB 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 performanceA mechanism with legal authority to require G&S transferEnforceable return obligation or ability to impose severe penalty for non-performance

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

Going Concern

and Insolvent Trading?

Session ObjectivesImplications of current economic and market conditionsGoing concern assumptionRegulatory requirementsLiquidity vs. Insolvency - IndicatorsGoing Concern Risk Factors

Current Conditions Massive interest rate reductions Plunging commodity prices Weaker AUD Slowing global growth Asset sales and falling valuations

Going ConcernFundamental principle in the preparation of financial statementsAssumes continued trading for the foreseeable futureFinancial statements prepared on the basis of able to realise its assets and discharge liabilities in the normal course of businessNo fire sales!!

Going Concern

Going concern assumption assumes:Pay debts as and when they fall dueContinue in operation without any intention or necessity to liquidate or otherwise wind up its operations

Going ConcernIf 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

Regulatory Requirement

Corporations Act 2001 – s.295(4)(c) Directors’ statementASIC Regulatory Guide 22 - Directors’ statement as to solvency

“Will be able to pay debts as and when fall

due”


Introduces prospective element i.e. will future debts be able to be paid – judgment involved !!

Prospective period is the period up to next directors’ statement

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 insolventTo be appropriate, negotiations to be underway and reasonable likelihood of refinance


Negative Directors’ Declaration

Doubt so great that company will be able to pay debts - make negative statement that entity unable to pay debts as and when fall due


Qualified and Negative Directors’ Statement Requirements

Clearly worded and in detail to comprehendIdentify item that is subject to material uncertainty Disclose monetary details where possible


Implications for AuditorsThe 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.

Liquidity & Solvency

LiquidityThe ability to convert an asset to cash quickly.

ORThe 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.


IndicatorsAccumulating debt and excess liabilities over assetsDefault on loan or interest paymentsIncreased monitoring and/or involvement of financierAccounts payable ageing deterioration


IndicatorsJudgment debts receivedSignificant unpaid tax and superannuation liabilitiesLoss of key management personnelDifficulties in obtaining finance or refinance No obvious source of funding

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 renewedMgt has no alternate plans should current facilities not be extended


Terms of renewed facilities have changed, making compliance more difficultFinancing is secured on assets that have declined in value, below the amount of the facilityTHE AGE OF EASY CREDIT IS OVER !!LOCK IN FACILITIES RATHER THAN ROLL OVER BANK FACILITIES


Management plans to overcome financing difficulties include asset disposals

Entity provides significant loans or guaranteesEntity dependent on guarantees provided by another partyFuture cash flows uncertain or volatile, customers taking longer to pay

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

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.

Auditors’ Responsibilities

Obtain assurance the accounts are true and fairAssess 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

SummaryAASB 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.

Impairment and Fair Value

A Case Study

Concept of impairment

Financial assets Inventory

Construction contracts

assets

Some assets measured at

fair value

Other non-financial

assets

AUS 702 The Audit report on GPFRAUS 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)

I’m sure there must be a section 294(4) in here somewhere

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.

Impairment testing

Calculate Recoverable Amount

Allocations / sequenceAny corporate assets? Any unallocated goodwill?

WhenMandatory (eg goodwill) Indicator of impairment

LevelAsset CGU

Identifying recoverable amount

Recoverable amountAsset 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

DisclosuresLoss recognised

or reversedAmounts

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?

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

Discount rates

Pre or post-taxSourceDisclosure – disaggregation for CGUs, segmentsWhat is impact on reader of disclosing an average?

Disclosure: Other key assumptions

Most sensitiveManagement’s approach to determining

Past experience, otherChanges from prior period

Entity specificValue assigned to key assumptions

if reasonably possible change will cause impairment

Terminal valuesJust 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 industryNeed to analyse how entity differs from industry average

InconsistenciesRange 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

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

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

Financial Reporting

Developments

2014 2015 2016 2017 2018

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)

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

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?

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-offOffsetting financial assets and liabilities

• Clarifies when to recognise a liability to pay a government levyInterpretation 21 Levies

2014 2015 2016 2017 2018

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 entities2014 2015 2016 2017 2018

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 1675 September 2014

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

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 liabilitiesProviding goods & services to investor/other partiesMight arise from legislation Acting as agent or principal?

Rights Policy directionsVeto rights over budgetNo need for day-to-day responsibility

Exposure Financial and non-financialDirect and indirectFurtherance of investors objectives

Some other 2015 changes• Management services provided by an entity are now related party

transactions not key management personnel compensationRelated 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

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

Disclosure initiativeMateriality –preparers use judgement

Immaterial information may detractApplies to the whole of the financial statementsApplies to each disclosure requirement

AASB 101 changesWords on order of notes removedLocation of accounting policy disclosure is flexible2014 2015 2016 2017 2018

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 measurementAgricultural 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

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 basesEquity method in separate financial statements

• Small amendments or clarifications to AASB 5, AASB 7, AASB 119 and AASB 1342012-14 Improvements

• Amendments to the requirements for investment entitiesInvestment entity – consolidation exception

2014 2015 2016 2017 2018

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

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