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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
Disclosures in accordance with AASB 12
Yes
Yes
Yes No
No
No
AASB 128
Disclosures in accordance with AASB 12
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
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
Identify separate performance obligations
Determine transaction price
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
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
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”
Regulatory Requirement
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
Regulatory Requirement
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
Regulatory Requirement
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
Regulatory Requirement
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.
Liquidity & Solvency
IndicatorsAccumulating debt and excess liabilities over assetsDefault on loan or interest paymentsIncreased monitoring and/or involvement of financierAccounts payable ageing deterioration
Liquidity & Solvency
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
Going Concern Risk Factors
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
Going Concern Risk Factors
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