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Challenge
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Care
Accounting Standards Update
IAG Conference
November 2019
David Hardidge, Director
2019–20 2020–21 Beyond
AASB 15 Revenue + AASB 1058 Income for
NFPs
AASB 16 Leases
AASB 1059 Service concessions
AASB 17 Insurance contracts
Reporting entities/ SPFRs
Conceptual framework (NFPs)
Upcoming changes
RDR
Conceptual framework (for profits)
Leases—why did we need the change?
‘One of my great ambitions before I die is to fly inan aircraft that is on an airline’s balance sheet’
Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB),
April 25, 2008
AASB 16
Same accounting treatment as for finance leases• Determine term• Determine rental payments (cash flows)• Determine discount rate
Recognise• Lease liability
‒ lease interest
• Lease asset (right-to-use asset)‒ depreciation
Parallel universe
Putting operating leases on balance sheet
Lease liability—discounted cash flows
1-Jul-101-Jul-10 1,000,000 1-Jul-11 1,000,000 1-Jul-12 1,000,000 1-Jul-13 1,000,000 1-Jul-14 1,000,000 1-Jul-15 1,000,000 1-Jul-16 1,000,000 1-Jul-17 1,000,000 1-Jul-18 1,000,000 1-Jul-19 1,000,000
NPV 5% 1-Jul-10 7,848,186
Lease accounting
Asset LiabilityOpening balance 1-Jul-10 7,848,186 7,848,186Interest 382,928Repayments -1,000,000 Depreciation -784,389
Closing balance 30-Jun-11 7,063,797 7,231,114
Leases—profit or loss effect
Building and office
Storage and IT facilities
Specialised equipment
Embedded leases
Cars
Car parks
Mobile phones
What operating leases go on balance sheet?
PCs
Software licences
Software as a service
Server capacity
Pot plants
Water coolers
Peppercorn leases
Lease—the right to control the use of an identified assetExemptions—short-term, low value
Lease—the right to control the use of an identified asset• Your obligations (lease liability)• Your right to use (lease asset)
Substantive substitution right• If the lessor can substitute the asset—do you have the right to control
the use of that identified asset? • Must be substantive
- If substitute for repairs and maintenance—not enough
Examples• Rubbish trucks• Rail cars (IFRS 16 Illustrative Example)
Identified asset
Internal office accommodationSpecialised buildings?
Employee housing
QFleet
DHPW leases
When should you include option renewals?
• Probable (>50% - more likely than not)
• Highly probable
• Reasonably certain
• Virtually certain
• When exercise option
• Significant economic incentive
• Probability weighted (i.e. 30% likely, use 30% payments)
Lease term –Renewals and options
IFRS Interpretations Committee (IFRIC)
• Interpretations
• Agenda Decisions (formerly Rejection Notices)
• Timing of changes- IASB - companies to be entitled to sufficient time to implement changes- Months, not years- https://www.ifrs.org/news-and-events/2019/03/time-is-of-the-essence/- Raised in ED/2018/1 + ED285 Accounting Policy Changes
IFRIC Agenda Decisions
Lease term and useful life of leasehold improvements (IFRIC Agenda Decision – Being discussed)
Lease no longer enforceable if each party can terminate with no more than an insignificant penalty
Cancellable – Continues until either party gives notice to terminate, e.g. 12 months notice
Renewable – Initial period and continues until terminated by either party
Lease term
CPI adjustments
Source: ABS Publication 6401.0, State budgets
2015-16 Budget 2.25 2.5 2.5 2.5
2015-16 Actual Queensland 1.62016-17 Budget Queensland 2.0 2.5 2.5 2.5
2016-17 Actual Queensland 1.82017-18 Budget Queensland 2.0 2.25 2.5 2.5
2017-18 Actual Queensland 1.72018-19 Budget Queensland 2.0 2.5 2.5 2.5
2018-19 Actual Queensland 1.72019-20 Budget Queensland 2.0 2.25 2.5 2.5
2015-16 16-17 17-18 18-19 19-20 20-21 21-22 22-23
Start of lease ?? ?? ?? ?? ?? ?? ?? ??
CPI Adjustments
1-Jul-11
1-Jul-11 1,020,000 1-Jul-12 1,020,000 1-Jul-13 1,020,000 1-Jul-14 1,020,000 1-Jul-15 1,020,000 1-Jul-16 1,020,000 1-Jul-17 1,020,000 1-Jul-18 1,020,000 1-Jul-19 1,020,000
1-Jul-101-Jul-10 1,000,000 1-Jul-11 1,000,000 1-Jul-12 1,000,000 1-Jul-13 1,000,000 1-Jul-14 1,000,000 1-Jul-15 1,000,000 1-Jul-16 1,000,000 1-Jul-17 1,000,000 1-Jul-18 1,000,000 1-Jul-19 1,000,000
NPV 5% 1-Jul-10 7,848,186
NPV 5% 30-Jun-11 7,231,114 7,375,737
Changed rent
What is a peppercorn lease?• Concessionary leases
Mandated fair value—temporary deferral—class-by-class
Do you have an existing policy to fair value finance leases?
What is fair value of an operating lease?• No market• Restrictions for not-for-profit• Termination clauses—e.g. 99 year lease and 2 year termination notice
by lessor• Contingent rentals, for example, 10 per cent of revenue
Peppercorn leases
?Reserve land
Incremental borrowing rate – adjusted for the terms and conditions of the lease• Currency• Type of asset• Term - Ensuring that the borrowing rate is for similar term• “Amount” (size of the “loan”)• Security
- Bank borrowings not usually for 100% of the asset- Lease asset is fully secured
• Others suggested- Amortising loan vs bullet-payment loan (IFRIC Agenda Decision)- Multiple discount rates (each year a different rate) (IFRIC - No)- Different rental arrangements (fixed vs CPI)
QTC Link websiteEarly adopter ERM Power – Discount rate 4%
Discount rate
Source: QTC Link website, viewed 18 Nov 2018
https://qtclink.qtc.com.au/
QTC Link website
QTC Link websiteRates
Transition
Asset 4,708,481Liability 5,179,109R/Earnings -470,628
Lease—commences 1 July 2015$1,000,000 pa., 10 years, 5% discount rateTransition date 1 July 2019
Option 1—Recalculate lease asset (transition date discount rate)Lower retained earnings
Option 2—Lease asset = lease liabilityNo effect retained earningsLower future results
Transition
Recalculate ROU ROU = lease liabilityLease asset (ROU) 4 708 481 5 179 109Lease liability 5 179 109 5 179 109Retained earnings -470 628 0
Straight-line lease liability
What do you do with it on transition?
Lease incentives / Lease fit-outs capitalised
What do you do with the asset and liability on transition?Transition
Queensland Treasury arranged demonstrations for:
• SAP
• Nomos One
• BDO LeadLease calculations
PPE carrying amount 500 million
Materiality 25 million
Scoresheet threshold 2 million
Estimated lease liability 5 million– What do you do?
Materiality
Reporting framework changes
1 July 2019 1 July 2020 1 July 2021
(Start date ????) ED291 NFP Definition and Guidance
Increases Corporations Act thresholds
NFP - ED293 Disclosure of compliance with R&M SPFS
ED295 Simplified Disclosures – Tier 2 – Replace RDRED295 early adoption ??
FP ED297 – Removal of SPFS
AASB 16 Leases
Not clear extent accounting standards recognition and measurement (R&M) have been followed for special purpose financial statements (SPFS)
Per September 2019 AASB meeting, proposals now only for NFPsFor-profits – “No more” SPFS after 1 July 2020 (ED297)
NFP required by legislation or other to comply with AASB 1054Disclose compliance with R&MIf have not performed assessment say so
Additional disclosures consolidation, equity accounting
ED293 Disclosure of compliance with R&M SPFS
General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities
Where we were – Tier 2Currently RDR (Reduced Disclosure Regime)
Shading of standardsProposed ITC39 SDR – Simplified Disclosure Regime
Reduced RDR but full for some standards
New proposals for Tier 2One standardBased on IFRS for SMEs (which was what RDR was originally based on)Some reductions in RDR disclosures, a few increases
ED295 Simplified disclosures
Required by legislation Private sectorIn
Financial statementsAustralian Accounting Standards or accounting standards
No link to public lodgementOut
Financial information but not financial statementsTrue and fair
ED297 Removal of SPFS for FPs
Constituting document or another document Private sectorGrandfathered
Created before and not amended after 1 July 2020Not opt-in
InCreated after or amended after 1 July 2020Australian Accounting Standards
Accounting standards not enoughOut
Accounting standardsIn
Opt-in GPFS + new conceptual frameworkPrivate or public sector
ED297 Removal of SPFS for FPs
QAO blog: www.qao.qld.gov.au/blogSubscribe: www.qao.qld.gov.au/subscribe
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Further advice
Q&A
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Disclaimer
AppendixAdditional material –IFRS website
Main page for IFRS supporting materials
Source: IFRS Website, viewed 7 Oct 2019https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standard/
Supporting material – IFRS Standards
Source: IFRS Website, viewed 7 Oct 2019https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standard/
Supporting material – IFRS 15
Source: IFRS Website, viewed 7 Oct 2019https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standard/ifrs-15/
Supporting material – IFRS 15
Source: IFRS Website, viewed 7 Oct 2019https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standard/ifrs-15/
Supporting material – IFRS 15
Source: IFRS Website, viewed 7 Oct 2019https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standard/ifrs-15/
