What’s new for 31 December 2016 annual financial statements?
The good news
The good news is that while there are several amendments applying for the first time to December 2016 annual financial statements, most entities will only be impacted by the ‘decluttering’ changes, with agricultural entities also being affected by the changes to accounting for bearer plants. Otherwise, the changes included in new standard AASB 14 Regulatory Deferral Accounts and the other amending standards are entity/transaction/balance specific, and therefore unlikely to impact your accounts except in specific circumstances.
However, you should note that the Australian Securities and Investments Commission (ASIC), as part of its financial reporting surveillance programme, continues to focus on particular risk areas in both listed and unlisted entities, and ‘naming and shaming’ entities required to restate financial statements as a result of these surveillance enquiries. Our article, 'ASIC calls on preparers to focus on useful and meaningful financial reports', includes more details on ASIC's focus areas for its surveillance of 31 December 2016 financial statements.
The calm before the storm
This is the calm before the storm, with AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers effective for your 31 December 2018 annual periods, and AASB 16 Leases effective for December 2019 annual periods. Next financial year, superannuation entities will be impacted by the new standard, AASB 1056 Superannuation Entities and public sector entities will be required to disclose more information about related party transactions (AASB 2015-6 Extending Related Party Disclosures to Not-for-Profit Public Sector Entities).
ASIC continue, as part of their financial reporting surveillance programme, to focus on disclosures in the financial statements about the impacts of these standards and amendments that have been issued, but not yet effective, specifically the impact of the new revenue, leasing and financial instruments standards (including loan provisioning and hedge accounting). At the very least, ASIC would expect you to be able to quantify the impacts of AASB 9 and 15 in next year’s December 2017 annual financial statements, and where retrospective adjustments will be made, there is an argument that you should also be in a position to quantify these impacts now.
What are the changes?
You need to consider the following standards and amending standards when preparing your 31 December 2016 annual financial statements:
All of the above apply for the first time to both December 2016 annual and half-year financial statements, except for AASB 2015-4, which already applied at 30 June 2016.
Listed companies also need to consider the changes to Corporations Regulation 2M.3.03 (disclosures in remuneration reports) and all entities applying rounding need to consider the new ASIC Legislative Instrument on rounding that recently replaced CO 98/100.
We also recommend that public sector entities adopt the changes early to AASB 2015-7 Amendments to Australian Accounting Standards — Fair Value Disclosures of Not-for-Profit Public Sector Entities which will reduce the amount of fair value disclosures.
For more information please refer to our Financial Reporting Update for December 2016.
Decluttering (AASB 2015-2)
As part of the International Accounting Standards Board’s initiative to improve disclosures in financial statements (Disclosure Initiative), amendments have been made to AASB 101 Presentation of Financial Statements to facilitate ‘decluttering’ of financial statements by allowing preparers to apply judgement when deciding which mandatory disclosures are relevant to users, and which are not.
Besides full general purpose financial statements, this ‘decluttering process’ should also be applied to financial statements prepared using the Reduced Disclosures, and special purpose financial statements.
For a reminder on how to implement these changes and our ‘4R’ process, please refer to our November 2016 Accounting News article, Time is running out to ‘declutter’ your financial statements — 31 December 2016 financial statements must be ‘decluttered’.
Bearer plants (AASB 2014-6)
A bearer plant is a living plant that is used in the production process of agricultural produce, is expected to bear produce for more than one period, and has a remote likelihood of being sold (AASB 141, paragraph 5). This means that entities growing produce for sale on plants such as grape vines, fruit trees, oil palms or tea bushes will be affected by these amendments.
AASB 2014-6 significantly changes the way entities account for bearer plants. The entire plant is no longer accounted for at fair value with gains and losses reported in profit or loss, but separated into the bearer plant, and the produce on the bearer plant.
The produce on the bearer plant remains within the scope of AASB 141, and continues to be accounted for at fair value. The bearer plant itself now falls within the scope of AASB 116 Property, Plant and Equipment, is initially measured at cost, and then subsequently accounted for under either the cost or revaluation model.
You will need to account for these changes retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, however the amendment includes certain transitional relief, such as being able to revert to the cost model, or using fair values at transition date as deemed cost.
For more information, please refer to our Accounting News articles:
Accounting for the acquisition of joint operations (AASB 2014-3)
As a result of diversity in practice, AASB 11 Joint Arrangements was amended by AASB 2014-3 to include guidance on the accounting for an acquisition in a joint operation that constitutes a business.
If an entity acquires an interest in a joint operation that is a business, it will follow the acquisition approach in AASB 3 Business Combinations, provided the principles do not conflict with any guidance in AASB 11. This means that the entity will recognise:
- Assets and liabilities as its share of the fair values, including its share of the related deferred tax assets and liabilities
- Acquisition-related costs as expenses in profit or loss, and
- Goodwill as the excess of the consideration over the fair value of the identifiable net assets acquired.
Entities only need to apply this amendment prospectively. If you acquire a joint operation that constitutes a business from 1 January 2016, you will need to account for this transaction using the acquisition method prescribed in AASB 11.
For more information, refer to our May 2014 Accounting News article, ‘Changes to IFRS 11 Joint Operations — Accounting for acquisition of interests in joint operations’.
Clarification of acceptable methods of depreciation or amortisation (AASB 2014-4)
The amendment to AASB 116 Property, Plant and Equipment clarifies that a revenue-based depreciation model is never permitted for items of property, plant and equipment because revenue generated by the asset does not adequately capture the consumption of the economic benefits embodied within the asset. For example, it may be appropriate to depreciate a production machine based on the number of widgets it produces, but it would not be considered appropriate to depreciate the production machine based on revenue from the widgets because the entity can sell the widgets for a range of different prices.
A similar amendment made to AASB 138 Intangible Assets clarifies that a revenue-based amortisation model is only permitted in very limited circumstances, including:
- Where an intangible asset is a measure of revenue — for example a toll road operator may have the right to operate a toll road up until the point that a certain amount of revenue has been generated, or
- Where revenue and consumption of the economic benefits are highly correlated — for example where an entity holds a concession to explore and extract gold from a gold mine that expires when total cumulative revenue reaches a certain threshold.
If your current accounting policy is to depreciate property, plant and equipment or amortise intangible assets based on revenue, you will need to assess whether you need to change this policy from 1 January 2016 to another acceptable method (e.g. straight line, or units of production) that is permitted under AASB 116 or AASB 138.
Changes to depreciation methods will be accounted for prospectively as changes in an accounting estimate.
Equity method in separate financial statements (AASB 2014-9)
AASB 2014-9 amends AASB 127 Separate Financial Statements to allow entities to measure their investments in subsidiaries, associates or joint ventures using the equity method (as described in AASB 128 Investments in Associates and Joint Ventures) in their separate financial statements.
AASB 127 previously only allowed entities to measure investments in subsidiaries, associates or joint ventures at either cost or fair value, in accordance with AASB 139 Financial Instruments: Recognition and Measurement (or AASB 9 Financial Instruments, if early adopted).
When first adopting these amendments on 1 January 2016, you may choose to continue with your accounting policy to hold your investments at cost or fair value, or you may choose to adopt the new equity accounting option, which will result in an increase in investments, retained earnings and other reserves on transition date.
Investment entities: applying the consolidation exemption (AASB 2015-5)
These changes clarify a number of different aspects of accounting for investment entities, as follows:
Intermediate parent entity consolidation exemption
Previously, intermediate entities were relieved from preparing consolidated financial statements where the ultimate parent prepared consolidated financial statements that complied with IFRS, which were available for public use.
The first amendment in AASB 2015-5 extends these exemptions where the ultimate parent entity is an investment entity, and therefore does not prepare consolidated financial statements, instead measuring investments in subsidiaries at fair value.
Subsidiaries that provide investment-related services
The second amendment clarifies that an investment entity must consolidate subsidiaries, rather than measure them at fair value through profit or loss, if they provide investment-related services. Such a subsidiary will only be consolidated if:
- It is not itself an investment entity, and
- Its main purpose is to provide investment-related services.
Equity accounting investment entities
If you are equity accounting an associate or joint venture that is an investment entity, you may choose to retain the fair value measurement applied by the associate or joint venture to its investments in subsidiaries. This means that no adjustments need to be made to unwind fair value measurement.
Consider if you are able to take advantage of the relief provided by these amendments.
Annual improvements (AASB 2015-1)
The International Accounting Standards Board’s 2012-2014 annual improvements in AASB 2015-1 are not expected to have a major impact on current practice. These are summarised in the table below:
||Impact of Amendments
|AASB 5 Non-current Assets Held for Sale and Discontinued Operations
If you reclassify an asset/disposal group from being held for sale to being held for distribution to owners, or from being held for distribution to owners to being held for sale, this is considered to be the continuation of the original plan of disposal.
If an asset ceases to be held for distribution to owners, the usual AASB 5 requirements for assets that cease to be classified as held for sale apply.
|AASB 7 Financial Instruments: Disclosures
When disclosing details of transferred financial assets under AASB 7.42D to 42G, there will be ‘continuing involvement’ for a service contract where the servicing fee is dependent on the amount or timing of cash flows collected from the transferred asset.
Offsetting disclosures required by AASB 7.13A to 13F are not explicitly required in interim periods but may be required if significant under AASB 134 Interim Financial Reporting.
|AASB 119 Employee Benefits
||High quality corporate bonds or national government bonds used to determine the discount rate must be denominated in the same currency as the benefits that will be paid to the employee.
|AASB 134 Interim Financial Reporting
||If the disclosures required by AASB 134.16A (mandatory interim disclosures) are included elsewhere in the interim financial statements (e.g. management commentary), a cross-reference is required to where this information can be found in the interim financial report.
Financial reporting requirements for Australian groups (AASB 2015-4)
This amendment is essentially an Australian ‘housekeeping’ matter that adds paragraph Aus 17.2 to AASB 128 to clarify, that in order to obtain an exemption from equity accounting interests in associates and joint ventures at intermediate levels within a group, the ultimate Australian entity must apply equity accounting in its own financial statements. Previously, this exemption was also available if the ultimate foreign entity applied equity accounting.
If you were previously relying on an ultimate overseas parent equity accounting to avoid equity accounting at intermediate levels in your Australian group, you will need to ensure that your ultimate Australian parent has equity accounted associates and joint ventures in its consolidated IFRS financial statements.
AASB 14 Regulatory Deferral Accounts
AASB 14 Regulatory Deferral Accounts is unlikely to impact any Australian entities because it only applies to first time IFRS adopters that are conducting rate-regulated activities and recognise associated assets and liabilities in accordance with their current national GAAP.
This is an interim standard, pending the outcome of the IASBs comprehensive project on rate-regulated activities.
Fair value disclosures for not-for-profit public sector entities
Although not effective until 1 July 2016, we recommend that not-for-profit public sector entities early adopt AASB 2015-7 Amendments to Australian Accounting Standards — Fair Value Disclosures of Not-for-Profit Public Sector Entities because it reduces the disclosures about level 3 fair value assumptions on items of property, plant and equipment for which future economic benefits are not primarily dependent on the asset’s ability to generate cash flows (e.g. roads and infrastructure assets such as for the supply of water).
For further information, refer to our May 2015 Accounting News article ‘Relief for public sector entities from some fair value disclosures’.
Amendments to Corporations Regulation 2M.3.03 for remuneration reports
When Corporations Regulation 2M.3.03 was first drafted, it unintentionally required key management personnel (KMPs) to disclose all of their personal shareholdings, in any company, in the remuneration report, rather than just their shareholdings in the disclosing entity itself (and its subsidiaries). Interim relief previously included in Class Order 14/632 has now been withdrawn, with Regulation 2M.3.03 being updated on 16 April 2016 to fix this, and other drafting anomalies as summarised below:
Shareholdings - All references in Regulation 2M.3.03 to ‘issuing entity’ have been changed to refer to ‘disclosing entity or any of its subsidiaries’ to clarify that KMP shareholding disclosures include only equity instruments issued by the disclosing entity or its subsidiaries.
Loans - The changes clarify that the required disclosures about loans to key management personnel do not include transactions that are in substance options, including non-recourse loans.
Transactions with KMPs — The superseded wording provided an exemption from disclosing KMP related party transactions if:
- The transaction occurred within a normal employee, customer or supplier relationship, on terms no more favourable than those dealing at arm’s length with an unrelated person, or
- Information about the transaction does not have the potential to adversely affect the allocation of scarce resources, or
- The transaction is trivial or domestic in nature.
The revised Regulation 2M.3.03 replaces the ‘or’ conditions above with ‘and’, meaning that all of the above criteria would need to be met for the disclosure exemption to apply. This is now consistent with the AASB 124 Related Party Disclosures requirement transferred a number of years ago.
- Disclosure about loans to KMPs does not include in substance options and non-recourse loans, and
- If you have updated your disclosure templates to exclude KMP transactions where either one of the above criteria applied, you will now need to revisit all KMP transactions to ensure that they are only omitted if all three criteria are met. This may result in more KMP transactions being disclosed than previously.
New ASIC Legislative Instrument on rounding
If you apply rounding in your financial statements, please remember to replace the reference in your directors’ reports and accounting policies from Class Order 98/100 to ASIC Corporations (Rounding in Financial/Directors’ Reports) Legislative Instrument 2016/191.
The re-made legislative instrument has been amended to clarify that the rounding exemptions only apply to dollar values (i.e. to the nearest thousand, hundred thousand or million dollars, depending on asset levels), and not to other amounts quoted in the financial statements (for example, numbers of shares, or when quantifying other items). Otherwise the requirements are generally the same.
Remember, that if you have assets less than $1 billion, you cannot round details of auditor’s remuneration, key management personnel compensation and related party disclosures in financial statements. Nor can you round remuneration report disclosures, and disclosures in the director's report of indemnities and insurance premiums, non-audit services for listed companies, and details for registered schemes.