Ten things to remember when preparing 31 December annual and half-year financial statements

After a busy few years implementing the new revenue, financial instruments, leasing, and not-for-profit income standards, the good news for most preparers is that there are only minor changes to accounting standards to consider for 31 December 2020 reporting. However, entities that have acquired businesses during the reporting period, and public sector entities that are grantors in service concession arrangements, may have some work to do. This article summarises ten things to remember when preparing 31 December 2020 financial reports.

  1. Doubling of reporting thresholds for proprietary companies
  2. Extension of reporting deadlines by one month
  3. New standards
  4. Rent concessions
  5. COVID-19 government stimulus measures
  6. Other COVID-19 impacts on 31 December 2020 financial statements
  7. Employee benefits (underpayments and double dipping on casual entitlements)
  8. Climate-related matters
  9. General purpose financial reports for significant global entities (SGEs)
  10. Listed entities – new Corporate Governance disclosures.

Please contact BDO’s IFRS Advisory team if you require assistance in this regard. You can also access our recent webinar, Accounting Standards Update: Getting Ready for 31 December 2020 for more information.

Doubling of reporting thresholds for proprietary companies

For years beginning on or after 1 July 2019, i.e. 31 December 2020 financial years, the thresholds for ‘large proprietary’ companies reporting to the Australian Securities and Investments Commission (ASIC) have doubled, resulting in many entities no longer having to prepare, have audited, and lodge financial statements for 31 December 2020 and beyond.

What are the new thresholds?

Proprietary companies are ‘large’ if two of the three thresholds in s45A of the Corporations Act 2001 are met. The Corporations Amendment (Proprietary Company Thresholds) Regulations 2019 introduced new Regulation 1.0.02B which increases these size thresholds for the purposes of s45A(3) as follows:

Previous thresholds Thresholds applying from 1 July 2019
Consolidated revenue for the financial year $25 million $50 million
Consolidated gross assets $12.5 million $25 million
Employees of the consolidated group 501 1001
Note 1: Part-time employees as an appropriate fraction of a full-time equivalent

Implications

Proprietary companies that become small will still be required by law to keep written financial records (s286 of the Corporations Act 2001) and in some cases may nevertheless be required to prepare and/or audit financial reports, for example if:

  • Directed to do so by ASIC or shareholders with at least 5% of the votes
  • They are foreign controlled and not consolidated into financial statements that are lodged with ASIC
  • They are foreign controlled and the relief in ASIC Legislative Instrument 2017/2014 has not been applied (i.e. they form part of a ‘large group’ in Australia or have chosen not to apply the relief)
  • They have undertaken crowd-sourced funding (s292(2(c)), or
  • They have bank reporting obligations.

Directors of ‘small proprietary’ companies should monitor circumstances every reporting period to ensure that they are meeting their financial reporting obligations under the Corporations Act 2001.

What about ‘grandfathered’ large proprietary companies?

There are no changes to the requirements for ‘grandfathered’ large proprietary companies.

Provided such entities have been audited since 1995, they will continue to be exempt from the requirement to lodge financial statements with ASIC. However, ‘grandfathered’ entities that become ‘small’ as a result of the higher thresholds should consider continuing to have an audit in order to maintain their ‘grandfathered’ status should the business grow and become ‘large’ again in future.

Extension of reporting deadlines by one month

Due to ongoing impacts of COVID-19 such as remote working arrangements and travel restrictions, some entities may continue to experience difficulties meeting reporting deadlines for 31 December 2020 half-year and annual financial statements. ASIC has therefore extended these reporting deadlines by one month. The extension covers reporting dates up to and including 7 January 2021.

It should be noted that the one-month extension only covers entities reporting to ASIC under:

  • Chapter 2M of the Corporations Act 2001 (i.e. disclosing entities, public companies, large proprietary companies, certain small proprietary companies and registered schemes), and
  • Chapter 7 (AFS licensees).

Extensions do not apply to foreign companies

The extension does not apply to registered foreign companies because these entities already have generous lodgment deadlines under s601CK.

This means that foreign entities listed on the ASX will not be able to lodge late and the usual deadlines will apply.

Extensions are not automatic for ASX listed entities

The one-month extension does not automatically apply to ASX lodgements until the ASX issues a Class Waiver to permit late lodgements. If this is similar to the Class Waiver covering 30 June 2020 reporting dates, we expect that it will require the entity to make an announcement to the market of its intention to rely on the extension relief.

More information

Please refer to our November 2020 Accounting News article for more information on deadlines for different types of entities.

New standards

The table below highlights new and amending standards that apply to annual and half-year reporting periods ending 31 December 2020 for the first time.

While many of these changes are unlikely to have a major impact on the majority of entities, businesses that have acquired other businesses or assets during the period will need to work through the new principles for determining whether you have acquired a ‘business’ under IFRS 3 Business Combinations, or individual assets under applicable Accounting Standards. If a grantor in a service concession arrangement, public sector entities will also need to contend with the new standard, AASB 1059.

Standard number

Standard name

References to BDO Accounting News articles

All entities

AASB 2018-6

Amendments to Australian Accounting Standards - Definition of a Business

How the optional concentration test could save you time assessing whether you have acquired a business (September 2020)

IASB amends definition of a 'business' in IFRS 3 (November 2018)

AASB 2018-7

Amendments to Australian Accounting Standards - Definition of Material

IASB amends definition of 'material' (November 2018)

AASB 2019-3

Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform

 

AASB 2019-1

Amendments to Australian Accounting Standards – References to Conceptual Framework

 

AASB 2019-5

Amendments to Australian Accounting Standards – Disclosure of the Effect of New IFRS Standards Not Yet Issued in Australia

Disclosure of the effect of new IFRS standards not yet issued in Australia (December 2019)

Not-for-profit entities

AASB 2019-4

Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements

NFP private sector entities to disclose extent of compliance with recognition and measurement requirements in Australian Accounting Standards (July 2020)

Public sector entities

AASB 1059

Service Concession Arrangements: Grantors

More infrastructure projects (service concession arrangements) of public sector entities to be capitalised on balance sheet (August 2017)

Application date of AASB 1059 Service Concession Arrangements: Grantors delayed until 2020 (November 2018)

AASB 2019-2

Amendments to Australian Accounting Standards – Implementation of AASB 1059

 

AASB 2019-7

Amendments to Australian Accounting Standards – Disclosure of GFS Measures of Key Fiscal Aggregates and GAAP/GFS Reconciliations - December 2019

 

Rent concessions

Many lessors have granted rent concessions to lessees during this COVID-19 pandemic period, resulting in either the waiver or deferral of lease payments (or both).

Implications for lessees

COVID-19 rent concessions have posed particular problems for lessees accounting for leases under IFRS 16 Leases where it is not clear whether the rent concession is a modification to the original lease contract (i.e. not part of the original terms and conditions of the lease contract). The IASB therefore amended IFRS 16 by introducing a time-limited practical expedient (IFRS 16, paragraph 46A) so that lessees can assume there is no lease modification, which will save time because revised discount rates will not need to determined.

The following Accounting News articles provide useful information about rent concessions, including: 

Topic

Title

Source

Eligible criteria for applying the practical expedient

IASB provides accounting relief for lessees who receive rent concessions

Accounting News – May 2020

Worked examples of how the practical expedient works for:

  • Waiver of rental payments
  • Deferral of rental payments

Accounting relief for COVID-19-related rent concessions approved by the IASB

Accounting News – June 2020

Worked examples of how the practical expedient works for:

  • Deferral of rental payments for six months and lease term extended by six months
  • Deferral of rental payments for six months – recouped over remainder of lease with additional interest on deferred payments to compensate for time value of money

More examples on accounting for COVID-19-related rent concessions by lessees

Accounting News – July 2020

Implications for lessors

COVID-19 rent concessions are also causing headaches for landlords trying to grapple with the appropriate accounting under IFRS 16. The following Accounting News article summarises FAQs to assist in accounting for rent concessions within the context of existing IFRS 16 requirements and ASIC’s comments noted in its FAQ 9B.

Topic Title Source
FAQs to assist in accounting for rent concessions Implications of COVID-19 for lessors - Your questions answered Accounting News – July 2020

COVID-19 government stimulus measures

A number of government stimulus measures have been on offer for businesses during the COVID-19 pandemic and these also present accounting challenges. Please refer to past Accounting News articles for more information on how to account for these different types of stimulus measures:

Topic

Title

Source

JobKeeper

Accounting for COVID-19 government stimulus by for-profit and not-for-profit entities – Job keeper payments

 

May 2020

 

 

Accounting for JobKeeper and JobMaker where employee costs have been capitalised

December 2020

Initial and additional cash flow boost

Accounting for COVID-19 government stimulus measures – Initial and additional cash flow boosts

June 2020

SME guarantee scheme

Accounting for COVID-19 government stimulus measures – COVID SME Guarantee Scheme  

August 2020

Land tax rebates (Queensland)

Accounting for land tax rebates received by landlords and the impact on outgoings audits

October 2020

JobMaker

Accounting for Federal Budget economic recovery stimulus measures – JobMaker Hiring Credit

November 2020

Final rules issued for JobMaker Scheme

December 2020

Other COVID-19 impacts on 31 December 2020 financial statements

Implications of COVID-19 for recognition and measurement

In addition to rent concessions and government stimulus measures discussed above, COVID-19 is also likely to impact the recognition and measurement of many items in the financial statements. BDO’s IFRB 2020/03 provides a snapshot of some of the areas affected. In addition, we have expanded on some of these concepts in Accounting News articles highlighted below:

Topic Title Source
COVID-19 impacts on:
  • Revenue recognition
  • Share-based payments
  • Termination benefits
Impairment is not the only accounting consequence of COVID-19 – Pay attention to revenue recognition, share-based payments and termination benefits June 2020
COVID-19 impacts on:
  • Impairment of non-financial assets
  • Provisions
  • Insurance proceeds
COVID-19 impacts on financial reporting – Impairment of non-financial assets, provisions and insurance proceeds May 2020
COVID-19 impacts on:
  • Financial instruments (IFRS 9)
  • Contracts assets (IFRS 15)
Coronavirus impacts on the accounting for financial instruments under IFRS 9 and contract assets under IFRS 15 April 2020

Disclosing impact of COVID-19

Regardless of whether entities have been unfavourably (or favourably) affected by COVID-19, ASIC expects disclosures in the Operating and Financial Review (OFR) to explain how business has been affected (refer ASIC FAQ 4).

ASIC has also indicated in FAQ 5 that entities should not present profit measures that attempt to remove the impact of COVID-19 (i.e. create hypothetical profit measures) as they may be misleading, nor should they split profit or loss into a ‘pre-COVID-19’ and ‘post-COVID-19’ period. Refer to June 2020 Accounting News article for more information.

COVID-19 may also have an impact on other disclosures in the financial statements, and also affect the classification of assets and liabilities as current or non-current, and whether non-current assets should, or should not, be classified as held for sale. Refer to July 2020 Accounting News article for more information.

Employee benefits (underpayments and double dipping on casual entitlements)

Remuneration underpayments

We have seen several recent instances in the press of widespread underpayment of employee wages. Businesses operating in industries where this problem has been prevalent need to ensure that they have adequately accounted for all employee wages in the appropriate period, including at the appropriate award, and for the appropriate number of hours worked. In some cases, retrospective restatement may be required if the reason for the underpayment was a prior period error. Our August 2020 Accounting News article provides more detail on the AASB Staff FAQ that answers three questions:

  1. In what year should the payments be recorded?
  2. How do I determine whether any prior year payments are material and require a restatement of the financial statements?
  3. What disclosures are required?

Double dipping on casual entitlements

The May 2020 Federal Court decision in WorkPac Pty Ltd v Rossato (Rossato decision) means that entities employing casual workers in similar circumstances to this case (i.e. on a regular, systematic and predictable basis with a predictable work schedule) will need to consider whether a provision is required in 31 December 2020 financial statements for any unpaid, or unused entitlements for annual leave, personal and carer’s leave, compassionate leave, public holiday pay and redundancy payments. This is particularly important given the level of retrenchments of casual workers during the COVID-19 pandemic. Refer to our August 2020 Accounting News article for more information.

This decision is subject to appeal in the High Court during 2021, but it is likely that a decision will not be handed down until later in 2021. At the time of writing, legislation is before Parliament proposing to remove the ability for ‘double dipping’ by casual employees. Nevertheless, entities should assume that the Rossato decision still stands when determining the extent of employee entitlement provisions in 31 December 2020 financial statements. We will endeavour to update you in future editions of Accounting News if the situation changes.

Climate-related matters

Even though IFRS standards do not refer explicitly to climate-related matters, there is increasing awareness that such issues may have an impact on financial reporting. With this in mind, the IASB recently released educational materials summarising how companies must consider climate-related matters when applying IFRS standards. Businesses should consider the educational materials when preparing 31 December 2020 financial statements because these matters may have a material impact, including when determining values for assets, liabilities and provisions, and well as when making disclosures regarding estimates and judgements.

Please refer to BDO's IFRB 2020/14 for a summary of these materials.

General purpose financial reports for significant global entities (SGEs)

Previously, SGEs were required to prepare general purpose financial statements for the ATO, however recent changes mean that only ‘country by country reporting entities’ (CBCREs) must prepare general purpose financial reports for years beginning on or after 1 July 2019.

CBCREs are essentially the same entities that were previously considered SGEs (under the old SGE definition), but the following types of entities, which were previously exempt, must now also prepare general purpose financial reports:

  • Immaterial subsidiaries, and
  • Investment entities or subsidiaries of investment entities.

Please refer to our September 2020 Accounting News article for more information.

Listed entities – new Corporate Governance disclosures

Listed entities should be mindful that the Fourth Edition of the Corporate Governance Principles and Recommendations (Fourth Edition) applies for the first time to 31 December 2020 year-ends. Disclosures in the Corporate Governance Statement should therefore conform to the Fourth Edition. Refer to October 2020 Accounting News article for more information.

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances.

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