Annual financial statements

What’s new for 30 June 2016 annual financial statements?

The good news

For 30 June 2016, the good news is that there are no new accounting standards, and only one small change to AASB 128 Investments in Associates and Joint Ventures that could impact your 30 June 2016 annual financial statements for the first time.

The calm before the storm

However, this is just the calm before the storm, with AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers effective for your 30 June 2019 annual periods, and AASB 16 Leases effective for June 2020. In addition, there are numerous changes to existing accounting standards that are effective from 1 January 2016 which may impact your 30 June 2017 financial statements.

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).

What are the changes?

You need to consider the following issues when preparing your 30 June 2016 annual financial statements:

  • Financial reporting requirements for Australian groups - Amending standard AASB 2015-4 Amendments to Australian Accounting Standards – Financial Reporting Requirements for Australian Groups with a Foreign Parent
  • Amendments to Corporations Regulations 2M.3.03 for remuneration reports
  • New ASIC Legislative Instruments
  • The ‘disclosure initiative’
  • Not-for-profit entities reporting to the ACNC
  • Fair value disclosures for not-for-profit public sector entities.

These are discussed briefly below.

Financial reporting requirements for Australian Groups - Amending standard AASB 2015-4

AASB 2015-4 is the only amending standard that applies for the first time to entities with a 30 June 2016 year-end.

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.

The amendment now makes the exemption for consolidation and equity accounting at intermediate levels in a group consistent. For both equity accounting and consolidation exemptions, the ultimate Australian entity must prepare consolidated financial statements, which includes equity accounting, if required.

Amendments to Corporations Regulations 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.

As an interim measure, the Australian Securities and Investments Commission (ASIC) issued Class Order 14/632 to clarify that only shares held by KMPs in the disclosing entity itself (or its subsidiaries) need be disclosed. This class order also required the disclosures in relation to the equity instruments to be separated into each class of equity instrument because this was omitted when the Regulation was originally drafted.

What changes have been made to the Regulations?

Regulation 2M.3.03 was updated on 16 April 2016 to fix the above-mentioned, and other drafting anomalies relating to:

  • Shareholdings of KMPs
  • Loans to KMPs
  • Transactions with KMPs.

Shareholdings - CO 14/632 is no longer required and has been withdrawn with effect from 16 April 2016. 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 also 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’. This means that all of the above criteria would need to be met for the disclosure exemption to apply. This is now consistent with the old AASB 124 Related Party Disclosures requirement transferred a number of years ago.

Entities that updated their disclosure templates to exclude KMP transactions where either one of the above criteria applied, 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.

Action points

The majority of the changes made to the Regulations were previously incorporated in CO 14/632, however, you will need to ensure that:

  • Disclosure about loans to KMPs do not include in substance options and non-recourse loans, and
  • All KMPs transactions have been disclosed unless they are on normal terms, do not have the potential to adversely affect allocation of scarce resources, and are trivial or domestic in nature.

New ASIC Corporations Legislative Instruments

ASIC has remade a number of legislative instruments (previously known as class orders) that affect 30 June 2016 annual financial statements. ASIC remakes legislative instruments when they expire, or reach their ‘sunset’ date of ten years from commencement date, if it determines that the legislative instrument remains ‘fit-for-purpose’ (that is effective, necessary and relevant).

The following class orders have been remade into legislative instruments, without making any substantive changes:

Remade Corporates Legislative Instrument

Details

Replaces Class Order

Commencement date

ASIC Corporations (Exempt Proprietary Companies) Instrument 2015/840 

Continuation of ‘grandfathering’ exemption from lodging financial statements

CO 05/638

1 October 2015

ASIC Corporations (Non-reporting Entities) Instrument 2015/841 

Non-reporting entities permitted to apply transitional provisions in accounting standards for recognition and measurement

CO 05/639

1 October 2015

ASIC Corporations (Post Balance Date Reporting) Instrument 2015/842 

Allows entities to disclose balance sheets showing financial effect of an acquisition or disposal after reporting date in the notes to the financial statements

CO 05/644

1 October 2015

ASIC Corporations (Electronic Lodgement of Financial Reports) Instrument 2016/181 

Relieves listed disclosing entities from obligations to lodge reports with both ASIC and a market operator (e.g. ASX), and allows the reports to be lodged electronically

CO 00/2451

CO06/6

CO 98/104

1 April 2016

Changes to rounding class order

ASIC has remade Class Order 98/100 into ASIC Corporations (Rounding in Financial / Directors’ Reports) Legislative Instrument 2016/191. This legislative instrument allows rounding in financial statements and director’s reports for financial years or half-years ending on or after 30 June 2016. ASIC Class Order 98/100 continues to apply to financial years or half-years that end on or before 29 June 2016.

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).

Therefore, Legislative Instrument 2016/191 no longer allows companies with assets greater than $1 billion to round the following items to the nearest $1,000 (whereas Class order 98/100 did):  

  • Corporations Act 2001 - s300(1)(d) – details of options granted to directors and any of the five most highly remunerated officers (directors’ report)
  • Corporations Act 2001 - s300(11) – directors’ interests in shares and options of listed companies
  • Corporations Act 2001 - s300(12) – directors of responsible entity of listed schemes – interests in shares and options
  • AASB 2 Share-based Payment, paragraphs 44 and 46 (details of options issued as share-based payments and inputs to the valuation model).

The re-made Legislative Instrument, however, permits rounding to the nearest one cent for all entities for amounts disclosed in accordance with AASB 2, paragraphs 44 and 46.

Summary

In summary, rounding thresholds for dollar disclosures are generally as follows:

Asset levels

Rounding

$10 million or less

No rounding

More than $10 million to $1 billion

To nearest $1,000

More than $1 billion to $10 billion

To nearest $100,000

More than $10 billion

To nearest $1,000,000

However, all entities may only round to the nearest cent for:

  • AASB 2, paragraphs 44 and 46 (details of options issued as share-based payments and inputs to the valuation model)
  • Corporations Act 2001, s300(6)(c) – issue price of options outstanding at date of the directors’ report
  • Corporations Act 2001 – s300(7)(d) and (e) – exercise price of options exercised during the period.

Entities may only round to the nearest 1/10th of a cent for earnings per share disclosures under AASB 133 Earnings per Share.

Only entities with assets greater than $1 billion can round the following items to the nearest thousand dollars (instead of the usual million dollar threshold):

  • Corporations Act 2001 – s300(1)(g), s300(8) and s300(9) – details of indemnities and insurance premiums
  • Corporations Act 2001 – s300(11B) and s300(11C) – details of non-audit services
  • Corporations Act 2001 – s300(13)(a) – details for registered schemes
  • Corporations Act 2001 – s300A(1)(c) and s300A(1)(e) – audited remuneration report information for listed companies
  • AASB 2, paragraph 50 (share-based payment expense and cash-settled share-based payment liabilities)
  • AASB 1054 Australian Additional Disclosures – auditor’s remuneration
  • AASB 124 Related Party Disclosures, paragraph 17 – key management personnel compensation
  • AASB 124, paragraphs 18 and 19 – transactions between related parties.

Entities with assets of $1 billion or less cannot round these items.

Action points

If you apply rounding in your financial statements and your year-end falls after 29 June 2016 you will need to change the rounding note in your financial statements and directors’ report to refer to Legislative Instrument 2016/191 rather than Class Order 98/100. You will also need to ensure you comply with the amendments made to the legislative instrument preventing rounding in some instances.

Disclosure initiative

The disclosure initiative is a broad-based project that aims to improve disclosure in general purpose financial statements. The International Accounting Standards Board (IASB) has currently completed the following two disclosure initiative projects and is working on further projects in this area:

  • Amendments to AASB 101 (AASB 2015-2) – effective for periods beginning on or after 1 January 2016
  • Amendments to AASB 107 (AASB 2016-2) – effective for periods beginning on or after 1 January 2017.

Is there any reason to adopt these changes early?

Our research has shown that, in response to the IASB’s disclosure initiative project (amendments to AASB 101), over 55% of the ASX 100 made changes to ‘declutter’ and improve disclosure in their financial statements by 31 December 2015. 

In this first suite of changes made to AASB 101, entities are now able to apply judgement when determining which disclosures to include in their financial reports. This means that you now have the ability to only include disclosures that you consider to be either quantitatively or qualitatively material (or otherwise useful) to users of your financial report.

While such changes are not mandatory for entities with years ending 30 June 2016, the improvements we have seen in the ASX 100 companies that have early adopted these amendments have significantly improved their financial statements because they are now highlighting information considered to be of high importance to users.

What steps can I take to improve my financial statements?

Action points

This process will become mandatory for entities with a financial year commencing on or after 1 January 2016, which means that you will be required to go through this decluttering process for your 30 June 2017 financial statements. Steps you can start now include:

More information

For more information, please refer to Accounting News articles:

Not-for-profit entities reporting to the ACNC

On 3 March 2016, the Government announced its decision to retain the Australian Charities and Investments Commission (ACNC). Therefore, any charities and not-for-profit entities that are registered with the ACNC will need continue to meet the reporting obligations of the ACNC and report to the ACNC for years ending 30 June 2016.

The ACNC also indicated that it will continue its work with the Government and state and territory regulators to reduce the red tape burden across the sector, announcing that it will continue to accept financial reports lodged with state and territory regulators for the 2016 reporting period.

For further information, refer to our March 2016 Accounting News article ‘ACNC is here to stay’, and our April 2016 Accounting News Article ‘ACNC transitional reporting continues’.

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).