What’s new for 30 June 2016 half-year financial statements?
There are a number of new and amending standards that are effective for the first time for 30 June 2016 half-year financial reports. While many of these amendments focus on specific areas, some of them may result in significant changes to your 30 June 2016 half-year financial statements. These include:
- Accounting for the acquisition of joint operations
- Clarification of acceptable methods of depreciation and amortisation
- Equity method in separate financial statements
- Investment entities: applying the consolidation exemption
- Bearer plants
- Annual improvements
- AASB 14 Regulatory Deferral Accounts.
Accounting for the acquisition of joint operations (Amending standard AASB 2014-3)
As a result of diversity in practice, AASB 11 Joint Arrangements has been amended by AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for Acquisitions in Joint Operations to include guidance on the accounting for an acquisition in a joint operation that constitutes a business.
If you acquire an interest in a joint operation that is a business, you will follow the acquisition approach in AASB 3 Business Combinations, as long as the principles do not conflict with any guidance in AASB 11. This means that you will recognise:
- Assets and liabilities at your share of the fair values, including your 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 have an acquisition of joint operations that constitute 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 – Amending standard AASB 2014-4
The amendments in AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation clarify that revenue-based methods of depreciation or amortisation are generally not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.
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 (e.g. consumption of benefit may be reflected in number of widgets produced rather than the revenue charged for the widget).
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 accounting policy is to depreciate property, plant and equipment based on revenue, 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.
If your accounting policy is to amortise an intangible asset using a revenue-based amortisation model, you will need to assess whether the intangible asset is a measure of revenue, or if the revenue and the consumption of the economic benefits are highly correlated. If they are not, then you need to change this policy to a method acceptable under AASB 138.
These changes are accounted for as a change in accounting estimate and are adjusted prospectively.
Equity method in separate financial statements – Amending standard AASB 2014-9
AASB 2014-9 Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements 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 – Amending standard 2015-5
AASB 2015-5 Amendments to Australian Accounting Standards – Investment Entities: Applying the Consolidation Exception amends AASB 10 Consolidated Financial Statements to clarify a number of different aspects of accounting for investment entities, as follows:
Intermediate parent entity consolidation exemption
This first amendment exempts an intermediate parent entity from preparing consolidated financial statements if the:
- Ultimate parent entity prepares consolidated financial statements that comply with IFRS (including where the ultimate parent entity is an investment entity that does not consolidate all of its subsidiaries and instead holds them at fair value), and
- Ultimate parent entity’s financial statements are available for public use.
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.
Bearer plants – Amending standard AASB 2014-6
AASB 2014-6 Amendments to Australian Accounting Standards – Agriculture: Bearer Plants amends AASB 141 Agriculture and 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.
What is a bearer plant?
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.
Will these amendments impact my profit and loss and balance sheet?
Bearer plants will be classified as property, plant and equipment under AASB 116 and measured using the cost or revaluation model. If you choose the cost model, you will depreciate the cost of the bearer plant over the life of the asset. If you choose the revaluation model, you will recognise revaluation gains or losses in other comprehensive income instead of in profit and loss.
Since the agricultural produce on the bearer plant remains within the scope of AASB 141, you will continue to recognise the fair value gains and losses in profit and loss up until the point of harvest.
Entities with bearer plants need to separate the carrying value of the bearer plant and the produce on the bearer plant. This process may be difficult and may require the assistance of specialist valuers.
The produce on the bearer plant continues to be accounted for under AASB 141 at fair value with changes in fair value recognised in profit or loss. The bearer plant will need to be accounted for under either the cost or revaluation model in accordance with AASB 116.
For more information, please refer to our Accounting News articles:
As a result of the International Accounting Standards Board’s 2012-2014 annual improvements cycles, AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards – 2012-2014 Cycle includes amendments that apply for the first time to 30 June 2016 half-years. These changes are not expected to have a major impact on current practice and 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.
AASB 14 Regulatory Deferral Accounts
While AASB 14 Regulatory Deferral Accounts is effective for the first time for 30 June 2016 half-years, it is unlikely to impact any Australian entity 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.
For more information please refer to our Financial Reporting Update for June 2016.