What’s new for 30 June 2019 reporting season?
Another ‘big bang’ and more bad news for June 2019 financial reports
Some of the ‘bad news’ headline financial reporting issues for preparers to consider for 30 June 2019 financial reports include:
- The third ‘big bang’ of standards and interpretations, including the new revenue and financial instruments standards and more
- A push by the AASB for entities preparing special purpose financial statements to disclose the extent of compliance with the recognition and measurement requirements of accounting standards
- Small proprietary companies taking advantage of the new ‘crowd-sourced funding’ rules could inadvertently trigger financial reporting obligations to ASIC, and
- The need for some smaller businesses to recalculate current and deferred tax balances where higher revenue thresholds for 2019 result in a lower 27.5% corporate tax rate.
Good news for June 2019 financial reports and beyond
For June 2019, incorporated associations in five states are now subject to streamlined financial reporting, which means that they only submit financial statements to the Australian Charities and Not-for-Profits Commission (ACNC), rather than to both the ACNC and state regulators.
In addition, the thresholds for ‘large’ proprietary companies reporting to the Australian Securities and Investments Commission (ASIC) has doubled, resulting in many such entities no longer having to prepare, have audited, and lodge financial statements for 30 June 2020 and beyond.
Please read further for more information on the above impacts. Alternatively, more information is available in our May 2019 webinar 'Getting ready for June 30 2019'.
Third ‘big bang’ for June 2019
As alerted in Accounting News articles and Webinars over the past two years, preparers of financial statements face a third ‘big bang’ of new standards and interpretations for the 30 June 2019 reporting season, including the new revenue and financial instrument standards, and a new interpretation on how to account for foreign currency transactions where consideration is received or paid in advance. There are also four smaller amendments to current standards that need to be considered. We have not seen such a ‘big bang’ since 2005, and then 2013 when the new consolidations, joint arrangements and fair value standards were applied for the first time.
New revenue standard (AASB 15 Revenue from Contracts with Customers) and new financial instruments standard (AASB 9 Financial Instruments) apply to June 2019 year-ends.
When applying AASB 15 and 9 for the first time, preparers need to pay attention to four issues:
- Recognition and measurement – These are complex standards, with new concepts and principles not previously seen in IFRS. BDO’s IFRS Advisory team can assist you in this regard.
- Transition – which method is best to apply? - Decisions about which of the various transition methods is best for your business can be tricky, because different methods can have a different impact on assets, liabilities and retained earnings, which in turn can have a significant impact on an entity’s future profit or loss, ability to pay dividends and meet bank covenants.
- Transition – disclosing impacts – Transition adjustments need to be clearly explained so users understand what has changed. Details of old and new accounting policies should be contrasted, together with details of each adjustment (ideally in a tabular format with narrative footnotes). AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 28 outlines the disclosure requirements when entities change accounting policies on initial adoption of a new accounting standard.
- Additional disclosures – AASB 15 requires a lot more disclosure about revenue from contracts with customers than AASB 118 Revenue, and the updated AASB 7 Financial Instruments: Disclosures includes extensive additional disclosures, particularly for hedging, and credit risk of financial assets.
Even if you have no adjustments on first-time adoption of AASB 9 and AASB 15, it is important to note that YOUR DISCLOSURES WILL STILL NEED TO CHANGE.
AASB 15 and AASB 9 terminology is very different to that used in the superseded versions of these standards. This means that for all entities:
- Accounting policies will need to be rewritten to comply with the requirements of these new standards
- Items previously branded as ‘revenue’ such as interest and dividend income will need to be rebranded as ‘other income’, and
- Certain types of investments will also need to be renamed (e.g. available-for-sale investments and held-to-maturity investments will now be referred to as either investments at fair value through profit or loss, or at fair value through other comprehensive income).
Additional disclosures take a significant amount of time to prepare, so we recommend that you commence redrafting financial statement reporting templates or packages in advance of 30 June 2019.
BDO has prepared online resources to assist in preparing these AASB 15
and AASB 7
new disclosures for the first time.
Please refer to Section A of our Financial Reporting Update - 30 June 2019 for further discussion on AASB 15, AASB 9 and other interpretation and amending standards applying to 30 June 2019 for the first time.
Do these new standards all apply to not-for-profit entities (NFPs) at 30 June 2019?
It should be noted that while AASB 9 applies to all entities during this period, AASB 15 applies only to for-profit entities, the application date for not-for-profit entities (NFPs) having been deferred to periods beginning on or after 1 July 2019 to align with the start date for the new income recognition standard, AASB 1058 Income of Not-for-Profit Entities.
In addition, new Interpretation 22 Foreign Currency Transactions and Advance Consideration only applies to for-profit entities at 30 June 2019. NFPs will only apply this interpretation for years beginning on or after 1 January 2019, i.e. 30 June 2020 year-ends.
Disclosure of extent of compliance with recognition and measurement requirements
While the Australian Accounting Standards Board (AASB) has yet to make a final determination on the future of special purpose financial statements (these are still permitted for 30 June 2019), in anticipation of their withdrawal, it is proposing to issue an Exposure Draft in July 2019, requiring disclosure on the extent of compliance with the recognition and measurement requirements of accounting standards.
This additional disclosure is only intended to apply to entities that prepare special purpose financial statements in accordance with Part 2M of the Corporations Act 2001, or the Australian Charities and Not-for-profits Commission Act 2012.
The AASB has indicated that it would like to see early adoption of these proposals.
More information is available in May 2019 Accounting News.
Crowd funding may result in more burdensome financial reporting
In September 2018, the Senate passed the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 which allows private companies with less than $25 million in consolidated gross assets and less than $25 million in consolidated annual revenue (including from related parties) to be able to use crowd-sourced funding to raise up to $5 million per year.
Although small proprietary companies can now make use of the new ‘crowd-sourced funding’ laws without having to convert to a public company, the bad news is that this brings with it certain financial reporting responsibilities which could result in more work for preparers of financial statements at 30 June 2019.
Small proprietary companies that raise $3 million or more
via crowd-sourced funding will now need to prepare, have audited and lodge
financial statements with ASIC, even though they are ‘small proprietary companies’ under s45A of the Corporations Act 2001
Those that have raised funds below the ‘CSF audit threshold’ of $3 million are required to prepare financial statements and lodge these with ASIC, but they do not need to be audited.
Financial statements will need to be prepared in accordance with Australian Accounting Standards. These are likely to be general purpose because the nature of crowd-sourced funding is likely to result in a large number of disparate shareholders who rely on financial statements for information to make and evaluate decisions about whether to invest in these companies, and to assess their performance.
This could prove to be a time-consuming and costly exercise for small proprietary companies, particularly those with complex transactions and balances.
Reduction in corporate tax rates means more work on current and deferred taxes for small businesses
The revenue threshold for small businesses to qualify for a reduced corporate tax rate of 27.5% has increased from $25 million to $50 million for years ending 30 June 2019. This means that small businesses with revenue less than $50 million for the 30 June 2019 financial year will now qualify for the reduced tax rates.
Affected entities, which previously were subject to a corporate tax rate of 30%, will also need to adjust calculations of current and deferred tax assets and liabilities for 30 June 2019 financial reports because these rates were substantively enacted at 30 June 2019 (reporting date).
Fewer associations have duplicate reporting obligations
The financial reporting burden for many incorporated associations has been reduced by the introduction of streamlined financial reporting requirements. Associations in Tasmania, South Australia, the ACT, New South Wales and Victoria are now only required to lodge financial statements with the Australian Charities and Not-for-Profits Commission (ACNC), rather than to both the state regulator and the ACNC. However, for some, more work has been required over the last few years to ensure that these financial statements comply with the Australian Charities and Not-for-profits Commission Regulation 2013, in particular, having to use an accruals, rather than a cash basis, of accounting, and compliance with the following minimum standards if special purpose financial statements are prepared:
- AASB 101 Presentation of Financial Statements
- AASB 107 Statement of Cash Flows
- AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
- AASB 1054 Australian Additional Disclosures.
For 30 June 2019, Victorian and New South Wales associations preparing special purpose financial statements will need to comply fully with these above-mentioned standards for the first time, however, they do not need to provide comparatives. Tasmanian, South Australian, and ACT associations were required to comply in previous years, so must therefore include comparatives as well.
Associations in Western Australia, Northern Territory and Queensland continue to report to state regulators as they have done previously.
Thresholds doubled for large proprietary companies
For years beginning on or after 1 July 2019, some large private companies will no longer be required to prepare, have audited, and lodge annual financial statements with the Australian Securities and Investments Commission (ASIC) because the thresholds for determining whether such entities are ‘large’ or ‘small’ have been doubled.
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 introduces new Regulation 1.0.02B which increase these size thresholds for the purposes of s45A(3) as follows:
||Thresholds applying from 1 July 2019
|Consolidated revenue for the financial year
|Consolidated gross assets
|Employees of the consolidated group
|1 Part-time employees as an appropriate fraction of a full-time equivalent
Proprietary companies that become small:
- Will still be required by law to keep written financial records (s286 of the Corporations Act 2001), and
- May nevertheless be required to prepare and/or audit financial reports if directed by ASIC or shareholders with at least 5% of the votes.
Rather than merely relying on the size tests noted above, directors should also continue to consider other circumstances which may trigger the need to prepare audited financial reports. Such circumstances may include bank reporting obligations or financial reporting obligations resulting from control by a foreign company for example.
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 proposed 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.
For-profit entities to experience a mini ‘big bang’ in 2020
For 30 June 2020, for-profit entities will be applying the new leases standard (AASB 16 Leases) and Interpretation 23 (which deals with uncertain tax positions),for the first time.
Because many aspects of the leases standard, AASB 16, require system changes from 1 July 2018 if the full retrospective transition method is applied, and 1 July 2019 if the modified retrospective approach is used, ASIC continues to espouse the view that by now, entities should be able to quantify the impacts of this standard, particularly because the amounts disclosed in the ‘operating lease commitment’ note is a starting point (MR 19-143).
Uncertain tax positions (Interpretation 23)
Interpretation 23 Uncertainty over Income Tax Treatments could also have a significant impact on taxes recognised in 2020 financial statements, particularly for entities with transfer pricing issues.
30 June 2020 financial statements will see you calculate your current tax liability and deferred tax balances as if the tax authorities were going to perform a tax audit, and the tax authorities knew all the facts and circumstances about your entity’s tax position. Please contact a member of BDO’s Tax team if you require assistance.
Please refer to Section B of our Financial Reporting Update - 30 June 2019 for further discussion on AASB 16 and Interpretation 23, as well as other amending standards applicable for June 2020 financial years and beyond.
Deferred ‘big bang’ for NFPs in 2020
While for-profit entities are going through the motions of applying the new revenue and financial instruments standards for years ending 30 June 2019, not-for-profit entities (NFPs) will have the full ‘triple threat’ of new standards to contend with in 2020, i.e. AASB 16, as well as the new income recognition standard, AASB 1058 Income of Not-for-Profit Entities and the new revenue standard, AASB 15.
No need to fair value right-of-use assets subject to peppercorn leases
However, good news for NFPs is that the Australian Accounting Standards Board has deferred the requirements to fair value right-of-use assets subject to a peppercorn lease (refer AASB 2018-8 Amendments to Australian Accounting Standards - Right-of-Use Assets of Not-for-Profit Entities).
Please refer to Section B of our Financial Reporting Update - 30 June 2019 for further discussion on the ‘triple threat’ standards for NFPs, as well as other amending standards applicable for June 2020 financial years and beyond.
On the horizon
Please refer to Section C of our Financial Reporting Update - 30 June 2019 for discussion on exposure drafts pending which may result in further changes to your financial statements in future.
If you require any assistance implementing any changes to your June 2019 financial statements, or any of the upcoming ‘triple threat’ new standards, please contact your engagement partner or a member of our BDO IFRS Advisory team.