30 June 2020 is likely to be a busy time for preparers of financial statements. In addition to new accounting standards for both for-profit and not-for-profit (NFP) entities, COVID-19 is presenting many complex accounting challenges that could add a significant amount of time to both the financial statement preparation and the audit process.
This article summarises just ten of the main issues to be aware of when preparing 30 June 2020 financial statements. Our May 2020 webinar, Accounting Standards Update: Getting ready for 30 June 2020 also includes a summary of reporting issues impacting 30 June 2020 financial statements.
Entities reporting to ASIC
1. Doubling of reporting thresholds for proprietary companies
2. Deadlines for annual reporting
3. Deadlines for half-year reporting
All entities (for-profit and NFPs)
4. AASB 16 Leases
5. Interpretation 23 Uncertainty over Income Tax Treatments
6. Impairment of long-term loans to joint ventures and associates
7. COVID-19 (including rent concessions and government stimulus measures)
8. Half-year reporting (listed and unlisted disclosing entities)
9. Special purpose financial statements (SPFS)
NFPs
10. NFPs – New income and revenue recognition standards
For years beginning on or after 1 July 2019, i.e. 30 June 2020 financial years, the good news is that 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 30 June 2020 and beyond.
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 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 | ||
Proprietary companies that become small:
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?
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.
The usual deadlines for entities preparing and lodging audited financial statements with ASIC are shown in the table below. Due to difficulties anticipated in completing these financial statements on time, ASIC has granted a one-month extension, also shown in the table below.
| Type of entity | Usual deadlines for reporting to ASIC after reporting date | Extended ASIC deadlines due to COVID-19 |
| Disclosing entities (listed and unlisted) | 3 months | 4 months |
| Public company (unlisted) | 4 months | 5 months |
| Large proprietary company | 4 months | 5 months |
| Small proprietary companies (e.g. certain foreign-controlled) | 4 months | 5 months |
| Registered scheme | 3 months | 4 months |
It should also be noted that ASIC has indicated that it will take no action against public companies that choose to hold their AGMs virtually due to lockdown restrictions, and who hold them up to two months late (i.e. within 7 months of reporting date instead of 5 months). Refer to ASIC MR 20-113 for more information.
Listed entities will need to inform the ASX before the usual lodgement deadline if they wish to apply the one-month extension. In addition, listed entities that are not mining exploration entities or oil and gas exploration entities must file an Appendix 4E with the ASX showing their preliminary results within two months of reporting date.
Disclosing entities, both listed and unlisted, must ordinarily lodge half-year financial statements together with a review report, with ASIC within 75 days of reporting date (i.e. by 13 September each year for 30 June reporting dates). ASIC has also granted a one-month extension due to COVID-19, which means that for 30 June 2020 half-years, disclosing entities have 106 days, rather than 75 days, to lodge their reviewed financial statements with ASIC (i.e. until 14 October 2020).
| Type of entity | Usual deadlines for reporting to ASX after reporting date (Appendix 4D) | Usual deadline for reporting to ASIC | Extended ASIC deadlines due to COVID-19 |
| Disclosing entities – listed | 2 months | 75 days1 | 106 days |
| Disclosing entities – unlisted | N/A | 75 days | 106 days |
Note 1: This timeline is usually brought forward by the requirement to lodge the Appendix 4D, which includes a copy of the reviewed half-year financial statements, within 2 months of year-end
Listed entities will need to inform the ASX before the usual lodgement deadline if they wish to apply the one-month extension. In addition, listed entities that are not mining exploration entities or oil and gas exploration entities must file an Appendix 4D within two months of reporting date. The Appendix 4D ordinarily includes the half-year financial statements, together with the auditor’s review report.
The new leases standard is expected to impact a large number of entities because many businesses lease items of property, plant and equipment and premises, and except for certain low value and short-term leases, these right-of-use assets will need to be capitalised on the balance sheet, together with the related lease liability.
Some issues to note on first-time adoption of AASB 16:
For more information on specific aspects of lease accounting, please refer to our previous editions of Accounting News and other training resources listed below:
Topic | Link to Accounting News article(s) | Training materials |
Identification of all leases |
|
|
Determining the IBR for each lease | ||
Determine the lease term | ||
Determine the lease payments | N/A | |
Select an appropriate transition method |
| |
Ongoing management of lease information, i.e. being able to account for modifications and reassessments | ||
Presentation & disclosure | N/A | |
Other related topics | Impairment of ROU assets | |
Business combinations | N/A | |
Sale and leaseback transactions | ||
Lessor accounting & sublease arrangements |
Our IFRS in Practice also provides detailed guidance and examples on the application of IFRS 16.
Interpretation 23 requires entities to calculate their current and deferred tax assets and liabilities as if the tax authorities were going to perform a tax audit, and the tax authorities knew all the facts and circumstances about the entity’s tax position.
We are unlikely to see changes to financial statements in the way entities recognise tax assets and liabilities if it is probable (more than a 50 per cent chance) that the tax authority will accept the uncertain tax position.
However, if it is not probable that the tax authority will accept the uncertain tax position, the effect of the uncertain tax position will need to be included when measuring the income tax expense and related current and deferred tax assets and liabilities, using either a ‘most likely amount’ or ‘expected value’ measurement method.
This is likely to have a significant impact on the quantum of income tax liabilities for entities subject to judgmental tax areas such as transfer pricing. Boards and audit committees who have not already done so, need to ensure that an extensive tax review is conducted, firstly to identify all uncertain tax positions; and then to assess the impact on the financial statements.
Please contact a member of BDO’s Tax team if you require assistance.
AASB 2017-7 Amendments to Australian Accounting Standards – Long-Term Interests in Associates and Joint Ventures clarifies that the ‘expected credit loss model’ under AASB 9 Financial Instruments must be applied to loans advanced to associates and joint ventures.
The changes are likely to have a major impact on entities with investments in overseas exploration projects that are funded primarily through loans advanced to associates and joint ventures, rather than via equity funding. Previously, many such entities relied on projects not yet being at a stage to be tested for impairment under AASB 6 Exploration for and Evaluation of Mineral Resources in order to conclude that there is no objective evidence of impairment under AASB 128 Investments in Associates and Joint Ventures.
AASB 2017-7 clarifies that loans are first tested for impairment under AASB 9 using the expected credit loss model, and then under AASB 128 for the investment as a whole.
COVID-19 is presenting many accounting challenges for preparers and auditors of 30 June 2020 financial statements, including consideration of going concern, impairment of assets (including expected credit losses on trade receivables and loans), modification to financial liabilities because of payment deferral or changes to loan conditions, measurement of revenue, lease rent concessions, and many more.
Our IFRB 2020 03 provides a useful summary of the possible impacts you should consider when preparing June 2020 financial statements. The following Accounting News articles also provide information about the accounting implications of COVID-19:
Please contact BDO’s IFRS Advisory team if you require assistance in accounting for COVID-19 related issues.
Changes to the terms of leases that are not contemplated in the original lease agreement are ordinarily accounted for as modifications under IFRS 16. This means that lease liabilities are remeasured at the date of modification using an updated incremental borrowing rate (IBR) at modification date, and the impact of the remeasurement is adjusted against the carrying amount of the right-of-use (ROU) asset, with amended amortisation expense on the ROU asset being recognised over the remaining period of the lease. Modification accounting could be a time-consuming and burdensome process for many lessees that have negotiated COVID-19 rent concessions with landlords, firstly to conclude whether such concessions were contemplated in the original terms of the lease, and secondly to determine new IBRs at modification date.
Our May 2020 Accounting News article summarises the IASB’s recent amendment to IFRS 16 which permit lessees, as a practical expedient, not to assess whether particular COVID-19-related rent concessions are lease modifications. Instead, lessees that apply the practical expedient would account for those rent concessions as if they were not lease modifications. Although lease liabilities will need to be recalculated at the date the concession is agreed between the lessee and lessor, lessees will not need to revise the IBR, and this should save a considerable amount of time.
Our more detailed article in this newsletter provides detailed examples, including journal entries, on how to account for rent waivers and deferrals.
In an attempt to shield the Australian economy from the severe economic effects of social distancing and lockdown rules, in March 2020, the government announced several stimulus measures for businesses that need to be accounted for within existing Australian Accounting Standards. These measures include:
Please contact BDO Tax or Business Services for advice on eligibility for any of these measures and IFRS Advisory for advice on the appropriate accounting.
Due to COVID-19, half-year reporting deadlines for both listed and unlisted disclosing entities have been extended by one month. Please refer our discussion above for more details.
Disclosing entities reporting for the half-year ending 30 June 2020 are effectively reporting for the first-half of the annual reporting period ending 31 December 2020. There are only two minor amending standards that may apply to these entities for the first time from 1 January 2020:
The new definition of a ‘business’ in AASB 3 Business Combinations must be applied to acquisitions occurring on or after the beginning of the first annual reporting period that begins on or after 1 January 2020. Please refer to our Accounting News article for a summary of these changes.
In response to findings that some entities were finding it difficult to apply this definition in practice, these amendment clarify:
Please refer to our Accounting News article for a summary of these changes.
Although not directly impacting 30 June 2020 financial statements, entities should note that from 30 June 2022 financial years, for-profit private sector entities will no longer be permitted to prepare SPFS if required to prepare financial statements:
In addition, the general purpose financial statements replacing these SPFS will not be prepared using the Reduced Disclosures, which is the current general purpose – Tier 2 framework. Instead, a new general purpose Simplified Disclosure framework will apply which is similar, but not identical, to disclosures required by IFRS for SMEs. Please read our recent Accounting News article for more details.
While SPFS may still be appropriate for these types of entities for 30 June 2020, we strongly encourage management to reconfirm previous conclusions regarding why the entity is a non-reporting entity for 30 June 2020, and to document this assessment.
We also encourage entities to start thinking about early adopting these changes and preparing general purpose financial statements with Simplified Disclosures for 30 June 2021. The benefit of this approach is that there are more transition exemptions available, including for some comparative disclosures that will not be available if the changes are adopted for 30 June 2022.
NFPs and certain public sector entities will be able to continue to prepare special purpose financial statements until the AASB has completed its targeted consultations on a new financial reporting framework for these types of entities (post 2021). In the interim, however, NFP private sector entities preparing special purpose financial statements for 30 June 2020 are required to disclose the extent of their compliance with the recognition and measurement requirements of Australian Accounting Standards. For more information, please refer to our Accounting News article.
In addition to the new leases standard and having to deal with accounting implications resulting from COVID-19, NFPs also need to implement the new income recognition standard, AASB 1058 Income of Not-for-Profit Entities and the new revenue standard, AASB 15 Revenue from Contracts with Customers for the first time.
NFPs only account for grant contracts under AASB 15 if they contain sufficiently specific performance obligations, otherwise grant income is generally recognised upon receipt in profit or loss. Making these assessments can be highly judgmental, can take a significant amount of time, and could have a big impact on the timing of income recognition in the financial statements. We therefore recommend all NFPs to start reviewing grant contracts in detail as soon as possible.
Please refer to our NFP page on our web site for resources including news articles, webinars and eLearning materials, or contact BDO’s IFRS Advisory Team if you require accounting assistance.