The good news is that there are only minor changes to accounting standards that could impact 31 December 2017 financial statements and unless you are preparing financial statements for an APRA regulated superannuation fund or a significant global entity, these are unlikely to have a material impact on measurement and disclosures in your December 2017 financial reports.
Australian entities part of a ‘significant global entity’, i.e. where worldwide revenue is A$1 billion or more, will for the first time lodge general purpose financial statements (GPFS) with the Australian Tax Office. You will only be impacted by these changes if you currently do not lodge GPFS with the Australian Securities and Investments Commission (ASIC) to meet your Corporations Act reporting requirements. Entities most affected by these new requirements because they currently may not be preparing GPFS are:
The GPFS, which can apply the reduced disclosures (RDR), will need to be lodged with the ATO with the annual tax return, and it is recommended that they be audited.
The general principle is that these GPFS be prepared applying Australian Accounting Standards, and including a consolidation for the Australian group. There are only very limited circumstances whereby other commercially accepted accounting principles can be applied (e.g. IFRS compliant or US GAAP) and therefore the overseas parent consolidation lodged instead of the Australian group.
The ATO has issued guidance on who must lodge a GPFS, how it is to be prepared, what needs to be lodged, as well as some worked examples.
On 9 May 2017, the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 was passed through the House of Representatives for a second time after various changes requested by the Senate in March 2017. This date is considered to be ‘substantive enactment’ for the purpose of determining current and deferred taxes under AASB 112 Income Taxes.
This Bill reduces the company tax rate to 27.5% for smaller companies carrying on a business where no more than 80% of assessable income is from passive income, and aggregate turnover* does not exceed:
*Aggregate turnover includes turnover of connected entities (including parent companies, subsidiary companies and sister subsidiary companies)
In order to establish the applicable tax rate, entities with 31 December 2017 reporting dates will need to establish which tax year their substituted accounting period relates to. For example, a small company with aggregate turnover of $20 million for the 31 December 2017 financial year with a substituted accounting period in lieu of 30 June 2018 will apply the lower 27.5% tax rate in its December 2017 financial statements.
It should be noted, however, that the recent issue of the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 proposes to clarify that for 30 June 2018 tax years and beyond, the lower tax rate will only apply if no more than 80% of the entity’s assessable income is from passive income (passive income test). At time of writing, this amendment had not been substantively enacted, therefore in the above example, the passive income test need only be considered in assessing whether an entity is eligible for the reduced 27.5% tax rate at 31 December 2017 if the change is substantively enacted by 31 December 2017.
AASB 112 requires a reduction in the corporate tax rate to impact the measurement of current tax in the year in which the new rate becomes effective. However, deferred tax assets and liabilities are measured at tax rates expected to apply in the period when the asset is realised, or the liability is settled.
Please refer to our May 2017 Accounting News article for more information.
At its November 2016 meeting, the IFRS Interpretations Committee clarified, for the purpose of calculating deferred tax, how an entity should determine the expected manner of recovery of an intangible asset that has an indefinite useful life. Diversity exists in practice on how entities account for this deferred tax liability (DTL).
As part of the Committee’s analysis of this issue, it noted that the existing guidance in IFRS is clear that the deferred tax on an intangible asset with an indefinite life should be calculated based on how the entity expects to recover the asset, i.e. either through use or through sale.
During the current financial year, Company A purchased Company B’s business, including all of its operations, stores and brand names which it intends to use. This transaction meets the definition of a business combination under AASB 3 Business Combinations.
As part of the purchase price allocation, brand names are assigned a fair value of $500 million.
The carrying amount of the brand name in the books of Company B (acquiree) is NIL.
The tax base of the brand name is NIL if used, and $500 million if sold.
The brand names are considered to have an indefinite life under AASB 138 Intangible Assets.
Company A has a 31 December 2017 year end.
Company A should recognise a DTL for the brand name because there is no exemption in AASB 112 Income Taxes for recognising DTLs that arise from assessable temporary differences on a business combination. If Company A had not recognised the DTL for the brand name to be recovered through use, then the journal entry to record the deferred tax liability would be (assuming goodwill is not impaired):
Dr Goodwill $150 million
Cr Deferred tax liability $150 million
30% of ($500 million less NIL tax base)
However, if Company A intended to hold the business short term, and then sell the business and brand name, it should instead recognise the DTL using the tax base on sale of the asset. The tax base of the brand name will then be $500 million and therefore no deferred tax liability will be recognised.
The fair value of a fixed rate debt instrument classified as ‘available-for-sale’ and measured at fair value can drop below its tax base if there is an increase in market interest rates. Many holders of such instruments do not currently recognise a deferred tax asset (DTA) for the deductible temporary difference on the basis that the investment is being held to its maturity, and therefore no loss will be realised. Even though the investment in the fixed rate instrument is not deemed to be impaired, AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses clarifies that if all other criteria for recognising DTAs have been met (i.e. probable), a DTA is recognised for the deductible temporary difference.
AASB 2016-1 also clarifies the following with respect to recognising DTAs:
AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 introduces new disclosures about changes in financial liabilities arising from cash flow and non-cash flow items. Your December 2017 financial statements will need to disclose a reconciliation of:
|2016||Cash flows||Acquisition||Foreign exchange movement||Fair value changes||2017|
|Assets held to hedge long-term borrowings||(675)||150||-||-||(25)||(550)|
|Total liabilities from financing liabilities||35,325||(2,150)||300||200||(25)||33,650|
The amendments to AASB 101 Presentation of Financial Statements facilitate the ‘decluttering’ of financial statement disclosures applied to your December 2016 financial reports. However, to date we note only limited uptake of the recommendations among our client base.
We strongly recommend clients to undertake this decluttering process. It will save time in future when producing the financial statements and in the audit process, and will result in financial statements that are more useful to investors.
There are simple steps all entities can take to reduce the amount of clutter in financial statements. This four step process, the ‘4 Rs’, is highlighted in the diagram below.
Note that Class Order 98/1418 has been superseded by ASIC Legislative instrument 2016/785 for financial years ending on or after 1 January 2017. Wholly-owned entities who are party to a deed of cross guarantee and therefore have relief from the requirement to prepare, have audited and lodge financial statements with ASIC, will therefore be subject to Legislative Instrument 2016/785 for December 2017 financial statements.
Although the disclosure requirements of the Legislative Instrument in the financial statements remain largely unchanged, you will need to update references in your financial statements and directors’ declaration from CO 98/1418 to Legislative Instrument 2016/785.
Given we are staring down the barrel of the biggest change to Australian Accounting Standards since first applying International Financial Reporting Standards in 2005, we should not be complacent. Transition date for the new revenue standard, AASB 15 Revenue from Contracts with Customers, and AASB 9 Financial Instruments, is 1 January 2018. This is around the corner. To follow shortly thereafter is the new leases standard, AASB 16 Leases from 1 January 2019, and you may find it more convenient early adopting AASB 16 so that only one set of transition disclosures is presented next year.
Because many aspects of these standards require system changes from 1 January 2018, the Australian Securities and Investments Commission (ASIC) continue to espouse the view that by now, entities should be able to quantify the impacts of these three standards, and should be disclosing these impacts for December 2017 financial statements (refer MR 17-423).
Not-for-profit entities (NFPs)
While the new financial instruments standard also applies to NFPs from 1 January 2018, it should be noted that the new revenue and leases standards only apply to NFPs from 1 January 2019. In particular, the application date for the revenue standard, AASB 15, was deferred to align with the 1 January 2019 effective date for the new income recognition standard for not-for-profit entities, AASB 1058 Income of Not-for-Profit Entities.
The recent release of Interpretation 23 Uncertainty over Income Tax Treatments could also have a significant impact on taxes recognised in your 2019 financial statements, particularly for entities with transfer pricing issues.
Next financial year 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.
For listed entities reporting half-year results at 31 December 2017, there are no new standards that will impact your interim financial report for the first time.
There are some changes to disclosures required by public sector NFPs (Federal, State and local governments, universities, etc.) reporting at December 2017, including:
If you require any assistance implementing any changes to your December 2017 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.