For annual reporters, the good news is that there are only minor changes to accounting standards (refer table below), and these are unlikely to have a material impact on measurement and disclosures in your June 2018 annual financial reports.
|AASB standard number||Standard name||Main change|
|2016-1||Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Tax Losses||Where the fair value on a fixed rate debt instrument to be held to maturity has decreased because of an increase in market interest rates, deferred tax assets must be recognised for the deductible temporary difference between the fair value and tax base, even though the instrument is not deemed to be impaired.|
|2016-2||Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107||More disclosure is required about changes in financing liabilities arising from cash flow and non-cash flow items. These disclosures are required for general purpose and special purpose financial statements but not for RDR.|
See example below
|2017-2||Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle||Clarifies that if an investment in a subsidiary, associate or joint venture is classified as held for sale, all disclosures in AASB 12 Disclosure of Interests in Other Entities apply except for paragraphs B10-B16.|
|Not-for-profit entities (NFPs)|
|2016-4||Amendments to Australian Accounting Standards – Recoverable Amount of Non-Cash-Generating Specialised Assets of Not-for-Profit Entities||Simplifies the impairment testing requirements for not-for-profit entities measuring specialised non-cash generating assets using the fair value model (i.e. cost approach).|
|Practice Statement 2||Making Materiality Judgements||Provides practical guidance for directors, trustees and preparers of financial statements when making judgements about what is material to the financial statements. Additional Australian information paragraphs have been inserted for NFPs.|
AASB 2016-2 introduces new disclosures into AASB 107 Statement of Cash Flows which require information about changes in financing liabilities arising from cash flow and non-cash flow items. An example of how such disclosure could be presented is shown below:
|2017||Cash flows||Acquisition||Foreign exchange movement||Fair value changes||2018|
|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 bad news is that there are several other issues lurking in the background that need to be considered when preparing your June 2018 annual reports. These include:
The impact of these is discussed briefly below.
For small businesses, a reduction in tax rate is always good news, but this means more work recalculating current and deferred tax asset and liability balances based on the new tax rates.
The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (Act) reduces the company tax rate to 27.5% for smaller companies carrying on a business where aggregate turnover* does not exceed:
*Aggregate turnover includes turnover of connected entities (including parent companies, subsidiary companies and sister subsidiary companies)
Entities meeting these turnover thresholds need to ensure that current and deferred taxes are calculated using the appropriate tax rate.
While some entities may not yet qualify for a reduction in tax rates, for example, because turnover currently sits between $25 and $50 million, they may qualify in 2019 when the threshold increases to $50 million. In such cases, while there is no change to the tax rate used to calculate current tax in 2018, there will be changes to deferred tax calculations because these will be recovered or settled at the reduced 2019 tax rate. Please refer to Accounting News article, May 2017, for a worked example.
Entities should also be mindful that the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018 (awaiting Senate approval at time of writing) 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 because it had not been approved by the Senate. The passive income test need only be considered in assessing whether an entity is eligible for the reduced 27.5% tax rate at 30 June 2018 if the change is substantively enacted by 30 June 2018.
Australian entities are SGEs when they are part of a group with worldwide consolidated accounting revenue of A$1 billion or more. SGEs now must lodge general purpose financial statements (GPFS) with the ATO together with the annual tax return. These can be prepared using the Reduced Disclosure Requirements (RDR) and it is recommended (but not legislated) that they be audited.
The ATO has issued fairly complex guidance on which Accounting Standards to apply when preparing GPFS for SGEs. In most cases, Australian Accounting Standards must be used, but in some rarer situations, for example, non-statutory entities, commercially accepted accounting principles (CAAP) are acceptable. The ATO guidance notes that IFRS and US GAAP would constitute CAAP, but other frameworks would need to be assessed on a case-by-case basis.
For years ending 30 June 2017, SGEs may have taken advantage of the transitional concessions and lodged the global parent’s consolidated financial statements (applying overseas GAAP), rather than the financial statements referring to the Australian group (refer December 2017 Accounting News article). These transitional concessions have now expired, and except in limited circumstances, SGEs will need to submit GPFS for the Australian group.
Entities likely to be impacted the most by these changes are those that currently do not lodge GPFS with ASIC to meet their Corporations Act reporting obligations, e.g.:
Although they will not impact June 2018 financial reports, there are a number of new standards and interpretations that will apply in the next two years, and the impact that they will have on reported results and financial position once adopted must be disclosed in 30 June 2018 financial statements.
When an entity has not applied a new IFRS that has been issued but is not yet effective, the entity shall disclose:
AASB 108, paragraph 30
In its latest media release of focus areas for its financial reporting surveillance program on June 2018 financial reports, ASIC’s expectation seems to be that particularly for AASB 9 and 15, entities should be in a position to quantity the impacts at 30 June 2018 because this is the latest possible transition date, and therefore entities should be running ‘live’ with their new accounting policies from 1 July 2018.
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. That is, an entity cannot automatically assume that the intangible asset will be recovered through sale (and therefore no DTL recognised).
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 30 June 2018 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 that will 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, i.e. $500 million.
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. NFPs with June year ends will therefore apply the new financial instrument standard from 1 July 2018 and the new revenue and leases standard from 1 July 2019.