Government stimulus packages, payment deferrals, rent concessions and more may have all impacted your position moving into EOFY, and these all present their own unique reporting challenges.
BDO’s National Leader, IFRS Advisory, Aletta Boshoff and National Leader, Tax, Neil Billyard discuss business and tax compliance issues for the reporting season in our Rethink Compliance audio series.
So what important points did they cover?
Financial reporting in the new economy
Financial reporting, despite the current economic environment, remains the same at its core: communicating the story of what happened during the year - which, this year, includes the damages wrought by COVID-19.
Increasingly, though, reporting is about making estimations, as opposed to basing judgements on historical costs. This is where some organisations are having trouble working out the uncertainties amid a volatile economy. When coming up with your estimation judgements, it’s imperative - now more so than ever - to ensure that they will withstand the scrutiny of audit, and that means asking:
- How did you come up with a fair value?
- What process did you follow?
- What was your thinking at the time?
Document everything so you can prove you had the best intentions at the time of judgement and did what you could with the information available to you.
Note: Don’t forget to take into account everything that has happened in your business and the wider regulatory environment since COVID-19. Have you received JobKeeper payments? Did you negotiate rent concessions? Do the ATO’s reporting extensions impact you? Document it all.
Factors to consider during this year’s reporting season
Cash is king right now. It’s important that organisations perform cash flow projections to support the fact that they are a going concern, and that they continue to prepare financial statements as a going concern.
Another consideration is that your business may be eligible for a tax refund. If you had a good start to the financial year but experienced downturn in the past months, this may have put you in a position where you have overpaid tax and can claim some of it back. It’s well worth putting the time and energy into a thorough tax return this reporting season, even if you feel it is an added stress in a stressful time.
Your cash flow projections will also support asset values in your balance sheet. For financial reporting purposes, your assets will have to be tested for impairment. But this won’t be done in ways past, where you’ve likely referred to fair values. You see, your business must know the future economic benefits associated with your assets (particularly plant and equipment). If you were to sell them today, you may not be able to earn more than their carrying amount. However, if you look at the value in use over the next five years, it could potentially exceed the carrying amount.
Revenue recognition is also likely to be impacted. This year Australia is using a new revenue recognition standard (introduced in the previous reporting period), and it has updated requirements around the modification of contracts. Of course, COVID-19 has led to a lot of contract negotiations as organisations remain nervous to commit to the costs of new work.
Before submitting any financial reports with the same framework as last reporting period, ensure your financial team has accounted for changes to revenue recognition that may have appeared due to changes in your company’s behaviour regarding contracts.
Don’t assume things will go back to normal
If we could close this article on a thought, it would be this: Don’t assume things will go back to normal after COVID-19 eases. Business operations have and will change in line with people’s new expectations, such as around digital technology. Anyone who does not try to think about the new world in the new way risks being left behind, and facing the challenges therein.
If you need help to Rethink your future business plans, our BDO experts are available to help you define ‘what’s next’.