On 3 December 2018, ASIC announced its focus areas for 31 December 2018 financial statements of listed and other public interest entities. It is now mandatory for both annual and interim financial reports prepared as at 31 December 2018 to comply with AASB 9 and AASB 15. ASIC has indicated it will review more than 85 annual and interim financial reports with a 31 December 2018 reporting date.
The mandatory application of AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers at 31 December 2018 means it is crucial for entities to be prepared now.
New Accounting Standards
It is now required that organisations comply with the new requirements of AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers.
AASB 9 and AASB 15 were published some time ago, but ASIC has repeatedly expressed concerns that some directors and managers of listed and public interest entities have not adequately engaged with the new requirements and therefore are currently not sufficiently prepared for the expected impact of these new Standards. As noted by ASIC:
These new accounting standards may significantly affect how and when revenue can be recognised, the values of financial instruments (including loan provisioning and hedge accounting), reported assets and liabilities relating to leases, accounting by insurance companies, and the general identification and recognition of assets, liabilities, income and expenses...
AASB 9 Financial Instruments
Except in relation to hedge accounting, AASB 9 supersedes both AASB 139 Financial Instruments: Recognition and Measurement and AASB Interpretation 9 Reassessment of Embedded Derivatives.
In addition to introducing a simplified classification system for financial assets (comprising fair value through profit or loss, fair value through other comprehensive income and amortised cost), AASB 9 replaces the current ‘incurred loss’ impairment model with an ‘expected loss’ impairment model. The new expected loss impairment model requires entities to prospectively recognise expected credit losses in respect to receivables and other financial assets not measured at fair value through profit or loss in accordance with either a three-stage (‘general approach’) or two stage (‘simplified approach’) model, subject to the nature of the financial asset and whether it comprises a significant financing component.
AASB 15 Revenue from Contracts with Customers
AASB 15 supersedes a number of Australian accounting pronouncements, including
AASB 118 Revenue, AASB 111 Construction Contracts, AASB Interpretation 13 Customer Loyalty Programmes and AASB Interpretation 1042 Subscriber Acquisition costs in the Telecommunications Industry. AASB 15 provides a single source of accounting requirements for all contracts with customers, thereby replacing all current accounting pronouncements on revenue. Specific exceptions include lease contracts and insurance contracts.
AASB 16 Leases and AASB 17 Insurance Contracts
Apart from AASB 9 and AASB 15, ASIC also notes several other Accounting Standards that have the potential to impact the reported results of entities now and into the future (subject to whether they are adopted prior to their mandatory application date), including AASB 16 Leases (applicable to annual reporting periods beginning on or after 1 January 2019), the anticipated amendments to other Australian Accounting Standards arising from amendments to the Conceptual Framework for Financial Reporting (currently applicable to annual reporting periods beginning on or after 1 January 2020) and AASB 17 Insurance Contracts (currently applicable to annual reporting periods beginning on or after 1 January 2021).
Impact of the changes
ASIC states that the impacts of these new Standards are not expected to be limited to reported numbers and will likely have real business impacts for some entities. Areas potentially impacted by the initial application of AASB 9 and AASB 15 include compliance with debt covenants and/or regulatory financial condition requirements, tax liabilities, dividend paying capacity and employee remuneration schemes. If they haven’t already experienced it, directors and management should also expect the new Standards to have substantive impacts on systems and processes they currently use to capture and manage the relevant information.
Irrespective of whether an entity has previously disclosed the expected impact of initially applying the new Standards, ASIC is expecting all entities with continuous disclosure obligations, irrespective of whether they are preparing annual or interim financial statements at 31 December 2018, to provide adequate disclosures of the initial impact of applying the new Standards, particularly AASB 9 and AASB 15. Moreover, ASIC notes that:
Public disclosure on the impact of the standards and timely implementation is important to investors and market confidence. Information that there will be no material impact may be also important information for the market.
ASIC is also expecting entities with continuous disclosure obligations to continue disclosing their progress in assessing the impact of Accounting Standards applicable to future reporting periods, including (when relevant) AASB 16, AASB 17 and the revised Conceptual Framework requirements. Entities with continuous disclosure obligations need to be cognisant of how these new Standards applicable in future reporting periods will impact any results forecasts they issue to the market in the period or periods leading up to their mandatory application.
Other ASIC Focus Areas
In addition to disclosing the impacts of new Accounting Standards, ASIC will be paying particular attention to how the following matters are dealt with in annual and interim financial reports at 31 December 2018.
Impairment testing and asset values
ASIC continues to be concerned about directors and auditors appropriately assessing the recoverability of assets such as goodwill, intangible assets and property, plant and equipment. Consistent with this, ASIC expects directors and auditors will ensure:
- cash flows, discount rates and other assumptions used in impairment testing are reasonable having regard to matters such as historical cash flows, economic and market conditions, and funding costs;
- discounted cash flows are not used to determine fair value less costs of disposal where forecasts and assumptions are not reliable;
- value in use calculations do not:
- use increasing cash flows after five years that exceed long-term average growth rates, and without taking into account offsetting impacts on dicount rates; and
- include cash flows from restructures and improving or enhancing asset performance;
- cash flows used are matched to carrying amounts of all assets that generate those cash flows, including inventories, receivables and tax balances;
- cash generating units (CGUs) are not identified at too high a level, including where cash inflows for individual assets are not largely independent; and
- CGUs for testing goodwill are not grouped at a higher level than the operating segments or the level at which results are monitored for internal management purposes.
Under Australian Accounting Standards, expenses can only be capitalised when:
- there is an asset as defined in the applicable Accounting Standard or Pronouncement;
- it is probably that the asset will generate future economic benefits; and
- any amounts capitalised can be reliably measured.
If costs incurred relate to an internally generated intangible item, the entity is permitted to capitalise those costs under AASB 138 Intangible Assets provided that:
- the costs do not relate to start-up, training, relocation or research activities; and
- any costs relating to development activities meet the six strict tests in the Standard for capitalisation.
Off-balance sheet arrangements
ASIC continues to expect directors and auditors to carefully review the treatment of any off-balance sheet arrangements, including:
- whether entities not currently consolidated are controlled and therefore should be consolidated;
- the accounting for joint ventures, particularly whether the joint arrangement is appropriately classified as either a joint operation or joint venture and the applicable accounting requirements have been applied; and
- disclosures relating to any structured entities.
This reporting season, like many before, ASIC is emphasising the need to preparers to ensure that they have:
- a proper understanding of both the tax and accounting treatments of reported transactions and events, and how differences between the two affect reported tax assets, tax liabilities and tax expense;
- considered and, if applicable, reflected the impact of any recent changes in tax legislation in their reported numbers; and
- appropriately reviewed the recoverability of any deferred tax assets recognised.
Accounting estimates and judgements
The preparation of financial statements in accordance with Australian Accounting Standards sometimes necessarily involves directors making estimates and judgements regarding some transactions and events. Accordingly, information regarding sources of estimation and significant judgements can be as important to users of the financial statements as the resulting numbers reported.
To facilitate users of financial reports correctly assessing the financial position and performance of an entity, ASIC expects all entities will disclose:
- any material assumptions, judgements and estimates the directors have applied to account for transactions and events; and
- sensitivity analyses in circumstances where the application of a reasonably possible alternative assumption would materially change the reported amount of the transaction or event.
Operating and financial review
Pursuant to section 299A(1) of the Corporations Act 2001, a listed entity is required to disclose, as part of its directors’ report, an operating and financial review (OFR), which comprises information that members of the listed entity would reasonably require to make an informed assessment of:
- the operations of the entity;
- the financial position of the entity; and
- the business strategies, and prospects for future financial years, of the entity.
Consistent with these requirements, ASIC notes that:
Risks and other matters that may have a material impact on the future financial position or performance of the entity should be disclosed. This could include, for example, matters relating to digital disruption, new technologies, climate change, Brexit or cyber-security. For more information see ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review...
In providing members of a listed entity with information they would reasonably require to make informed assessments of the operating and financial performance of the entity, directors need to ensure any information presented that is not prepared in accordance with Australian Accounting Standards (non-IFRS information) is not misleading and is presented in accordance with ASIC Regulatory Guide 230 Disclosing non-IFRS financial information.
Are you ready to apply the new Accounting Standards and disclose their impact on your reported financial results and financial positions? Get in touch with your Pitcher Partners contact.
A copy of ASIC’s media release on its focus areas for 31 December 2018 is available here.