ACCOUNTING

NEWSMARCH 2018

www.bdo.com.au

IN THIS EDITIONP1 Blind Freddy – Common errors when

accounting for property, plant and equipment (IAS 16)

P5 Convertible notes - Are you accounting for these correctly (Part 1)?

P8 Is a novated lease a ‘lease’ for the employer under IFRS 16?

P8 AASB approves IASB amendments to IFRS 9, IAS 28 and annual improvements (2015-2017 cycle)

P9 AASB issues Practice Statement 2 Making Materiality Judgements

P10 BDO monthly webinars – please register for 2018 webinars now

P10 New BDO resources & publicationsP11 Comments sought on exposure drafts

In this edition, we continue our ‘Blind Freddy’ series, this month focusing on common errors when accounting for PPE (scope and ‘cost’ errors) and commence a new series where we look at the complexities surrounding the accounting for convertible notes.

We also look at the impact of the new leases standard, IFRS 16 Leases on the accounting for novated leases by employers.

Lastly, we highlight some recent approvals by the Australian Accounting Standards Board of recent releases by the International Accounting Standards Board, including changes to IFRS 9, IAS 28, various annual improvements, and the long-awaited Practice Statement 2 Making Materiality Judgements.

BLIND FREDDY – COMMON ERRORS WHEN ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT (IAS 16)

The ‘Blind Freddy’ proposition is a term used by Justice Middleton in the case of ASIC v Healey & Ors [2011] (Centro case) to describe glaringly obvious mistakes.

In 2018 we continue our successful ‘Blind Freddy’ series, this month highlighting some common ‘Blind Freddy’ errors when accounting for property, plant and equipment (PPE) in the entity’s financial statements. IAS 16 Property, Plant and Equipment is the accounting standard which sets out the key principles for recognising and measuring PPE. While PPE may not be a material item on the balance sheet for service entities, it is often a significant item for entities owning land and buildings, those using heavy machinery and equipment such as manufacturers, explorers and construction businesses, those with significant CAPEX such as for store fit-outs, as well as agricultural producers with bearer plants.

Although the requirements of IAS 16 are not particularly complex, there are nevertheless a number of areas where preparers make common ‘Blind Freddy’ mistakes, and these fall into the following four main categories:

X Scope - Accounting for items as PPE when they are not PPE X What is ‘cost’? X The revaluation model X Depreciation.

This month we focus on ten ‘Blind Freddy’ errors relating to the scope of IAS 16, as well as common errors regarding what can and cannot be included as part of the ‘cost’ of an item of PPE

BLIND FREDDY ERROR 1 – ACCOUNTING FOR ITEMS AS PPE WHICH ARE NOT WITHIN THE SCOPE OF IAS 16

IAS 16 applies to the accounting for ‘property, plant and equipment’ (PPE) which are defined as tangible items that are:

X Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and

X Expected to be used during more than one period.

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BLIND FREDDY ERROR 3 – ALL PLANTS ACCOUNTED FOR AS BEARER PLANTS

IAS 16, paragraph 3(b) is clear that it is only bearer plants, and not all plants, that are accounted for as PPE. This means that the following are not bearer plants, and therefore should be accounted for at ‘fair value less costs to sell’ under IAS 41:

X Trees in a timber plantation grown for use as lumber X Annual crops such as maize and wheat, and X Where there is more than a remote likelihood of selling the plant upon which the produce grows for an amount greater than scrap value.

BLIND FREDDY ERROR 3

Accounting for all plants as bearer plants as PPE under IAS 16, instead of as biological assets under IAS 41.

BLIND FREDDY ERROR 4 – BEARER ‘ANIMALS’ TREATED AS BEARER PLANTS

Following on from Blind Freddy error 2 above, bearer plants are accounted for under IAS 16. That is, they are used in the production or supply of agricultural produce, they are expected to bear produce for more than one period, and there is a remote likelihood of selling the plant itself as agricultural produce.

Some preparers of financial statements mistakenly apply these requirements ‘by analogy’ to animals (using sheep as an example), on the basis that:

X Sheep are used in the production of agricultural produce (wool) X They are expected to bear produce for more than one period, and

X There is a remote likelihood of selling the sheep as agricultural produce, except when they are old and die (as an incidental sale).

This amendment was not intended to be applied by analogy to other situations because it was a narrow scope amendment to IAS 16, mainly to relieve owners of palm oil plantations in countries such as Malaysia from having to measure bearer plants such as palm trees at fair value.

BLIND FREDDY ERROR 4

Accounting for animals with features similar to bearer plants as PPE.

BLIND FREDDY ERROR 5 – TREATING SPARE PARTS, STAND-BY AND SERVICING EQUIPMENT AS INVENTORY

Many preparers incorrectly assume that spare parts, stand-by equipment and servicing equipment are automatically accounted for as inventory, and expensed when they are used.

IAS 16, paragraph 8 notes that such items are recognised as PPE when they meet the definition of PPE. Otherwise, they are classified as inventory. This suggests that the default classification is PPE unless proven otherwise.

However, the following items are not PPE, and are excluded from the scope of IAS 16:

ITEMS ACCOUNTED FOR UNDER OTHER STANDARDS

Investment properties IAS 40 Investment Property

Biological assets related to agricultural activity (other than bearer plants)

IAS 41 Agriculture

Exploration and evaluation assets

IFRS 6 Exploration for and Evaluation of Mineral Resources

While the above mentioned items may meet the definition of PPE because they are held for use in the production or supply of goods or services over a period of more than 12 months (e.g. investment properties and biological assets such as sheep used to produce wool), a common error is to measure them under IAS 16, rather than the specific standards specified above. This could result in entities incorrectly recognising, for example:

X Investment property fair value movements in other comprehensive income rather than profit or loss, masking earnings volatility for certain property companies, and

X Biological assets such as sheep or cattle at cost when the relevant standard, IAS 41 requires measurement at ‘fair value less costs to sell’.

. BLIND FREDDY ERROR 1

Applying the wrong accounting standard to account for items of PPE that are scoped out of IAS 16.

BLIND FREDDY ERROR 2 – BEARER PLANTS ACCOUNTED FOR AS BIOLOGICAL ASSETS

IAS 41 applies to ‘biological assets’ which are living animals or plants. Certain items meet the definition of a ‘biological asset’ (e.g. dairy cattle, sheep, fruit trees, oil palms, rubber trees, etc.) but are considered ‘bearer plants’ and therefore accounted for as PPE under IAS 16.

A bearer plant is a living plant that: (a) is used in the production or supply of agricultural produce(b) is expected to bear produce for more than one period, and (c) has a remote likelihood of being sold as agricultural

produce, except for incidental scrap sales.

IAS 16 - Definition of ‘bearer plant’

A common ‘Blind Freddy’ error occurs when entities fail to split up the bearer plant (e.g. fruit tree) and the agricultural produce growing on it (e.g. apples). If the bearer plant is not mature, in some cases this could distort earnings because the combined asset (including the bearer plant) is measured at fair value through profit or loss, rather than the bearer plant being measured at fair value through other comprehensive income, or at cost less accumulated depreciation.

BLIND FREDDY ERROR 2

Classifying bearer plants as biological assets and measuring them at ‘fair value less costs to sell’, instead of as PPE using the ‘cost’ or ‘revaluation’ model in IAS 16.

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Where these items are only expected to be used during one period (say for less than 12 months), they should be classified as inventory. If they are expected to be used during more than one period, they should be classified as PPE and depreciated accordingly.

BLIND FREDDY ERROR 5

Assuming all spare parts and stand-by and servicing equipment are inventories.

BLIND FREDDY ERROR 6 – CAPITALISING COSTS INCURRED AFTER THE ASSET IS CAPABLE OF OPERATING IN THE MANNER INTENDED BY MANAGEMENT (START-UP COSTS AND INITIAL OPERATING LOSSES)

IAS 16, paragraph 15 requires items of PPE to be initially measured at ‘cost’, which includes the purchase price and various other costs (refer extract of paragraph 16 below), but only those direct costs incurred until the asset is in the location and condition such that it can be used as management intended (paragraph 20).

The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-

refundable purchase taxes, after deducting trade discounts and rebates.

(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

IAS 16, paragraph 16

Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment: (a) costs incurred while an item capable of operating in the

manner intended by management has yet to be brought into use or is operated at less than full capacity

(b) initial operating losses, such as those incurred while demand for the item’s output builds up, and

(c) costs of relocating or reorganising part or all of an entity’s operations.

IAS 16, paragraph 20

A common ‘Blind Freddy’ error is to misjudge the timing that an asset becomes available for use (i.e. capable of operating in the manner intended by management), and continue to capitalise costs after this date, for example:

X Start-up costs when asset is yet to be brought into use or is operating at less than full capacity

X Initial operating losses as demand for a product builds up, and X Costs of subsequent redeployment of an asset.

BLIND FREDDY ERROR 6

Failing to have a formal ‘drop dead’ or practical completion date to indicate when an item of PPE is capable of operating in the manner intended by management.

BLIND FREDDY ERROR 7 – OMITTING ESTIMATED ‘MAKE GOOD’ COSTS FROM THE COST OF PPE WHEN THE ENTITY HAS A PRESENT OBLIGATION AS A RESULT OF A PAST OBLIGATING EVENT

IAS 16, paragraph 16(c) requires the cost of an item of PPE to include the initial estimate of certain ‘restoration costs’ if an entity incurs an obligation for these, either:

X When the item is acquired, or X As a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

‘Restoration costs’ include the costs of dismantling and removing the item, and restoring the site on which it is located.

Although the point in time at which restoration obligations are recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets can be judgemental, once it has been established that an entity has a ‘present obligation as a result of a past event’ under IAS 37, the debit side of this provision entry is made to the relevant PPE item. The cost of the item of PPE is increased by the provision amount, and is depreciated over the useful life of the asset.

Example:

Entity XYZ enters into a 10-year lease for office premises (no fit out) and is accounted for as an operating lease under IAS 17 Leases.

Entity XYZ conducts a fit out and installs various partitions, carpets, a kitchen and a bathroom which are all capitalised as leasehold improvements.

At the end of the lease, Entity XYZ is required to restore the premises to its original condition, i.e. remove all improvements.

Once the fit out has been completed, Entity XYZ has a present obligation to make good the premises at the end of the lease. This obligation arises as a result of a past event under IAS 37 (i.e. by installing the leasehold improvements).

Entity XYZ therefore estimates the restoration costs at the end of Year 10, discounts these costs to present value at the time of fit-out, and adds this discounted amount onto the cost of leasehold improvements.

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It is important to note, however, that if there is no lease, i.e. Entity XYZ undertakes improvements to its own premises, the ‘intention’ of Entity XYZ to dismantle the fit out at the end of its useful life does not create an obligation under IAS 37 because there is no lease. In such cases, dismantling costs would not be included in the cost of PPE.

BLIND FREDDY ERROR 7

Omitting ‘make good’ costs from the cost of leasehold improvements when the entity has a present obligation as a result of a past event under IAS 37 to ‘make good’ lease premises.

BLIND FREDDY ERROR 8 – FAILING TO CAPITALISE BORROWING COSTS ON SELF-CONSTRUCTED QUALIFYING ASSETS

The current version of IAS 23 Borrowing Costs has been in effect since January 2009, however many people think they still have a choice whether to capitalise interest when a qualifying asset is being constructed. IAS 23, paragraph 8, requires borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, to be capitalised.

There is no choice!

BLIND FREDDY ERROR 8

Expensing borrowing costs incurred when constructing a qualifying asset.

For more information, please refer to our Accounting News article on common errors in applying IAS 23.

BLIND FREDDY ERROR 9 – CEASING CAPITALISATION OF BORROWING COSTS TOO LATE

At the opposite end of the spectrum to Blind Freddy error 8 above, some entities continue to capitalise borrowing costs on self-constructed qualifying assets beyond the time permitted by IAS 23, paragraph 22, which is when ‘substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.’

Common ‘Blind Freddy’ errors include capitalising borrowing costs when:

X The asset is complete but is not yet being used, or X The asset is complete but there has been a delay in the sale process.

BLIND FREDDY ERROR 9

Continuing to capitalise borrowing costs after the qualifying asset is ready to be used or sold.

For more information, please refer to our Accounting News article on common errors in applying IAS 23.

BLIND FREDDY ERROR 10 – NOT REDUCING THE COST OF PPE FOR THE EFFECT OF DEFERRED PAYMENT TERMS

Another common ‘Blind Freddy’ error occurs when preparers fail to realise that the ‘cost’ of PPE acquired on deferred payment terms is not the same as the ‘cost’ when the purchase price of the asset is paid immediately. The supplier has effectively provided

a loan to the buyer for the cost of the asset which, in an arm’s length transaction, would be expected to attract interest charges at market rates.

IAS 16, paragraph 23 clarifies that ‘cost’ of an item of PPE is the ‘cash price equivalent’ at initial recognition, with the difference being recognised as interest expense over the credit period (or capitalised under IAS 23).

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with IAS 23.

IAS 16, paragraph 23

BLIND FREDDY ERROR 10

Failing to reduce the cost of an asset acquired on deferred payment terms for the effect of implicit borrowing costs.

COSTS OF TESTING WHETHER AN ASSET IS FUNCTIONING PROPERLY

IAS 16, paragraph 17(e) currently permits the costs of testing whether an asset is working properly to be capitalised into the cost of PPE, after deducting the net proceeds from selling any items produced while bringing the asset to the relevant location and condition.

There is currently diversity in practice as to the timing when deducting these sale proceeds ceases, with some deducting only sale proceeds from actual test items produced, and others deducting all sale proceeds from any items (be they test items or not) until the asset is available for use.

As a result, an Exposure Draft ED 280 Property, Plant and Equipment – Proceeds before Intended Use proposes to clarify that all proceeds from selling items prior to the PPE item being available for use are recognised as revenue, and not as a reduction in the cost of the PPE item.

For more information on the proposals, please refer to Accounting News article (July 2017)

NEXT MONTH

Please continue reading next month for more ‘Blind Freddy’ errors when accounting for PPE.

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CONVERTIBLE NOTES - ARE YOU ACCOUNTING FOR THESE CORRECTLY (PART 1)?In the current economic climate, we continue to see different types of convertible note arrangements, typically entered into by companies needing to offer attractive returns in order to obtain funds from lenders and investors.

WHAT IS A CONVERTIBLE NOTE?

As the name implies, ‘convertible notes’ usually result in debt funding being converted into equity, providing the investor with upside returns. However, some convertible notes also have a cash settlement feature which protects the investor from any downside losses where the option conversion feature is ‘out of the money’.

We also see issuers adding enhancements to conversion features in order to attract investors. These enhancements still result in terms that are advantageous to the issuer, because in comparison with a straightforward interest-bearing loan, the convertible note can result in lower cash outflows, with the lender accepting a lower interest rate on the funds advanced because the conversion feature will, potentially, provide a significant enhancement to the overall return for the investor.

IS A CONVERTIBLE NOTE ALWAYS A ‘COMPOUND’ FINANCIAL INSTRUMENT OF THE ISSUER?

A common misunderstanding in the accounting for convertible notes is that these instruments are always classified as ‘compound’ financial instruments on the balance sheet of the issuer.

A compound financial instrument contains both a liability and equity component:X Liability – contractual arrangements

to deliver cash, andX Equity – call option granting holder

the right to convert debt into a fixed number of ordinary shares.

Some conversion features in these notes fail the ‘fixed for fixed’ requirement in order for the option component to be classified as equity, and instead should be classified as either straight debt (financial liability), or as a derivative liability.

WHY IS CLASSIFICATION OF CONVERTIBLE NOTES SO CRITICAL?

Firstly, the classification as equity or debt may have a significant impact on the quantum of the entity’s net equity, which could impact compliance with bank covenants and key ratios.

Also, if conversion features are classified as derivative liabilities, these are subsequently remeasured at each reporting date at fair value through profit or loss, which could impact employee remuneration arrangements, including bonus schemes linked to reported profits and share-based payments, as well as overall investor communications if there are negative impacts on earnings.

In this new series of articles, we explore some common mistakes when classifying convertible notes by the issuer. In this first article, we recap the requirements for classifying these notes as debt v equity, and will follow in subsequent months with examples demonstrating the classification based on a variety of fact patterns.

DEBT OR EQUITY?

As noted above, convertible notes can be classified as all debt, all equity, or a mixture of both. To determine the appropriate classification, we need to consider the relevant definitions in IAS 32 Financial Instruments: Presentation.

FINANCIAL LIABILITY

(a) Contractual obligationi To deliver cash or another

financial asset to another entity..., or

ii To exchange financial assets (or liabilities) with another entity under conditions that are potentially unfavourable to the entity.

(b) Contract that will/may be settled in entity’s own equity instruments and is:i A non-derivative for which

the entity is/may be obliged to deliver a variable number of the entity’s own equity instruments, or

ii A derivative that will/may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments…

EQUITY

Any

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that

evi

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resi

dual

inte

rest

in

the

asse

ts o

f an

entit

y af

ter d

educ

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all o

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s.or

6 ACCOUNTING NEWS

The above diagram only includes an extract of the relevant definitions, which are far more detailed. However, for the purposes of determining the appropriate classifications by an issuer, they can be summarised into two key principles:

1. Does the issuer have a contractual obligation to deliver cash or another financial asset that it cannot avoid?

If the issuer does not have an unconditional right to avoid delivering cash or another financial asset to settle the convertible note, this obligation meets the definition of a financial liability

2. A financial instrument can only be classified as equity if the ‘fixed-for-fixed’ criterion is met.

This means that the note will be settled by the issuer delivering a fixed number of its own equity instruments in exchange for a fixed amount of cash.

The following flow chart summarises the accounting requirements in IAS 32 in relation to the evaluation of liability and equity classification of financial instruments.

Liability Compound

Equity

Do the exemptions in IAS 32.16A-D apply?

Is there an obligation to issue a fixed number of shares to settle an instrument

whose book value is variable, e.g. denominated in a foreign currency?

Is there a contractual obligation to pay cash that the issuer cannot avoid?

Equity

Does the instrument have any characteristics that are similar to

equity?

Is there an obligation to issue a variable number of shares?

YES

YES

YES

YES

YES

NO

NONO

NO

NO

Let’s look at some simple examples to demonstrate how the process works.

Example 1: Entire note is classified as equity

Entity A issues 1,000 convertible notes for $1,000 each (total proceeds of $1,000,000).

Each note is mandatorily convertible into 1,000 ordinary shares anytime between issue date and closing date (which is three years after issue date).

Applying the guidance in the flow chart above, Entity A classifies the convertible notes as ‘equity’ because:

X It has no contractual obligation to deliver cash to the holders (the notes are mandatorily convertible)

X The ‘fixed for fixed’ test is met, i.e. it will convert the notes into a fixed number of shares, predetermined on issue date of the notes, and

X There is no obligation to issue a fixed number of shares to settle a variable obligation.

Example 2: Entire note is classified as debt

Entity B issues 1,000 convertible notes for $1,000 each (total proceeds of $1,000,000), paying an annual coupon of 5% p.a.

The notes are convertible at the option of the holder for a three-year period, with the number of shares to be issued on conversion being determined by dividing the face value of each note ($1,000) by the market value of the Entity B’s share price on conversion date.

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Note holders can also elect to have their debt repaid in cash if they do not wish to convert at the end of the three-year conversion period.

Applying the guidance in the flow chart above, Entity B classifies the convertible notes as debt because:

X It has a contractual obligation to deliver cash to the holders if the holders so elect

X The conversion terms fail the ‘fixed for fixed’ test because a variable number of shares will be issued on conversion, based on the market value of the shares on conversion date, and

X There is no embedded derivative.

Example 3: Note is classified as a compound instrument

Entity C issues 1,000 convertible notes for $1,000 each (total proceeds of $1,000,000), paying an annual coupon of 5% p.a.

Each note is convertible into 1,000 ordinary shares anytime between issue date and closing date (which is three years after issue date).

Note holders can also elect to have their debt repaid in cash if they do not wish to convert at the end of the three-year conversion period.

Applying the guidance in the flow chart above, Entity C classifies the convertible notes as a compound instrument because:

X It has a contractual obligation to deliver cash to the holders if the holders so elect (debt portion)

X The conversion feature meets the ‘fixed for fixed’ test, i.e. option to convert the notes into a fixed number of shares which is predetermined on issue date of the note (equity portion).

MEASUREMENT OF DEBT AND EQUITY COMPONENTS OF A COMPOUND FINANCIAL INSTRUMENT

IAS 39 Financial Instruments: Recognition and Measurement (and IFRS 9 Financial Instruments from 1 January 2018) make it clear that except where a financial instrument is quoted in an active market (such as a listed share), the transaction price for the instrument is its fair value. This means that where a whole instrument is either entirely debt, or entirely equity, the instrument will initially be measured at its transaction price.

For compound instruments, i.e. notes comprising a host liability and embedded equity conversion feature, the diagram below shows how the different components are measured on initial recognition:

X The fair value of the liability component is determined first, i.e. the contractual stream of future cash flows is discounted at the rate of interest that would apply to an identical financial instrument without the conversion option (that is, a stand-alone loan or debt instrument), and

X The equity component is then assigned as the residual amount, by deducting the amount calculated for the liability component from the fair value of the instrument as a whole. This is consistent with the definition of equity under which an equity instrument is a residual interest.

As noted above, unless the convertible note is quoted on an active market, the fair value of the convertible note at initial recognition is assumed to be the transaction price for the instrument as a whole, and no further valuation exercise is required.

NEXT MONTH

Next month, we continue our convertible note series using a simple example to illustrate the process described in the flowchart above, determining the appropriate classification, as well as measurement issues and the relevant journal entries.

Fair value of convertible note

Fair value of the liability

Equity residual component

- =

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IS A NOVATED LEASE A ‘LEASE’ FOR THE EMPLOYER UNDER IFRS 16?All leases currently classified as ‘operating leases’ by lessees in accordance with IAS 17 Leases will, under IFRS 16 Leases, need to be assessed to determine whether a right-of-use asset and lease liability need to be capitalised on balance sheet for periods starting from 1 January 2019.

The maths used to calculate right-of-use assets and lease liabilities is not easy! It is therefore imperative that entities assess all ‘lease’, rental and service contracts as a matter of urgency to determine whether there is a right-of-use asset and lease liability to be capitalised.

ONE EXAMPLE OF SUCH AN AGREEMENT TO BE CONSIDERED IS A ‘NOVATED LEASE’.

What is a ‘novated lease’?

An employee may enter into a lease arrangement with a finance company (usually for a motor vehicle) and then enter into a three-way agreement with their employer and the finance company whereby:

X The employer takes on the obligations of the lessee X The terms of the agreement provide that if the employee ceases employment, the novated (three way) arrangement ceases, and obligations under the original lease will revert to the employee, and

X The employee also has the risk for the residual value (balloon payment).

HOW SHOULD THE EMPLOYER ENTITY ACCOUNT FOR A NOVATED LEASE ARRANGEMENT UNDER IFRS 16?

The employer entity would not have a lease as defined in IFRS 16 because the contract does not convey the right for the employer to control the use of an identified asset. The vehicle is effectively the employee’s vehicle to use as he/she wishes, with the lease payments being a salary sacrifice to optimise the employee’s tax position.

IFRS 16, paragraph B9, states that to assess whether a contract conveys the right to control the use of an identified asset, an entity shall assess whether it has both:1. The right to obtain substantially all the economic benefits from

use of the asset, and2. The right to direct the use of the identified asset.

It is the employee, not the employer, who has the rights in 1. and 2. above, with the substance of the arrangement being that the employer entity is simply facilitating a tax effective way for the employee to obtain the vehicle.

IF YOU REQUIRE ASSISTANCE

If you require assistance with any other IFRS 16 implementation issues, please contact your engagement partner or BDO IFRS Advisory Services.

AASB APPROVES IASB AMENDMENTS TO IFRS 9, IAS 28 AND ANNUAL IMPROVEMENTS (2015-2017 CYCLE)The Australian Accounting Standards Board (AASB) recently approved some amendments to standards by the International Accounting Standards Board (IASB), meaning that these are now available for early adoption in Australia:

X AASB 2017-6 Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation

X AASB 2017-7 Amendments to Australian Accounting Standards – Long-term Interests in Associates and Joint Ventures

X AASB 2018-1 Amendments to Australian Accounting Standards – Annual Improvements 2015-2017 Cycle.

PREPAYMENT FEATURES WITH NEGATIVE COMPENSATION

Ordinarily, financial assets classified as either amortised cost or at fair value through other comprehensive income (FVTOCI) must meet the SPPI test (solely payments of principal and interest). Some financial assets with prepayment features fail the SPPI test only as a result of a prepayment feature.

The amendments to IFRS 9, which apply to annual periods beginning on or after 1 January 2019, permit entities to measure such financial assets at amortised cost or FVTOCI if they fail SPPI only as a result of a prepayment feature.

For more information - please read Accounting News article, Changes to IFRS 9 – Prepayment features with negative compensation to be considered SPPI (November 2017).

IMPAIRMENT OF LONG-TERM INTERESTS IN ASSOCIATES AND JOINT VENTURES (LOANS)

These changes to IAS 28 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. This is because such loans will in future:

X First be tested for impairment under IFRS 9 applying the ‘expected credit loss’ model, and

X Then be tested applying the IAS 28 impairment model, which requires objective evidence of impairment (not evident for E&E projects not yet being tested for impairment under IFRS 6 Exploration for and Evaluation of Mineral Resources).

This could result in impairment write-downs on such investments being incurred much earlier in future. The changes apply to annual periods beginning on or after 1 January 2019,

For more information - please read Accounting News article, ‘Expected credit loss’ model under IFRS 9 to be applied to loans advanced to associates and joint ventures (November 2017).

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ANNUAL IMPROVEMENTS (2015 TO 2017 CYCLE)

The annual improvements, which are minor or narrow in scope make amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs.

For more information - please read Accounting News article, ‘Annual improvements 2015-2017 cycle – changes to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs’ (February 2018).

AASB ISSUES PRACTICE STATEMENT 2 MAKING MATERIALITY JUDGEMENTSIn December 2017, the Australian Accounting Standards Board (AASB) approved the International Accounting Standards Board’s Practice Statement 2 Making Materiality Judgements as an Australian Practice Statement. It provides practical guidance for directors, trustees and preparers of financial statements when making judgements about what is material to the financial statements.

The Australian Practice Statement is essentially the same as its international equivalent, except that the AASB has added specific guidance for not-for-profit entities (NFPs).

NOT-FOR-PROFIT ENTITY ADDITIONAL GUIDANCE

Guidance relating to NFPs is included in the Practice Statement as additional ‘Aus’ paragraphs and examples, and basically ‘translates’ some of the principals into not-for-profit language and concepts. For example, the Australian Practice Statement highlights that for NFPs:

X Primary users are existing and potential resource providers such as donors and taxpayers, rather than investors and lenders to for-profit entities

X Primary users can also be recipients of goods and services, such as beneficiaries, and members of the community, as well as those performing an oversight function (e.g. members of parliament)

X Primary users are more concerned with the NFP achieving its objectives and future service potential than making a financial return

X Information needs of primary users are identified in a similar manner to for-profit entities (i.e. the total information needs of all primary user categories is the set of common information the entity needs to provide)

X Step 1 in the materiality process involves identifying additional information that users might need to make decisions about resource allocation, such as information about the service potential of existing resources, and explanation about any significant impairment

X It may not be appropriate to assess materiality quantitatively by reference to profitability because NFPs are primarily concerned with achieving objectives such as service delivery rather than profit

X Information about the existence and terms of a grant agreement relating to a NFP is assessed in a similar manner to loan covenants (e.g. breaches) of for-profit entities.

MORE INFORMATION

For more information - please read Accounting News article, IASB issues guidance on making materiality judgements (IFRS Practice Statement 2 Making Materiality Judgements) (October 2017).

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BDO MONTHLY WEBINARS – PLEASE REGISTER FOR 2018 WEBINARS NOWAre you interested in an easy way to stay up to date with financial reporting and accounting standards which impact your business?

We invite you to register for our 2018 BDO Financial Reporting and Accounting standards live webinar series (11am to 12pm Sydney AEDT or AEST).

VIEW & REGISTER FOR WEBINARS

2018 webinars are as follows:

DATE TOPIC

18 April 2018 IFRS 15 – Problem Areas

16 May 2018 Accounting Standards Update: Getting Ready for 30 June 2018

20 June 2018 Transition to IFRS 9

25 July 2018 IFRS 9 – Risk Assessment

22 August 2018 IFRS 9 – Problem Areas

19 September 2018

Transition to IFRS 16

24 October 2018 IFRS 16 – Risk Assessment

21 November 2018 Accounting Standards Update: Getting Ready for 31 December 2018

12 December 2018 IFRS 16 – Problem Areas

NEW BDO RESOURCES & PUBLICATIONSAUSTRALIAN RESOURCES

The IFRS Advisory section of our website includes training materials on IFRS and other financial reporting issues including the following webinars (one hour video recorded presentations presented live on a monthly basis).

Recent webinars include:

MONTH TOPIC

February 2018 Transition to IFRS 15

January 2018 Triple Threat Accounting Standards - The wait is over

December 2017 The New AASB 9 Financial Instruments - Hedging Requirements

November 2017 Financial Reporting Update – Getting Ready for 31 December 2017

IFRS at a glance

Need to knows

IFRS in practice

Comment letters on IFRS standard setting

'One page' and short summaries of all IFRS standards.

Updates on major IASB projects and highlights practical implications of forthcoming changes to accounting standards.

Practical information about the application of key aspects of IFRS, including industry specific guidance.

Our most recent IFRS in Practice update previous versions on IFRS 16 Leases and IFRS 15 Revenue from Contracts with Customers (issued in February 2018).

Includes BDO comments on various projects of international standard setters, including Exposure Drafts and other Discussion Papers, when it is considered that the issue is significant to the BDO network and its clients.

Our most recent comment letters relate to IASB ED 2017/6 Definition of Material and IASB ED 2017/5 Accounting Policies and Accounting Estimates.

MONTH TOPIC

October 2017 The New AASB 16 – Recognition and Measurement

September 2017 The New AASB 16 – Identifying a Lease and Determining the Lease term

August 2017 The New AASB 15 – Determining and Allocating the Transaction Price to the Performance Obligations

July 2017 The New AASB 15 – Identifying the Contract and the Separate Performance Obligations in the Contract

June 2017 Overview of the New IFRS 15 Revenue from Contracts with Customers

May 2017 Financial Reporting Update – Getting ready for 30 June 2017

April 2017 The new AASB 9 Financial Instruments – Impairment requirements

March 2017 The New AASB 9 Financial Instruments – Classification and Measurement Requirements

March 2017 The New AASB 1058 Income of Not-for-Profit Entities

February 2017 Overview of the New AASB 16 Leases

Please register for our webinars in 2018.

BDO GLOBAL RESOURCES

The IFRS section of our BDO Global website includes a range of publications on IFRS issues such as:

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FOR MORE INFORMATIONADELAIDE

PAUL GOSNOLDTel +61 8 7324 6049 paul.gosnold@bdo.com.au

BRISBANE

TIM KENDALLTel +61 7 3237 5948 timothy.kendall@bdo.com.au

CAIRNS

GREG MITCHELLTel +61 7 4046 0044 greg.mitchell@bdo.com.au

DARWIN

CASMEL TAZIWATel +61 8 8981 7066 casmel.taziwa@bdo.com.au

HOBART

DAVID PALMERTel +61 3 6324 2499 david.palmer@bdo.com.au

MELBOURNE

DAVID GARVEYTel: +61 3 9603 1732 david.garvey@bdo.com.au

NEW SOUTH WALES

GRANT SAXONTel: +61 2 9240 9976 grant.saxon@bdo.com.au

PERTH

PHILLIP MURDOCHTel +61 8 6382 4716 phillip.murdoch@bdo.com.au

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and omissions. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees.

BDO is the brand name for the BDO network and for each of the BDO member firms.

© 2018 BDO Australia Ltd. All rights reserved.

COMMENTS SOUGHT ON EXPOSURE DRAFTSAt BDO, we provide comments locally to the Australian Accounting Standards Board (AASB) and internationally to the International Accounting Standards Board (IASB). We welcome any client comments on exposure drafts that are currently available for comment. If you would like to provide any comments please contact Aletta Boshoff at aletta.boshoff@bdo.com.au.

DOCUMENT PROPOSALSCOMMENTS DUE TO AASB BY

COMMENTS DUE TO IASB BY

ED 283 Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Public Sector Licensors

Subject to certain exceptions, this ED proposes to include licenses issued by not-for-profit public sector licensors within the scope of AASB 15 if they are not subject to AASB 16 Leases.

It also proposes to add Appendix G as Australian application guidance for not-for-profit public sector licensors.

31 March 2018 N/A

ED 284 Recent Standards – Reduced Disclosure Requirements

Proposes a reduction in disclosures required by AASB 16, AASB 1058 and AASB 1059 for entities applying reduced disclosures (Tier 2).

31 March 2018 N/A