REAL WORLD

Financial Reporting Update

March 2016

BUSINESS INSIGHTS

Ag

en

da

New accounting standards – what you

need to know?

Business issues – are you affected?

Panel - How will cybersecurity and data analytics affect you?

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New accounting standards What you need to know?

New accounting standards – what you need to know?

• What you need to know for June

• Leasing

• Revenue

• Financial Instruments

Now is the time to

prepare for change “ ”

What you need to know for June

Accounting standards

• Equity accounting relief not available for ultimate Australian entity

Annual Improvements

• See Value Accounts publication

◦ Vesting conditions for share based payments

◦ Contingent consideration in a business combination

◦ Additional disclosures in segment reporting

◦ Key management personnel for management entities

• Disclosure initiative

IFRIC developments

• Uncertain tax positions (UTPs)

• FX translation of prepaid income and prepaid expenses

ASIC Class Orders

• No major changes expected from review of class orders

• Update references to class orders in financial statements

Registered charities

• Transitional relief no longer applies

• All medium and large charities need to prepare financial statements

Leasing

How is lessee accounting changing?

Presentation Operating

lease accounting

Finance lease

accounting

IFRS 16

(in scope leases)

Asset No asset

recognised

Property Plant &

Equipment

Right-of-use asset

Liability No liability recognised

Lease liability

Lease liability

Income statement

Straight line single lease

expense

Depreciation & interest expense

Amortisation & interest expense

Current accounting

Accounting under new standard

• There is no grandfathering of existing leases

• The only exemptions are for short-term and low-value leases

• The definition of a lease is changing

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

1 2 3 4 5 6 7 8 9 10

An

nu

al

Exp

en

se (

in C

)

Years

ProposedStandard

CurrentStandard

Cash Rents

Changing your income statement

• Larger impact on income statement in earlier years of a lease

• A portfolio effect can help reduce overall income statement volatility

INCLUDED

• Fixed payments

(including make good obligations)

• Rent incentives • Discount rates

EXCLUDED

• Service

payments

IT DEPENDS

• Variable lease

payments (eg. % sales)

• Lease terms, options • Residual value

payments • Penalty payments • Market / CPI rent

reviews

Factors that will influence the lease liability on your balance sheet

• Remeasurement of lease liability each year

Changes to your balance sheet

Ratio Calculation Expected effect on reported information

Explanation

Gearing Liabilities/Equity Increase because reported debt increases

EBITDA Profit before interest, tax, depreciation and amortisation

Increase because there will be no operating lease expense included

FCF Free cash flow Cash flows under the lease are unchanged

Equity Carrying amount of leased assets reduces faster than the reduction of the lease liability in early years of lease

Profit before tax

Lease expense (amortisation + interest expense) is greater than previous operating lease expense in early years of lease

EPS Profit/Number of shares on issue

Lease expense (amortisation + interest expense) is greater than previous operating lease expense in early years of lease

What does this mean for your business?

What does this mean for your business?

Various potential commercial implications

• Tax / dividend planning

• HR and remuneration

• Real estate strategy (eg. lease v buy, lease term)

• Banking covenants

• Systems and processes

Use a phased and measured approach but start now…

Transition to the

new standard

Understand

the impact

Get

organized

Leases Transformation

AASB 117

IFRS 16

Now 2019

Project Management & Use of Automated Tools and Templates

• Take inventory of leases

• Knock on effect on other contracts (eg. debt agreements)

• Engage with stakeholders about the change

• Impact on financial statements

• Implement strategies to mitigate impact

• Communicate the impact to stakeholders

• Controls and systems to monitor your leases

• Drive strategy for lease optimisation

• Sustainable changes to business processes

How to prepare for the change

Technology can help

Lease Assessment App

Revenue – on the path to implementation

Effective date 1 January 2018

Step 1 Identify the contract

Step 2 Separate performance obligations

Step 3 Determine transaction price

Step 4 Allocate transaction price

Step 5 Recognise revenue

Revisiting the revenue model

Separating performance obligations

Examples dealing with specialized manufacturing, software, installation, consumables/spare parts

Deeper dive – What’s new in revenue?

Licenses of intellectual property

New guidance on right to access (over time) vs right to use (point in time)

Principal vs agent

Examples dealing with on-line shopping, subcontractors, travel agents, loyalty vouchers, recruitment services

Transition relief

Proposed amendments:

• Provisional pricing

• Shipping & handling

• Highly probable constraint on variable consideration

• Asset management fees

• Optional goods and services

• Identifying performance obligations

Deeper dive – recent developments

• Contract enforceability & termination clauses

• Significant financing

• Exercising material rights

• Practical application of the portfolio approach

• Warranties

• Contract costs

Areas of focus at IASB – TRG discussions

Use a phased and measured approach but start now…

Transition to the

new standard

Understand

the impact

Get

organized

Revenue Transformation

AASB 118

AASB 15

Now 2018

Project Management & Use of Automated Tools and Templates

• Cross functional project team

• Take a sample revenue contract through the 5 steps

• Engage with stakeholders about the change

• Data analysis and impact on financial statements

• Consider broader commercial implications

• Communicate the impact to stakeholders

• Calculate numbers

• Sustainable changes to business processes, systems and controls

How to prepare your business for the change

Financial Instruments

Hedge accounting rules are relaxed

Credit losses on financial assets recognised as expected, rather than incurred

New measurement option for equity investments; extra disclosure

Benefits of early adopting AASB 9

Business issues Are you affected?

Business issues – Are you affected?

• Media spotlight on tax transparency - Special purpose financial reporting

• Stakeholders are demanding more transparency - Remuneration reporting

• Companies under increasing pressure to pay dividends - Paying dividends

• Increased regulator activity - ASIC surveillance

• Increased public scrutiny

• Tax legislation passed

- Entities >$1 bn income to lodge consolidated general purpose financial statements with ATO

- Overrides existing reporting relief

- Commencing 1 July 2016 – ie 2017 y/e

• Reduced disclosure regime being reviewed

• Transitioning to reduced disclosure GPFS

Special purpose v general purpose

Business Issue: Media spotlight on tax transparency

Business issue: Stakeholders are demanding more transparency

Streamlining remuneration reports - building trust in your business

Investors want clear

explanation of how

reward links to

performance & how

performance links to

company strategy &

shareholder returns

Four simple steps to improve readability

• Identify redundant or duplicated information

• Restructure information and consolidate where possible

• Avoid jargon and boilerplate disclosures

• Use graphs, tables and other design elements for clear messaging

Remuneration reports

Extract from ASX Annual Report 2015, page 28

Extract from Aurizon Annual Report 2014-15, page 30

Ongoing debate

about changing

legislation –

watch this space…

Current state of paying dividends in Australia

Business issue: Companies under increasing pressure to pay dividends

You need to satisfy three tests to pay dividends

The profit test applied at the single

company level

The net assets test

Requirements in your constitution

• A policy or plan to pay franked dividends where no current profits are

available

• Negative retained earnings at the date of the proposed dividend

• Fixed dividend payouts that may exceed profits

• Profits residing in subsidiaries that are carried at or close to fair value

• Pressures on impairment

Accounting, tax and legal need to align

Paying a dividends could result in complications if you have:

Business Issue: Increased regulator activity

ASIC surveillance

[20 October 2015]

Academies Australasia reduces reported revenue

[20 October 2015]

American Patriot Oil & Gas Limited corrects errors and related

party disclosures

[2 October 2015]

Fatfish Internet Group restates result to

31 December 2014

[23 September 2015]

Kazakhstan Potash reduces asset values by $302 million

[15 September 2015]

Tigers Realm Coal Limited writes down assets by $168 million

[1 September 2015]

Wollongong Coal Limited writes

down assets

[18 February 2015]

Primary Healthcare reduces goodwill

Headlines from ASIC

media releases

Current ASIC focus areas

• Impairment

• Tax

• Revenue and expense recognition

• Disclosure of estimates and judgements

• Cybersecurity

ASIC surveillance

ASIC has asked for information – what now?

• Take it seriously and reply within the time frame given

• Address all issues raised

• Support positions with accounting literature

• Consult with advisors if needed

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Cybersecurity/Data analytics panel

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Financial Reporting Update March 2016

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