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Accountants
- 1: Value In Use Impairment Models
- 2: Going Concern - Double Jeopardy
- 3: Business Combinations - Overpayment on Acquisition
- 4: Removal of special purpose financial statements - consolidation requirements
- 5: 2022 the Horizon for Accountants
- 6: 2021 the horizon for Accountants
1 - Value In Use Impairment Models
We are putting the spotlight on common errors that arise in the application of AASB 136 Impairment of Assets in a four-part series.
In this month’s issue, being Part 1, we look at the common errors in value in use models relating to a failure to:
- Reflect expectations about possible variations in the amount or timing of future cash flows;
- Base cash flow projections on reasonable and supportable assumptions;
- Apply a maximum period of 5 years for cash flow projections or if greater than 5 years, subject to the specific restrictions within AASB 136;
- Exclude the effect of capital improvements or restructuring; and
- Include the cost of servicing the asset.
Failure to comply with the requirements of AASB 136 is one of the principal reasons for litigation against company directors, management, and their auditors of failed companies.
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2 - Going Concern - Double Jeopardy
In this month’s issue of Spotlight on Accounting Errors we consider errors that can arise when dealing with an entity’s going concern disclosure obligations.
Following a corporate collapse, it is common for the failed company directors and management to be in the spotlight regarding their failure to adequately disclose the uncertainties and risk about the ability of the entity to continue as a going concern and the key judgements applied in making their assessment that the entity could continue as a going concern. Typically, when entities consider their going concern disclosure obligations, they address the issue of whether there are material uncertainties that require disclosure in accordance with AASB 101 paragraph 25, failing to provide information regarding management’s evaluation of the significance of those conditions or events and plans that led them to conclude that those uncertainties were not material as required by AASB 101 paragraph 122.
Failure to disclose the key judgements applied in determining that there were no material uncertainties regarding the entity’s ability to continue as a going concern, can be a reason for litigation against company directors, management, and their auditors of failed companies.
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3 - Business Combinations - Overpayment on Acquisition
Basford Consulting is excited to announce the launch of our new series, “Spotlight on Accounting Errors,” which aims to draw attention to common errors made by directors, management, and accountants that often go unnoticed by auditors and can result in significant inaccuracies in financial statements.
Our inaugaral spotlight deals with the failure to impair goodwill arising from a business acquisition where the acquiror overpaid on acquisition. Typically, accountants assume that the purchase price represents the fair value, supporting the recoverable amount of acquired goodwill, and as AASB 3 Business Combinations allows an acquiror to adopt provisional accounting for a period up to 12 months after the acquisition, that no impairment loss is required to be recognised in the year of acquisition. We consider the requirements of AASB 136 Impairment of Assets and its application to goodwill arising from business combinations in the year of acquisition.
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4 - Removal of special purpose financial statements - consolidation requirements
In this publication we consider the impact of the removal of special purpose financial statements for entities preparing consolidated financial statements for the first time.
When preparing consolidated financial statements, entities need to determine:
- Whether to apply AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors or AASB 1 First-time Adoption of Australian Accounting Standards to its transition; and
- How subsidiaries were acquired.
5 - 2022 the Horizon for Accountants
This article is to help accountants in Australia, both preparers and auditors, identify the changes to Australian accounting standards over the next 3 years.
The significant changes are for those entities:
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currently preparing special purpose financial reports, 2022 means the end of special purpose reporting, heralding the application of complex measurement and disclosure requirements; and
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entities previously applying the reduced disclosure regime, 2022 sees the introduction of new disclosures with the introduction of AASB 1060.
The amendments to accounting standards applicable to Australian for-profit entities with 30 June financial reporting year-ends are:
Accounting changes applicable for 30 June 2022 Reporting
The following new pronouncements have application to annual financial reporters with a year-ending on or after 30 June 2022 except for the Interbank Offered Rates (IBOR) Phase 2 reforms which apply to 31 December 2021 year-ends:
Removal of special purpose financial statements AASB 2020-2
For-profit entities that prepare financial statements in accordance with the Corporations Act 2001, other legislation, their constitution, or other agreements will no longer be allowed to prepare special purpose financial statements.
Practical implications
Affected entities will have to apply the full recognition and measurement requirements of Australian accounting standards.
Interest rate benchmark reform Phase 2 – Amendments to AASB 9, 139 and 7
The Phase 2 amendments, which respond to the impact of IBOR reform, relate to address issues that might affect financial reporting when an existing interest rate benchmark is replaced. Phase 1 deals with issues arising before the reform takes effect. The Phase 2 amendments deal with replacement issues, relating to the modification of financial assets, financial liabilities, lease liabilities and specific hedge accounting requirements.
Practical implications
IBOR is not commonly used in Australia, so the impact is not expected to be significant for Australian entities. For those affected, transparent disclosure of the impact of IBOR reform on risk management is required.
Accounting changes applicable for 30 June 2023 Reporting
The following new pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2022:
AASB 116 Amendments - proceeds before intended use
Sale proceeds will no longer be allowed to be deducted from the cost of property, plant, and equipment before its intended use. Instead, an entity recognizes the sale proceeds and the cost of producing those sales in its profit or loss.
Practical implications
Determining the costs of production may be difficult. Companies in the natural resources industry are likely to be impacted by this amendment.
AASB 137 Amendments - costs of fulfilling an onerous contract
In assessing whether a contract is onerous an entity is required to include both the incremental costs of fulfilling that contract and an allocation of other costs that relate directly to fulfilling contracts, such as depreciation of equipment used to fulfil the contract and contract management and supervision costs.
Practical implications
Entities that applied the incremental cost approach will see provisions increase to reflect the inclusion of costs related directly to contract activities.
Accounting changes applicable for 30 June 2024 Reporting
The following new pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2023:
AASB 17 Insurance Contracts
AASB 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation, and disclosure. Insurance contracts combine features of both a financial instrument and a service contract. The objective of AASB 17 is to provide an accounting model for insurance contracts that provides useful information about these features.
Practical implications
AASB 17 is a complete overhaul of accounting for insurance contracts and for entities that issue insurance and reinsurance contracts, it will require significant changes to accounting systems and processes.
AASB 101 Amendments to classification of current and non-current liabilities
Currently entities classify a liability as current when they do not have an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Under the amendment:
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the AASB has removed the requirement for a right to be unconditional and now requires that a right to defer settlement must have substance and exist at the end of the reporting period;
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rights are in existence if covenants are complied with at the end of the reporting period; and
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introduces a definition of ‘settlement’ to make it clear that settlement refers to transfers of cash, equity instruments and other assets or services.
The existing requirement to ignore management’s intentions or expectations for settling a liability when determining the classification remains unchanged.
Practical implications
The revised definition needs to be considered in relation to compliance with loan covenants. In addition, the amendments may impact the classification of convertible instruments that are settled with the transfer of equity instruments.
Accounting changes applicable for 30 June 2025 Reporting
The following new pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2024:
Disclosure of Accounting Policies and Definition of Accounting Estimates
Unfortunately, too many financial reports contain boiler plate disclosures of accounting policies and accounting estimates that simply reproduce the content of the applicable accounting standard and therefore provide little benefit for users of the financial statements.
Similarly, many financial reports contain accounting policies that are either not relevant or relate to non-material transactions.
Under the amendment the following changes are made to the disclosure of accounting policies:
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The term ‘significant accounting policies’ has been replaced with ‘material accounting policy information’.
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An entity is required to disclose material accounting policy information.
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Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements.
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Accounting policy information that relates to immaterial transactions, other events or conditions, is immaterial and need not be disclosed.
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If an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information.
Under the amendment the following changes are made to accounting estimates:
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Accounting estimates are monetary amounts in financial statements that are subject to measurement; and
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The effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors.
Practical implications
The amendments should improve the usefulness of accounting policy disclosures to users of financial reports. The transparency required by providing material accounting policy disclosure may lead to questioning from regulators and increase the risk of litigation.
Amending standards impacting reporting for 30 June 2022 Reporting
| Standard | Title | Date issued | Effective date for reporting periods |
|---|---|---|---|
| AASB 2020-2 | Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities | Mar 2020 | beginning on or after 1 Jul 2021 |
| AASB 1060 | General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities | Mar 2020 | beginning on or after 1 Jul 2021 |
Amending standards impacting reporting post 30 June 2022 Reporting
| Standard | Title | Date issued | Effective date for reporting periods |
|---|---|---|---|
| AASB 2020-1 | Classification of Liabilities as Current or Non-current | Mar 2020 | beginning on or after 1 January 2022. |
| AASB 2020-3 | Annual Improvements 2018–2020 and Other Amendments | Jun 2020 | beginning on or after 1 Jan 2022. |
| AASB 2020-6 | Classification of Liabilities as Current or Non-current – Deferral of Effective Date | Aug 2020 | beginning on or after 1 January 2022. |
| AASB 2021-2 | Disclosure of Accounting Policies and Definition of Accounting Estimates | Mar 2021 | beginning on or after 1 January 2023. |
| AASB 2021-3 | Covid-19-Related Rent Concessions beyond 30 June 2021 | Apr 2021 | beginning on or after 1 April 2021. |
| AASB 2021-5 | Deferred Tax related to Assets and Liabilities arising from a Single Transaction | Jun 2021 | beginning on or after 1 Jan 2023. |
| AASB 2021-6 | Disclosure of Accounting Policies: Tier 2 and Other Australian Accounting Standards | Dec 2021 | beginning on or after 1 January 2023. |
| AASB 2021-7 | Amendments to AASB 10 and AASB 128 | Dec 2021 | beginning on or after 1 January 2025. |
AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities
AASB 1060 sets out a new, separate disclosure standard to be applied by all entities that are reporting under Tier 2 of the differential reporting framework in AASB 1053. AASB 1060 has been developed based on a new methodology and principles to be used in determining the Tier 2 disclosures that are necessary for meeting user needs, to replace the existing reduced disclosure requirements (RDR) framework.
AASB 2020-1 Classification of Liabilities as Current or Non-current
AASB 2020-1 amends AASB 101, refining the conditions that would permit an entity to classify a liability as non-current.
The key amended paragraphs in AASB 101 are:
| Paragraph | Details |
|---|---|
| 69 | An entity shall classify a liability as current when: |
| 69 d | it does not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. |
| 72A | An entity’s right to defer settlement of a liability for at least twelve months after the reporting period must have substance and, as illustrated in paragraphs 73–75, must exist at the end of the reporting period. If the right to defer settlement is subject to the entity complying with specified conditions, the right exists at the end of the reporting period only if the entity complies with those conditions at the end of the reporting period. The entity must comply with the conditions at the end of the reporting period even if the lender does not test compliance until a later date. |
| 73 | If an entity has the right, at the end of the reporting period, to rollover an obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non‑current, even if it would otherwise be due within a shorter period. If the entity has no such right, the entity does not consider the potential to refinance the obligation and classifies the obligation as current. |
| 74 | When an entity breaches a condition of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current, even if the lender agreed, after the reporting period and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. An entity classifies the liability as current because, at the end of the reporting period, it does not have the right to defer its settlement for at least twelve months after that date. |
| 75A | Classification of a liability is unaffected by the likelihood that the entity will exercise its right to defer settlement of the liability for at least twelve months after the reporting period. If a liability meets the criteria in paragraph 69 for classification as non-current, it is classified as non-current even if management intends or expects the entity to settle the liability within twelve months after the reporting period, or even if the entity settles the liability between the end of the reporting period and the date the financial statements are authorised for issue. However, in either of those circumstances, the entity may need to disclose information about the timing of settlement to enable users of its financial statements to understand the impact of the liability on the entity’s financial position (see paragraphs 17(c) and 76(d)). |
| 76 | If the following events occur between the end of the reporting period and the date the financial statements are authorised for issue, those events are disclosed as non-adjusting events in accordance with AASB 110 Events after the Reporting Period: |
| 76a | refinancing on a long-term basis of a liability classified as current (see paragraph 72); |
| 76b | rectification of a breach of a long-term loan arrangement classified as current (see paragraph 74); |
| 76c | the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement classified as current (see paragraph 75); and |
| 76d | settlement of a liability classified as non-current (see paragraph 75A). |
AASB 2020-2 – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities
The removal of special purpose financial reports is the key issue for 2022. Entities that previously prepared special purpose financial reports to fulfill the requirements of the Corporations Act or other legislation (because they deemed themselves not to be a reporting entity), will for 30 June 2022 year ends have to apply the full measurement and consolidation requirements of the relevant AASB standard.
We envisage this will cause significant difficulties for a number of large unlisted entities, due to the application of:
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AASB 10 (identifying subsidiaries);
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AASB 15 (revenue recognition);
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AASB 9 (measurement of financial assets and liabilities);
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AASB 136 (impairment of goodwill and other non-current assts);
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AASB 2 (identifying share-based payments); and
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AASB 112 (recognising and measuring deferred tax assets and liabilities).
AASB 2020-2 amends:
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the Conceptual Framework for Financial Reporting;
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the Framework for the Preparation and Presentation of Financial Statements;
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Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity;
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AASB 1 First-time Adoption of Australian Accounting Standards;
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AASB 10 Consolidated Financial Statements;
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AASB 1048 Interpretation of Standards;
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AASB 1053 Application of Tiers of Australian Accounting Standards; and
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AASB 1057 Application of Australian Accounting Standards.
AASB 2020-2 amendments to the Conceptual Framework
AASB 2020-2 amends the following key paragraphs in the Conceptual Framework:
| Paragraph | Details |
|---|---|
| Aus1.1 | This Conceptual Framework applies to: |
| (a) | for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; |
| (b) | other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021; and |
| (c) | other for-profit entities (private sector or public sector) that elect to prepare general purpose financial statements. |
AASB 2020-2 amendments to AASB 1
AASB 2020-2 permits entities that elect to apply AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to periods beginning before 1 July 2021 (i.e., early application) to also elect to apply the short-term exemptions from restating comparative information set out in AASB 1053 Application of Tiers of Australian Accounting Standards Appendix E, where applicable. For entities that apply that relief, references to the ‘date of transition to Australian Accounting Standards’ in this Standard shall mean the beginning of the first Australian-Accounting-Standards reporting period.
Short-term exemptions for entities applying Tier 2 – Simplified Disclosures for periods beginning before 1 July 2022 Appendix E of AASB 1053
Appendix E of AASB 1053 sets out optional short-term exemptions for for-profit private sector entities applying AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-For-Profit Tier 2 Entities to periods beginning before 1 July 2022, as follows:
(a) relief from distinguishing the correction of errors and changes in accounting policy, for periods beginning before 1 July 2022;
(b) relief from providing comparative information not previously disclosed in the notes, for periods beginning before 1 July 2021; and
(c) relief from restating comparative information, for periods beginning before 1 July 2021.
If an entity applies one or more of the exemptions set out in Appendix E, it shall disclose that fact.
AASB 2020-3 – Annual Improvements 2018–2020 and Other Amendments
AASB 2020-3 impacts:
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AASB 1 (first time adoption relief for subsidiaries);
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AASB 3 (business combinations reference to Conceptual Framework);
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AASB 9 (accounting for fees on a modified financial liability);
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AASB 116 (sales revenue earned when testing property, plant and equipment);
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AASB 137 (assessment of whether a contract is loss making); and
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AASB 141 (excluding tax in determination of fair value).
Main requirements of – Annual Improvements 2018–2020
AASB 2020-3 amends:
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AASB 1 to simplify the application of AASB 1 by a subsidiary that becomes a first-time adopter after its parent in relation to the measurement of cumulative translation differences;
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AASB 3 to update a reference to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations;
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AASB 9 to clarify the fees an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability;
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AASB 116 to require an entity to recognise the sales proceeds from selling items produced while preparing property, plant and equipment for its intended use and the related cost in profit or loss, instead of deducting the amounts received from the cost of the asset;
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AASB 137 to specify the costs that an entity includes when assessing whether a contract will be loss-making; and
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AASB 141 to remove the requirement to exclude cash flows from taxation when measuring fair value, thereby aligning the fair value measurement requirements in AASB 141 with those in other Australian Accounting Standards.
AASB 2020-3 amendments to AASB 9
The key amendment to AASB 9 is:
| Paragraph | Details |
|---|---|
| B3.3.6 | For the purpose of paragraph 3.3.2, the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. In determining those fees paid net of fees received, a borrower includes only fees paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf |
AASB 2020-3 amendments to AASB 116
The key amendments to AASB 116 are:
| Paragraph | Details |
|---|---|
| 17 | Examples of directly attributable costs are: |
| 17e | Costs of testing whether the asset is functioning properly (i.e., assessing whether the technical and physical performance of the asset is such that it is capable of being used in the production or supply of goods or services, for rental to others, or for administrative purposes). |
| 20A | Items may be produced while bringing an item of property, plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management (such as samples produced when testing whether the asset is functioning properly). An entity recognises the proceeds from selling any such items, and the cost of those items, in profit or loss in accordance with applicable Standards. The entity measures the cost of those items applying the measurement requirements of AASB 102 Inventories. |
| Disclosure | |
| 74A | If not presented separately in the statement of comprehensive income, the financial statements shall also disclose: |
| 74a | The amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in profit or loss; and |
| 74b | The amounts of proceeds and cost included in profit or loss in accordance with paragraph 20A that relate to items produced that are not an output of the entity’s ordinary activities, and which line item(s) in the statement of comprehensive income include(s) such proceeds and cost. |
AASB 2020-3 amendments to AASB 137
The key amendments to AASB 137 are:
| Paragraph | Details |
|---|---|
| 68A | The cost of fulfilling a contract comprises the costs that relate directly to the contract. Costs that relate directly to a contract consist of both: |
| (a) | The incremental costs of fulfilling that contract—for example, direct labour and materials; and |
| (b) | An allocation of other costs that relate directly to fulfilling contracts—for example, an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract among others. |
AASB 2021-2 amendments Disclosure of Accounting Policies and Definition of Accounting Estimates
AASB 2021-2 amends:
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AASB 7: to clarify that information about measurement bases for financial instruments is expected to be material to an entity’s financial statements;
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AASB 101: to require entities to disclose their material accounting policy information rather than their significant accounting policies;
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AASB 108: to clarify how entities should distinguish changes in accounting policies and changes in accounting estimates;
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AASB 134: to identify material accounting policy information as a component of a complete set of financial statements; and
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AASB Practice Statement 2: to provide guidance on how to apply the concept of materiality to accounting policy disclosures.
AASB 2021-2 amendments to AASB 101
The amendments switch from the term ‘significant accounting policies’ to ‘material accounting policy information’.
| Paragraph | Details |
|---|---|
| 10 | A complete set of financial statements comprises: |
| 10(e) | notes, comprising material accounting policy information and other explanatory information. |
| Disclosure of accounting policy information | |
| 117 | An entity shall disclose material its significant accounting policy information (see paragraph 7). Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. |
| 117A | Accounting policy information that relates to immaterial transactions, other events or conditions is immaterial and need not be disclosed. Accounting policy information may nevertheless be material because of the nature of the related transactions, other events, or conditions, even if the amounts are immaterial. However, not all accounting policy information relating to material transactions, other events or conditions is itself material. |
| 117B | Accounting policy information is expected to be material if users of an entity’s financial statements would need it to understand other material information in the financial statements. For example, an entity is likely to consider accounting policy information material to its financial statements if that information relates to material transactions, other events or conditions and: |
| 117B(a) | the entity changed its accounting policy during the reporting period and this change resulted in a material change to the information in the financial statements; |
| 117B(b) | the entity chose the accounting policy from one or more options permitted by Australian Accounting Standards—such a situation could arise if the entity chose to measure investment property at historical cost rather than fair value; |
| 117B(c) | the accounting policy was developed in accordance with AASB 108 in the absence of an Australian Accounting Standard that specifically applies; |
| 117B(d) | the accounting policy relates to an area for which an entity is required to make significant judgements or assumptions in applying an accounting policy, and the entity discloses those judgements or assumptions in accordance with paragraphs 122 and 125; or |
| 117B(e) | the accounting required for them is complex and users of the entity’s financial statements would otherwise not understand those material transactions, other events, or conditions—such a situation could arise if an entity applies more than one Australian Accounting Standard to a class of material transactions. |
| 117C | Accounting policy information that focuses on how an entity has applied the requirements of the Australian Accounting Standards to its own circumstances provides entity-specific information that is more useful to users of financial statements than standardised information, or information that only duplicates or summarises the requirements of the Standards. |
| 117D | If an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information. |
| 117E | An entity’s conclusion that accounting policy information is immaterial does not affect the related disclosure requirements set out in other Australian Accounting Standards. |
| 122 | An entity shall disclose, along with material accounting policy information or other notes, the judgements, apart from those involving estimations (see paragraph 125), that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. |
AASB 2021-2 amendments to AASB 108
AASB 2021-2 amends the definition of an accounting estimate as:
Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty.
| Paragraph | Details |
|---|---|
| 32 | An accounting policy may require items in financial statements to be measured in a way that involves measurement uncertainty – that is, the accounting policy may require such items to be measured at monetary amounts that cannot be observed directly and must instead be estimated. In such a case, an entity develops an accounting estimate to achieve the objective set out by the accounting policy. Developing accounting estimates involves the use of judgements or assumptions based on the latest available, reliable information. Examples of accounting estimates include: |
| 32(a) | A loss allowance for expected credit losses, applying AASB 9 Financial Instruments. |
| 32(b) | The net realisable value of an item of inventory, applying AASB 102 Inventories. |
| 32(c) | The fair value of an asset or liability, applying AASB 13 Fair Value Measurement. |
| 32(d) | The depreciation expense for an item of property, plant, and equipment, applying AASB 116 Property, Plant and Equipment. |
| 32(e) | A provision for warranty obligations, applying AASB 137 Provisions, Contingent Liabilities and Contingent Assets. |
| 32A | An entity uses measurement techniques and inputs to develop an accounting estimate. Measurement techniques include estimation techniques (for example, techniques used to measure a loss allowance for expected credit losses applying AASB 9) and valuation techniques (for example, techniques used to measure the fair value of an asset or liability applying AASB 13). |
| 32B | The term ‘estimate’ in Australian Accounting Standards sometimes refers to an estimate that is not an accounting estimate as defined in this Standard. For example, it sometimes refers to an input used in developing accounting estimates. |
| 34 | An entity may need to change an accounting estimate may need revision if changes occur in the circumstances on which the accounting estimate was based or as a result of new information, new developments or more experience. By its nature, a change in an accounting estimate does not relate to prior periods and is not the correction of an error. |
| 34A | The effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors. |
| 38 | Prospective recognition of the effect of a change in an accounting estimate means that the change is applied to transactions, other events, and conditions from the date of that change in estimate. A change in an accounting estimate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. For example, a change in a loss allowance for expected credit losses affects only the current period’s profit or loss and therefore is recognised in the current period. However, a change in the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset affects depreciation expense for the current period and for each future period during the asset’s remaining useful life. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods is recognised as income or expense in those future periods. |
| 48 | Corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need changing as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error. |
AASB 2021-2 amendments to AASB 7
| Paragraph | Details |
|---|---|
| 21 | In accordance with paragraph 117 of AASB 101 Presentation of Financial Statements, an entity discloses material accounting policy information. Information about the measurement basis (or bases) for financial instruments used in preparing the financial statements is expected to be material accounting policy information. |
AASB 2021-2 amendments to AASB Practice Statement 2
Practice Statement 2 has been amended to provide examples and guidance on determining whether accounting policy information is material.
AASB 2021-3 – Covid-19-Related Rent Concessions beyond 30 June 2021
AASB 2021-3 amends AASB 16 Leases to extend by one year the application period of the practical expedient added to AASB 16 by AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19-Related Rent Concessions.
The practical expedient permits lessees not to assess whether rent concessions that occur as a direct consequence of the covid-19 pandemic and meet specified conditions are lease modifications and instead, to account for those rent concessions as if they were not lease modifications. AASB 2021-3 extends the practical expedient to rent concessions that reduce only lease payments originally due on or before 30 June 2022, provided the other conditions for applying the practical expedient are met.
AASB 2021-5 – Deferred Tax related to Assets and Liabilities arising from a Single Transaction
AASB 2021-5 amends AASB 112 to clarify the accounting for deferred tax on transactions that, at the time of the transaction, give rise to equal taxable and deductible temporary differences. In specified circumstances, entities are exempt from recognising deferred tax when they recognise assets or liabilities for the first time. The amendments clarify that the exemption does not apply to transactions for which entities recognise both an asset and a liability and that give rise to equal taxable and deductible temporary differences. This may be the case for transactions such as leases and decommissioning, restoration, and similar obligations. Entities are required to recognise deferred tax on such transactions.
AASB 2021-7 -Amendments to AASB 10 and AASB 128 (deferral of effective date)
AASB 2021-7 defers the mandatory application date of amendments to AASB 10 and AASB 128 that were originally made in AASB 2014-10 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture so that the amendments are required to be applied for annual reporting periods beginning on or after 1 January 2025 instead of 1 January 2022.
6 - 2021 the horizon for Accountants
After nearly 10 years of constant change to accounting standards, including the introduction of the “triple whammy” of AASB 9, AASB 15 and AASB 16, the accounting horizon is very calm for those entities already preparing general purpose financial reports, unless they are In the insurance sector with AASB 17 being introduced in 2024. The situation is definitely not as calm for those entities having previously prepared special purpose financial statements, with special purpose being removed in 2022.
This article is to help accountants in Australia, both preparers and auditors, identify what changes they need to be aware of over the next 4 years.
The amendments to Accounting Standards applicable to Australian for-profit entities with 30 June financial reporting year-ends are:
December year ends – application of these standards are 6 months earlier, for example 2021 amendments apply on 31 December 2020, except for AASB 2020-2 Removal of Special Purpose Financial Statements which will apply to 31 December 2022 for December reporters.
Good news for Accountants
Accountants can breathe a sigh of relief that the period of significant change in key accounting standards is over. From 2017 to 2020 the adoption of three significant new accounting standards had widespread application and transformed corporate financial reporting. These being:
- AASB 9 Financial Instruments;
- AASB 15 Revenue from Contracts with Customers; and
- AASB 16 Leases.
There are some changes that Accountants need to be aware of in 2021 and future years, but these are not of the size or scale to cause concern for most. Looking forward to 2024, there are no significant new standards on the horizon other than AASB 17 Insurance Contracts. AASB 17, whilst significant for insurance companies, does not have the wide reach of AASB 9, 15 and 16 and for most entities will have no impact on their financial reporting.
Accounting changes applicable for 2021
The following new pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2020:
Revised definition of a business – Amendments to AASB 3 (AASB 2018-6)
The IASB and AASB amended the definition of a business in AASB 3 to resolve difficulties that arise when an entity determines whether it has acquired a business or a group of assets.
The amendments clarify:
- In order to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.
- Remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs;
- Add guidance and illustrative examples to help entities assess whether a substantive process has been acquired;
- Narrows the definition of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs; and
- Adds an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.
Practical implications
The introduction of the optional concentration test is of particular interest for acquisitions of entities where the purchase price is mainly attributable to underlying acquired assets rather than goodwill, which often occur in acquisitions in the natural resources and real estate industry sectors.
Covid-19 related rent concessions – Amendments to AASB 16 (AASB 2020-4)
Many entities have been granted rent concessions such as deferral of lease payments and payment holidays as a result of Covid-19 business disruptions. The International Accounting Standards Board published an optional practical expedient for lessees to account for such concessions as a lease modification, accounting for the rent concession as a variable lease payment in the financial reporting period. The lessee would also make a corresponding adjustment to the lease liability, in effect derecognising the part of the lease liability that has been forgiven or waived.
AASB 16 paragraph 46B provides strict criteria that must be met before a lessee may apply this practical expedient. Lessees’ rental concessions must occur as a direct consequence of the Covid-19 pandemic and where the following conditions are met:
- The change in lease payments result in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
- Any reduction in lease payments affects only payments due on or before 30 June 2021; and
- There is no substantive change to other terms and conditions of the lease.
Practical implications
This concession provides relief and is likely to be taken up by entities with many property leases, as otherwise the rent concession would likely be considered a lease modification, triggering recalculation of the lease liability.
Definition of material – Amendments to AASB 101 and AASB 108
The definition of material has been deleted from AASB 108, with the revised definition provided in AASB 101. The amendments ensure that the definition of material is consistent across all Accounting Standards.
The new definition states that
“information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, with provide financial information about a specific reporting entity.”
Changes in the definition:
- Introduces “could reasonably be expected to influence” – rather than the old wording could influence
- Obscuring information is a concept that has been introduced with guidance provided on the ways that information can be obscured in financial statements
- Primary users are a change from the old definition which simply referred to users.
Obscuring
Material information can be obscured in the following ways:
- If the language regarding a material item is vague or unclear;
- If information regarding a material item is scattered in different places in the financial statements;
- If dissimilar items are inappropriately aggregated;
- If similar items are inappropriately disaggregated; and
- If material information is hidden by immaterial information to the extent that it becomes unclear what information is material.
Practical implications
The introduction of the requirement to not ‘obscure information’ places emphasis on how information is reported in financial statements.
Interest rate benchmark reform Phase 1 – Amendments to AASB 9, 139 and 7
The Phase 1 amendments, which respond to the impact of Interbank Offered Rates (IBOR) reform, provide temporary relief enabling hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate.
Without these amendments, some hedge accounting requirements in AASB 9 and AASB 139 may be affected by uncertainties arising from the impact of the reform on the timing and amount of designated future cash flows. Due to such uncertainties, entities could be required to discontinue hedge accounting. Entities may also not be able to designate new hedging relationships.
The reliefs have the effect that IBOR reform should not generally cause hedge accounting to terminate. Any hedge ineffectiveness should continue to be recognized in profit or loss as required by AASB 9 and AASB 139.
Practical implications
IBOR is not commonly used in Australia, so the impact is not expected to be significant for Australian entities. For those affected, transparent disclosure of the impact of IBOR reform on risk management is required.
The conceptual framework for financial reporting
The revised Conceptual Framework for Financial Reporting is not a standard. Its purpose is to assist the IASB and the IFRS Interpretations Committee in developing standards and interpretations. The Conceptual Framework is also applied by preparers of financial reports where there is no applicable accounting standard in place.
The IASB issued the Conceptual Framework in March 2018, it includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities.
Practical implications
Entities should refer to the Conceptual Framework when accounting in situations where no standard applies to the transaction or where there is a choice of accounting policy that may be applied.
Beyond 2021
Accountants need to consider future amendments for two reasons:
- Whether the amendment should be early adopted; and
- Disclosure of the potential impact of issued but not yet effective new Accounting Standards and amendments in the Annual Financial Statements as required by AASB 108.
Accounting changes applicable for 2022
The following new pronouncements have application to annual financial reporters with a year-ending on or after 30 June 2022 except for the IBOR Phase 2 reforms which apply to 31 December 2021 year-ends:
Removal of special purpose financial statements AASB 2020-2
For profit entities that prepare financial statements in accordance with the Corporations Act 2001, other legislation, their constitution, or other agreements will no longer be allowed to prepare Special Purpose Financial Statements.
Practical implications
Affected entities will have to apply the full recognition and measurement requirements of Australian Accounting Standards.
Interest rate benchmark reform Phase 2 – Amendments to AASB 9, 139 and 7
The Phase 2 amendments, which respond to the impact of Interbank Offered Rates (IBOR) reform, relate to address issues that might affect financial reporting when an existing interest rate benchmark is actually replaced. Phase 1 deals with issues arising before the reform takes effect. The Phase 2 amendments deal with replacement issues, relating to the modification of financial assets, financial liabilities, lease liabilities and specific hedge accounting requirements.
Practical implications
IBOR is not commonly used in Australia, so the impact is not expected to be significant for Australian entities. For those affected, transparent disclosure of the impact of IBOR reform on risk management is required.
Accounting changes applicable for 2023
The following new pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2022:
AASB 116 Amendments - proceeds before intended use
Sale proceeds will no longer be allowed to be deducted from the cost of property, plant and equipment before its intended use. Instead, an entity recognizes the sale proceeds and the cost of producing those sales in its profit or loss.
Practical implications
Determining the costs of production may be difficult. Companies in the natural resources industry are likely to be impacted by this amendment.
AASB 137 Amendments - costs of fulfilling an onerous contract
In assessing whether a contract is onerous an entity is required to include both the incremental costs of fulfilling that contract and an allocation of other costs that relate directly to fulfilling contracts, such as depreciation of equipment used to fulfil the contract and contract management and supervision costs.
Practical implications
Entities that applied the incremental cost approach will see provisions increase to reflect the inclusion of costs related directly to contract activities.
Accounting changes applicable for 2024
The following new pronouncements have application to annual financial reporters with a year-ending on or after 31 December 2023:
AASB 17 Insurance Contracts
AASB 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Insurance contracts combine features of both a financial instrument and a service contract. The objective of AASB 17 is to provide an accounting model for insurance contracts that provides useful information about these features.
Practical implications
AASB 17 is a complete overhaul of accounting for insurance contracts and for entities that issue insurance and reinsurance contracts, it will require significant changes to accounting systems and processes.
AASB 101 – Amendments to classification of current and non-current liabilities
Currently entities classify a liability as current when they do not have an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Under the amendment:
- the AASB has removed the requirement for a right to be unconditional and now requires that a right to defer settlement must have substance and exist at the end off the reporting period;
- rights are in existence if covenants are complied with at the end of the reporting period; and
- introduces a definition of ‘settlement’ to make it clear that settlement refers to transfers of cash, equity instruments and other assets or services.
The existing requirement to ignore management’s intentions or expectations for settling a liability when determining the classification remains unchanged.
Practical implications
The revised definition needs to be considered in relation to compliance with loan covenants. In addition, the amendments may impact the classification of convertible instruments that are settled with the transfer of equity instruments.
Bad news for Auditors in professional practice
For Auditors, although accounting changes that they have to understand are minimal in 2021 the introduction of ASA 540 revised, applicable for 31 December 2020 audits, heralds a new era of complexity and a drive for quality which we discuss in our article “2021 the horizon for Auditors”.