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:

1. Whether the amendment should be early adopted; and
2. 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”.