Clarity in financial reporting monthly newsletter

AASB 1060 – new resources for Simplified Disclosures

Why does it matter?  With many for-profit entities no longer being able to prepare special purpose financial statements or Reduced Disclosure Requirements (RDR) financial statements from 1 July 2021, affected entities need to evaluate the impacts and prepare to transition to the new Simplified Disclosure regime.  We have a range of resources to assist.

AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060) is effective for annual financial reporting periods beginning on or after 1 July 2021 and applies to ‘Tier 2’ entities (those without public accountability, including most for-profit private sector entities currently preparing special purpose financial statements). Existing for-profit entities preparing Tier 1 financial statements (i.e. full compliance with disclosures in all Australian Accounting Standards), and not-for-profit entities preparing special purpose financial statements, will not be impacted.

The key impacts for for-profit entities moving from special purpose financial statements to Simplified Disclosures include:

• Substantially more disclosures than might be included in special purpose financial statements, particularly in respect of movement schedules in relation to property, plant and equipment, intangibles, biological assets, provisions and deferred tax balances, information about related parties, transactions and balances, reconciliations of income taxes, information about revenue sources, details of leases, and disclosures about financial instruments
• Full compliance with the recognition and measurement requirements of Australian Accounting Standards, including  equity accounting (to the extent relevant to the entity)
• The requirement to prepare consolidated financial statements for all ultimate Australian parent entities (unless the entity is an investment entity)
• The need for AASB 1060 compliant and audited comparative information in their first financial statements presented under AASB 1060. For entities with a June year end, this means information for 30 June 2021 will be required as comparative information in June 2022 financial statements, including consolidation and equity accounting if required
• Complex transitional provisions, which for example in some cases provides the opportunity to adopt a deemed cost for certain assets or use a ‘short-cut method’ to establish the initial consolidated position
• Depending on the nature of the entity’s previous financial reporting, additional relief may be available to early adopters.

Entities moving from RDR to Simplified Disclosures do not have specific transition requirements, but will mostly have reduced disclosures.

It is important that affected entities understand the impacts and plan now.

We’ve released new and updated resources for entities preparing to transition to general purpose financial statements under AASB 1060:

Model financial statements –  Our Tier 2 model financial statements illustrate the disclosures required for a for-profit private sector entity under AASB 1060, including the transitional disclosures required when moving from unconsolidated special purpose financial statements to consolidated financial statements.

New disclosures for entities that previously prepared special purpose financial statements and unconsolidated financial statements are clearly indicated to enable entities to easily identify major areas of change

Understanding transition –  Our Clarity publication, Simplified Disclosures – Transition options and opportunities, explains how entities adopt AASB 1060 and explores options available – including options where the entity is eligible to apply AASB 1 First-time Application of Australian Accounting Standards 

CBC reporting entities – Our Clarity publication, GPFS for CBC reporting entities has also been updated to expand the information related to Simplified Disclosures, and to provide cross-references between resources available.

Action steps?  If you have supplier financing arrangements, ensure you are aware of, and comply with, the latest IFRIC® and iGAAP guidance.

'Supplier financing' or 'reverse factoring' arrangements are a class of transaction in which a 'factor' (typically a financial institution) pays an entity’s suppliers on its behalf. The entity (purchaser) then reimburses the factor and makes payment for any interest and charges at a later date.

In light of the recent IFRIC agenda decision on these arrangements, additional guidance has been provided in iGAAP (links below are available to iGAAP subscribers):

• Assessing the presentation of 'reverse factoring' or 'supplier financing' arrangements  – Clarifies when supplier financing arrangements should be considered trade payables and notes that liabilities that are part of a reverse factoring arrangement should be presented (iGAAP Chapter A4 Section 4.4.2):
  • As part of 'trade and other payables' only when those liabilities have a similar nature and function to trade payables (e.g. when those liabilities are part of the working capital used in the entity’s normal operating cycle), or
  • Separately when the size, nature or function of those liabilities makes separate presentation relevant to an understanding of the entity’s financial position. In assessing whether it is required to present such liabilities separately (including whether to disaggregate trade and other payables), an entity should consider the amounts, nature and timing of those liabilities
• Cash flows resulting from supplier financing arrangements  – Explains that the assessment of the nature of the liabilities that are part of the arrangement may help in determining whether the related cash flows arise from operating or financing activities.  If the factoring arrangement results in the liability being classified as a borrowing, there may be only one cash flow between the entity and the bank to repay the debt (i.e. financing cash flow) as opposed to paying the trade payable (i.e. operating cash flow). In this case, the factoring transaction should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about the financing activity (iGAAP Chapter A21 Section 5.4.4.2-1)
• Disclosure of supplier financing arrangements – Explains that supplier financing arrangements often give rise to liquidity risk and as such, disclosure is expected when they are entered in to by an entity.  These disclosures would include information about exposures to risks arising from supplier financing arrangements, how those risks are managed, quantitative disclosures (including concentrations of risk), maturity analysis and other relevant disclosures required by AASB 7 Financial Instruments: Disclosures. (iGAAP Chapter B11 Section 5.2.2.5-1).

Two minute update

Why does it matter?  Ensure you are aware of the latest developments.

A summary of recent developments:

• Virtual meetings (including AGMs) –  The Federal Government’s legislation to extend the COVID-19 concessions around virtual meetings and electronic signing of documents are currently being considered by the Senate and has not been enacted.  The temporary Corporations Determination expired in late March 2021, and ASIC has released a ‘no-action position’ which permits companies to continue to hold meetings such as AGMs using appropriate technology until the legislation is in force or 31 October 2021.  The ‘no-action position’ also permits an additional two months to hold AGMs for entities with financial years up to 7 April 2021, but does not extend to the electronic execution of company documents or to modifications of the continuous disclosure obligations
• Cloud computing arrangements – In March 2019, IFRIC® considered the accounting for Software-as-a-Service (SaaS) arrangements and concluded that for many such arrangements the substance is that the entity has contracted to receive services (SaaS services) rather than the acquisition of intangible software assets.  The IFRIC has recently considered the impact of this conclusion on the accounting for the implementation costs associated with such arrangements in an agenda decision expected to be finalised in late April 2021.

Whilst AASB 138 Intangible Assets addresses the accounting for the acquisition of intangible assets it does not address the accounting for services.  It is not appropriate to analogise to the guidance in AASB 138 for the accounting for costs incurred in setting up SaaS arrangements that do not result in the acquisition of an intangible asset or which include, in addition to the acquisition of intangible assets, the provision of services.  As AASB 138 is not applicable to service arrangements, implementation costs incurred need to be considered under general principles. These general principles are likely to result in significantly more implementation spend being expensed than previously.  Furthermore, this expense will be an operating expense.

There may be significant consequences and considerations arising from the application of this most recent IFRIC agenda decision, particularly where adjustments are required to expense previously capitalised IT costs in current and prior periods. These include the potential for significant one-off operating expenses, continuous disclosure requirements if profit guidance is impacted, tax accounting, EBITDA covenants etc

• Repayment of JobKeeper – The ATO has released guidance for entities seeking to voluntarily return JobKeeper funds to the government, including guidance on when such amounts may be considered deductible for tax purposes.  Entities choosing to return such payments should ensure the amounts returned are only recognised once the company has clearly committed to returning the amounts, are clearly disclosed in their financial statements and are treated consistently for accounting and tax purposes (see also our Tax@Hand article)
• ASX listing rule amendments – The ASX has released amendments to the ASX Listing Rules and associated guidance on online forms, notification of security issues and corporate action timetables.  The changes are effective from 5 June 2021.  Details can be found in this Listed@ASX Compliance Update.