Clarity in financial reporting - November 2022

December 2022 models and reporting guide now available

Why does it matter? Our new model financial reports and reporting guide are useful resources for the upcoming reporting season.

We have released the following editions of the models and reporting guide:

• December 2022 Tier 1 models and reporting considerations publication - in addition to global and Australian-specific illustrative disclosures, this document contains our popular 'what's new in financial reporting' analysis, which provides a summary of key considerations for the December 2022 reporting season. This edition contains an illustrative tax transparency report for the first time
• Australian financial reporting guide (12th edition) - the guide contains everything you need to know about the Australian financial reporting framework. The 12th edition has a new chapter covering sustainability disclosures (including climate), expanding on the previous content and incorporating global and Australian developments as we move toward mandatory sustainability reporting in Australia. In addition, financial reporting for Australian financial services licensees (AFSLs) has been incorporated throughout, along with other changes
• December 2022 Model half-year financial report - this illustrative guide has been updated for recent developments in the current environment. With half-year reporting focusing on updating information from the most recent annual report, this document provides key matters to consider.

These documents complete the suite of models available for the December 2022 reporting period, after the earlier release of our Model special purpose financial statements (17th edition). Entities preparing Tier 2 financial statements at December 2022 can refer to our June 2022 model Tier 2 financial report.

More information: Model financial statements
 
Financial reporting implications of the October 2022 Federal Budget

Why does it matter? The October 2022 Federal Budget handed down on Tuesday 25 October 2022 may impact financial reporting.

Summary

As with previous budgets, the October 2022 Federal Budget may have a broad range of financial reporting implications, including:

Impact of the multinational tax integrity package (proposed to apply to income years commencing on or after 1 July 2023)

• Under one limb of the announced thin capitalisation regime, an entity’s debt-related deductions would be limited to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortisation). This new earnings-based test would replace the existing safe harbour test (based on the entity’s debt to equity ratio). Deductions denied under the entity-level EBITDA test would be able to be carried forward and claimed in a subsequent income year (for up to 15 years)
• The introduction of an anti-avoidance rule to prevent significant global entities (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low- or no-tax jurisdictions
• These two proposals may have impacts on the recognition of current and deferred taxes, particularly in respect of the possible recognition of deferred tax assets for carried forward denied interest deductions, and possibly increasing the recognition of carried forward deferred tax losses where they will be utilised because deductions have been denied
• More immediate impacts may occur in terms of debt refinancing, and liquidity risk and capital management disclosures, if restructuring of Australian financing arrangements is anticipated in response to the proposals
• Large multinationals (defined as significant global entities) would be required to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO. An earlier consultation paper sought feedback on whether such information should be based on EU proposals, the Global Reporting Initiative Tax Standard or a mandated Tax Transparency Code
• Australian public companies (listed and unlisted) would be required to disclose information on the number of subsidiaries and their country of tax domicile.

Changes to franking

• The Budget announced the Federal Government’s intention to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs, which would apply from Budget night. This would prevent an entity from treating part of the consideration for an off-market buyback as a frankable dividend
• The Federal Government previously announced retrospectively acting exposure draft legislation to prevent companies from attaching franking credits to distributions to shareholders made outside or additional to the company's normal dividend cycle, to the extent the distributions are funded directly or indirectly by capital raising activities that result in the issue of new equity interests
• These changes may alter intended capital management plans of an entity, which may affect the capital management disclosures made under AASB 101 Presentation of Financial Statements
• The retrospective nature of the change related to distributions funded by capital raisings may result in the loss of franking credits on distributions previously received by entities, resulting in prior period adjustments.

Other considerations

• Entities should consider reviewing their model forecasts and assumptions for consistency with the overall budget assumptions and understand the nature of any differences. This may be particularly relevant in relation to the forecasts for inflation and energy prices
• The Budget contains a commitment to fund Treasury and the AASB to develop and introduce climate reporting standards for large businesses and financial institutions, in line with international reporting requirements.

For more information about the Federal Budget, see our October 2022 Federal Budget analysis.

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Two minute update

Why does it matter? Being aware of recent developments allows a timely and informed response.

A summary of recent developments:

IASB finalises amendments to current and non-current classification

The IASB has finalised amendments to clarify how an entity classifies liabilities with covenants as current or non-current. The amendments amend earlier amendments that are not yet effective and which had created some uncertainties in interpretation. The previous amendments cannot be early adopted without also applying the new amendments.

The AASB is expected to make equivalent amendments in due course. The new requirements are effective on a retrospective basis for annual reporting periods beginning 1 January 2024 (a year later than the original amendments) and will also introduce new disclosures about covenants. Entities should consider the revised requirements in relation to existing and new borrowings that are expected to be in place when the amendments become effective.

More information can be found in iGAAP in Focus IASB issues amendments to IAS 1 regarding the classification of liabilities with covenants.

IOSCO calls for transparency in financial reporting

The Board of the International Organization of Securities Commissions (IOSCO) has issued a public statement encouraging issuers, external auditors, as well as audit committees (or those charged with governance) to be particularly vigilant in times of economic uncertainty in their consideration of how risks and uncertainties that could affect or have affected an issuer’s operations, financial condition, cash flows and prospects can be transparently communicated to investors.

The statement highlights the following financial statement considerations:

• Going concern
• Events after the reporting period
• Updating and assessing significant judgements, estimates and estimation uncertainty
• Cybersecurity risks
• Non-GAAP financial measures.

APES 205 revised to respond to the removal of the reporting entity concept and pending accounting policy disclosure changes

The Accounting Professional & Ethical Standards Board (APESB) has issued a revised APES 205 Conformity with Accounting Standards, which addresses recent changes to Australian Accounting Standards to remove the reporting entity concept for most for-profit private sector entities and the forthcoming change to the disclosure of ‘material accounting policy information’ rather than ‘significant accounting policies’.

The revised APES 205 requires special purpose financial statements to disclose ‘material accounting policies’ and to also comply with any Australian Accounting Standards that apply to those financial statements. The revised APES 205 is effective from 1 January 2023, with early adoption permitted. More information can be found in the APESB Technical Alert.

Global sustainability reporting developments – Recent updates on progress toward new global sustainability reporting disclosure standards:

• ISSB update – The International Sustainability Standards Board (ISSB) met in October 2022 and subsequently held a supplementary November 2022 meeting in addition to the main November 2022 meeting. The ISSB is rapidly progressing redeliberations with a view to issuing finalised IFRS Sustainability Disclosure Standards as early as possible in 2023
• New Integrated Reporting and Connectivity Council – The IFRS Foundation has announced the formation and membership of a new advisory group, the Integrated Reporting and Connectivity Council (IRCC). The IRCC has a diverse membership and will advise on how reporting required by the IASB and ISSB could be integrated
• CDP to include ISSB climate standard – the ISSB and CDP (formerly the Carbon Disclosure Project) have announced that the CDP will incorporate the forthcoming ISSB climate-related IFRS^® Sustainability Disclosure Standard (IFRS S2) into its global environmental disclosure platform, with effect from the 2024 reporting cycle. This will effectively accelerate the early adoption of the IFRS S2 standard by entities reporting under the CDP framework
• TCFD 2022 Status Report – The Task Force on Climate-related Financial Disclosures (TCFD) has published its 2022 Status Report. An accompanying announcement notes growing support for the TCFD recommendations (on which the ISSB’s proposals are based) and steady growth in the average number of recommended disclosures being disclosed.