Clarity in financial reporting - May 2021 newsletter

Key actions

• Software-as-a-Service arrangements
• June 2021 reporting deadlines extended
• Accounting considerations of the Federal Budget

Key developments

• Two minute update
• Accounting for common control transactions

Software-as-a-service arrangements

Why does it matter?  New guidance on accounting for cloud computing arrangements is in place and needs to be taken into account in the current reporting season. The IFRS Interpretations Committee (IFRIC®) has published two agenda decisions clarifying how arrangements in respect of a specific part of cloud technology, Software-as-a-Service (SaaS), should be accounted for. The agenda decisions did not address the accounting for other components of cloud technology such as Infrastructure-as-a-Service and Platform-as-a-Service:

• The first agenda decision, published in March 2019, concludes that SaaS arrangements are likely to be service arrangements, rather than intangible or leased assets.  This is because the customer typically only has a right to receive future access to the supplier’s software running on the supplier’s cloud infrastructure and therefore the supplier controls the intellectual property (IP) of the underlying software code
• The second agenda decision, published in April 2021, deals with specific circumstances in relation to configuration and customisation costs incurred in implementing SaaS:

1. In limited circumstances, certain configuration and customisation activities undertaken in implementing SaaS arrangements may give rise to a separate asset where the customer controls the IP of the underlying software code. For example, the development of bridging modules to existing on-premise systems or bespoke additional software capability
2. In all other instances, configuration and customisation costs will be an operating expense.  They are generally recognised in profit or loss as the customisation and configuration services are performed or, in certain circumstances, over the SaaS contract term when access to the cloud application software is provided

This conclusion could result in a reduction in profit in a particular year, impacting measures such as earnings before interest and tax (EBIT), earnings before interest, tax, depreciation and amortisation (EBITDA) and profit before tax (PBT)

• Where a change in accounting policy is required, comparative financial information should be retrospectively restated to derecognise previously capitalised costs, where material, in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
• There may be several consequential impacts beyond the immediate accounting implications arising from the IFRIC agenda decisions that should be considered, e.g. the impact on business metrics and targets linked to profit measures.

More information: We’ve published a new edition of our Clarity publication Software-as-a-Service arrangements, providing more analysis and background to this important issue.

Action steps?  Consider the impact of the relief available for June 2021 in planning your timetable for the upcoming reporting season.

One month extension for lodgement of financial reports

ASIC has announced a one-month extension of the deadline for the lodgement of financial reports for the June 2021 reporting season and subsequently released a Corporations Instrument to give effect to the extension.

The extended lodgement deadlines only apply to balance dates from 23 June 2021 to 7 July 2021 (inclusive).  Therefore, balance dates between 7 January 2021 and 23 June 2021 cannot take advantage of the one month lodgement deadline extension and must lodge financial reports in the normal timeframes.

The ASX has also released a Class Waiver to enable listed entities to take advantage of the extended deadlines in the same manner as previous periods.

Annual general meetings (AGMs)

ASIC has adopted a ‘no action’ position where companies do not hold their annual general meeting (AGM) within five months after the end of the financial year, but do so up to seven months after year end.  This builds on an earlier ASIC ‘no action’ position which permits companies to continue to hold meetings such as AGMs using appropriate technology.

As discussed in our April 2021 newsletter, ASIC’s ‘no action’ position on the holding of AGMs is an interim measure pending passage of legislation.  The seven month time period is available to all balance dates up to and including 7 July 2021.

Continuous disclosure obligations

Unlike in earlier periods, the continuous disclosure regime modifications are not in effect and normal continuous disclosure obligations must be met.  This may however change if the Federal Government bill is passed by the Parliament (the Bill is currently before the Senate and has been referred to the Senate Economics References Committee with a report due 30 June 2021).  Accordingly, entities should ensure they are fully compliant with their continuous disclosure obligations under the Corporations Act 2001 and ASX Listing Rules.

More information: We have published a new edition of our Clarity publication Revised financial reporting deadlines for June 2021, which details the revised deadlines for various listed and unlisted entities and explores the relief available by ASIC and the ASX in more detail.

Action steps?  With the announcement of the Federal Budget on 11 May 2021, it is important to consider the accounting implications.

Below are some of the key accounting considerations arising from the Federal Budget handed down on 11 May 2021.

Temporary full expensing extended

The temporary full expensing of eligible depreciating assets for tax purposes would be extended for a further 12 months to 30 June 2023.  An immediate deduction will give rise to a deferred tax liability for the taxable temporary difference between the carrying amount of the asset and the tax base (which will generally be zero).

Temporary loss carry-back measures extended

Corporate tax entities with an aggregated annual turnover of less than $5 billion are able to carry back tax losses from the 2019‑20, 2020‑21, and 2021‑22 income years to offset previously taxed profits as far back as the 2018‑19 or later income years.  The Budget proposals would extend this to tax losses from the 2022‑23 income year.  The carry back is optional, the amount carried back cannot generate a franking deficit and is limited by the level of previously taxed profits.

Considerations include:

• Recognition of a current tax asset – AASB 112 Income Taxes requires the benefit relating to a tax loss that can be carried back to recover current tax of a previous period to be recognised as an asset.  As the carry back is optional, only entities that elect to carry back will be able to recognise a current tax asset
• Classification – Any current tax asset recognised would be classified based on its expected receipt. As the intention is that refunds of past tax would be paid on lodgement of the entity’s tax return, the amount would generally be classified as a current asset
• Deferred taxes – The assessment of the recoverability of deferred tax assets may change as a result of the ability to carry back tax losses
• Uncertain tax positions – As the carry back is limited to the level of previously taxed profits, uncertain tax positions in relation to prior income years may directly or indirectly impact the amount of tax losses that can be recognised as an asset.

Corporate collective investment vehicle (CCIV) regime

Originally announced in the 2016-17 Budget, the Government has announced it will proceed with the introduction of a tax and regulatory framework for corporate collective investment vehicles (CCIV) with a revised commencement date of 1 July 2022.

A CCIV would be an investment vehicle with a corporate structure that provides flow‑through tax treatment for investors. The initial proposed Bill to implement the regime was released for consultation in early 2019.  Under that Bill, a CCIV would be a company limited by shares with registered sub-funds.  The CCIV could issue shares and debentures that are referable to only one sub‑fund, including redeemable ordinary shares.

Financial reporting considerations include:

• Under the proposed Bill, a CCIV would be required to prepare an annual financial report for each sub-fund, however would prepare only one directors’ report for the CCIV as a whole, and not separate directors’ reports for each sub-fund. Half-year financial and directors’ reports would be prepared for sub-funds with enhanced disclosure securities on issue
• As a flow-through vehicle, it is unlikely that a CCIV would be required to recognise any current or deferred taxes.

Patent box regime

From 1 July 2022, a concessional tax rate of 17% would apply to income which is relevantly derived from Australian owned and developed medical and biotechnology patents (with the clean energy sector also being considered). Only granted patents, which were applied for after the Budget announcement, would be eligible.

For tax accounting purposes, this would create another category of tax activity which may require separate current and deferred tax accounting.  For instance:

• Current tax accounting may need to be bifurcated into amounts that would be taxed at 17% and those that may be taxed at a higher rate.  This may require a similar process to that applied to the determination of amounts on revenue and capital account
• Deferred tax assets and liabilities associated with assets and liabilities would be measured using the 17% tax rate to the extent they were used in the eligible activity and counted in the determination of the taxable profits subject to the lower rate
• The determination of whether it is probable sufficient taxable profits are available against which deferred taxes can be utilised would need to consider both the design of the regime (including any ring-fencing) and the differing tax rates applicable to each income stream. In some cases, it may mean deferred tax assets expected to be probable no longer meet the test.

Digital games tax offset

The Budget includes a refundable Digital Games Tax Offset (DGTO) of 30% which would target the development of transferable skills and position Australia to take a greater share of the global gaming market. The new offset would commence with effect from 1 July 2022 for Australian resident companies or foreign resident companies with a permanent establishment in Australia. To qualify, there will be a minimum spend requirement of $500,000 on qualifying Australian games expenditure.

Accounting considerations include:

• As the tax offset is refundable, it may most often be accounted for as a government grant under AASB 120 Accounting for Government Grants and Disclosure of Government Assistance
• A credit will be recognised in profit or loss over the periods necessary to match the benefit of the credit with the costs for which it is intended to compensate. Such periods will depend on whether the related costs are capitalised or expensed as incurred for accounting purposes.

Other considerations

The Budget contains numerous other measures which would impact various entities. In addition, the impacts of the Budget will affect economic outcomes. The combined effects of the Budget may need to be considered in such areas as:

• Substantive enactment - The current and deferred tax implications of the Budget changes must be recognised where the entity’s reporting date is after substantive enactment of the enabling legislation of each measure. Where the legislation has not been enacted at the entity’s reporting date, subsequent events disclosure may be required, rather than amending current and deferred tax accounting reflected in the financial statements
• Cash flow forecasts – Cash flows used in recoverable amount models when testing impairment under AASB 136 Impairment of Assets may require the assessment of various scenarios, and the budget may impact some or all such scenarios.  For example, the tax loss carry back and immediate capital expenditure tax write off may result in changes to the way in which capital expenditure and tax cash flows are included in value in use models
• Expected credit losses (ECLs) – The development of ECLs in respect of loans and other receivables should consider the known and macro-economic impacts of the Budget
• Employee implications – The announced changes to government support programmes and superannuation arrangements (including eliminating the $450 monthly threshold to pay compulsory superannuation and not changing the legislated superannuation guarantee levy increase to 12% over the coming years) would need to be taken into account in the measurement of employee liabilities and cash flow forecasts where relevant.

Each of the above Budget measures are complex and appropriate tax advice should be sought.

More information: Deloitte Federal Budget resources.

Two minute update

Why does it matter?  Ensure you are aware of the latest developments and consider their impacts.

A summary of recent developments:

• Climate and sustainability reporting developments – The support for broader and internationally consistent climate and sustainability reporting continues to grow.  Entities should monitor and respond to developments to ensure they are ready for any upcoming changes.  Set out below are some important recent developments:
  • The IFRS Foundation is consulting on changes to the IFRS Foundation Constitution to accommodate the creation of an International Sustainability Standards Board (ISSB) which would set IFRS Sustainability Standards under the auspices of the Foundation
  • The European Commission is also proposing a new Corporate Sustainability Reporting Directive (see our Purpose-driven Business Reporting in Focus publication for details)
• Amendments to guidance on accounting policies and estimates – Consistent with recent IASB amendments, the AASB has recently issued amendments that change the way in which accounting policies are disclosed in financial reports, requiring disclosure of material accounting policy information rather significant accounting policies – with an emphasis on meaningful, entity-specific information rather than repeating the requirements of standards.  Whilst not applicable until 2023, early adoption may be attractive for entities looking to remove ‘clutter’ from their financial reports.  More information can be found in this edition of IFRS in Focus
• Treatment of right-of-use assets in NTA calculations by AFSL holders –  ASIC has issued a Corporations Instrument which amends the definition of ‘excluded assets’ for certain Australian financial service licensees (AFSL) so that right-of-use assets are included in an AFSL adjusted net tangible assets (NTA) calculation.  This effectively formalises the current treatment previously permitted by a temporary ASIC ‘no action’ position.  More information can be found in the ASIC media release
• ASX consultation on oil and gas reporting – The ASX is consulting on amendments to Chapter 5 of the ASX Listing Rules to align the reporting requirements for oil and gas production and exploration activities with the revised Petroleum Resources Management System sponsored by the Society of Petroleum Engineers, the American Association of Petroleum Geologists, the World Petroleum Council and the Society of Petroleum Evaluation Engineers (commonly referred to as the “SPE-PRMS”).  The consultation is open for comment until 28 May 2021.

Accounting for common control transactions

Why does it matter?  There is currently no guidance on accounting for group reorganisations, restructures and similar common control transactions.  The IASB is currently developing new proposals and now is a great time to consider the key issues and to respond to the IASB and AAS

The IASB proposals:

• Address how to account for transfers of businesses under common control (i.e. whether to recognise the net assets of the business transferred at fair value applying the acquisition method under AASB 3 Business Combinations or at predecessor carrying amounts)
• Stipulate which predecessor carrying amounts to use when predecessor carrying amounts are required
• Prohibit the restatement of comparatives.

For a more detailed understanding of the proposals, see IFRS in Focus IASB publishes Discussion Paper on 'Business Combinations under Common Control’.

Comments on the proposals to the AASB close on 17 July 2021 and to the IASB on 1 September 2021.

More information:, IASB project page, AASB invitation to comment