Bentleys & ANZ Perth: Critical financial reporting update & business mentoring

Financial Reporting Update

April 2017Presented by:

Carmen Ridley Bentleys National Audit &

Accounting Technical Director

Accountants AdvisorsAuditors Accountants AdvisorsAuditors

Disclaimer© Australian Financial Reporting Solutions – April 2017– all rights reserved

This presentation is intended for instruction. It is general information only, and is not specific business advice or financial advice and no person should rely on the contents without first obtaining advice from a qualified professional person acting in that role or reference to source materials such as accounting standards.

Nevertheless, all care has been taken in preparing this information to the time of its distribution at the training event. Australian Financial Reporting Solutions, related entities, officers and employees do not accept any contractual, tortuous or other form of liability for this content or for any consequence arising from its use or for omissions or errors, including responsibility to any person by reason of negligence.


AASB 9 Financial

Instruments

AASB 15 Revenue from Contracts with Customers

AASB 16 Leases

ASIC focus areas

Changes to auditor

reporting

Agenda


Timeline for new standards

30 June 2017 30 June 2019

30 June 2020

30 June 2018

Financial instruments

Revenue (FP)

Photo by crackdog - Creative Commons Attribution License https://www.flickr.com/photos/88645472@N00 Created with Haiku Deck

AASB 9 Financial Instruments


AASB 9 Financial InstrumentsEffective for annual reporting periods beginning on or after 1 January 2018Changes in relation to:

Classification of financial assetsAmortised cost or fair value Equity through OCIAll equity instruments at fair value;

Hedging;Impairment

Expected loss v incurred loss.


AASB 9 measurement requirements

Equity instrument not designated

through OCI (held for trading)

•Measured at fair value •Changes in value / gains on sale through profit or loss

Equity instrument designated

through OCI

•Measured at fair value •Changes in value / gains on sale through OCI•Dividends through profit or loss


AASB 9 – consider…Do you have the following transactions?

Equity investments held at costAvailable for sale financial assetsSignificant receivables / loans balancesDerivatives Insurance entities – delay implementation?

Internal champion Training and communication

Revenue AASB 15


AASB 15 Revenue from Contracts with Customers

Effective for annual reporting periods beginning on or after 1 January 2018Core principle:

“Recognise revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”

Model for revenue recognition which focuses on controlSignificantly increased disclosure requirementsReplaces AASB 111, AASB 118 and certain interpretations

1. Identify the contract with the customer

5. Recognise revenue as the performance

4. Allocate the transaction price to the performance obligations

2. Identify the performance obligations

3. Determine the transaction price

The 5 step path to revenue recognition


Transfer of control

Control is transferred over time

Yes

Yes

No

Control is transferred over a point in time

Does customer control the assets as it is created or enhanced?

Does customer receive and consume the benefits as the entity performs?

Does the asset have an alternative use to the entity?

No

No

Yes

Does entity have the enforceable right to receive payment for work to date and expect to fulfil the contract as

promised?

No

Yes


Contract costsCosts to obtain a contract

Costs which would not have been incurred if the contract has not been wonRecognised as an asset if they are expected to be recoveredIf expected period is less than 12 months then expense as a practical expedient

Costs to fulfill a contract If these costs are within the scope of other standards (e.g. AASB 102, AASB 116 or AASB 138) - treatment is in accordance with appropriate standardIf not, then you should capitalise them only if certain criteria are met


Costs to fulfil a contractAre the costs incurred within the scope

of another standard?

Are the costs expected to be recovered?

Do the costs generate of enhance resources that will be used to satisfy

performance obligations?

Do the costs relate directly to a contract?

No

Yes

Yes

Yes

Yes

No

No

No

Capitalise costs(subject to amortisation and impairment)

Expense costs as incurred

Account for costs in accordance with relevant

standard


Action items

1. Acknowledge – AASB 15 is complicated 2. Determine your time-line – to be sooner rather than later3. Project champion4. Knowledge transfer to staff5. Involvement of non-finance staff6. Changes to contracts / bank covenants7. Quantify impact on reported numbers8. Stakeholder communication 9. Audit requirements 10.Don’t stick your head in the sand

Leases


AASB 16 Fundamental Principle

All leases on statement of financial position (balance sheet)Two exceptions

Income statement

Interest and depreciation expense

Impairment of right-of-use asset

Variable lease payment not dependent on an index

Balance sheet

Right to use asset (tangible)

Lease liability


Two exceptions

Short term leases

• A lease that at commencement date has a lease term of ≤ 12 months

• Excludes leases with purchase options • Lease term is non-cancellable period plus options

which are reasonably certain• Lease modification or change in lease term

considered a new lease

Low value assets

•Value assessed on new asset•Management assessment•BC notes US$5,000•Examples – laptops, tablets, small office furniture


Income statement

1 2 3 4 5 6 70

0.5

1

1.5

2

2.5

3

3.5

4

4.5

AASB 16 AASB 117 Cash rents


What to do?

What leases are in place?What are the current terms and conditions?Do either of the exemptions apply?Do bank covenants, bonus schemes etc need to be renegotiated?Are appropriate processes in place to account for leases on balance sheet?


ASIC Focus Areas


ASIC financial reporting surveillance

Focus areas released and no changesHeadline:

ASIC has called on companies to provide information for users of financial reports that is useful and meaningful ahead of the preparation of reports for the period

ended 31 December 2016.

In particular, companies should adopt realistic valuations for asset values, appropriate accounting policies and provide more effective communication of that

information


ASIC focus areas

Impairment testing and asset valuesAccounting policy choice:

Off balance sheet arrangementsRevenue recognition Expense deferralTax accounting

Estimates and accounting policy judgementsImpact of new accounting standards.


Future of the financial reporting framework

General purpose v special purposePublicly availableRole of Reduced Disclosure Framework (RDR)Watch this space ….


Potential Impact on Loan Covenants

Delays in revenue recognition

Recognition of operating leases on the balance sheet

Effect of operating leases on EBITDA


QUESTIONS?


Practical Forecasting3 Way model


Impact of changes

Forecast Revenue impact on results and EBITDARecognition of Operating leases on balance sheet Establish reporting ratios for loan covenants and KPI’sOur solution: Develop a 3 way forecast and make a plan based on the projections


Business best practice

By understanding the financial impact of these changes:Make informed strategies to improve your business and Review the impact that changes to key drivers have on your profit, cash flow and the balance sheet


Why is a 3-way forecast needed?

Don’t drive your business blindfoldedMaintain the relationship with your lender and keep abreast of your lending covenants eg:

Debt to EquityInterest coverWorking capital position


Profitability KPI’s


3-way forecasting


3-way forecasting


3-way forecasting


KPI Dashboard


Bentleys Mentoring

Understand impact to your numbersMake informed decisions including scenario planning and sensitively analysisDesign a better future for your businessInspire, guide and give advice


Final Questions / thoughts