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

Financial Reporting
Update
April 2017
Presented 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
Leases
Revenue (NFP)
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 Instruments
Effective for annual reporting periods beginning on or after 1 January
2018
Changes in relation to:
Classification of financial assets
Amortised cost or fair value
Equity through OCI
All equity instruments at fair value;
Hedging;
Impairment
Expected loss v incurred loss.

AASB 9 measurement requirements
• Measured at fair value
• Changes in value / gains on sale
through profit or loss
Equity instrument
not designated
through OCI (held
for trading)
• Measured at fair value
• Changes in value / gains on sale
through OCI
• Dividends through profit or loss
Equity instrument
designated
through OCI

AASB 9 – consider…
Do you have the following transactions?
Equity investments held at cost
Available for sale financial assets
Significant receivables / loans balances
Derivatives
Insurance entities – delay implementation?
Internal champion
Training and communication

AASB 15 Revenue from Contracts with Customers
Effective for annual reporting periods beginning on or after 1 January
2018
Core 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 control
Significantly increased disclosure requirements
Replaces 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 costs
Costs to obtain a contract
Costs which would not have been incurred if the contract has not been won
Recognised as an asset if they are expected to be recovered
If 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 standard
If not, then you should capitalise them only if certain criteria are met

Costs to fulfil a contract
Are 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 later
3. Project champion
4. Knowledge transfer to staff
5. Involvement of non-finance staff
6. Changes to contracts / bank covenants
7. Quantify impact on reported numbers
8. Stakeholder communication
9. Audit requirements
10.Don’t stick your head in the sand

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
• 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
Short term
leases
• Value assessed on new asset
• Management assessment
• BC notes US$5,000
• Examples – laptops, tablets, small office
furniture
Low value
assets

Income statement
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7
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 changes
Headline:
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 values
Accounting policy choice:
Off balance sheet arrangements
Revenue recognition
Expense deferral
Tax accounting
Estimates and accounting policy judgements
Impact of new accounting standards.

Future of the financial reporting framework
General purpose v special purpose
Publicly available
Role 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 Forecasting
3 Way model

Impact of changes
Forecast Revenue impact on results and EBITDA
Recognition of Operating leases on balance sheet
Establish reporting ratios for loan covenants and KPI’s
Our 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 blindfolded
Maintain the relationship with your lender and keep abreast of your
lending covenants eg:
Debt to Equity
Interest cover
Working capital position

Profitability KPI’s

3-way
forecasting

KPI Dashboard

Bentleys Mentoring
Understand impact to your numbers
Make informed decisions including scenario planning and
sensitively analysis
Design a better future for your business
Inspire, guide and give advice

Final Questions / thoughts

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

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