ACCOUNTING

NewsdeCemBeR 2010

www.bdo.com.au

IN ThIs edITIONPx What’s new for December 2010

Px Which standards do I apply?

Px FAQs

Px Comments sought on exposure drafts

This Christmas we bring good news that there are no major changes to accounting standards or interpretations that could impact your financial statements for 31 December 2010 (annual or half-years). However, the IASB have been busy over the last couple of years tinkering with standards and interpretations and making improvements here and there. The Corporations Amendment (Corporate Reporting Reform) Bill 2010 which received Royal Assent on 28 June 2010 also impacts financial statements for 31 December 2010 for the first time, as do the Reduced Disclosure Requirements for Tier Two entities preparing general purpose financial statements. This month’s newsletter summarises these changes.

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whAT’s New fOR deCemBeR 2010?

changes to standards and interpretations for the 31 december 2010 reporting season will affect entities with reporting dates as follows:• Annual periods ending 31 December 2010 (listed or unlisted entities)• Half-years ending 31 December 2010 (listed entities and unlisted disclosing entities).

Also impacting 31 December 2010 annual financial statements for the first time:• Corporations Amendment (Corporate Reporting Reform) Bill 2010 which received Royal Assent

on 28 June 2010• Reduced Disclosure Requirements for Tier Two entities described in AASB 1053 Application

of Tiers of Australian Accounting Standards that currently prepare general purpose financial statements.

These changes are summarised below.

annual periodsIf you are preparing financial statements for the annual period ended 31 December 2010, you may be impacted by the following changes to accounting standards and interpretations:

• AASB 3 Business Combinations (2008)• AASB 127 Consolidated and Separate Financial Statements (2008)• AASB 2009-8 Amendments to Australian Accounting Standards – Group cash-settled Share-based

Payment Transactions• AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual

Improvements Project.

aasb 3 Business Combinations (2008) and AASB 127 Consolidated and Separate Financial Statements (2008)For 31 December balancing entities, AASB 3 (2008) applies prospectively to business combinations where the acquisition date was on or after 1 January 2010 and the amendments to AASB 127 apply from the same date.

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Major differences between the revised versions of these two standards and the superseded version of AASB 3 are:

ACCOUNTING TReATmeNT

RevIsed sTANdARds sUPeRseded sTANdARds

acquisition costs such as advisory, legal, accounting, due diligence, stamp duties etc to be expensed as incurred

acquisition costs included as part of purchase consideration and capitalised into goodwill

Terminology is ‘non-controlling interests’ Terminology is ‘minority interests’

non-controlling interest can be measured at either:• Proportionate share of net identifiable assets acquired• Fair value

minority interests measured at proportionate share of net identifiable assets acquired

Adjustments to contingent or deferred consideration are recognised in profit or loss

Adjustments to contingent or deferred consideration are adjusted against goodwill (This requirement continues to apply to pre AASB 3 (2008) business combinations)

intangible assets to be recognised separately from goodwill even if not reliably measurable

intangible assets to be recognised separately from goodwill if reliably measurable

Detailed requirements for re-acquired rights No guidance for re-acquired rights

step acquisitions – associate to controlling interest – remeasure initial investment in associate to fair value via profit or loss

step acquisitions – associate to controlling interest – no gain/loss on step acquisition

step acquisitions – available-for-sale investment (afs) to controlling interest – treated as a disposal of AFS investment and subsequent acquisition of controlling interest. Balance on available-for-sale reserve reclassified through profit or loss

step acquisitions – available-for-sale investment (afs) to controlling interest – no gain/loss on step acquisition

step acquisitions post control (e.g. 60 percent interest increased to 80 percent) – treated as transactions between equity holders and no further goodwill recognised

step acquisitions post control (e.g. 60 percent interest increased to 80 percent) – diversity in practice. Could have resulted in further goodwill or been treated as an equity transaction

step downs retaining control (e.g. 80 percent interest to 60 percent) – treated as transactions between equity holders

step downs retaining control (e.g. 80 percent interest to 60 percent) – gain/loss recognised in profit or loss on sell-down of a portion of the investment

step downs lose control – treated as a disposal of whole investment and subsequent acquisition of an associate/AFS investment at fair value. Gain/loss recognised in profit or loss

step downs lose control – smaller gains/losses recognised in profit or loss being difference between carrying amount of interest sold and proceeds

aasb 2009-8 Amendments to Australian Accounting Standards – Group cash-settled Share-based Payment TransactionsInterpretation 11 AASB 2 – Group and Treasury Share Transactions, previously clarified the accounting in the individual financial statements of group companies where one company in the group received goods/services and another group company issued shares or options in return. AASB 2009-8 amends the requirements of AASB 2 Share-based Payment with respect to group cash-settled share-based payment transactions and therefore fills the void left by Interpretation 11 which only dealt with equity-settled share-based payment transactions involving group companies.

Example:Sub B Pty Limited (Sub B) receives stationery supplies from Best & Less Stationery Pty Limited (Best & Less) on 1 April 2010 with a fair value of $1,000. Parent A Limited (Parent A) is the parent entity of Sub B. Parent A is listed on the ASX. Parent A’s shares are trading at one dollar on 1 April 2010.

Parent A agrees to settle the debt owing to Best & Less on 30 June 2010 at a value linked to the increase/decrease in the share price of Parent A. So for example, if Parent A’s share price increases to $1.50, Parent A will be required to pay Best & Less $1,500. However, if Parent A’s share price decreases to $0.75, Parent A will only be required to pay Best & Less $750.

The journal entries on the date that the stationery is received are as follows:

Parent A

1 APRIl 2010Dr Investment in Sub B $1,000Cr Liability – Best & Less $1,000

Sub B

1 APRIl 2010Dr Stationery expense $1,000Cr Equity contribution from Parent A $1,000

Group

1 APRIl 2010Dr Stationery expense $1,000Cr Liability – Best & Less $1,000

Assume that on 30 June 2010 (payment date), Parent A’s share price is $1.25. The journal entries in Parent A are as follows:

Parent A

30 JUNe 2010Dr Investment in Sub B $250Cr Liability – Best & Less $250

Dr Liability – Best & Less $1,250Cr Cash $1,250

Question one:should sub b recognise any further stationery expense for the additional $250 recognised by parent b?

answer one: No. Sub B is required to account for this transaction as an equity-settled share-based payment transaction because:• It is not required to issue its own equity instruments to settle the

obligation; and• It is also not required to settle the obligation at all.

The amount recognised for equity-settled share-based payment transactions can only be amended after grant date if permitted by AASB 2, paragraphs 19-21 (i.e. for non-market vesting conditions). In this case, there are no non-market vesting conditions and Sub B therefore makes no further entries for this transaction.

3 accounting news

Question Two: what happens to the additional $250 debited to parent a’s investment in sub b that has no equivalent entry in sub b?

answer two:AASB 2, paragraph 43A envisages this concept of ‘asymmetrical accounting’ whereby the amount recognised by the entity receiving the goods/services may be different to the amount recognised by the group company that settles the obligation.

As one cannot have this ‘dangling debit’ investment in Sub B in the group financial statements, it is our view that this additional $250 will need to be written off on consolidation as an additional share-based payment expense (not as an additional stationery expense).

Interpretation 11 and Interpretation 8 (which requires expensing any unidentified goods/services under AASB 2) have been withdrawn and their requirements included in AASB 2 for periods beginning on or after 1 January 2010. The changes must be applied retrospectively, which means that prior year comparatives must be restated, as well as opening balances of retained earnings.

aasb 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements ProjectThe International Accounting Standards Board (IASB) made the following changes to standards and interpretations during their 2008 annual improvements project that impact your 31 December 2010 annual financial statements:

sTANdARd/INTeRPReTATION ClARIfICATION

AASB 5 Non-current Assets Held for Sale and Discontinued Operations

Disclosures required for non-current assets classified as held for sale or discontinued operations are limited to those required by AASB 5.

Disclosures from other standards are only required if other standards specifically require disclosure for assets held for sale or discontinued operations, e.g. AASB 133 Earnings per Share requires disclosure of EPS for discontinued operations. (P)

AASB 8 Operating Segments Disclosures for total assets by reportable segment only required if provided to the chief operating decision maker. (R)

AASB 101 Presentation of Financial Statements

The classification of a liability is not affected by the counterparty having an option for the liability to be settled by the issue of equity instruments.

Provided there is no requirement to transfer cash or other assets within 12 months, such liabilities can be classified as non-current, e.g. a long-term convertible note that could be convertible in six month’s time can be classified as a non-current liability.(R)

AASB 107 Statement of Cash Flows Only expenditure that results in a recognised asset in the statement of financial position is eligible for classification as cash flows from investing activities.

R&D, marketing, and exploration expenses written off cannot be classified as cash flows from investing activities. (R)

AASB 117 Leases Very long leases of land can be classified as a finance lease where the risks and rewards are effectively transferred, despite there being no transfer of title. Leasehold land for very long leases can be classified as PPE and revalued.

There is still debate about exactly what a very long lease is. Is it 50 years? Is it 99 years? No one is really sure.(R)

AASB 118 Revenue Example 21 has been added as guidance for determining whether an entity is acting as agent or principal. An entity may be acting as principal when it has exposure to the significant risks & rewards associated with sale/service, e.g. entity:• Has primary responsibility for providing goods or services• Has inventory risk• Has latitude in establishing prices• Bears credit risk for amount received from customer.

AASB 136 Impairment of Assets Cash-generating units (CGUs) to which goodwill is allocated cannot be larger than operating segments defined in AASB 8 Operating Segments (before aggregation).

Amendment also applies to unlisted entities when assessing goodwill impairment (even though AASB 8 only applies to listed entities and entities in the process of listing).(P)

AASB 139 Financial Instruments: Recognition and Measurement

Relates to the scope exclusion for forward contracts that will result in a business combination. Clarifies that the term of the forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and complete the transaction. (P)

AASB 139 Financial Instruments: Recognition and Measurement

If a hedge of a forecast transaction subsequently results in a financial asset or financial liability being recognised, gains/loss in other comprehensive income are to be recognised in profit or loss in same period(s) during which the hedged forecast cash flows affect profit or loss.

Example: An interest rate swap is taken out for a two year period as a hedge on a five year loan. The hedge gain/loss should offset variable interest payments over the two year hedge period (rather than over the five year period of the loan. (P)

AASB 139 Financial Instruments: Recognition and Measurement

Clarifies that a call, put or prepayment option embedded in a debt instrument is closely related (i.e. embedded derivative does not need to be measured separately) if:• Option’s exercise price is approximately = on each exercise date to amortised cost of debt instrument• Exercise price of the prepayment option reimburses the lender for the amount of the present value (PV) of the lost

interest for the remaining term of contract (additional requirement added). (P)Example where prepayment option reimburses lender for PV of lost interest:$100,000 loan fixed at ten percent with a remaining five year term. Current interest rates are seven percent. Penalty for early repayment is that borrower will have to pay the lender the present value of the three percent differential interest rate over the remaining five year term.

(P) Amendment applies prospectively, so comparatives do not need to be restated (R) Amendment applies retrospectively, so comparatives do need to be restated

4 accounting news

half-year periodsIf you are preparing half-year financial statements for the six month period ended 31 December 2010, you may be impacted by the following changes to accounting standards and interpretations:

Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments

AASB 2009-10 Amendments to Australian Accounting Standards – Classification of Rights Issues

AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project

interpretation 19The global financial crisis has seen a rise in the number of debt for equity swap transactions and there has been diversity in the way debtors have accounted for these transactions. Some entities have measured the equity instruments they issued at fair value and recognise a gain/loss on extinguishment in profit or loss, while others have measured the equity instruments issued at the fair value of the liability extinguished which means that no or little gain/loss is recognised in profit or loss.

Interpretation 19 clarifies that the equity instruments should be measured at their fair value, unless fair value cannot be reliably measured, in which case the fair value of the debt extinguished can be used. These principles are illustrated in Fig 1.

use fv of equity instruments issued

use fv of liability extinguished

fv of equity instruments can

be measured reliably?

Yes

no

fig 1

exAmPle ONe

ABC Limited isses 1 million shares with a fair value (FV) of $1000,000 to Big Bank Limited to extinguish a debt worth $500,000. The accounting entries are as follows:scenario one: fv of equity instruments is usedDr Debt $500,000Cr Equity $100,000Cr Gain $400,000

scenario two: fv of debt is usedDr Debt $500,000Cr Equity $500,000

The interpretation applies retrospectively, so comparatives will need to

be restated for debt for equity swaps that occurred last year. However, the IASB in their Basis of Conclusions have indicated that restatement beyond the previous period is not necessary because the only impact would be on classification of the entries between retained earnings and share capital.

classification of rights issuesThis change came about because there was diversity in practice as to how to account for rights issues where shares are issued in exchange for a fixed dollar amount of a foreign currency (that is not the functional currency). This amendment clarifies that such rights issues are to be treated as equity only if the entity offers the shares pro rata to all its existing shareholders in the same class.

Retrospective restatement is required, so comparatives must be restated.

Annual improvementsThese improvements relate mainly to AASB 3 Business Combinations (2008). For further information, please refer to the article, ‘More annual improvements’ in Accounting News, May 2010.

Corporations Act amendmentsAccounting News, July 2010, summarises, in detail, the amendments to the Corporations Act financial reporting requirements (Chapter 2M) resulting from the Corporations Amendment (Corporate Reporting Reform) Bill 2010 which received Royal Assent on 28 June 2010. The following changes were effective for years ending on or after 30 June 2010, so may impact 31 December 2010 balancing entities for the first time: • parent entity financial statements – These are no longer permitted

under s295(2)(b) where consolidated financial statements are required. However, Class Order 10/654 overrides this requirement so that entities can leave in the parent entity columns if they wish (useful for AFS licensees that consolidate for the purposes of s295(2)(b) but are also required to lodge separate parent entity financial statements as licence holder under s989B(2)).

• directors’ declarations – If the financial statements include an explicit and unreserved statement of compliance with IFRSs (IFRS compliance statement), the directors must include a reference to this IFRS compliance statement in their directors’ declaration (s295(4)(ca)). The directors’ declaration should not repeat the fact that the financial statements comply with IFRSs. They should just say that the financial statements include a statement of compliance with IFRSs. Remember that this compliance statement is not required, and cannot be made, for non-reporting entities that do not do all IFRSs disclosures and for not-for-profit entities that apply some of the ‘Aus’ measurement paragraphs of Australian Accounting Standards which are different to the IFRSs measurement requirements.

• dividends – All dividends declared on or after 28 June 2010 (date of Royal Assent) must meet the new dividend rules in revised s254T (assets must exceed liabilities after the dividend is paid and solvency requirements). Assets and liabilities must be calculated before a dividend is declared by applying all recognition and measurement requirements in Australian Accounting Standards. This could be problematical for small proprietary companies or non-reporting entities that do not comply with all recognition and measurement standards, e.g. accounting for derivatives, deferred tax liabilities etc.

5 accounting news

whICh sTANdARds dO I APPly?when ifrs was first adopted in 2005, the iasb tended to release new standards, and changes to existing standards, with a start date of 1 JanuarY to align with manY european companies having 31 december Year ends. this made deciding which accounting standards applied to Your financial Year fairlY easY.

fAQsQuestion: how do we account for post-combination acQuisition costs (i.e. where investment increased from saY 60 percent to 80 percent) in the financial statements of:• the parent entitY• the group?

answer:PARENT ENTITYInvestments in subsidiaries accounted for under AASB 127 Consolidated and Separate Financial Statements are scoped out of AASB 139 Financial Instruments: Recognition and Measurement. AASB 127.38(a) permits an investment in a subsidiary to be measured using ‘cost’. Our view is that ‘cost’ includes all costs associated with the investment, including transaction costs. This is consistent with the accounting treatment for investments in subsidiaries accounted for under AASB 127.38(b), i.e. under AASB 139. AASB 139.43 requires that financial assets be recognised initially at fair value plus transactions costs.

GROUPAASB 3 Business Combinations (2008), paragraph 53 only provides guidance on the expensing of acquisition-related costs when these relate to a business combination. A group that increases its share in a subsidiary from say 60 percent to 80 percent is not undertaking a business combination and therefore AASB 3.53 is not relevant.

AASB 127.30 requires that changes in a parent’s ownership interest in a subsidiary that does not result in a loss of control are accounted for as equity transactions, i.e. transactions with owners in their capacity as owners. It is therefore our view that any acquisition-related costs for additional tranches should also be accounted for as equity transactions and therefore debited to equity.

• companies limited by guarantee - Small companies limited by guarantee (those that are not deductible gift recipients for tax purposes that have revenues less than $250,000) are no longer required to have an audit (refer full definition in s45B). Medium sized ones* can elect to have a review of their annual financial statements rather than an audit. There are also streamlined directors’ report requirements included in s300B, so companies limited by guarantee no longer prepare a directors’ report under sections 299 and 300.

*Medium-sized companies limited by guarantee are those that: • Are deductible gift recipients with revenues less

than $250,000; or• Have revenues less than $1 million.

reduced disclosure requirementsFor years ending on or after 30 June 2010, Tier Two entities described in AASB 1053 Application of Tiers of Australian Accounting Standards, that have previously prepared general purpose financial statements using full IFRSs, now have a choice to prepare general purpose financial statements using the Reduced Disclosure Requirements outlined in AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements.

Tier Two entities are those that are not publicly accountable. So listed entities, unlisted disclosing entities, co-operatives that issue debentures, registered managed investment schemes, superannuation plans registered with APRA, authorised deposit-taking institutions (ADIs), etc cannot apply the Reduced Disclosure Requirements.

Provided there is nothing in their constitutions or regulations that specifically require full IFRSs general purpose financial statements, the following types of entities could consider applying the Reduced Disclosure Requirements:• Large proprietary companies that are not

contemplating an IPO in future

• Charities• Clubs• Schools• Public sector entities that are not Federal,

State and territory Governments, local governments or universities.

If you wish to apply the Reduced Disclosure Requirements, www.aasb.com.au includes a ‘Table of RDR versions’ in which each standard includes shaded grey paragraphs to indicate disclosures not required for reduced disclosures.

For further information on Reduced Disclosure Requirements, refer to Accounting News, July 2010.

Having departed from this trend by issuing AASB 3 Business Combinations (2008) with a start date of 1 July 2009, the IASB now seem to have a haphazard pattern of start dates, with some being 1 January and others being 1 July.

To further complicate the situation, annual improvements and ad hoc amendments to standards and interpretations are often quickly compiled into the latest version that you see under ‘Table of Standards’ or ‘Table of Interpretations’ on the AASB web site. This means that the latest copy of a standard you may be looking at on the AASB web site may include requirements that are not yet effective and you could land up mistakenly adopting things early without knowing it.

So, to make sure you are referring to the correct version of a standard or interpretation that applies to your year end, it’s safest to refer to www.aasb.com.au and then search by reporting period.

6 accounting news

fOR mORe INfORmATION

Nsw/ACT

waYne basfordTel +61 2 9286 5452 wayne.basford@bdo.com.au

NORTh QUeeNslANd

greg mitchellTel +61 7 4046 0044 greg.mitchell@bdo.com.au

NORTheRN TeRRITORy

casmel taziwaTel +61 8 8981 7066 casmel.taziwa@bdo.com.au

QUeeNslANd

tim KendallTel +61 7 3237 5948 timothy.kendall@bdo.com.au

sOUTh AUsTRAlIA

paul gosnoldTel +61 8 8224 5264 paul.gosnold@bdo.com.au

TAsmANIA

craig stephensTel +61 3 6324 2499 craig.stephens@bdo.com.au

vICTORIA

paul carrTel +61 3 8320 2129 paul.carr@bdo.com.au

wesTeRN AUsTRAlIA

brad mcveighTel +61 8 6382 4670 brad.mcveigh@bdo.com.au

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO (Australia) Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and emissions. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

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© 2010 BDO (Australia) Ltd. All rights reserved.

COmmeNTs sOUGhT ON exPOsURe dRAfTsAt BDO, we provide comments locally to the AASB and internationally to the IASB. We welcome any client comments. If you like to provide any comments please contact Wayne Basford.

dOCUmeNT PROPOsAlsCOmmeNTs dUe TO AAsB By

COmmeNTs dUe TO I AsB By

ED 205 Extending Relief for Consolidation, the Equity Method and Proportionate Consolidation

Exemptions from preparing consolidated financial statements (or equity accounting or proportionate consolidation) by an intermediate parent extended to situations where:• Parent is a Tier 2 entity preparing

consolidated financial statements under the Reduced Disclosure requirements (rather than full IFRSs)

• Parent entity is a not-for-profit Tier 1 entity that is not fully IFRSs compliant.

12 January 2011

N/A

ED Tier 2 Supplement to ED 204 Deferred Tax: Recovery of Underlying Assets (proposed amendments to AASB 112)

Proposes that additional disclosures identified in ED 204 Deferred Tax: Recovery of Underlying Assets (proposed amendments to AASB 112) be included in the Reduced Disclosure Requirements.

31 January 2011

N/A

ED Tier 2 Supplement to ED 198 Revenue from Contracts with Customers

Proposes various disclosure exemptions for the Reduced Disclosure Requirements.

31 January 2011

N/A

ED Tier 2 Supplement to ED 202R Leases

Proposes various disclosure exemptions for the Reduced Disclosure Requirements.

31 January 2011

N/A