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ACCOUNTING 2020
Wayne Basford
Partner - BDO
ACCOUNTING 2020
1. How many new standards are becoming applicable before 2020?
2. What are these standards?3. When do you intend to gain an overall awareness of
these standards?4. When do you intend to gain an adequate knowledge of
these standards to fulfil your role as an accountant ?5. How will you gain an adequate understanding of these
new standards?6. What is your plan to get your organisation ready for
these new standards?
Page 2Financial reporting update
“Do you intend to still be an accountant involved in financial reporting in 2020?”
ACCOUNTING 2020
Page 3Financial reporting update
ACCOUNTING 2020
• AASB 9 - periods beginning on or after 1/1/2018
• AASB 15 - periods beginning on or after 1/1/2018
• AASB 16 - periods beginning on or after 1/1/2019
Page 4Financial reporting update
ACCOUNTING 2020
1. Is it worth early adopting any of these new standards?
2. How complex will the required change to internal processes and systems be?
3. When is the date of transition?
Page 5Financial reporting update
When will you get round to understanding these new standards?
AASB 9
Page 6Financial reporting update
AASB 9
Effective date
• Applies to annual periods beginning on or after 1 January 2018
Four parts
1. Classification & measurement of financial assets (2009)
2. Classification & measurement of financial liabilities and derecognition (2010)
3. Hedging (2013)
4. Impairment of financial assets and limited amendments to classification & measurement(2014)
Page 7Financial reporting update
AASB 9 Financial Instruments
AASB 9
Early adoption
• 31 December year ends are basically last chance to early adopt piecemeal
• Complete AASB 9 (2014) must be early adopted for financial years beginning on or after 1 February 2015
Piecemeal approach
• Early adopt say AASB 9 (2009) without early adopting later versions
• Various combinations possible
Page 8Financial reporting update
AASB 9 Financial Instruments
LEASES STATUS UPDATE
Page 9Financial reporting update
LEASES STATUS UPDATE
Main changes to current practice – Operating leases of lessees (IASB)
• Right of use (ROU) asset to be capitalised on the balance sheet (except if < 12 months)
• Front-end loaded expense (interest > lease expense in early years)
• Leases of small assets (laptops etc.) will not need to be capitalised
Page 10Financial reporting update
Leases
EXAMPLE
• Company ABC took out a 5 year lease of a building
• Interest rate is 10%
• Lease payments are CU100,000 p.a.
Question: How should Company ABC account for the transaction under the forthcoming Leases standard?
Answer:
• Present value of lease payments:
= 100,000/1.1 + 100,000/1.1.^2 + 100,000/1.1^3 + 100,000/1.1^4 + 100,000/1.1^5
= CU379,079
• Recognise liability and right of use asset of CU379,079 on initial recognition
Leases – Project UpdatePage 11
EXAMPLE
Year
Lease Liability
(B/S)Interest (P/L)
(10%) Cash flowROU Asset
(B/S)
Amortisation Expense
(P&L)
P&L Impact under new
Standard
Leaseexpense
under IAS 17
0 379,079 379,079
1 316,987 37,908 (100,000) 303,263 75,816 113,724 100,000
2 248,685 31,699 (100,000) 227,447 75,816 107,514 100,000
3 173,554 24,869 (100,000) 151,631 75,816 100,684 100,000
4 90,910 17,355 (100,000) 75,816 75,816 93,171 100,000
5 0 9,090 (100,000) 0 75,816 84,907 100,000
Total 500,000 500,000Leases – Project UpdatePage 12
EXAMPLE
Assume that at the beginning of year 1, Company ABC has:
• Other assets of CU2,000,000
• No other liabilities
Balance sheet beginning of Year 1 IAS 17 New Leases Standard
Right of use asset - CU379,079
Other assets CU2,000,000 CU2,000,000
Total assets CU2,000,000 CU2,379,079
Lease liability - CU379,079
Equity CU2,000,000 CU2,000,000
Leases – Project UpdatePage 13
EXAMPLE
Assume during Year 1 Company ABC has:
• Revenues of CU800,000
• Other operating costs of CU400,000
Income statement Year 1 IAS 17 New Leases Standard
Revenue CU800,000 CU800,000
Other operating costs CU(400,000) CU(400,000)
Operating lease expense CU(100,000) -
EBITDA CU300,000 CU400,000
Amortisation right of use asset - CU(75,816)
Operating profit CU300,000 CU324,184
Finance costs - CU(37,908)
Profit or loss CU300,000 CU286,276
Leases – Project UpdatePage 14
EXAMPLE
During Year 1 Company ABC has CU500,000 cash flows from operating activities, and no other cash flows from investing or financing activities
Cash flow statement IAS 17 New LeasesStandard
Cash outflow from operating leases CU(100,000)
Other operating cash flows CU500,000 CU500,000
Total operating activities CU400,000 CU500,000
Principal repayments CU(62,092)
Interest payments CU(37,908)*
Total financing activities - CU(100,000)
Total investing activities - -
Total cash inflows CU400,000 CU400,000
* Alternatively this amount can be shown under operating activities Leases – Project UpdatePage 15
LEASES STATUS UPDATE
Practical expedients
• Short-term leases < 12 months
• Lessee ‘small ticket’ leases – if value as new is $5,000 or less, even if material in aggregate (USA – no exemption)
Page 16Financial reporting update
Leases
LEASES STATUS UPDATE
Impacts
• Bank covenants
• Employee bonus schemes
• Need to create ‘right of use’ asset registers for ‘operating lease’ assets and calculate finance charges & depreciation
Page 17Financial reporting update
Leases
AASB 15 REVENUE
Page 18Financial reporting update
BACKGROUND RECAP
• It is difficult!
• Needs attention now!!!!
• Changes pattern of revenue recognition
• Changes pattern of profit
• Far more disclosures
Page 19Financial reporting update
Remember
BACKGROUND RECAP
• Bonus schemes
• Share-based payment schemes
• Earnings per share
• Earn outs
• Deferred payments
• Bank covenants
• Dividends payments
What are your action plans between now and 1 January 2018 (retrospective application date)?
Page 20Financial reporting update
What may be impacted?
BACKGROUND RECAP
• Software companies
• Construction companies
• Residential real estate
• Manufacturers
• Professional services
• Licensors
• Retailers and consumer industries
• Media companies
• Telecommunication companies
• Everyone else?
Page 21Financial reporting update
Types of entities that may be impacted
FIVE STEP MODEL
Page 22Financial reporting update
Five step model
FIVE STEP MODEL
Page 23Financial reporting update
Five step model
FIVE STEP MODEL
Page 24Financial reporting update
Five step model
FIVE STEP MODEL
Page 25Financial reporting update
Five step model
STEP THREE – DETERMINE THE TRANSACTION PRICE
Page 26Financial reporting update
Transaction price is the amount of consideration
the entity expects to be entitled in exchange for transferring goods/services
Consideration Fixed Variable
VARIABLE CONSIDERATION
Page 27Title
An entity shall include in the transaction price some, or all, of an amount of variable
consideration, only to the extent that it is highly probable that a significant reversal in
the amount of cumulative revenue recognised will not occur when the uncertainty
associated with the variable consideration is subsequently resolved.’
STEP THREE: DETERMINE TRANSACTION PRICE
• Widget Co signed a one year contract with BMW to supply widgets for the following prices:
• Based on past experience, Widget Co estimates total sales volume will be 150,000 widgets
Question: As a at reporting date Widget Co has sold 30,000 widgets how much revenue do Widget Co recognise?
Page 28Title
Example Volume discounts
Price per widget Sales volume
CU10 0-100,000 widgets
CU9 100,001–200,000 widgets
CU8 200,001 widgets and above
STEP THREE: DETERMINE TRANSACTION PRICE
Question: As a at reporting date Widget Co has sold 30,000 widgets how much revenue do Widget Co recognise?Answer : The average transaction price is CU9.67 per widget
Page 29Title
Example Volume discounts
CU10 per widget X 100,000 widgets
CU1,000,000
CU9 per widget X 50,000 widgets CU450,000
Total consideration CU1,450,000
Estimated total volume 150,000 widgets
Average price per widget CU9.67(CU1,450,000/150,000)
STEP THREE: DETERMINE TRANSACTION PRICE
Question: As a at reporting date Widget Co has sold 30,000 widgets how much revenue do Widget Co recognise?
Answer (cont):
* The contract liability will reverse when sales >100,000 and the amount billed is CU9
Page 30Title
Example Volume discounts
DR CR
DR Cash(CU10 per widget X 30,00 widgets)
CU300,000
CR Revenue(CU9.67 per widget X 50,000 widgets)
CU290,100
CR Contract liability CU9,900
FIVE STEP MODEL
Page 31Financial reporting update
Five step model
STEP FOUR – ALLOCATE PRICE TO OBLIGATIONS
What if I don’t sell item separately?
• Estimate selling price customers would be willing to pay
• Estimate expected cost + appropriate margin
• Residual approach (transaction price less other observable standalone selling prices) - only appropriate when:
- There is a broad range of selling prices or
- The price is not yet established and the goods or service has not been previously sold on a stand-alone basis
Page 32Financial reporting update
Relative standalone selling prices
STEP FOUR: ALLOCATE TRANSACTION PRICE
• Club G is a golf club it charges a non refundable admission fee of CU5,000
• Membership fee is CU12,000 per year
• Club G estimates the average period of membership is 10 years
Question: How should the admission fee be accounted for?
Page 33Title
Example Allocating transaction price
STEP FOUR: ALLOCATE TRANSACTION PRICE
Question: How should the admission fee be accounted for?Answer: • One performance obligation – to allow the member to play
golf• Admission fee:
- Not a separate performance obligation- Recognised over the average membership period
Page 34Title
Example Allocating transaction price
Day 1 Year 1 Year 2 Year 3
Revenue(IFRS 15)
- CU12,500(12,000+(5,000/10))
CU12,500 (12,000+(5,000/10))
CU12,500 (12,000+(5,000/10))
Revenue (IAS 18)
CU5,000 CU12,000 CU12,00 CU12,000
STEP FOUR: ALLOCATE TRANSACTION PRICE
Practical implications• Delays revenue• Require systems and processes to:
- Recognise a liability on ‘day 1’- Allocate liability to revenue in subsequent periods
Page 35Title
Example Allocating transaction price
STEP FOUR: ALLOCATE TRANSACTION PRICE
• Same facts as previous example • Club G is also currently doing a promotion when a new
member signs up it will receives the following:- Golf umbrella - 10 hours of golf lessons- 30% discount on competition fees for the next year
Question: How should Club G account for the transaction?
Page 36Title
Example Allocating transaction price
STEP FOUR: ALLOCATE TRANSACTION PRICE
Question: How should Club G account for the transaction?Answer:• There are four performance obligations:
- Play golf - Golf umbrella - 30% discount on competition fees for the next year- 10 hours of free golf lessons
• The total transaction price is CU125,000((CU12,000x10)+(CU5,000))
• Transaction price allocated to each obligation• Recognise revenue as each of these obligations are
performed
Page 37Title
Example Allocating transaction price
STEP FOUR: ALLOCATE TRANSACTION PRICE
Question: How should the admission fee be accounted for?Answer (cont):
Page 38Title
Example Allocating transaction price
StandaloneSelling Price
Allocate transaction price
Play golf for 10 years CU120,000 (1,200x10)
CU124,121(120,000/120,850X125,000)
Golf umbrella CU50 CU52(50/120,850X125,000)
30% discount on competition fees for the first year
CU300 CU310(300/120,850X125,000)
10 hours of golf lessons CU500 CU518(500/120,850X125,000)
Total CU120,850 CU125,000
STEP FOUR: ALLOCATE TRANSACTION PRICE
Question: How should the admission fee be accounted for?Answer (cont):
• *Day 1 revenue consists of the free umbrella (CU52)• ** Year 1 revenue consists of: (1) play golf for 12mths (CU12,412), (2)
30% discount competition fees (CU310) and (3) golf lessons (CU518)• *** Year 2- 10 revenue consists of play golf for 12mths
Page 39Title
Example Allocating transaction price
Day 1 Year 1 Year 2 Year 3
Revenue(IFRS 15)
CU52* CU13,240** CU12,412*** CU12,412***
Revenue (IAS 18)
CU5,000 CU12,000 CU12,000 CU12,000
STEP FOUR: ALLOCATE TRANSACTION PRICE
Practical implications• Most likely delays revenue• Identify ‘distinct’ performance obligations• Determine the standalone selling price for each
performance obligation• Require systems and processes to track delayed
revenue
Page 40Title
Example Allocating transaction price
FIVE STEP MODEL
Page 41Financial reporting update
Five step model
STEP FIVE - RECOGNISE REVENUE
If one of the following apply
Page 42Financial reporting update
Recognise revenue over time
(a) Customer simultaneously receives and consumes the benefits as the entity performs
(b) Asset that is created or
enhanced is controlled by the
customer
(c) Vendor has no alternative use of the
asset and an enforceable right to
payment for performance to date
Examples:• Cleaning services• Access to golf/gym
memberships
Examples:
• Some work in progress (WIP)
• Construction on customer’s premises
• Building software on customer’s server
Examples:
• Residential real estate apartments
• Designing advertisements
OR OR
STEP FIVE - RECOGNISE REVENUE
If performance obligation not satisfied over time, recognise when customer has control, e.g. when:
• Supplier has right to be paid for asset
• Customer has legal title
• Entity transferred physical possession (but not always)
• Customer has significant risks & rewards of ownership
• Customer has accepted the asset
Page 43Financial reporting update
Point in time
ACCOUNTING 2020
• AASB 9 - periods beginning on or after 1/1/2018
• AASB 15 - periods beginning on or after 1/1/2018
• AASB 16 - periods beginning on or after 1/1/2019
Page 44Financial reporting update
CONTACTS
Page 45Financial reporting update
Wayne Basford, Partner 38 Station StreetSubiaco, WA 6008AUSTRALIAOffice +61 8 6382 4600Fax +61 8 6382 [email protected]