April/May 2019

Financial Reporting Update

1. ASIC Surveillance2. What’s Coming?3 New Standards4. What’s Happening Locally/Globally?

Introduction & Agenda

SurveillanceASIC

1

Headlines from ASIC media releases

Premier Investments writes down brand name assets

[17 October 2018]

Kazakhstan Potash reduces profit on issuing replacement convertible notes

[17 August 2018]

Yellow Brick Road writes down intangible assets

[21 March 2019]

Mustera Property Group restates net assets and discloses related party transactions

[25 March 2019]

Prime Financial Group increases reported liabilities

[1 April 2019]

Pro-Pac Packaging writes down goodwill

[2 April 2019]

Current ASIC focus areas

● New accounting standards

● Impairment testing and asset values

● Revenue recognition

● Expense deferral

● Off-balance sheet arrangements

● Tax accounting

● Operating and financial review

● Non-IFRS financial information, and

● Estimates and accounting policy judgements.

coming?What’s

2

Standards and interpretations

1 January 2018

● Share-based payment clarifications

● Financial instruments● Revenue - for profit

entities● Financial instruments -

not-for-profit entities

1 January 2019

● Leases● Uncertain tax positions ● Revenue/contributions/

leases - not-for-profit entities

● Prepayment features of loans

● Long term interests in associates and JVs

● Defined benefit plan amendment

1 January 2020 and beyond

● Definition of material ● Definition of a business ● Contributions of assets to

associates/joint ventures● Insurance● Conceptual framework

Interpretation 23 - Uncertainty over income tax treatments

What the Interpretation clarifies:

● unit of account - whether to consider exposures individually or

in aggregate for a territory

● detection risk - assume tax authorities will review

● threshold --> probable

● measurement

○ most likely amount method

○ expected value method

IFRIC Agenda decisions

Determining exchange rates when there's lack of exchangeabilityExplains the judgement in determining the exchange rate in territories that lack exchangeability

Deposits relating to taxes other than income tax Addresses whether a deposit relating to a tax that is not accounted for as an income tax is a contingent asset

Assessment of promised goods and servicesAddresses whether fees received at inception of a contract relate to a service for which revenue can be recognised

Customer's right to access the supplier's software hosted on the cloudClarifies whether a cloud-computing arrangement is a lease or a service

Ref: IFRS Interpretation Committee Updates

IFRIC Agenda decisions

Sale of output by a joint operator Addresses situations where the output a joint operator receives in a reporting period is different from the output to which it's entitled

Liabilities in relation to a joint operator's interest in a joint operationClarifies how joint operators should consider liabilities of their investees (including leases)

Holdings of cryptocurrencies (tentative)Discusses whether cryptocurrencies are an intangible or inventory

Application of the highly probable requirement in renewable energy hedgesAddresses how to apply the highly probable threshold when there is uncertainty in the timing and magnitude of the forecast hedge transaction which is different for producers and consumers

standardsNew

3

Revenue

What regulators are asking about

52% of registrants receiving comments disclosed that adoption of the standard had an immaterial impact on their financial statements.

Comment letters from the SEC

What are regulators asking about?

“You disclose you recognize revenue over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion). Revise to disclose why this method is a faithful depiction of the transfer of goods or services....”

“Tell us how you considered the guidance….in determining the point in time at which you recognize revenue and disclose any significant judgments made in evaluating when control is transferred.”

“For [A], [B], and [C] services, please provide us with your analysis as to why these services were not separately identifiable in accordance with the guidance….”

Comment letters from the SEC

[Source: PwC, Stay informed: SEC comment letter observations on the new revenue standard, November 2018]

What are regulators asking about?

“Please explain to us, in detail, how you account for variable consideration when determining the transaction price... [in] each specific circumstance that causes variability in the consideration….

“Furthermore, in your May [X], 2018 earnings call, you provided product line updates for certain divisions. Given these factors,

please tell us how you considered the presentation and use of divisional revenue information when determining the appropriate disaggregated revenue categories that depict how the nature, amount, timing and uncertainty of cash flows are affected by economic factors and in the context of meeting the overall disclosure objective...”

“We note from your disclosure on page [XX] that…….in accordance with ASC 606 guidance, you believe you are a principal in the

arrangement...and now recognize revenues based on a gross transaction price. Please provide us with your analysis regarding how you determined you are the principal in these transactions.”

Comment letters from the SEC

[Source: PwC, Stay informed: SEC comment letter observations on the new revenue standard, November 2018]

What are regulators asking about? Industries of focus to the SEC

Disclosure requirements Annual disclosure requirements

● Info about POs:○ when satisfied○ when paid○ obligations (refunds, warranties)

● Method used for recognising revenue over time● Judgements on when control passes at a point in

time● Transaction price

○ how determined○ judgements made with variable consideration○ non-cash○ financing

● Judgements with allocating transaction price● Capitalised contract costs and amortisation

● Contract assets vs receivables vs contract costs

● Explanation of movement in contract asset and liability (qualitative and quantitative)○ prior deferred revenue recognised○ revenue recognised for POs satisfied

in prior period● Timing of revenue vs payments for POs● Transaction price allocated to unsatisfied

POs and when that will be recognised● Disaggregated revenue● Separation of AASB 15 revenue from other

revenue/income● Separation of impairment from receivable/contract assets

from other impairment● Practical expedients adopted● Significant judgements and estimates

Don’t forget, if prior period not restated…..need to carry forward AASB 118/111 policies.

Disclosure examples

Raytheon Company US - early adopted in FY17

Disaggregation of revenue

By Business segment

By Geography

By Major customers

By Type of contracts

Missile Systems

Intelligence, Information and Services

Integrated Defense Systems

Space and Airborne Systems

Forcepoint

[Source: Raytheon 2017 Annual Report, page 126-7]

Disclosure examples

Raytheon Company US - early adopted in FY17

Contract assets and liabilities

Explanation of movements in

contract assets/liabilities

Revenue recognised in current year related to

prior year contract liability

[Source: Raytheon 2017 Annual Report, page 99]

Disclosure examples

Raytheon Company US - early adopted in FY17

Remaining performance obligation

[Source: Raytheon 2017 Annual Report, page 92]

Description of amount/timing of committed

revenue/transaction price that is unperformed

InstrumentsFinancial

● Properly assess impairment provisions of IFRS 15 contract assets, loans to joint ventures, and intercompany loans

● Explain changes in the classification of assets● Explain how significant increases in credit risk are

determined

● Explain mapping of stages to internal credit ratings

● Quantify sensitivity of ECL to changes in assumptions● New IFRS 7 disclosures missed

● Explain if new standard impact is immaterial

What the UK regulator is saying about IFRS 9 adoption

New disclosure requirements of AASB 7 for Annual Reporting

Hedging● Risk management strategy, notional amounts and timing of hedging

instruments, sources of ineffectiveness and uncertainty, accumulated gains and losses and FV adjustments

Equity investments designated at FVOCI● Disclosures at individual investment level: rationale, fair value,

dividends, cumulative gains/losses, disposals

Credit Risk● Credit risk management practices, movement reconciliations,

breakdowns by risk grades and aging buckets, exposures, measurement method, write-off policy, application of modifications

Trade Receivables ECL provision matrix

Total$'000

< 30 days$'000

31-60 days $'000

61-90 days $'000

> 90 days $'000

31 Dec 2016 Trade Other Trade Trade Trade

Consolidated

Expected loss rate 0.50% - 5% 30% 75%

Gross carrying amount

60,500 27,100 20,000 8,700 2,900 1,800

Loss allowance provision

(2,790) (135) - (435) (870) (1,350)

Net receivables 57,710 26,965 20,000 8,265 2,030 450

Trade Receivables ECL movement reconciliation

Impairment on Intercompany loans - consider:

● Internal or external credit ratings

● External loans of the borrower, their status and seniority

● Historical arrears

● Interest rates/credit spreads used for transfer pricing

● Legal enforceability of parental guarantees

● Probability-weighted outcome

Debt modification

1) Modification vs extinguishment

● Determined based on relative present value of cashflows

● Use original EIR to discount

2) Modification impact

● Difference in present values is the gain or loss on modification

● Gain or loss in P&L upfront, not deferred

IBOR Reform

Interbank offered rates (IBORs) such as LIBOR and Euribor will be replaced in the near future

What to do now?

● Inventory of contracts with IBOR● Watch IASB developments for transition relief

What could this affect?

● Hedging relationships and documentation● Debt modifications or extinguishment● Fair value measurements● Variable lease liabilities● Assets and liabilities that use an IBOR-based discount rate

Leases

Discount rates - three basic principles

Develop a methodology that's consistent and can be replicated

Keep it pragmatic and consider materiality

Think about broader impacts of the discount rate for your business

Discount rates - Broader business impacts

IMPAIRMENT

Lower discount rates

Higher right-of-use asset in CGU

INCOME STATEMENT VOLATILITY

Higher discount rates

Higher interest expense

Greater P&L volatility

BALANCE SHEET

Higher discount rates

Lower liability Lower right-of-use

asset

3 4

Discount rates - FAQ

Can I use the rate on my bank debt to discount my future lease payments?

What adjustments might I need to make to an external debt rate to get to an incremental borrowing rate?

What can I do if I don’t have external debt?

Is there a difference in the discount rate methodology for appreciating vs depreciating assets?

1 2

Moving to business as usual

Integration between systems and with other business areas

● Think about opportunities to use your system to enhance other

areas of the business

Who should be involved in the process?

● Process starts with a designated contract manager

● Consider involving procurement and/or legal

● Approval and tracking for entering into leases

Moving to business as usual

Implementing clear processes and effective controls

● Entering new leases into system

● Updating existing leases

● Processes around judgmental areas (discount rates, extension options)

● New monthly close procedures

● Appropriate approvals and review

A system does not ensure compliance - you will need to make judgments, test calculations and ensure data integrity.

Moving to business as usual

Address business impacts of the standard

● Thin capitalisation

● Remuneration and debt covenants

● Internal management reporting structure

Disclosing the expected impacts

● Disclosure expectations for June 2019

● Additional work that will be performed by auditors

○ System testing to ensure compliance

○ Controls tests

○ Contract reviews to ensure lease data appropriately

captured

○ Review of your transition process

● Disclosing secondary impacts (eg. impairment and

deferred tax)

What are the expectations of auditors and regulators for 30 June 2019 annual reports?

happeningWhat’s4

locally/globally?

Locally - Reporting

Large proprietary company reporting thresholds increased

Revenue > $50m Assets > $25m Employees > 100

Special purpose financial statements - proposal to no longer lodge with ASIC● New reduced disclosure regime being developed

● Not-for-profit entities considered separately - potential 3 tier reporting to reduce

regulatory burden

Locally - Banking Royal Commission / Climate Change

Disclosure of climate change-related risks and other business risks ● Greater disclosure requirements on climate change where

material impact expected● Consider wider impact on financial statements - impairment,

technological and other key risks

Banking Royal Commission● Consider customer remediation● Provisions and contingent liabilities

Locally - Climate change

How to assess materiality

Could climate-related or other emerging risks affect entities qualitatively in a way that influences investors?

Yes No

Are these risks likely to have a material impact?

Have these risks affected financial statements?

YesNoYes No

Update disclosures

Disclose why no impact

Disclose impact No disclosure

[Source: Adapted from AASB-AUASB climate-related risk joint bulletin, December 2018, page 4. Updated publication, April 2019]

Brexit - entities doing business with the UK or that have UK operations

● Consider disclosures

● Subsequent events

● Impairments and valuations

● Restructuring

● Directors duties and dividends

● Tax

● Interim reporting

Globally - Brexit

Need more information?

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