webinar: financial reporting in the not-for profit...

Webinar: Financial reporting in the not-for profit sector 26 June 2014

1 Financial reporting in the Not-for-Profit Sector 2014

Presenters

Emma Pratt

Kris Peach


June 2014 reminders

Future standards

June 2015 overview and not-for-profit control guidance

Questions

Next wave of standards


Next wave of Standards

Annual improvement projects 2009 -2011

Many

Low change

High change Med change

Level of change

June 2014 2018 June 2015 TBA Application date

Interpretation 20: Stripping costs

AASB 7 Financial Instruments: Asset

and liability offsetting

Removal of individual KMP Disclosure for For-Profit entities

(disclosing or listed)

AASB 1053 Reduced Disclosure

Requirements

AASB 119 Employee benefits (amended)

AASB 13 Fair Value measurement

Consolidation suite of standards for for-profit entities

Improvement projects 2011-2013 and

2010-2012

AASB 136 Impairment of Assets

(Disclosures)

AASB 1055 Budgetary Reporting (Public Sector only)

Interpretation 21 Levies

AASB 132 Financial Instruments: Asset

and liability offsetting

AASB 119 Defined Benefits (Employee

contributions)

Consolidation suite of standards

AASB 11 Joint arrangements

AASB 12 Disclosure of interests

in other entities

AASB 10 Consolidated

Financial Statements with NFP guidance

Amendments to AASB 10

Investment exception

AASB 128 Investments in

Associates and Joint Ventures (2011)

AASB 127 Separate financial statements

AASB 9 Financial Instruments:

Classification and Measurement

AASB 4 Insurance contracts

AASB 9 Financial instruments:

Macro hedging

AASB 9 Financial instruments: Impairment

AASB 117 Leases

AASB 9 and 139 Novation of derivatives

& continuation of hedge accounting

Entities impacted

Few

AASB 15 Revenue Recognition

AASB 9 Financial Instruments:

General hedging


June 2014 reminders

Future standards


Questions



Recap – New standards effective years ending 30 June 2014 2014 New standards

Annual Improvements (2009 – 2011)

Low change


Level of change

AASB 2011-4

Removal of Individual KMP Disclosures for

For-Profit entities (disclosing or listed)

AASB 7

Financial instruments

Asset and liability offsetting

Interpretation 20

Stripping costs

AASB 1053

Reduced disclosure

requirements


for For-Profit entities

AASB 119

Employee benefits

(Amended)

û û AASB 13

Fair value measurement

6 Financial reporting in the Not-for-Profit Sector 2014 6 Financial reporting in the Not-for-Profit Sector 2014

AASB 119 Recap – Employee benefits amended 2014 New standards

Key changes

■ Defined benefit plans

– Actuarial gains and losses only in OCI (consistent with AASB 1049 for public sector)

– Change to definition of return on plan assets (investment tax not in discount rate)

– Expected return on plan assets = net interest recognised in profit or loss (restricted to discount rate)

■ Change to definitions of short-term and other long-term employee benefits – more long term measurement, still current disclosure

■ Termination benefits may be recognised earlier

■ Retrospective application ■ Have we consulted actuaries to ensure using updated methodology? ■ Do variances from prior year require explanation to key stakeholders? ■ Have we updated our leave calculation methodologies? ■ NSW : Consider Treasury Circular 14/04


AASB 119 Recap – Employee benefits amended 2014 New standards

Required Disclosure

■ Retrospective application of change in accounting policy if material

■ Third balance sheet required if material

■ Describe nature and effect of change in accounting policy

■ Disclose a summary of the quantitative impact of the balance sheet, profit or loss, comprehensive income and cash flows for each item affected

■ Consider model financial statements for disclosure


AASB 13 Recap – Fair value measurement 2014 New standards

Key changes

■ Fair value defined as an exit price

■ Addresses all fair value-based measurements (except for Inventories and Leases)

■ Covers both financial and non-financial items

– Government and other not-for-profits are a big user of non-financial items

■ Additional fair value note disclosures

– Three-level hierarchy extended to all fair value measurements

– Additional information required

■ Credit risk adjustments required for fair value of derivatives entered into

■ Assess and communicate the impact of the change in fair value definition ■ Check methodology is consistent with latest valuation guidance ■ Additional information collected to prepare fair value hierarchy

■ Assess and communicate the impact of the change in fair value definition ■ Check methodology is consistent with latest valuation guidance ■ Additional information collected to prepare fair value hierarchy disclosures ■ NSW public sector to consider TPP 14-01 – conduct of a revaluation


Practical update on AASB 13

Depreciated replacement cost (DRC)

Value in use AASB 136?

Fair value AASB 13

All costs? Include Interest if third party would

Consider application

■ How is DRC calculated?

2014 New standards


Valuations guidance exists 2014 New standards

These provide guidance as to the valuation approaches – market, income and cost – including some of the specific features that differentiate public service assets

IVSC specific guidance included in ■ IVSC 300 : Valuations for Financial Reporting ■ Technical Information Paper 2: The Cost Approach for Tangible Assets


AASB 13 Highest and best use 2014 New standards

Factors to be considered in determining an alternative use for a non financial asset

Financially feasible?

Legally permissible?

Physically possible?

Maximises value to market participant?

Alternative use to be considered in valuation

Yes

Yes

Yes

Yes

Alternative use cannot be used to value the asset

No

No

No

No


AASB 13 Hierarchy 2014 New standards

Level 1 Level 2 Level 3

Unobservable inputs

Projected cash flows used to value an asset

(value-in-use) Replacements costs (DRC)

Highest level of disclosures Cost approach

(i.e. replacement costs – DRC)

Inputs other than quoted prices included in level 1,

that are observable for the asset or liability, either

directly or indirectly

Interest rates observable at commonly quoted

intervals, credit spreads and implied volatilities

Market approach or Income approach where observable

Quoted prices (unadjusted) in active markets for identical

assets or liabilities that the entity can access at the

reporting date

Quoted prices for an equity security that trades on the Australian Stock Exchange

Market approach (unlikely for non-financial assets)

Three-level hierarchy (as defined in AASB 7) extended to all fair value measurements

■ Judgment on whether level 1, 2, 3?


POLL QUESTION 1


AASB 1053 Overview – Differential reporting 2014 New standards

Reporting entity

Publicly accountable

General purpose

Examples include

Tier 1 (AAS) ■ Full recognition

■ Full measurement

■ Full disclosure

General purpose

Examples include ■ Not-for profit private sector entities (unless regulator requires) ■ Public sector entities, other than Tier 1 entities

Tier 2 (AAS – RDR) ■ Full recognition

■ Full measurement

■ Reduced disclosure

■ Not IFRS compliant

Special purpose

?

Yes

Yes

No

No

■ Listed companies

■ Disclosing entities

■ Financial institutions

■ Insurance

■ Federal, state & local government

■ Government departments, statutory authorities & SOC’s

■ All Tier 1 per Treasury for public sector ■ Other not-for profits Tier 2


Annual improvements to IFRS 2009-2011 cycle, AASB 2012-5 2014 New standards

Standards Considerations

AASB 1 First-time Adoption of Australian Financial Reporting Standards

■ If previously complied with IFRS/AAS in the past and want to reinstate compliance, may apply AASB 1 or apply IFRS/AAS as if never stopped

AASB 101 Presentation of Financial Statements

■ Only third balance sheet required when change in accounting policy, retrospective restatement or reclassification (i.e. no notes other than AASB 108 requirements)

■ Clarifies if provided comparative statements beyond minimum (e.g. 3 years of profit / loss), only need additional notes for the extra statements

AASB 116 Property, Plant and Equipment

■ Spare parts, stand by equipment and servicing recognised as inventory unless they meet definition of PPE

AASB 132 Financial Instruments: Presentation

■ Clarifies taxes payable on equity distributions / dividends generally recognised through profit and loss rather than equity

AASB 134 Interim Financial Reporting

■ In the rare situation, segment reporting required in public sector (e.g. privatisation imminent), interim financial reports disclose segment assets and liabilities


■ Corporations Act financial reporting requirements removed for charities

- Basis of preparation reference to ACNC requirements /regulations

- Minimum standards (AASB 101, 107, 108 etc) for all special purpose financial reports (not just companies)

■ Incorporated association and certain other charities, still submitting financial reports to state or territory regulator can submit same financial report for 2014

New Australian Charities and Not-for-Profits commission (ACNC) reporting requirements for Charities

Size Criteria Annual Reporting requirements for years beginning 1 July 2013

Small Revenue < $250,000 Information statement

Medium Revenue is $250 000 or more, but less than $1 million

Information statement Reviewed or audited financial reports

Large Revenue is $1 million or more

Information statement Audited financial reports

2014 New standards


June 2014 reminders

Future standards


Questions




Standards effective year ending 30 June 2015 2015 Future standards

Low change


Level of change Many

Entities impacted

Few

Improvement projects 2010-2012 and 2011-2013 Interpretation 21 Levies

AASB 136 Impairment of Assets (Disclosures)

AASB 132 Financial Instruments: Asset and liability offsetting

AASB 1055 Budgetary Reporting (Public Sector only)

AASB 9 and 139 Novation of derivatives & continuation of hedge accounting

AASB 11 Joint arrangements Amendments to AASB 10 Investment exception

AASB 12 Disclosure of interests in other entities

AASB 128 Investments in Associates and Joint Ventures (2011)

AASB 10 Consolidated Financial Statements with NFP guidance

AASB 127 Separate financial statements

Note Consolidation suite of standards is mandatory for for-profit entities for years beginning 1 January 2013 onwards, but is only mandatory for not-for-profits for years beginning 1 January 2014 or later

June 2015


AASB 10 Not-for-profit implementation guidance for control and structured entities

Not-for-profit examples

Not-for-profit guidance

AASB 10 Consolidated financial statements

■ Need to reassess every arrangement ■ Experience has been difficult applying in practice ■ Control of an asset in an entity might give control of an entity


AASB 10 In a nutshell

■ The relationship needs no financial investment in the investee ■ Investors who are investment entities are exempted from

consolidation requirements

+ Exposure to variability in

returns Power + = Link between

power and returns

Control

Investor has existing substantive rights that give it current ability to direct activities significantly affecting investee’s returns i.e. the relevant activities


In the not-for-profit context Power – the purpose and design of investee

Investee required to deploy assets / incur liabilities in a way that affects returns of the not-for-profit investor?

Power =

substantive rights

Rights that usually give power ■ Appoint / remove KMP ■ Contractual decision making rights ■ Voting rights and rights from

contractual arrangements ■ Other parties rights? ■ Investee’s economic dependence

alone does not lead to power


■ May include providing goods / services that assist in achieving investee’s social policy objectives

In the not-for-profit context Power – the purpose and design of investee

Investee required to deploy assets / incur liabilities in a way that affects returns of the not-for-profit investor?

Power =

substantive rights

■ Does legislation or the constituting documents mandate activities of the investee? ■ Not-for-profit has power even if no responsibility for day-to-day operations

Returns

Rights that usually give power ■ Appoint / remove KMP ■ Contractual decision making rights ■ Voting rights and rights from

contractual arrangements ■ Other parties rights? ■ Investee’s economic dependence

alone does not lead to power

Rights for NFP entities include ■ Statutory arrangements or

administrative arrangements ■ Policy directions relating to

relevant activities ■ Approve or veto operating and capital

budgets relating to relevant activities


In the not-for-profit context Link between power and returns

■ Investor’s ability to use its power over the investee to affect the amount of investor returns

Link between power and returns

Consider ■ Scope of decision making authority over investee ■ Rights of other parties including substantive removal rights not held by one party ■ Remuneration: level of linkage with investee’s performance ■ Exposure to variability in returns because of other interests held in the investee ■ Economic dependence alone not enough for control

Principal Agent vs

Single party holds substantive rights to remove

the decision maker without cause


Case study Control of an NGO’s decision on housing program

■ Currently 16 board members ■ Members appointed by public nomination

Other unrelated parties

■ Sets parameters for who can obtain housing, pricing, maintenance and what happens on sale of properties

■ Review / advise on board decisions ■ Currently no voting rights ■ Can change manner in which board of NGO

is determined

Government Department (D)

Relevant activities ■ Selecting applicants ■ Operations ■ Maintenance ■ Investment decisions on properties

NGO decides based on

voting rights

■ Only low cost housing

■ Economically dependent on government grants


POLL QUESTION 2


Solution Control of an NGO’s decision on housing program

■ Purpose and design

■ Decisions about the relevant activities of the NGO are made through voting rights i.e. Board decisions

■ Government department has set the parameters for the relevant activities and can change them – substantive rights

■ Economic dependency not enough by itself if NGO had other operation’s unlikely to be a factor

Power over significant decisions + Exposure to

variability in returns

■ Government department obtains indirect, non-financial returns through its ability to direct the NGO’s decisions, so as to further the department’s social policy objective of providing low-cost housing

Link between power and returns +

■ Through its ability to determine key relevant activity parameters, government department can use its power to affect the amount of its returns from the activities of the NGO

■ With control over who to offer to and at what price – control over parameters around investment decision means control over residual asset and therefore also service concession


June 2014 reminders

Future standards


Questions



Standards issued but not yet effective

Standards issued

AASB 9

Financial instruments General hedging

AASB 9

Financial instruments Classification and measurement of financial assets and liabilities

Future Standards

AASB 14

Regulatory deferral accounts

Note New IFRS standards may only be early adopted in Australia where an equivalent AASB is issued prior to the date of approval of the financial statements

Low change


Level of change û AASB 15

Revenue from Contracts with customers

■ Consider whether to early adopt

AASB 1056

Superannuation


AASB Standard Setting Work Program

Exposure Draft

Final Standard

Quarter 3 2014 Quarter 4 2014

Borrowing costs

Income of not-for-profit entities

Tier 2 transition requirements

Amendments to AASB 1053

Related parties disclosure in

not-for-profit entities

Income of not-for-profit entities Borrowing costs

Grantor reporting Service concessions

TBD

Grantor Reporting Service concessions

Australian specific projects


Related parties disclosure in not-for-profit entities Extending related party disclosures to NFP entities

■ Final standard expected 2014

■ AASB 124 ‘Related Party Disclosures’ to be extended to NFP public sector

■ Ministers potentially key management personnel (KMP)

■ Reduced disclosure where appropriate Ministerial remuneration disclosures made in other financial statements

■ Modified disclosure requirements for government-related entities

– Only individually or collectively significant

■ Implementation guidance for NFP government entities

■ To be effective years ending 30 June 2017 (comparatives required)

■ GGS financial statements not exempt

AASB public sector projects


Income of Not-for-Profit entities

■ Dependent on IFRS 15 Revenue – now issued

■ Exposure Draft expected Quarter 3 of 2014

■ Existence of performance obligation = deferral of revenue (better matching than AASB 1004)

■ Need to consider enforceability of contract, specificity of obligations

■ No distinction between reciprocal and non-reciprocal

■ Peppercorn leases

– Currently mixed treatment for finance lease either as government grant or amount paid

– Proposed standard to recognise grant element first

■ Transition requirements not yet determined

■ May be beneficial to early adopt IFRS 15

Australian specific projects


A Year for Simplification - 2014

■ Perform high level check on materiality of annual leave provision amendments

■ Check instructions to valuers in line with AASB 13

■ Perform a sense check on financial statements – avoid unnecessary clutter

■ For public sector, assess impact of state guidance/policy

■ For charities, consider impact of ACNC reporting requirements

Be Prepared for 2015

■ Assess your projects, assets, investments for control

■ Consider early adoption of AASB 9 Financial Instruments and AASB 15 Revenue from contracts with customers

Key take-aways


Kris Peach Partner

+61 (03) 9288 5297

[email protected]

Emma Pratt Director

+61 (07) 3233 9775

[email protected]

Thank you


POLL QUESTION 3


■ AASB 13 – Application to particular types of physical non-current assets

■ AASB 13 – Additional disclosures

■ AASB 1055 – Public Sector budgetary reporting

■ Annual Improvements Project 2010 – 2012 Cycle

■ Annual Improvements Project 2011 – 2013 Cycle

Appendix – Additional Information


AASB 13 Application to particular types of physical non-current assets

2014 New standards

Asset characteristics – consider for highest and best use Valuation technique

Land assets with no feasible alternative use

■ Parks and botanical gardens, national parks and reserves ■ Land under specialised buildings or infrastructure assets that are

restricted in use as a result of mandates for service delivery, measured in combination with any plant or infrastructure

Market approach or income approach In contrast, if no restrictions (i.e. surplus) or held to earn rentals or capital appreciation then value based on higher feasible alternative

Specialised Buildings

■ Buildings designed for a specific limited purpose for example, schools, hospitals, court houses etc.

■ Consider any restrictions on the use and disposal of the buildings as well as the risk that any alternative use will not be approved

Generally measured using the cost approach or if part of a cash generating unit, the income approach

Specialised plant and infrastructure

■ Designed for a specific limited purpose. Eg water and sewerage authority or an electricity distributor which are highly specialised.

■ In most cases, government mandates means no feasible alternative (measure in combination with the land and any other related Property, Plant and Equipment)

Generally measured using the cost approach or if for profit the income approach. In commercial rate-regulated industries likely the income approach is most representative of fair value. Unlikely a market approach.

Heritage / cultural assets

■ Have unique cultural, historical, geographical, scientific and or environmental attributes.

■ Include natural history collections, library/museum collections and heritage properties (eg. government house, parliament house).

■ Few or no alternative uses because of natural, legal and financial restrictions on their use and disposal.

Observable market prices for marketable heritage assets for example artworks – market approach No observable market – cost approach (reproduction cost)

■ Judgment on whether level 1, 2, 3? ■ SA: Use of income approach restricted – Require Treasury approval


Additional disclosures

Recurring Non-recurring FV disclosed Requirement L1 L2 L3 L1 L2 L3 L1 L2 L3

Fair value at end of reporting period AASB 13.93(a) P P P P P P Reasons for the measurement AASB 13.93(a) P P P Level within hierarchy AASB 13.93(b) P P P P P P P P P Transfers with hierarchy AASB 13.93(c) P P Description of valuation technique AASB 13.93(d) P P P P P P Any changes to valuation technique and reasons AASB 13.93(d) P P P P P P Quantify unobservable inputs AASB 13.93(d) P P P Reconciliation of opening and closing balance AASB 13.93(e) P Unrealised gains/losses from remeasurement and where disclosed in the Statement of Comprehensive Income

AASB 13.93(f) P

Description of valuation processes and policies AASB 13.93(g) P P Narrative sensitivity to changes in unobservable inputs AASB 13.93(h)(i) P If highest and best use differs from actual, then reason why AASB 13.93(i) P P P P P P P P P

2014 New standards AASB 13


AASB 1055 Public sector - budgetary reporting 2015 Future standards

Budget financial statements (any) with similar detail to

accounting standards financial statements?

No budget disclosures

■ NFP within GGS ■ GGS ■ Whole of government

No budget disclosures (e.g. Universities and local government)

Results of entity separately presented to Parliament?

No Yes

Yes No

Yes

Budget disclosures ■ Restate budget to accounting standards presentation ■ Explain variances to original budget

■ Standard issued March 2013. Application date 30 June 2015 (with effect from 1 July 2014)

■ Consider 30 June 2014 Budget process


Annual Improvements Project 2010 – 2012 Cycle 2015 Future standards

Standards Detail Consider

AASB 3 Business Combinations

■ Contingent consideration classified as a financial or non-financial asset or liability, must be measured at fair value through profit or loss at each reporting date

Transition specific, consider case by case

AASB 13 Fair Value Measurement

■ Clarifies that short-term receivables and payables with no stated interest rate can be measured at invoice amounts without discounting, where the effect of discounting is immaterial, which is consistent with AASB 108.8

No change to existing application

AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets

■ New requirements under the revaluation model: ■ (a) the gross carrying amount of PPE / intangible assets is adjusted

consistently with the revaluation of the carrying amount of the asset ■ (b) Accumulated depreciation / amortisation is eliminated against the gross

carrying amount of the asset

For public sector, NSW mandates ■ cost approach uses (a) ■ Income / market approach

uses (b) Other States - consider,

especially if applying the revaluation model.

AASB 124 Related Party Disclosures

■ Definition of related party is expanded to include an entity (or group which it is a part of), which provides key management personnel (KMP) services to the reporting entity or parent of the reporting entity

■ KMP services provided by a separate management entity are disclosed separately from KMP employees

Not yet relevant for not-for-profit public sector Recommend early adoption for others

AASB 8 Operating Segments

■ Disclose judgements made by management in applying the aggregation criteria

■ An entity is only required to provide a reconciliation of segments’ assets to the entity’s assets when assets are reported to CODM

Not relevant unless privatising

AASB 2 Share based Payment

■ Amends the definitions of vesting condition and market condition and adds definitions for performance condition and service condition



Annual Improvements Project 2011 – 2013 Cycle 2015 Future standards

Standards Detail Consider

AASB 13 Fair Value Measurement

■ Clarifies that the portfolio exemption in paragraph 48 applies to all contracts within the scope of AASB 139 (AASB 9), regardless of whether they meet the definition of a financial asset or financial liability

Consider together with AASB 13 implementation

AASB 1 First–time Adoption of Australian Financial Reporting Standards

■ Clarifies the meaning of ‘effective IFRSs’ to include exiting and currently effective IFRSs and new or revised IFRSs not yet mandatorily effective (provided early adoption is permitted)

Generally not applicable

AASB 3 Business Combinations

■ Clarifies all joint arrangements are exempt from AASB 3

■ Clarifies AASB 3 criteria distinguishes between a business combination and an asset acquisition


AASB 140 Investment Property

■ Clarifies AASB 140 criteria is used only to distinguish between investment property and owner occupied property


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