160316 - CIMA Preliminary Slides.pptx [Read-Only] locations docs...ACCOUNTING 2020 • AASB 9...

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?

Financial reporting update

“Do you intend to still be an accountant involved in financial reporting in 2020?”

ACCOUNTING 2020


ACCOUNTING 2020

• AASB 9 - periods beginning on or after 1/1/2018




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?


When will you get round to understanding these new standards?

AASB 9


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)


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


AASB 9 Financial Instruments

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


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 Update

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 Update

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


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


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 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)


Leases


Impacts

• Bank covenants

• Employee bonus schemes

• Need to create ‘right of use’ asset registers for ‘operating lease’ assets and calculate finance charges & depreciation


Leases

AASB 15 REVENUE


BACKGROUND RECAP

• It is difficult!

• Needs attention now!!!!

• Changes pattern of revenue recognition

• Changes pattern of profit

• Far more disclosures


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)?


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?


Types of entities that may be impacted

FIVE STEP MODEL


Five step model

STEP THREE – DETERMINE THE TRANSACTION PRICE


Transaction price is the amount of consideration

the entity expects to be entitled in exchange for transferring goods/services

Consideration Fixed Variable

VARIABLE CONSIDERATION

Title

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?

Title

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


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

Title


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)


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

Title


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


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


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?

Title

Example Allocating 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

Title


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


Practical implications• Delays revenue• Require systems and processes to:

- Recognise a liability on ‘day 1’- Allocate liability to revenue in subsequent periods

Title



• 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?

Title



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

Title



Question: How should the admission fee be accounted for?Answer (cont):

Title


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


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

Title


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


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

Title


FIVE STEP MODEL


Five step model

STEP FIVE - RECOGNISE REVENUE

If one of the following apply


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


Point in time

ACCOUNTING 2020





CONTACTS


Wayne Basford, Partner 38 Station StreetSubiaco, WA 6008AUSTRALIAOffice +61 8 6382 4600Fax +61 8 6382 [email protected]

160316 - CIMA Preliminary Slides.pptx [Read-Only] locations docs...ACCOUNTING 2020 • AASB 9...

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