ACCOUNTING

NEWSAPRIL 2015

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IN THIS EDITIONP1 Attention directors – ASX Corporate

Governance changes – Part 8 - The challenges facing ASX boards with operations in emerging markets

P4 AASB 15 – Revenue recognition to change for the manufacturing industry

P8 New BDO publications

P9 Public sector entities to disclose related party transactions

P9 Recent ASIC enforcements – Entities restate their financial statements

P10 ACNC continues to accept state-based regulator financial reports

P10 Corporations Act changes receive Royal Assent

P11 Comments sought on exposure drafts

In this edition we continue our series on the practical implications of the revised ASX Corporate Governance Principles, specifically the challenges boards face when conducting operations in emerging markets.

We look at how the new revenue standard, AASB 15 Revenue from Contracts with Customers will impact manufacturers and how recent changes to AASB 124 Related Party Disclosures mean that the public sector will, in future, have to disclose details of related party transactions. We also discuss details of restatements companies have been required to make as a result of ASIC’s financial reporting surveillance program.

Lastly, we confirm that the ACNC have agreed, in some cases, to accept financial information given to state-based regulators, rather than what is required under the ACNC Act 2012 and unlisted disclosing entities will no longer be required to prepare remuneration reports from 19 March 2015 onwards.

ATTENTION DIRECTORS – ASX CORPORATE GOVERNANCE CHANGES – PART 8 - THE CHALLENGES FACING ASX BOARDS WITH OPERATIONS IN EMERGING MARKETSIn this month’s Corporate Governance article we consider some of the implementation issues of the revised corporate governance principles facing directors of ASX listed entities with significant operations in emerging markets.

In November last year John Price, an ASIC Commissioner, spoke at the Asia–Pacific Resources Conference 2014. Even though the speech was made at a resources conference, recognising the large number of listed Australian resources companies operating in emerging markets, Commissioner Price’s message is applicable to all directors of ASX companies with significant operations in emerging markets

‘Globalisation – and the increase in integration, competition and complexity of the global financial system – brings with it new issues for our financial markets, and ASIC is committed to ensuring that our regulatory framework can deal with the technical changes and innovations that arise.’

Quote from ASIC Commissioner, John Price speech at Asia-Pacific Resources Conference, November 2014

The corporate governance issues raised by Commissioner Price fall into two distinct scenarios, namely:

1. An Australian Company with an Australian Board operating in an emerging market (very common in the mining and natural resources sector), and

2. A company listed on the ASX, possibly through a backdoor listing, with a board comprised mainly of non-Australian residents and operating solely in an emerging market.

In this month’s article we look at the challenges an Australian board faces in applying the revised ASX Corporate Governance Principles when the entity has some or all of its operations in emerging markets.

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What are emerging markets?ASIC considers emerging market companies to be listed entities with significant operations or assets in Eastern Europe, Africa, South America, the Middle East and parts of Asia, including China.

Governance challenges for entities with operations in emerging marketsIn 2013, ASIC conducted a high-level review of emerging market companies in Australia and identified a number of issues around the governance and risk management of listed entities with operations in emerging markets. The specific areas of risk identified by ASIC included:

• Poor corporate governance and internal control and risk management systems

• Over-reliance on key individuals located outside Australia • Complex ownership structures or contractual arrangements, making it

difficult to ensure title and control over assets, and • The difficulty in obtaining reliable information and verifying opinions

about an overseas entity’s operations and performance.

How to improve governance of operations in emerging marketsTo address some of these areas of risk, ASIC suggests the following, where applicable, should be adopted by emerging market companies (extracted from ASIC Commissioner John Price speech at Asia-Pacific Resources Conference, November 2014):

• Structure the board to add value – for example, by appointing independent directors

• Implement robust internal controls and risk management policies to mitigate preventable difficulties in operating in foreign jurisdictions

• Adequately consider the extent of the entity’s and board’s legal obligations in both the Australian and their overseas market, and manage the associated risks where laws between countries are different

• Address potential conflicts of interest and related party transactions – for example, by providing adequate disclosure to shareholders and seeking their approval, and

• For share offers made available to the public, ensure the disclosure used is an accurate reflection of the business undertaken by the entity and the risks associated with the business. For example, it may be particularly important that adequate verification of assets and ownership is undertaken as part of a due diligence process in preparing an offer. It is also important that emerging market companies not incorporated in Australia clearly disclose any differences in legal and regulatory requirements between Australia and the jurisdiction of incorporation, and explain the risks this may present to shareholders or investors.

Not a ‘tick box’ exerciseASIC consider that some of the challenges faced by emerging market companies can be mitigated by good corporate governance. Commissioner Price stated that effective corporate governance relies on both:

• ‘Hard’ structural elements, such as specific legal obligations, and • ‘Soft’ behavioural factors, driven by directors and management

faithfully performing their duty of care to the company.

Commissioner Price also stated that ASIC encourages directors not to regard corporate governance as a ‘box ticking’ exercise. Good governance should be part of a director’s mindset when discharging his or her functions to ensure a compliance culture in the organisation.

Key issues to be considered by directors of ASX listed companies operating in emerging marketsBelow we consider some of the key practical issues regarding corporate governance that boards should be considering in respect of their operations in emerging markets.

Education and processes – Board skills matrix, professional development and induction programsAs set out in Recommendation 2.2 of the ASX Corporate Governance Principles and Recommendations (Third Edition), a listed entity should have a board skills matrix which can be used as a tool to identify any gaps in the collective skills of the board that should be addressed as part of a listed entity’s professional development initiatives for directors.

The skills matrix needs to be appropriately tailored for the challenges of operating in an emerging market.

Questions that directors should be asking in respect of the skills matrix include:

• How many directors can speak and read the language of the country the entity operates in?

• How many directors have experience operating in the country the entity operates in?

• Who is familiar with the laws and customs of the country the entity operates in?

• What is the selection criteria for selecting board members when considering the skills required to operate in that geographical location?

• Have all directors been appropriately trained/inducted as to the risks associated with operating in that emerging market?

Recommendation 2.6 of the Third Edition recommends that a listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively.

This raises the question as to whether all board members have received appropriate training/induction in respect of the country/countries the entity operates in. Specifically does the induction program include:

• Background on the specific country• Political briefing, particularly as it reflects sovereign risk and force of

law• Social briefing• Level of bribery and corruption• Local law in terms of disputes, environmental, litigation, employment,

property ownership and foreign ownership• Local taxation as it applies to withholding tax, GST, payroll tax,

distribution of dividends and thin capitalisation• Local customs as it impacts ownership of assets and dispute resolution• Local economic situation?

Further, there should be a process in place for the board to be kept up to date with any changes to the above as they may impact the company’s operation in that emerging market.

Code of conduct

Recommendation 3.1 of Third Edition‘A listed entity should have a code of conduct for its directors, senior executives and employees…’

Having operations in an emerging market, with potentially a largely non-English speaking workforce, possesses a number of implementation challenges. Questions directors should be asking include:

• Do we have an appropriate code of conduct, tailored for the challenges of operating in emerging markets?

• What language is it in?• How is it communicated to all senior staff, including those operating

overseas, or those who are non-English speaking or not Australian?• Has the code of ethics being appropriately modified for operating in

emerging markets?

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Financial reporting

Third Edition - Principle 4: Safeguard integrity in corporate reporting‘A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting.’

The key duties of an audit committee (Recommendation 4.1) include reviewing:• The scope and adequacy of the external audit, and• The independence and performance of the external auditor.

If there is not a separate audit committee then these duties become the responsibility of the full board.

Where an entity has operations in an emerging economy audited by local auditors, the board or the audit committee should determine:

• How competent is the auditor in the emerging economy? • Is the auditor independent? • Is the auditor applying international standards on auditing?• What processes do the Australian auditors employ to verify the quality of the audit work

performed in the local country?• Do the Australian auditors visit the overseas location?• Does the Australian audit partner visit the overseas location?• Is the local audit team familiar with IFRS? • What level of training and quality control has the overseas auditor in respect of auditing listed

entities applying IFRS?

Risk management

Third Edition - Principle 7: Recognise and manage risk‘A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework.’

A pervasive consideration as to risk management for entities operating in emerging markets is ‘who can be trusted?’ and ‘on what basis do I conclude that someone can be trusted?’.

It is very common for entities to be very reliant on a local partner, or local agent to be their ‘in-country expert’. Boards need to know and understand how this partner was recruited or introduced. What reference checks were performed before appointing them? Are they exposing the organisation to significant risk through being over reliant on one individual or organisation?

Recommendation 7.2 of Third Edition‘The board or a committee of the board should review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound…’

Again, having operations in an emerging market, with potentially a largely non-English speaking workforce possesses a number of implementation challenges. Questions directors should be asking include:

• If the risk management framework is in English, has it been translated so key non-English speaking directors and management can apply it?

• Who reviews the risk management framework?• Do the risks identified properly reflect the risks associated with operating in that particular

emerging economy?• How are language barriers dealt with between the board and line management (i.e. those at the

mine gate)?

Internal audit functions

Recommendation 7.3 of Third Edition‘A listed entity should disclose … processes it employs for evaluating and continually improving the effectiveness of risk management and internal control processes.’

As discussed in last month’s Accounting News article, the recommendation to annually review the risk management framework is likely to prove particularly challenging for an entity without an internal audit function. For those entities operating in emerging markets, this recommendation raises a number of practical issues:

• Who can do the review?• What skills and knowledge does the reviewer require to be able to perform the review?• Are reviewers willing and able to visit the overseas location?• If the review is done in the overseas country, can the review be relied upon? Trusted?• What is the cost of performing this evaluation?

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Economic, environmental and social sustainability risks

Recommendation 7.4 of Third Edition‘A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.’

Commissioner Price’s speech was to the Asia–Pacific Resources Conference, and as widely reported following the speech, the ASX has a significant number of listed mining and exploration companies operating in emerging markets, in Africa, central Asia, Latin America and the Pacific. Many emerging markets are operating with less sophisticated but constantly evolving legislation than is in force in Australia regarding mining, exploration, environmental obligations and laws around foreign ownership and mineral royalties. This in turn presents unique risks in respect of sustainability. For example, will a change in government or local law mean the project is stranded or no longer economically viable and how can this type of risk be managed?

Recommendation 7.4 will therefore perhaps represent the most significant challenge to those ASX mining and exploration companies operating overseas.

The recommendation not only requires identification and disclosure of the sustainability risks, but also how these risks are managed. Many junior explorers find themselves with single project operations in emerging markets, yet are currently operating under significant funding constraints which may mean the entity simply is not in a position to actively manage these risks.

More information on the ASX Corporate Governance changes

Please refer to other articles in our Accounting News Corporate Governance series for more information:

• Accounting News – August 2014 – Part 1 - Introduction to the changes to the Third Edition of ASX Corporate Governance Principles and Recommendations

• Accounting News – September 2014 – Part 2 - Exposure to economic, environmental and social sustainability risks

• Accounting News – October 2014 – Part 3 - Roles and responsibilities of directors with respect to financial reporting – Skills matrix and professional development requirements

• Accounting News – November 2014 – Part 4 - ‘If not, why not’ disclosure requirements• Accounting News – December 2014 – Part 5 – Principle 7: Recognise and manage risk• Accounting News – February 2015 – Part 6 – Role of the board in managing and monitoring risk• Accounting News – March 2015 – Part 7 – Role of the audit committee and the internal audit

function

AASB 15 – REVENUE RECOGNITION TO CHANGE FOR THE MANUFACTURING INDUSTRY This month we take a closer look at the impacts of AASB 15 Revenue from Contracts with Customers on the manufacturing industry. For these entities, AASB 15 could significantly change the pattern of revenue and profit recognition, as well as affect bank covenants, performance-based compensation (including bonuses and share-based payments), internal budgeting processes, and market and investor communications.

AASB 15 contains more specific guidance on revenue recognition than the current AASB 118 Revenue standard.

The following areas are likely to have a significant impact on entities within the manufacturing industry under AASB 15:

• Volume discounts• Volume rebates• Set up fees• Payments to customers• Payments received in advance.

Effective date and transition The effective date of AASB 15 is for annual reporting periods beginning on or after 1 January 2017. Entities can choose to apply a ‘full’ or ‘partial’ retrospective approach when first applying this Standard.

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If an entity chooses to apply the ‘full’ approach, it will retrospectively restate its comparatives in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, subject to certain exceptions for completed contracts.

If applying the ‘partial’ approach’, the entity will recognise the cumulative effect of the retrospective adjustments as an adjustment to opening retained earnings on 1 January 2017 (date of initial application). Contracts that are completed at the date of initial application are not retrospectively restated.

Volume discountsAASB 15 includes more detailed guidance on ‘variable consideration’ and restricts the amount of variable consideration that can be recognised as revenue to the amount where it is ‘highly probable that a significant reversal of revenue recognised will not occur’.

Manufacturers often offer volume discounts as the production cost per unit typically decreases as more units are produced. Volume discounts are considered to be a form of ‘variable consideration’ under AASB 15 because the total amount to be paid by the customer for the contract is not known at the start, and is dependent on the total quantity of goods that is ultimately purchased by the customer.

Under AASB 15, manufacturing entities will need to estimate the amount of the volume discount and defer a portion of revenue until that discount is applied. This is likely to result in later recognition of revenue and profit in comparison with current accounting.

Example 1On 1 July 2017, Widget Co signed a one year contract to supply widgets to Entity A for the following prices:

PRICE PER WIDGET SALES VOLUME

$10 0-100,000 widgets

$9 100,001–200,000 widgets

$8 More than 200,000 widgets

Based on past experience, Widget Co estimates total sales volume of 150,000 widgets.

Question At 31 December 2017 Widget Co has sold 30,000 widgets. How much revenue should Widget Co recognise under AASB 15?

Answer The amount of revenue recognised per widget is $9.67. Therefore revenue recognised is $290,000 ($9.67 x 30,000). The amount is calculated as follows:

$10 per widget X 100,000 widgets $1,000,000

$9 per widget X 50,000 widgets $450,000

Total consideration $1,450,000

Estimated total volume 150,000 widgets

Average price per widget $9.67 ($1,450,000/150,000)

The average transaction price is $9.67 per widget.

DR CR

DR Cash ($10 per widget X 30,000 widgets) $300,000

CR Revenue ($9.67 per widget X 30,000 widgets) $290,000

CR Contract liability $10,000

The contract liability will reverse when sales >100,000 widgets and the amount billed is $9 per widget.

If 120,000 widgets are sold between 31 December 2017 and 30 June 2018, the journal entries are:

DR CR

DR Cash ($10 per widget X 70,000 widgets) + ($9 per widget X 50,000 widgets) $1,150,000

DR Contract liability $10,000

CR Revenue ($9.67 per widget X 120,000 widgets) $1,160,000

The table below shows how revenue recognition for volume discounts is delayed under AASB 15.

AASB 118 AASB 15

31 December 2017

Revenue $300,000 $290,000

Contact liability (B/S) $10,000

30 June 2018

Revenue $1,150,000 $1,160,000

Total $1,450,000 $1,450,000

(B/S) = balance sheet account

Volume rebates

Volume rebates are also considered to be a form of ‘variable consideration’ under AASB 15 because the total amount to be paid by the customer for the contract is not known at the start and is dependent on the eventual sales volume to customers.

Under AASB 15, manufacturing entities will need to estimate the amount of the expected volume rebate, and defer a portion of revenue as a liability until the rebate is claimed. This is likely to result in a reduction of revenue in earlier reporting periods.

Example 2On 1 July 2018, Widget Co signed a one year contract to supply widgets to Entity B for $10 a widget. If Entity B orders more than $1,000,000 widgets within 12 months, Entity B will receive 10 per cent of the purchase price as cash back.

Based on past history, Widget Co is quite certain that Entity B will order more than $1,000,000 worth of widgets within the 12 months period.

Question On 31 December 2018, Widget Co has sold 50,000 widgets. How much revenue should Widget Co recognise under AASB 15?

Answer The amount of revenue recognised per widget is $9 ($1,000,000 - $100,000 cash back /100,000 widgets). The difference between the unit selling price ($10) and $9 is recognised as a liability for cash consideration to be paid at the end of the 12 months period.

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Journal for 31 December 2018:

DR CR

DR Cash ($10 per widget X 50,000 widgets) $500,000

CR Revenue ($9 per widget X 50,000 widgets) $450,000

CR Liability - consideration payable to customer $50,000

If Widget Co sold 100,000 widgets to Entity B between 31 December 2018 and 30 June 2019, journal entries at 30 June 2019 are:

DR CR

DR Cash ($10 per widget X 100,00 widgets) $1,000,000

CR Revenue ($9 per widget X 100,000 widgets) $900,000

CR Liability - consideration payable to customer $100,000

DR CR

DR Liability - consideration payable to customer $150,000

CR Cash $150,000

The table below shows how revenue recognition for volume rebates is impacted under AASB 15. While the overall net impact on profit or loss is the same under both AASB 118 and AASB 15 (albeit the selling cost and revenue could occur in different reporting periods under AASB 118), the total amount shown as revenue under AASB 15 will be less by the amount of the volume discount.

AASB 118 AASB 15

31 December 2018

Revenue $500,000 $450,000

Selling cost ($50,000)

Liability (B/S) $50,000 $50,000

30 June 2019

Revenue $1,000,000 $900,000

Selling cost ($100,000) -

(B/S) = balance sheet account

Set up fees

Fees for procurement of specialist machinery/equipment, recruiting specialist skilled employees, or building capacity to fulfil the contract are not recognised separately as revenue when incurred. As the customer does not directly receive a benefit from these activities, this does not represent revenue. Instead, any fees charged are recognised when the related goods are sold. Costs in relation to these activities may be capitalised and amortised as the goods are sold.

Example 3 On 30 June 2018, Widget Co signed a contract to supply Entity C with a special type of widget for $10 each. Entity C places an order for 100,000 widgets. To manufacture this type of widget, Widget Co needs to incur costs of $30,000 to reconfigure its machinery. Entity C has agreed to pay an upfront, non-refundable set up fee of $50,000 for the reconfiguration. Cost of production is $4 per widget.

Question How should Widget Co recognise the setup fee and the associated costs under AASB 15?

Answer The $50,000 received from the customer is not recognised separately as revenue on 30 June 2018, but is deferred and recognised as revenue as the widgets are sold. The reconfiguration costs are capitalised and amortised over the period of the contract. Under AASB 15, this results in revenue and profit being deferred in comparison to current accounting.

Journals for 30 June 2018 are:

DR CR

DR Cash $50,000

CR Deferred revenue $50,000

DR CR

DR Contract asset $30,000

CR Cash $30,000

Assume by 31 December 2018 that 50,000 widgets were sold. Revenue recognised per widget is $10.50 (($10 X 100,000) + $50,000)/100,000). Journals for 31 December 2018 are:

DR CR

DR Cash ($10 x 50,000) $500,000

DR Deferred revenue $25,000

CR Revenue ($10.50 x 50,000) $525,000

DR CR

DR Cost of goods sold $15,000

CR Contract asset $15,000

The table below shows how revenue recognition for setup fees is delayed under AASB 15.

AASB 118 AASB 15

30 June 2018

Revenue $50,000 -

Expenses ($30,000)

Profit $20,000 -

Deferred revenue (B/S) - $50,000

Contract asset (B/S) - $30,000

31 December 2018

Revenue $500,000 $525,000

COGS ($200,000) ($215,000)

Gross profit $300,000 $310,000

Deferred revenue (B/S) - $25,000

Contract asset (B/S) - $15,000

(B/S) = balance sheet account

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Payments to customersManufacturers may make payments to their customers for promoting their products or other services. Under AASB 15, payments paid to a customer are treated as a reduction in revenue, rather than as a separate cost.

Example 4On 1 July 2017, Chairs Co enters into a contract to sell 1,000 chairs at $100 each to Entity C. Chairs Co also pays $10,000 to Entity C to ensure that its chairs are prominently placed in Entity C’s stores for the next 12 months.

Question On 31 December 2017, Chairs Co sells 500 chairs. How much revenue should Chairs Co recognise under AASB 15?

Answer On 1 July 2017, Chairs Co recognises an asset of $10,000 being ‘prepayment’ for a right to occupy the prominent display area. The journals are:

DR CR

DR Asset – Right to prominent display $10,000

CR Cash $10,000

On 31 December 2017, the amount of revenue to be recognised is reduced by the amount of payment to Entity C. Revenue to be recognised per chair is $90 {[($100x1,000)-$10,000]/1,000}

Journal entries for 31 December 2017 are:

DR CR

DR Cash ($100 per chair X 500 chairs) $50,000

CR Revenue ($90 per chair X 500 chairs) $45,000

CR Asset – Right to prominent display ($10,000/1,000) X 500 $5,000

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Contracts with payments received in advance Customers may enter into a contract with a manufacturer where the customer pays upfront for the goods to be received in a future period (more than 12 months). Under AASB 15, the amount of revenue recognised on contracts with such arrangements is likely to be higher than the actual contract price. The advance payment from the customer represents a form of a financing to the manufacturer. Revenue recognised under AASB 15 would effectively be ‘grossed up’ by the amount of interest expense (being the amount ‘borrowed’ from the customer to fund the manufacturer).

Example 5On 1 January 2017, Manufacturer Y is paid $3 million to supply ABC Ltd with 1 million badges at the end of each year for the next three years. Assume cost of goods sold is $500,000 per year. Manufacturer Y’s three year borrowing rate is 10 per cent.

Question How should Manufacturer Y account for the contract under AASB 15?

Answer

YEAR

OPENING CONTRACT

LIABILITY(A)

AASB 15 INTEREST EXPENSE

(B) = (A) X 10

AASB 15 REVENUE(C)

CLOSING CONTRACT

LIABILITY(D) = (A) +(B) – (C)

2017 $3,000,000 $300,000 $1,100,000[($3m+$300,000)/3m]X1m $2,200,000

2018 $2,200,000 $220,000$1,210,000

[($2.2m+$220,000)/2m]X1m

$1,210,000

2019 $1,210,000 $121,000 $1,331,000

Total revenue of $3,641,000, and interest expense of $641,000 is recognised under AASB 15 for the three year contract as follows:

2017 2018 2019 TOTAL

AASB 15

Revenue $1,100,000 $1,210,000 $1,331,000 $3,641,000

Cost of goods sold $500,000 $500,000 $500,000 $1,500,000

Gross profit $600,000 $710,000 $831,000 $2,141,000

Interest expense $300,000 $220,000 $121,000 $641,000

Net profit $300,00 $490,000 $710,000 $1,500,000

Revenue of $3 million is recognised under AASB 118 for the three year contract as follows:

2017 2018 2019 TOTAL

AASB 118

Revenue $1,000,000 $1,000,000 $1,000,000 $3,000,000

Cost of goods sold $500,000 $500,000 $500,000 $1,500,000

Gross profit $500,00 $500,00 $500,00 $1,500,000

Interest expense Nil Nil Nil Nil

Net profit $500,00 $500,00 $500,00 $1,500,000

Practical implicationsThe impacts of AASB 15 are not only the significant changes in the patterns of revenue and profit recognition as the above examples have shown. The impact and change of AASB 15 to systems and processes should not be underestimated. In the case of volume discounts, systems and processes would need to be in place to determine the amount of revenue to be deferred and to track the balance of the deferred revenue liability account. For some payments to customers and set up costs that qualify for recognition as an asset, systems and processes need to be in place to set up an additional asset account and to determine the amount of amortisation to be recognised as goods or services are provided. If there are any contracts with significant advanced payment terms, systems and processes will also need to be in place to account for the implicit borrowing cost and calculate the ‘grossed up’ revenue.

NEW BDO PUBLICATIONSThe Audit section of our website includes a range of publications on IFRS issues. Look for the ‘Global IFRS Resources’ link which includes resources such as:

IFRS at a Glance – ‘one page’ and short summaries of all IFRS standards.

IFRS News at a Glance – provides high-level headlines of newly released documents by the IASB and IFRS related announcements by securities regulators.

Need to Knows – updates on major IASB projects and highlights practical implications of forthcoming changes to accounting standards. Recent Need to Knows include IFRS 9 Financial Instruments - Impairment of Financial Assets (Dec 2014), IFRS 15 Revenue from Contracts with Customers (Aug 2014), IFRS 9 Financial Instruments – Classification and Measurement (May 2014) and Hedge Accounting (IFRS 9 Financial Instruments) (Jan 2014).

IFRS in Practice – practical information about the application of key aspects of IFRS, including industry specific guidance. Recent IFRS in Practice include IFRS 15 Revenue from Contracts with Customers (Oct 2014), IAS 7 Statement of Cash Flows (May 2014), Distinguishing between a business combination and an asset purchase in the extractives industry (March 2014), IAS 36 Impairment of Assets (Dec 2013) and Common Errors in Financial Statements – Share-based Payment (Dec 2013).

Comment letters on IFRS standard setting - includes BDO comments on various projects of international standard setters, including Exposure Drafts and other Discussion Papers, when it is considered that the issue is significant to the BDO network and its clients. Latest comment letters include IASB ED 2014-04 Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value, IASB ED 2014-03 Recognition of Deferred Tax Assets for Unrealised Losses and Request for information – Post-implementation Revieww: IFRS 3 Business Combinations.

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PUBLIC SECTOR ENTITIES TO DISCLOSE RELATED PARTY

In a significant change from current requirements, from 1 July 2016 Australian government and local government entities will be required to disclose related party information in the same way that private sector entities have to now.

The Australian Accounting Standards Board has recently released AASB 2015-6 Amendments to Australian Standards – Extending Related Party Disclosures to Not-for-profit Public Sector Entities. This extends the scope of AASB 124 Related Party Disclosures to remove the current exemption for not-for-profit public sector entities such as Government Departments, Universities and Local Councils.

The new standard adds implementation guidance with a series of examples specifically tailored to the Australian environment. In each of these examples there is discussion about who may, and may not, fall under the definition of ‘key management personnel’, for whom the new disclosure requirements apply. Typically this group comprises the executives and senior management, along with the members of boards, councils or other equivalent governing structures.

Related party transactions will be required to be disclosed to the extent necessary for users to understand the potential effect of the relationship on the financial statements. The standard suggests that in some circumstances, certain related party transactions may be determined to be immaterial and thereby not necessary for disclosure, e.g. transactions occurring during the course of delivering public service objectives, on the same terms as to the public generally. However, other than for this, the same level of disclosure that currently applies to public companies will apply to not-for-profit public sector entities.

Entities in this sector who have not already done so, will be required to give prompt consideration to this new standard, – including to whom the new disclosure requirements apply, what transactions are likely to be material, and what information systems are needed to ensure that all the necessary supporting information is captured. Key management personnel will have to be educated to understand what additional information is required to be released in the public domain, and consideration will have to be given to the likely response from the users of financial statements to this new information.

RECENT ASIC ENFORCEMENTS – ENTITIES RESTATE THEIR FINANCIAL STATEMENTSIn a new approach to broadcasting the results of its surveillance program on financial reports of listed and unlisted entities, the Australian Securities and Investments Commission (ASIC) has recently issued several Media Releases, effectively ‘naming and shaming’ entities that have restated their financial statements as a result of ASIC’s surveillance programs.

Most of the restatements result from overstated asset values (impairment) but in a show of what ASIC means by including ‘taxation’ on its list of focus areas, one of the restatements resulted in changes to deferred tax balances and one related to revenue being recognised in the incorrect period.

Details of the restatements are summarised briefly below.

ENTITY NAME DETAILS OF RESTATEMENT REQUIRED

Terramin Australia Limited (MR 14-215)

Write off balance of exploration and evaluation assets ($3.8 million) because rights to tenure in area of interest had expired, even though bureaucracy was delaying granting of mining license.

iProperty Group Limited (MR 14-202)

Impairment write-down of $4.6 million. Impairment model used fair value less costs of disposal (FVLCD) to determine recoverable amount. ASIC considered insufficient evidence to support fair value measurement.

Cyclopharm Limited (MR 14-218)

Write off intangible asset of $3.38 million because entity could not demonstrate that all development phase asset recognition criteria of AASB 138, para 57 had been met.

Resolute Mining Limited (MR 15-045)

Write down Syama mine ($310 million) to reflect announced ore reserves in assumptions used for impairment models.

Greenearth Energy Limited (MR 15-061)

Write down geothermal operations ($2.15 million) because Victorian government had issued a moratorium on hydraulic fracturing (which these operations related to).

Tribune Resources Limited (MR 15-063) Various adjustments to deferred tax and current tax liabilities.

GoConnect Limited (MR 15-005)

$4.3 million goodwill impairment charge. Original impairment model used fair value less costs of disposal (FVLCD) to determine recoverable amount. ASIC considered insufficient evidence to support fair value measurement.

Primary Health Care Limited (MR 15-028)

Part of goodwill on acquisition of doctor practices reallocated to identifiable intangibles. $426 million goodwill write-down, $140 million increase in identifiable intangibles and net decrease in retained earnings to retrospectively amortise the identifiable intangibles over short periods.

Balanced Securities Limited (MR 15-077) $5.8 million revenue (interest income) recognised in incorrect period.

Minemakers Limited (MR 15-074)

Debit impairment reserve on available-for-sale investment reclassified from reserves to accumulated losses for prior years (objective evidence of a significant or prolonged decline in fair value).

Action pointsThese restatements give us a flavour of the types of issues ASIC will be focussing on for 30 June 2015 financial reports. In the meantime, some action points for you to consider include ensuring:

• A proper purchase price allocation is performed for all business combinations and ensure appropriate fair value is assigned to all identifiable intangible assets

• Impairment models use most recent actual results and data as assumptions for calculating recoverable amount, particularly focussing on latest information announced to the market

• There is no objective evidence of a significant or prolonged decline for available-for-sale asset write-downs remaining as debit reserves and not recognised in profit or loss

• Fair value assumptions used to determine recoverable amount (fair value less costs of disposal) can be supported by market data

• Complex deferred tax and current tax calculations are checked by a person knowledgeable on tax matters pertaining to your business

• Revenue is recognised in the correct period• Robust documentation to substantiate why recognition criteria for internally generated

development intangibles have been met at each reporting date.

10 ACCOUNTING NEWS

ACNC CONTINUES TO ACCEPT STATE-BASED REGULATOR FINANCIAL REPORTSIn the past, the Australian Charities and Not-for-profits Commission (ACNC) has indicated that they will accept financial reports in the format required to be lodged with a State or Territory regulator (which may be different to the format, content and Accounting Standard requirements required by the ACNC).

This leniency was provided on the basis that the transitional requirements of the ACNC Regulations (section 60-D) permitted short-form financial information to be lodged with the ACNC for the 2013-2014 financial year where, during the 2012-2013 financial year, the entity:

• Was not required to prepare financial statements that complied with Accounting Standards (AASB 101, 107, 108, 1048 and 1054), and

• Did not prepare financial statements in accordance with Accounting Standards (AASB 101, 107, 108, 1048 and 1054).

Does this leniency still apply for 2015 financial reports lodged with the ACNC?Yes. In her Commissioner’s Column (17 March 2015), the ACNC Commissioner, Susan Pascoe indicated that she has used her discretion to extend these transitional reporting arrangements for the 2015 reporting period (e.g. 2014-2015).

This means that ACNC registered entities can file the same financial statements that they file with a state or Territory-based regulator (e.g. incorporated associations, co-operatives, etc.) with the ACNC.

The copy issued to the state or Territory-based regulator can be uploaded with the Annual Information Statement for the ACNC and will be accepted as meeting the ACNC financial reporting requirements.

The Commissioner also indicated that the ACNC is currently in ongoing discussions with state and Territory regulators, with a view to broader long-term inter-jurisdictional harmonisation and red tape reduction (e.g. make the reporting requirements the same for the ACNC and other regulators).

CORPORATIONS ACT CHANGES RECEIVE ROYAL ASSENTIn the March Accounting News we referred to recent changes introduced into the Corporations Act 2001 by the Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015 (amending Act) which passed through both Houses of Parliament on 2 March 2015. This amending Act received Royal Assent on 19 March 2015.

The changes relate to:

• Remuneration reports – These are now only required for listed companies and include some minor disclosure deletions/changes

• Changes to financial years – Clarifies that use of the +- 7 day option for a financial year is disregarded when determining whether the financial year has been changed in the last five years

• General meetings – Can no longer be requested by 100 shareholders• Auditor appointment – No longer required for small and medium-

sized companies limited by guarantee.

Effective dateThe changes apply from 19 March 2015, however transition provisions only require the changes to apply to:

• Remuneration reports for years ending on or after 19 March 2015 (31 March 2015 year ends onwards), and

• General meetings called after 19 March 2015 (meetings called by 100 shareholders prior to 19 March 2015 will still go ahead).

Remuneration reports for unlisted disclosing entities will no longer be required from 19 March 2015.

11 ACCOUNTING NEWS

FOR MORE INFORMATIONADELAIDE

PAUL GOSNOLDTel +61 8 7324 6049 paul.gosnold@bdo.com.au

BRISBANE

TIM KENDALLTel +61 7 3237 5948 timothy.kendall@bdo.com.au

CAIRNS

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

DARWIN

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

HOBART

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

MELBOURNE

DAVID GARVEYTel: +61 3 9603 1732 david.garvey@bdo.com.au

NEW SOUTH WALES

GRANT SAXONTel: +61 2 9240 9976 grant.saxon@bdo.com.au

PERTH

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 omissions. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees.

BDO is the brand name for the BDO network and for each of the BDO member firms.

© 2015 BDO Australia Ltd. All rights reserved.

COMMENTS SOUGHT ON EXPOSURE DRAFTSAt BDO, we provide comments locally to the Australian Accounting Standards Board (AASB) and internationally to the International Accounting Standards Board (IASB). We welcome any client comments on exposure drafts that are currently available for comment. If you would like to provide any comments please contact Wayne Basford at wayne.basford@bdo.com.au.

DOCUMENT PROPOSALSCOMMENTS DUE TO AASB BY

COMMENTS DUE TO IASB BY

ED 259 Classification of Liabilities(Proposed amendments to AASB 101)

Proposes to clarify that classification of liabilities as either current or non-current is based on rights that exist at the end of the reporting period.

9 May 2015 10 June 2015