Financial Reporting Update 2020

What you need to know for the June reporting season

Welcome and agenda

1. Financial reporting impacts of COVID-19

2. Our regulatory environment

● top causes of restatements

● questions asked of directors

3. Reporting requirements in Australia

4. Leasing - what we've learned

5. Other topical areas that may affect you

COVID-19impacts of

reportingFinancial1

Listed AGMs allowed Online

ASX Low doc offerings allowed for more companies

Placement limits lifted from 15-25% and other ASX capital relief

ASIC deadlines extended for certain unlisted entities

ACNC reporting deadlines extended

Insolvency temporary relief for 6 months for directors (safe harbour) and company debtors

Temporary regulatory relief given under COVID-19 Some of the regulator relief programs with reporting implications…

Going concern considerations

Management will need to think through:

● How has uncertainty been incorporated into cash flow forecasts?

● When will things return to 'normal'?

● Will you have potential covenant breaches?

● Is there at any time a deficiency of current assets to liabilities?

● Will financing be able to be obtained as needed?

● Will customers be able to pay on time?

● If you have undrawn banking facilities, are they accessible?

● How have events that have occurred post-balance sheet date been considered?

At the date of issuing the financial statements, will the entity will be able to continue as a going concern for a period of at least the next 12 months?

Going concern considerations

Disclosures will differ depending on the outcome of the assessment:

If you conclude….. Disclose

There is no material uncertainty

● the indicators and the judgements applied ● management’s rationale for why there is no material uncertainty

There is a material uncertainty of the entities ability to continue as a going concern

● the principal events or conditions that cast doubt on going concern ● management’s plans to deal with these conditions ● statement that there is a material uncertainty ● an emphasis of a matter paragraph in the auditor’s opinion

The entity is not a going concern

● statement that financial statements are not prepared on a going concern basis

● the basis on which the financial statements are prepared ● the reason why the entity is not a going concern

Impacts on valuation of non-financial assets

Disclosure of the key judgements made and sensitivities across all of these items will be important

Impairment of non financial assets

● indicators may lead to more frequent testing of impairment - including interim accounts

● update the impairment models to incorporate increased uncertainty

○ expected value approach vs single estimate

○ discount rates

○ avoid double counting risk

Impacts on valuation of non-financial assets

Valuation of inventory

● net realisable value

● cost capitalisation

Deferred tax assets

● recoverability

● consistency of forecasts

Disclosure of the key judgements made and sensitivities across all of these items will be important

Impacts on financial instruments

● Impairment of receivables and contract assets ○ adjust provisions matrix ○ segment portfolio○ consider government support○ include forward looking assumptions and multiple scenarios○ intercompany loans

● Financial liabilities○ modifications, payment holidays and government support

● Other items to look out for:○ fair value measurement○ hedge accounting

Disclosure of the key judgements made and sensitivities across all of these items will be important

Other accounting implications of COVID-19

Rent relief → lessor and lessee accounting

Revenue recognition • Probable threshold

• Variable considerationBorrowings

Provisions Employee remuneration and share-based payments

Impacts of known changes post balance date

Jobkeeper payment

Cash flow support for small and medium businesses

Temporary relief for financially distressed businesses

Indirect tax subsidies

SME Loan Guarantee Scheme

Tax incentives - increasing the instant asset write-off and accelerating depreciation deductions

Other accounting implications of COVID-19 Some of the Government relief programs with accounting implications…

of restatementsASIC: Top causes

environmentOur regulatory2

ASIC - top causes of restatements

PS&C Limited impairs goodwill

[16 September 2019]

iSignthis restates funds held on behalf of merchants

[24 September 2019]

Eco Energy devalues intellectual property assets

[26 November 2019]

Environmental Group amends acquisition accounting

[23 December 2019]

Avista writes down deferred tax asset and brand name

[5 February 2020]

Wollongong Coal writes down mine assets

[30 September 2019]

asked of directors

environment:Our regulatory2

Questions

ASIC - questions about impairment

● An explanation as to the basis for estimating future cash flows and composition of estimates of future cash flow.

● An electronic copy of your CGU(s) DCF models.

● Details supporting all key assumptions.

● An electronic copy of the discount rate calculation and supporting documentation including explanation of how the calculation satisfies the requirements in AASB 136.

● A copy of all board papers explaining approach to determining the values assigned to the following key assumptions. Explain whether those values reflect past experience or are consistent with external sources of information (explaining any differences):

○ revenue and EBITDA estimates○ operating and capital expenditure○ working capital changes○ allocation of corporate costs and elimination of costs○ free cash flow ○ other significant assumptions used.

● A copy of price forecast, forward pricing reports and other contracts used by management to support short-term spot price, medium-term contracts and long-term agreement price assumptions.

● A copy of independent consultants’ assessments used by management to support assumptions.

● Reconciliation of non-current assets and working capital allocated to its CGU(s) to the balance sheet.

● Breakdown of any unallocated corporate costs and explanation for why not allocated.

● Prior year’s analysis of budgets and cash flows, variances to actual results - with explanations of how significant variances were considered into your valuation.

● An electronic copy of the company's sensitivity calculations on whether a reasonably possible change in any of the key assumptions could lead to an impairment.

● Reconciliation of the changes in headroom for current and prior year.

Types of impairment information requested

ASIC - questions about revenueExample revenue information requested

● Breakdown of revenue by type

● Breakdown of trade receivables, accrued income and deferred revenue by each type of revenue stream.

● For each type of revenue stream:

○ Provide a sample agreement.

○ Explain the basis of revenue recognition with reference to identifying performance obligations, how and when they are satisfied, the basis of using point in time and over time approach.

○ Explain the nature of your revenue and trade receivables cycle, including relationship between trade receivable at year end to revenue.

● Provide a list of trade receivables as at year end, by age bucket, detailing amounts that have been subsequently collected and amounts that remain outstanding.

● A copy of all documents provided to your board of directors on revenue recognition.

● A copy of all documents containing communication regarding revenue recognition with your auditor or external experts/consultants, including any reports prepared.

● Any other information that may assist our understanding of the company's revenue recognition treatment.

● Explain the application of AASB 15 to contract modifications and variable consideration.

ASIC - other topics

Example tax information requested

● Explain the key assumptions/ judgements used in deferred tax asset recognition.

● Evidence to support the probability of future taxable profits

○ Tax returns for the last three years

○ Board approved budgets

○ Other relevant information

● Why non-GAAP financial information is not appropriately labelled in the financial report.

● Why the Company believes the non-GAAP information is useful to users of the financial statements.

● How directors will apply the provisions of RG 230 when issuing future announcements and financial reports containing non-GAAP financial information.

Example non-statutory measures information requested

Australiarequirements in

Reporting3

Replacement of the Reduced Disclosure Regime (RDR)RDR is being replaced with a Simplified Disclosure Regime (SDR). Mandatory from 1 July 2021. The benefits of early adoption include:

• no restatement of comparatives for recognition and measurement changes• no comparative disclosures for additional disclosures required• no requirement to distinguish between errors and changes in accounting policies when

transitioning from SPFS to GPFS

Status of Special Purposes Financial Statements (SPFS)• for-profit private sector entities → no longer able to prepare statutory SPFS from 1 July 2021• encouraged to transition from SPFS to SDR• for-profit private sector entities that are “large” → consider basis of prep

Not-for profit considerationsThe removal of SPFS does not apply to NFP yet, but the replacement of RDR with SDR does apply.

*More information: Straight Away Alert, 12 March 2020

Reporting requirements in Australia

learned?What we've

Leasing:4

Leasing - What did companies find most difficult?

32% felt that standard-setters did not provide sufficient guidance and transition relief to enable an efficient and cost-effective transition process.

PwC’s 2019 Global IFRS 16 Post-Implementation Survey*:

*More information: IFRS 16 - Beyond the Implementation (2019 IFRS 16 Post-Implementation Survey) website, PwC

55% indicated that the challenges brought about by the implementation were unexpected.

72% believe that their current solution does not provide full functionality to cope with their lease accounting and reporting requirements.

32% 55% 72%

Leasing - What topics did companies find most difficult?PwC’s 2019 Global IFRS 16 Post-Implementation Survey:

Leasing - Things to think about beyond transition

Systems and spreadsheets○ Do they calculate in accordance with the standard?○ Are the inputs updated?○ What aspects require manual inputs vs automatic?

Processes to ensure remeasurement triggers are identified and calculated ○ CPI escalations○ market rent reviews○ changes in the assessed lease terms (using revised discount rate)○ modifications (using revised discount rate)○ new leases - including embedded and renegotiations

Can your system capture all disclosure requirements?

Leasing - other hot topics with calculations

● Lease term○ assessment of renewal options ○ possibly could go beyond contractual terms --

IFRIC

● Incremental borrowing rate○ bullet rate vs amortising rate -- IFRIC

● Variable lease payments based on an index (CPI or market rent review)○ what to include in initial measurement?○ how to remeasure when changes occur?

Leasing - What should be disclosed in year-end accounts?

Other disclosures:

● Maturity analysis of lease liabilities separate from other financial liabilities

● Qualitative and quantitative information about the company leasing activities:

○ the nature of the lessee’s leasing activities

○ future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities

○ variable lease payments

○ extension options and termination options

○ residual value guarantees

○ leases not yet commenced to which the lessee is committed

● Restrictions or covenants imposed by leases

● Sale and leaseback transactions

● Short-term leases or leases of low-value assets

● Reconciliation of operating lease commitments to opening lease liability

Recommended tabular format disclosure:

● the carrying amount of right-of-use assets by class

● interest expense on lease liabilities

● expense relating to short-term leases

● expense relating to leases of low-value assets

● expense relating to variable payments not included in the liability

● sublease income

● total cash outflow for leases

● additions to right-of-use assets

● gains or losses arising from sale and leaseback transactions

Leasing - What are the flow-on impacts?

● Net tangible assets ratios - ASX, APRA, ASIC

● Deferred tax accounting

● Segment reporting

● Statement of cash flows

● Business combinations

There are many other aspects affected by the lease accounting:

“...there was an error in the cash flow statement, under which interest outflow for AASB 16 purposes was counted both in ‘interest paid’ and in ‘principal repayment for lease liabilities’." 26 February 2020, Financial Review

may affect youareas that

Other topical5

Other areas that may affect you

Tax - uncertain tax positions

● Triggers for recognition

● Clear disclosure of facts/contingencies

● Presentation on balance sheet and income statement

● Inter-territory group transactions (hybrid mismatch tax rule) - complex and

pervasive

Liabilities classification - current vs non-current

● Focus on substantive right to defer payment vs expectation of deferring

payment

● Clarification for convertible instruments

Other areas that may affect you

Benchmark interest rate reform

● Initial relief for hedge accounting -- effective 1 January 2020

● IASB proposing additional relief for actual changes

Supplier financing

● Debt or trade payables?

● Operating or financing cash flow?

Wage understatements

● Change in estimates or prior year error?

Need more information?

Visit us at IFRS - Financial Reporting

and our COVID-19 webpage

Talk to your PwC

contactInform Manual of

Accounting

pwc.com.au

Thank you

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