Dear Special Purpose Financial Report Preparers – let me call you SPFRPs for short – it will be much easier. By now your accountant and/or auditor will be telling you that this coming FY21 reporting year is the final year that you can prepare such special purpose financial reports (SPFRs) and that life is about to get a whole lot more complex. But what does this really mean and how much pain will you be in?
Well, the answer will really depend on to what extent you really were special purpose. Were you applying accounting standards with most of the disclosures or were your financial statements not much different from a simple balance sheet and profit and loss statement with a couple of notes (as may have been the case with AFSL entities)?
Without getting into what previously was required under ASIC Regulatory Guide 85, let us assume that you are the latter, and that there is work to do. This article will outline where you should expect some heat.
Cast aside old ideas that revenues are earned as you invoice your customer. You now have AASB 15 to deal with, which means, broadly speaking, accruing revenues as services and/or goods are received or benefitted by the customer. If these are over time, expect some balance sheet impacts from new accounts relating to contract assets and liabilities, which cover the timing difference between earning those revenues and when they are invoiced.
I mean annual leave and long service leave. Yes, these are generally not deductible for tax purposes, however they are liabilities under accounting standards and should be accrued for, grossed up for on-costs (super, payroll tax, work-cover, etc) and adjusted for the time impacts of wage inflation and present value discounting.
That is not just a rental agreement – it is an asset and a liability, which transposes rental arrangements from a profit and loss matter to a balance sheet matter, complete with amortization and present value calculations.
Items that were formerly temporary differences and reflected as increments or decrements to the current tax charge and now added back as a deferred tax impact, with the difference represented in the balance sheet as a deferred tax asset or liability. As a fact check, the tax charge or benefit should more appropriately correlate with the profit before tax, charged out at the applicable statutory rate, adjusted for permanent differences.
Impairment and amortisation of intangible assets
Those intangible assets in your balance sheet should now be supportable by impairment analyses. If amortizing, they will require, at least annually, an impairment trigger test. If they are not, they will require a much more robust full impairment analysis (also annually) corroborated through either a discounted cashflow model or an income-earnings model. Expect your auditor to devote significant amounts of time and attention to examining these.
Transactions and corporate structures
That investment you previously represented on your balance sheet will now need to be assessed as to whether it should be consolidated, equity accounted or held at fair value. If a consolidation has been missed, expect a significant amount of pain as you consolidate for the first time your (audited) subsidiary into the consolidated entity.
As stated above, under ASIC Regulatory Guide 85 these matters should have been applied, if ASIC’s guidance had been interpreted and followed appropriately. However, it should be noted that this guidance formerly did not have a full force of law – it was intended to clarify what, from ASIC’s point of view, would be needed to achieve a true and fair view, as required under the Corporations Act.
For those good corporate citizens who had already been applying the recognition and measurement components of accounting standards, but not the disclosures, the main impact will relate to the quantum of disclosures in the financial statements. To give this clarity AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-For-Profit Tier 2 Entities has been rolled out and is available for early adoption.
The main disclosure impacts we foresee from this standard will relate to the following:
- A cashflow note with reconciliation
- A statement of changes in equity (can be avoided in some cases)
- Material balance sheet and profit and loss notes
- Revenue disclosures, providing disaggregated detail on performance obligations arising from obligations with customers
- A prima facie income tax reconciliation to profit before tax; and
- Related party disclosures, including aggregated detail of remuneration from key management personnel (directors and senior management)
We believe that for a majority of preparers, the major differences in disclosure requirements for entities applying AASB 1060 compared to those of a full general-purpose financial report will relate to the following exceptions:
- Segment reporting
- Reporting on detailed sensitivities to financial risks, like credit, interest rate or foreign exchange risks, and
- Impairment disclosures.
Transitioning your obligations
Are you doing this in-house? With these amped-up requirements now is the time to consider whether that trusty old Excel or Word document is now up to the task. Many organisations are now transitioning to functional and effective bots, which come pre-packaged with ready-to-use disclosures that can be easily tailored to your circumstances and with an audit trail directly from your trial balance(s). Now may be time to re-consider this under this new framework so that you can get to the equally important task of managing your organisation’s profitability and meeting its internal stakeholder demands.
Note: there are some exceptions from this change, for example if you are holding your financial statements to not comply with Australian Accounting Standards.
For more information on the changes or assistance preparing your general purpose financial report, please contact your local William Buck Audit and Assurance advisor.