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AFIAA A MOMENT WITH NEVILLE - 2010

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  1. AFIAA A MOMENT WITH NEVILLE - 2010 May 2010 Client name - Event - Presentation title

  2. AFIAA A MOMENT WITH NEVILLE - 2010 • Topics • Revised report disclosures 2010 • [AASB 101; 3R, 9 ] • Significant changes not yet effective • Future directions in financial reporting • Audit Issues AFIAA Conference 2010

  3. WHAT’S NEW FOR JUNE 2010? AASB 2008-5 & AASB 2008-6 Annual Improvements AFIAA Conference 2010

  4. WHAT’S NEW FOR JUNE 2010?AASB 2008-5 & AASB 2008-6 Annual Improvements Project • What are the changes? • AASB 138 Intangible Assets • Advertising and promotional activities: • Recognise as an expense when it has a right to access those goods • May recognise a prepayment when payment has been made in advance of the entity obtaining a right to access • Retrospective application AFIAA Conference 2010

  5. WHAT’S NEW FOR JUNE 2010?AASB 2008-5 & AASB 2008-6 Annual Improvements Project • What are the changes? • AASB 140 Investment Property • Property under construction or development for future use as investment property: • Scoped into AASB 140 • To be valued at Fair value • FV movements recognised in P/L [not Asset Revaluation Reserve, as previously] • Prospective application but can adopt from an earlier date if fair values available AFIAA Conference 2010

  6. Fair value disclosures WHAT’S NEW FOR JUNE 2010?AASB 2009-2 Financial Instruments Disclosures • Enhanced fair value disclosures include: • Disclosure of the level in the three-level fair value hierarchy into which the fair value measurements are categorised • Significant transfers between levels 1 & 2 • A reconciliation of the balances for fair value measurements in level 3 • A sensitivity analysis for level 3 fair value measurements: • if changing one or more inputs that change the FV significantly AFIAA Conference 2010

  7. Fair value hierarchy WHAT’S NEW FOR JUNE 2010?AASB 2009-2 Financial Instruments Disclosures • What are the Changes? AFIAA Conference 2010

  8. Fair value hierarchy WHAT’S NEW FOR JUNE 2010?AASB 2009-2 Financial Instruments Disclosures • Categories of the three-level hierarchy EXAMPLE AFIAA Conference 2010

  9. Fair value hierarchy WHAT’S NEW FOR JUNE 2010?AASB 2009-2 Financial Instruments Disclosures • Reconciliation of balances for FV measurement – Level 3 EXAMPLE

  10. WHAT’S NEW FOR JUNE 2010?AASB 2009-2 Financial Instruments Disclosures • Maturity analyses • Previously for liabilities – now includes : • Assets – Loans , Investments , receivables, (plus comparatives) • Non-derivative financial liabilities (including financial guarantee contracts) • Derivative financial liabilities Liquidity Risk Report gross cash flows for the remaining contractual maturities if essential for understanding the timing of cash flows (include interest) AFIAA Conference 2010

  11. WHAT’S NEW FOR JUNE 2010?AASB 2009-2 Financial Instruments Disclosures • Clarification to whether contractual amounts should be shown gross or net - for example: • Finance lease obligations should be shown gross before deducting finance charges • Interest rate swaps Cash flows for pay-floating/received-fixed should be shown net if net cash flows are exchanged • Cash flows to be shown gross for derivative financial instruments for which it settles gross • Loan commitments to be shown gross Liquidity Risk AFIAA Conference 2010

  12. WHAT’S NEW FOR JUNE 2010?AASB 101R - Presentation of Financial Statements - name changes

  13. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • Statement of Financial Position • Minor wording changes: • “balance sheet date” replaced with “end of reporting date” (ERD) • “equity holders” replaced with “owners” • “minority interest” replaced with “Non-controlling interest” (NCI ) when AASB 3 Revised applies AFIAA Conference 2010

  14. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • Statement of Financial Position • An entity is now required to present three statements of financial position in certain circumstances: • current year • prior year • beginning of earliest comparative period (3rd statement of financial position) • Third statement of financial position: • an accounting policy has been applied retrospectively; or • an error has been adjusted retrospectively; or • items have been reclassified, even if there is no income statement effect. AFIAA Conference 2010

  15. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • New Format - Statement of Financial Position • “Opening Balance Sheet” Example: • Year end balance sheet 30 June 2010 • Comparative balance sheet 30 June 2009 • Opening balance sheet 1 July 2008 How big is your page? AFIAA Conference 2010

  16. WHAT’S NEW FOR JUNE 2010?AASB 101R - Presentation of Financial Statements Statement of Comprehensive Income Same as old income statement AFIAA Conference 2010

  17. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • Reclassification Adjustments: • Reclassification adjustments relating to components of other comprehensive income • Examples: • gains realised on the disposal of available-for-sale financial assets (AASB 139) • hedged forecast transaction affects profit or loss (AASB 139) • Changes in revaluation surplus (AASB 116 or AASB 138) • Actuarial gains and losses on defined benefit plans (AASB 119) Present in Statement of Comprehensive Income or in the Notes AFIAA Conference 2010

  18. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • Statement of Comprehensive Income – Tax: • Disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in: • the statement of comprehensive income or • in the notes • An entity may present components of other comprehensive income either: • net of related tax effects; or • before related tax effects with one amount shown for the aggregate amount of income tax relating to those components (i.e. gross) AFIAA Conference 2010

  19. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • Statement of Changes in Equity: • Total comprehensive income for the period: • showing separately the total amounts attributable to owners of the parent and to minority interest • For each component of equity, the effects of retrospective application or retrospective restatement • The amounts of transactions with owners in their capacity as owners to be shown separately • Contributions by and distributions to owners (shown separately) • For each component of equity: • reconciliation between the carrying amount at the beginning and the end of the period separately disclosing each change AFIAA Conference 2010

  20. WHAT’S NEW FOR JUNE 2010? AASB 101R - Presentation of Financial Statements • New name - Statement of Cash Flows • No key changes to presentation of cash flows – name change only AFIAA Conference 2010

  21. WHAT’S NEW FOR JUNE 2010?AASB 3R – Business Combinations • AASB 3 and AASB 3 Revised requires the application of the acquisition method! AFIAA Conference 2010

  22. WHAT’S NEW FOR JUNE 2010?AASB 3R – Business Combinations • Changes • The scope was broadened: • business combinations involving only mutual entities, and • business combinations achieved by contract alone. • Broader definition of what constitutes a ‘business combination’ AFIAA Conference 2010

  23. WHAT’S NEW FOR JUNE 2010?AASB 3R – Business Combinations • Changes • Key changes: • Fair value of the assets and liabilities (including contingent liabilities) • Provisional accounting - 12 months to determine fair values if uncertain • Consideration for the acquisition at fair value of the shares issued • Net gains now taken to equity (reserves) not to the income statement AFIAA Conference 2010

  24. WHAT’S NEW FOR JUNE 2010?AASB 3R – Business Combinations • Changes • Key changes: • Expenses of the acquirer • Costs of acquisition by the acquirer [due diligence, legal, stamp duties, taxation advice, compliance, meetings to accept, submissions to APRA / ASIC] • Staff retrenchments – if as a consequence of the acquisition • Restructuring costs AFIAA Conference 2010

  25. WHAT’S NEW FOR JUNE 2010?AASB 3R – Business Combinations • Changes • Key changes: • Expenses of the acquirer 11. “costs the acquirer expects but is not obliged to incur in the future to effect its plan to • exit an activity of an acquiree or • to terminate the employment of or • relocate an acquiree's employees, are not liabilities at the acquisition date. Therefore, the acquirer does not recognise those costs as part of applying the acquisition method (i.e. The net assets acquired ) AFIAA Conference 2010

  26. WHAT’S NEW FOR JUNE 2010?AASB 3R – Business Combinations • Changes • Contingent liabilities • acquirer shall recognise as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably. • Therefore, contrary to AASB 137, the acquirer recognises a contingent liability assumed in a business combination at the acquisition date even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. AFIAA Conference 2010

  27. WHAT’S NEW FOR JUNE 2010?AASB 123 – Borrowing costs • Capitalise all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset • Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use • All other borrowing costs are immediately recognised as expenses • Only capitalise if construction commences on or after application rate No longer have the accounting policy choice to capitalise or expense AFIAA Conference 2010

  28. WHAT’S NEW FOR JUNE 2010?AASB 123 – Borrowing costs The requirements of the new AASB 123 are presented in the following diagram: AFIAA Conference 2010

  29. CORPORATIONS ACT CHANGES Corporations Act Changes AFIAA Conference 2010

  30. CORPORATIONS ACT • ED of Corporations amendment (Corporate Reporting Reform) BILL 2010: • Released 4 December 2009 • Submissions on draft close 3 February 2010 • Expected to be effective for June 2010 year ends AFIAA Conference 2010

  31. CORPORATIONS ACT • Main changes: • Requirements for paying dividends • Parent entity financial statements • IFRS declaration in directors’ statement • Solicitors’ representation letters AFIAA Conference 2010

  32. CORPORATIONS ACT • Requirements For Paying Dividends: • S254T of Corps Act to be repealed & replaced • Will replace the ‘profits test’ with a solvency test • A company will be able to pay a dividend if: • the company’s assets exceed its liabilities and the excess is sufficient for the payment of the dividend • it is fair and reasonable to the company’s shareholders as a whole, • and it does not materially prejudice the company’s ability to pay its creditors • The existing directors’ duty to prevent insolvent trading in section 588G will continue to apply • To apply from date of royal assent AFIAA Conference 2010

  33. CORPORATIONS ACT Parent Entity Annual Financial Statements not required in a consolidated group: • S295(2) & 303(2) of Corps Act to be repealed & replaced • Where Accounting Standards require consolidated financial statements to be prepared, separate parent entity financial statements will not be required • Regulations will require a note to include limited parent entity financial information: • current and total assets • current and total liabilities • shareholders’ equity, showing separately issued capital and reserves • profit or loss • details of any guarantees entered into by the parent entity in relation to the debts of its subsidiaries • details of any contingent liabilities, and • details of its capital commitments • To apply for financial years ending on or after 30 June 2010 AFIAA Conference 2010

  34. CORPORATIONS ACT • Parent Entity Annual Financial Statements • The simplified director’s report would included the following disclosures: • Description – short and long term objectives • Strategy for achieving objectives • Principal activities during the year • How activities assisted in achieving the entities objectives • How performance is measured – key performance indicators • Name – each person who has been a director at any time during or since the end of the year and the period • Director’s qualifications • Number of meetings the board of directors held • Each class of membership in the company • Total amount – members liable to contribute if company wound up AFIAA Conference 2010

  35. CORPORATIONS ACT • IFRS Declaration In Directors’ Statement: • The directors’ declaration in a company’s annual report will have to include a statement of whether, in the directors opinion, the financial statements and notes are prepared in compliance with IFRS as made by the IASB. • Aim to make consistent with audit report AFIAA Conference 2010

  36. CORPORATIONS ACT • Solicitors’ Representation Letters: • Response to the ‘Westpac decision’ • Solicitors’ representation letters are to be protected from disclosure to another person or to a court • Exceptions will exist to ensure that the ASIC, APRA and CALDB can continue to access these communications for the purpose of performing their functions AFIAA Conference 2010

  37. WHAT’S NEW FOR JUNE 2014? AASB 9 Financial Instruments A new financial instrument standard ready for adoption AFIAA Conference 2010

  38. CLASSIFICATIONAIFRS 9 • AIFRS 139 amended measurement classes • AASB 139 categories eliminated: • Held to maturity • Available for Sale • Loans and receivables • Two measurement categories to apply: • Amortised cost • Fair value AFIAA Conference 2010

  39. AMORTISED COST MEASUREMENT AIFRS 9 • Determined on the basis of: • Business model • As determined by key management personnel (AASB 124) Not an instrument by instrument focus • Hold financial assets to collect contractual cash flows Do not need to hold assets to maturity • Contractual terms AFIAA Conference 2010

  40. MEASUREMENT AIFRS 9 • Initial recognition: • Fair value • amortised cost • Subsequent measurement: • Definition of amortised cost as previously includes transaction costs fees • Reference to AASB 139 for impairment of assets at amortised cost, fair value measurement and hedge accounting AFIAA Conference 2010

  41. BUSINESS MODEL – EXAMPLES AIFRS 9 • Business model is to hold investments / loans to collect contractual cash flows? • Apply amortised cost method even if some are sold [ Investment - Bills of exchange] • Can now sell in particular circumstances and portfolio is not tainted: • e.g. • No longer meets investment policy • ADI adjusts portfolio to match expected timing of payouts • Entity needs to fund capital expenditure Formerly tests were Hold to maturity Vs Available for sale AFIAA Conference 2010

  42. BUSINESS MODEL – EXAMPLES AIFRS 9 • Business model is to originate loans and sell them ? • Fair value method applies, unless consolidated Loans sold to a securitisation vehicle 1. Consolidated entity business model: • Hold loans and collect contractual cash flows • May qualify for amortised cost measurement 2. Individual entity business model: • Originate and sell loans • Do not qualify for amortised cost measurement AFIAA Conference 2010

  43. CONTRACTUAL TERMS FOR CASH FLOWS AIFRS 9 • AMORTISED COST • Assess on an instrument by instrument basis: • Principal • Interest • Specified dates for repayment • Interest represents consideration for: • Time value of money • Credit risk AFIAA Conference 2010

  44. LEVERAGE AIFRS 9 • Standard amplifies variability of contractual cash flows • Leverage does not have economic characteristics of interest • Includes derivative contracts: • Option • Forward • Swap • Cannot qualify for measurement at amortised cost AFIAA Conference 2010

  45. EQUITY INSTRUMENTS • Do not have cash flows that are solely principal and interest Fair value measurement, through profit and loss • Optional recognition in Other Comprehensive Income (OCI) Provided it is Not held for trading Irrevocable election is made on initial recognition of each investment All changes in fair value in OCI No recycling to income statement Dividends recognised in profit or loss AFIAA Conference 2010

  46. EFFECTIVE DATEAIFRS 9 • Periods beginning 1 January 2013 Linked to effective date for impairment and hedge accounting Early adoption permitted for December 2009 year ends AFIAA Conference 2010

  47. LOOKING FORWARD The next big bang AFIAA Conference 2010

  48. LOOKING FORWARDThe next “big bang” • Financial instruments – impairment and effective interest rate • Liabilities • Leases AFIAA Conference 2010

  49. LOOKING FORWARDImpairment Proposals • Financial instruments – impairment and Amortised Cost (effective interest rate) • The objective of amortised cost measurement is to provide information about the effective return on a financial asset or financial liability by allocating interest revenue or interest expense over the expected life of the financial instrument. • The effective return reflects an allocation over the expected life of the instrument of • fees, points paid or received, • transaction costs and other premiums or discounts as well as • the initial estimate of expected credit losses on a financial asset. AFIAA Conference 2010

  50. LOOKING FORWARD Impairment Proposals • Financial instruments – impairment and Amortised Cost (effective interest rate) • Changes seek to embed the impairment into the Amortised cost method • Requires the cash flows from the amortised costs approach to also recognise the estimated impairment loses discounted back to PV • The estimates for the cash flow inputs are expected values. Hence, estimates of the amounts and timing of cash flows are the probability-weighted possible outcomes. • Applies a look through the economic cycle approach to eliminate major underprovisions – sound familiar? Refer APS 220 (51, 52) AFIAA Conference 2010