New accounting standards
The new accounting standards will have the greatest impact for many companies since the adoption of International Financial Reporting Standards (IFRS) in 2005, ASIC states.
The new standards include the following.
- AASB 9 Financial Instruments (applies from years commencing 1 January 2018)
- AASB 15 Revenue from Contracts with Customers (applies from years commencing 1 January 2018)
- AASB 16 Leases (applies from years commencing 1 January 2019)
- AASB 17 Insurance Contracts (applies from years commencing 1 January 2021): ASIC notes that The International Accounting Standards Board (IASB) has proposed to defer the application date for the standard on which AASB 17 is based to years commencing 1 January 2022
- Amendments to standards to apply the new definition and recognition criteria in the Conceptual Framework for Financial Reporting (applies from years commencing 1 January 2020)
New lease accounting and other requirements
With respect to the new lease accounting standard, ASIC says that directors and auditors should ensure that notes to 30 June 2019 financial statements disclose the impact on future financial position and results of new requirements for accounting for leases, accounting for insurance businesses, and new definition and recognition criteria for assets, liabilities, income and expenses. ASIC adds that it considers that is 'reasonable for the market to expect that companies will be able to quantify the impact of the new standards, particularly for the lease standard'.
ASIC also highlights that 'a new conceptual framework that contains new definition and recognition criteria for assets, liabilities, income and expenses in the framework will apply for years commencing 1 January 2020 where the criteria are not inconsistent with a specific requirement of an accounting standard.Companies will need to make note disclosure at 30 June 2019 of the future impact of the criteria in the new framework'.
Impact of the new standards?
ASIC Commissioner John Price said that, the 'new accounting standards can significantly affect results reported to the market by companies, require changes to systems and processes, and affect businesses.’
In particular, the new accounting standards may significantly affect how and when revenue can be recognised, the values of financial instruments (including loan provisioning and hedge accounting), reported assets and liabilities relating to leases, accounting by insurance companies, and the general identification and recognition of assets, liabilities, income and expenses.
More extensive disclosure
ASIC considers public disclosure on the impact of the standards and timely implementation is important for investors and market confidence and adds that information that there will be no material impact may also be important for the market.
'It is important that directors and management ensure that companies inform investors and other financial report users of the impact [of the new accounting standards] on reported results. Required disclosure on the effect of the new standards is more extensive than that made by many companies for the 31 December 2018 half-year' ASIC states.
ASIC review
ASIC states that required disclosure on the effect of the new standards is more extensive than that made by many companies for the 31 December 2018 half year and adds that the regulator will be reviewing more than 200 full year financial reports at 30 June 2019 'to promote quality financial reporting, and useful and meaningful information for investors'.
Other Areas of Focus
Role of directors and management in ensuring the quality of reports: Referencing both ASIC Information Sheet 183 Directors and financial reporting and ASIC Information Sheet 203 Impairment of non-financial assets: Materials for directors ASIC emphasises that 'directors are primarily responsible' for the quality of the financial report including ensuring that quality financial information is provided 'on a timely basis'.
ASIC adds that companies are required to have appropriate processes, records and analysis to support information in their reports rather than 'simply relying on the independent auditor'. Companies are also expected, ASIC writes, to apply the appropriate expertise and experience particularly in more difficult and complex areas such as accounting estimates (including impairment of non-financial assets), accounting policies (such as revenue recognition) and taxation.
Further detail
ASIC draws attention to a number of specific issues in relation to the following areas: accounting estimates, accounting policy choices (revenue recognition and expense deferral, off balance sheet arrangements and tax accounting. Among other things, ASIC flags the following.
Impairment testing and asset values: ASIC identifies the recoverability of the carrying amounts of assets such as goodwill, other intangibles and property, plant and equipment an 'important area of focus'. Other areas of focus on asset values include: companies affected by climate change, market changes, digital disruption, technological change or Brexit; and the valuation of financial instruments, particularly where values are not based on quoted prices or observable market data. Fair values should be based on appropriate models, assumptions and inputs.
Revenue recognition: ASIC notes that the new revenue standard is considerably more detailed than the previous standard and focuses on performance obligations.ASIC states that directors and auditors should review an entity’s revenue recognition policies to ensure that revenue is recognised in accordance with the substance of the underlying transactions when applying the new revenue recognition accounting standard.
Key Disclosures
- Operating and financial review (OFR): Referencing ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review, ASIC reminds companies that listed entities should disclose information that may have a material impact on the future position/performance of the entity and cites a number of examples of the sort of information this may include: Brexit, cybersecurity; new technology or climate.
ASIC also suggests that directors could consider 'whether it would be worthwhile to disclose additional information that would be relevant under integrated reporting, sustainability reporting or the recommendations of the Task Force on Climate-related Financial Disclosures where that information is not already required for the Operating and Financial Review'.
- Non IFRS financial information: Referencing Regulatory Guide RG 230 Disclosing non-IFRS financial information ASIC states that directors should consider whether any non-IFRS financial information in the OFR or other documents outside the financial report is 'potentially misleading'.
- Estimates and accounting policy judgements: ASIC states that disclosures regarding sources of estimation uncertainty and significant judgements in applying accounting policies are important to allow users of the financial report to assess the reported financial position and performance of an entity and that as such 'directors and auditors should ensure disclosures are made and are specific to the assets, liabilities, income and expenses of the entity'.In addition, the regulator states that key assumptions and sensitivity analysis are important as they enable users of the financial report to 'make their own assessments about the carrying values of the entity’s assets and risk of impairment given the estimation uncertainty associated with many asset valuations'.
[Source: ASIC media release 7/06/2019]
Related News: Struggling to meet new AASB 16 requirement?
A survey by Lease Accelerator of over 60 senior finance professionals has found that almost one-third of companies are behind schedule or have not started projects to meet the July 1 deadline. Almost 85% of respondents said the project had turned out to be more complex than they anticipated and 61% are finding the project more complex than the new revenue recognition standard AASB 15.
[Sources: Lease Accelerator media release 18/06/2019; Accountants Daily 18/06/2019]
