deCemBeR 2010 www.bdo.com.auACCOUNTINGNewswhAT’s New fOR deCemBeR2010? IN ThIs edITION Px What’s new for December 2010 Px Which standards do I apply? Px FAQs Px Comments sought on exposure drafts This Christmas we bring good news that there are no major changes to accounting standards or interpretations that could impact your financial statements for 31 December 2010 (annual or half-years).changes to standards and interpretations for the 31 december However, the IASB have been busy2010 reporting season will affect entities with reporting dates as over the last couple of years tinkeringfollows: with standards and interpretations and• Annual periods ending 31 December 2010 (listed or unlisted entities) making improvements here and there.• Half-years ending 31 December 2010 (listed entities and unlisted disclosing entities). The Corporations Amendment (Corporate Reporting Reform) Bill 2010 which receivedAlso impacting 31 December 2010 annual financial statements for the first time: Royal Assent on 28 June 2010 also impacts• Corporations Amendment (Corporate Reporting Reform) Bill 2010 which received Royal Assent financial statements for 31 December on 28 June 2010 2010 for the first time, as do the Reduced• Reduced Disclosure Requirements for Tier Two entities described in AASB 1053 Application Disclosure Requirements for Tier Two of Tiers of Australian Accounting Standards that currently prepare general purpose financial entities preparing general purpose financial statements. statements. This month’s newsletterThese changes are summarised below. summarises these changes.annual periodsIf you are preparing financial statements for the annual period ended 31 December 2010, you maybe impacted by the following changes to accounting standards and interpretations:• AASB 3 Business Combinations (2008)• AASB 127 Consolidated and Separate Financial Statements (2008)• AASB 2009-8 Amendments to Australian Accounting Standards – Group cash-settled Share-based Payment Transactions• AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project.aasb 3 Business Combinations (2008) and AASB 127 Consolidated and Separate FinancialStatements (2008)For 31 December balancing entities, AASB 3 (2008) applies prospectively to business combinationswhere the acquisition date was on or after 1 January 2010 and the amendments to AASB 127 applyfrom the same date. continued over page...
2 accounting newsMajor differences between the revised versions of these two standards and the superseded version of AASB 3 are: ACCOUNTING TReATmeNT RevIsed sTANdARds sUPeRseded sTANdARds acquisition costs such as advisory, legal, accounting, due diligence, stamp duties acquisition costs included as part of purchase consideration and capitalised into etc to be expensed as incurred goodwill Terminology is ‘non-controlling interests’ Terminology is ‘minority interests’ non-controlling interest can be measured at either: minority interests measured at proportionate share of net identifiable assets • Proportionate share of net identifiable assets acquired acquired • Fair value Adjustments to contingent or deferred consideration are recognised in profit Adjustments to contingent or deferred consideration are adjusted against or loss goodwill (This requirement continues to apply to pre AASB 3 (2008) business combinations) intangible assets to be recognised separately from goodwill even if not reliably intangible assets to be recognised separately from goodwill if reliably measurable measurable Detailed requirements for re-acquired rights No guidance for re-acquired rights step acquisitions – associate to controlling interest – remeasure initial step acquisitions – associate to controlling interest – no gain/loss on step investment in associate to fair value via profit or loss acquisition step acquisitions – available-for-sale investment (afs) to controlling interest step acquisitions – available-for-sale investment (afs) to controlling interest – treated as a disposal of AFS investment and subsequent acquisition of controlling – no gain/loss on step acquisition interest. Balance on available-for-sale reserve reclassified through profit or loss step acquisitions post control (e.g. 60 percent interest increased to 80 percent) – step acquisitions post control (e.g. 60 percent interest increased to 80 percent) treated as transactions between equity holders and no further goodwill recognised – diversity in practice. Could have resulted in further goodwill or been treated as an equity transaction step downs retaining control (e.g. 80 percent interest to 60 percent) – treated as step downs retaining control (e.g. 80 percent interest to 60 percent) – gain/loss transactions between equity holders recognised in profit or loss on sell-down of a portion of the investment step downs lose control – treated as a disposal of whole investment and step downs lose control – smaller gains/losses recognised in profit or loss being subsequent acquisition of an associate/AFS investment at fair value. Gain/loss difference between carrying amount of interest sold and proceeds recognised in profit or lossaasb 2009-8 Amendments to Australian Accounting Standards – GroupGroup cash-settled Share-based Payment Transactions 1 APRIl 2010Interpretation 11 AASB 2 – Group and Treasury Share Transactions, Dr Stationery expense $1,000previously clarified the accounting in the individual financial Cr Liability – Best & Less $1,000statements of group companies where one company in the groupreceived goods/services and another group company issued shares or Assume that on 30 June 2010 (payment date), Parent A’s share price isoptions in return. AASB 2009-8 amends the requirements of AASB 2 $1.25. The journal entries in Parent A are as follows:Share-based Payment with respect to group cash-settled share-basedpayment transactions and therefore fills the void left by Interpretation 11 Parent Awhich only dealt with equity-settled share-based payment transactionsinvolving group companies. 30 JUNe 2010 Dr Investment in Sub B $250Example: Cr Liability – Best & Less $250Sub B Pty Limited (Sub B) receives stationery supplies from Best & Less StationeryPty Limited (Best & Less) on 1 April 2010 with a fair value of $1,000. Parent A Dr Liability – Best & Less $1,250Limited (Parent A) is the parent entity of Sub B. Parent A is listed on the ASX. ParentA’s shares are trading at one dollar on 1 April 2010. Cr Cash $1,250Parent A agrees to settle the debt owing to Best & Less on 30 June 2010 at a value Question one:linked to the increase/decrease in the share price of Parent A. So for example, if should sub b recognise any further stationery expense for theParent A’s share price increases to $1.50, Parent A will be required to pay Best & Less$1,500. However, if Parent A’s share price decreases to $0.75, Parent A will only be additional $250 recognised by parent b?required to pay Best & Less $750. answer one:The journal entries on the date that the stationery is received are as No. Sub B is required to account for this transaction as an equity-settledfollows: share-based payment transaction because: • It is not required to issue its own equity instruments to settle theParent A obligation; and 1 APRIl 2010 • It is also not required to settle the obligation at all. Dr Investment in Sub B $1,000 The amount recognised for equity-settled share-based payment Cr Liability – Best & Less $1,000 transactions can only be amended after grant date if permitted by AASB 2, paragraphs 19-21 (i.e. for non-market vesting conditions). In this case,Sub B there are no non-market vesting conditions and Sub B therefore makes 1 APRIl 2010 no further entries for this transaction. Dr Stationery expense $1,000 Cr Equity contribution from Parent A $1,000
3 accounting newsQuestion Two: Interpretation 11 and Interpretation 8 (which requires expensing anywhat happens to the additional $250 debited to parent a’s unidentified goods/services under AASB 2) have been withdrawn andinvestment in sub b that has no equivalent entry in sub b? their requirements included in AASB 2 for periods beginning on or after 1 January 2010. The changes must be applied retrospectively, which meansanswer two: that prior year comparatives must be restated, as well as opening balancesAASB 2, paragraph 43A envisages this concept of ‘asymmetrical of retained earnings.accounting’ whereby the amount recognised by the entity receiving thegoods/services may be different to the amount recognised by the group aasb 2009-5 Further Amendments to Australian Accounting Standardscompany that settles the obligation. arising from the Annual Improvements Project The International Accounting Standards Board (IASB) made the followingAs one cannot have this ‘dangling debit’ investment in Sub B in the group changes to standards and interpretations during their 2008 annualfinancial statements, it is our view that this additional $250 will need to improvements project that impact your 31 December 2010 annualbe written off on consolidation as an additional share-based payment financial statements:expense (not as an additional stationery expense). sTANdARd/INTeRPReTATION ClARIfICATION AASB 5 Non-current Assets Held for Sale Disclosures required for non-current assets classified as held for sale or discontinued operations are limited to those required and Discontinued Operations by AASB 5. Disclosures from other standards are only required if other standards specifically require disclosure for assets held for sale or discontinued operations, e.g. AASB 133 Earnings per Share requires disclosure of EPS for discontinued operations. (P) AASB 8 Operating Segments Disclosures for total assets by reportable segment only required if provided to the chief operating decision maker. (R) AASB 101 Presentation of Financial The classification of a liability is not affected by the counterparty having an option for the liability to be settled by the issue Statements of equity instruments. Provided there is no requirement to transfer cash or other assets within 12 months, such liabilities can be classified as non- current, e.g. a long-term convertible note that could be convertible in six month’s time can be classified as a non-current liability.(R) AASB 107 Statement of Cash Flows Only expenditure that results in a recognised asset in the statement of financial position is eligible for classification as cash flows from investing activities. R&D, marketing, and exploration expenses written off cannot be classified as cash flows from investing activities. (R) AASB 117 Leases Very long leases of land can be classified as a finance lease where the risks and rewards are effectively transferred, despite there being no transfer of title. Leasehold land for very long leases can be classified as PPE and revalued. There is still debate about exactly what a very long lease is. Is it 50 years? Is it 99 years? No one is really sure.(R) AASB 118 Revenue Example 21 has been added as guidance for determining whether an entity is acting as agent or principal. An entity may be acting as principal when it has exposure to the significant risks & rewards associated with sale/service, e.g. entity: • Has primary responsibility for providing goods or services • Has inventory risk • Has latitude in establishing prices • Bears credit risk for amount received from customer. AASB 136 Impairment of Assets Cash-generating units (CGUs) to which goodwill is allocated cannot be larger than operating segments defined in AASB 8 Operating Segments (before aggregation). Amendment also applies to unlisted entities when assessing goodwill impairment (even though AASB 8 only applies to listed entities and entities in the process of listing).(P) AASB 139 Financial Instruments: Relates to the scope exclusion for forward contracts that will result in a business combination. Clarifies that the term of the Recognition and Measurement forward contract should not exceed a reasonable period normally necessary to obtain any required approvals and complete the transaction. (P) AASB 139 Financial Instruments: If a hedge of a forecast transaction subsequently results in a financial asset or financial liability being recognised, gains/loss Recognition and Measurement in other comprehensive income are to be recognised in profit or loss in same period(s) during which the hedged forecast cash flows affect profit or loss. Example: An interest rate swap is taken out for a two year period as a hedge on a five year loan. The hedge gain/loss should offset variable interest payments over the two year hedge period (rather than over the five year period of the loan. (P) AASB 139 Financial Instruments: Clarifies that a call, put or prepayment option embedded in a debt instrument Recognition and Measurement is closely related (i.e. embedded derivative does not need to be measured separately) if: • Option’s exercise price is approximately = on each exercise date to amortised cost of debt instrument • Exercise price of the prepayment option reimburses the lender for the amount of the present value (PV) of the lost interest for the remaining term of contract (additional requirement added). (P) Example where prepayment option reimburses lender for PV of lost interest: $100,000 loan fixed at ten percent with a remaining five year term. Current interest rates are seven percent. Penalty for early repayment is that borrower will have to pay the lender the present value of the three percent differential interest rate over the remaining five year term.(P) Amendment applies prospectively, so comparatives do not need to be restated (R) Amendment applies retrospectively, so comparatives do need to be restated
4 accounting newshalf-year periods be restated for debt for equity swaps that occurred last year. However,If you are preparing half-year financial statements for the six month the IASB in their Basis of Conclusions have indicated that restatementperiod ended 31 December 2010, you may be impacted by the following beyond the previous period is not necessary because the only impactchanges to accounting standards and interpretations: would be on classification of the entries between retained earnings and share capital.Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments classification of rights issues Amendments to Australian Accounting Standards –AASB 2009-10 This change came about because there was diversity in practice as to Classification of Rights Issues Amendments to Australian Accounting Standards arising how to account for rights issues where shares are issued in exchange forAASB 2010-3 a fixed dollar amount of a foreign currency (that is not the functional from the Annual Improvements Project currency). This amendment clarifies that such rights issues are to beinterpretation 19 treated as equity only if the entity offers the shares pro rata to all itsThe global financial crisis has seen a rise in the number of debt for equity existing shareholders in the same class.swap transactions and there has been diversity in the way debtors have Retrospective restatement is required, so comparatives must be restated.accounted for these transactions. Some entities have measured theequity instruments they issued at fair value and recognise a gain/loss on Annual improvementsextinguishment in profit or loss, while others have measured the equity These improvements relate mainly to AASB 3 Business Combinationsinstruments issued at the fair value of the liability extinguished which (2008). For further information, please refer to the article, ‘More annualmeans that no or little gain/loss is recognised in profit or loss. improvements’ in Accounting News, May 2010.Interpretation 19 clarifies that the equity instruments should be Corporations Act amendmentsmeasured at their fair value, unless fair value cannot be reliably measured, Accounting News, July 2010, summarises, in detail, the amendments to thein which case the fair value of the debt extinguished can be used. These Corporations Act financial reporting requirements (Chapter 2M) resultingprinciples are illustrated in Fig 1. from the Corporations Amendment (Corporate Reporting Reform) Bill 2010 which received Royal Assent on 28 June 2010. The following changes were effective for years ending on or after 30 June 2010, so may impact 31 December 2010 balancing entities for the first time: fv of equity • parent entity financial statements – These are no longer permitted Yes instruments can use fv of equity under s295(2)(b) where consolidated financial statements are be measured instruments issued required. However, Class Order 10/654 overrides this requirement so reliably? that entities can leave in the parent entity columns if they wish (useful for AFS licensees that consolidate for the purposes of s295(2)(b) but are also required to lodge separate parent entity financial statements as licence holder under s989B(2)). • directors’ declarations – If the financial statements include an no explicit and unreserved statement of compliance with IFRSs (IFRS use fv of liability compliance statement), the directors must include a reference to this extinguished IFRS compliance statement in their directors’ declaration (s295(4) (ca)). The directors’ declaration should not repeat the fact that the financial statements comply with IFRSs. They should just say thatfig 1 the financial statements include a statement of compliance withexAmPle ONe IFRSs. Remember that this compliance statement is not required, and cannot be made, for non-reporting entities that do not do all IFRSsABC Limited isses 1 million shares with a fair value (FV) of $1000,000 to disclosures and for not-for-profit entities that apply some of the ‘Aus’Big Bank Limited to extinguish a debt worth $500,000. The accounting measurement paragraphs of Australian Accounting Standards whichentries are as follows: are different to the IFRSs measurement requirements.scenario one: fv of equity instruments is used • dividends – All dividends declared on or after 28 June 2010 (dateDr Debt $500,000 of Royal Assent) must meet the new dividend rules in revised s254TCr Equity $100,000 (assets must exceed liabilities after the dividend is paid and solvencyCr Gain $400,000 requirements). Assets and liabilities must be calculated before ascenario two: fv of debt is used dividend is declared by applying all recognition and measurementDr Debt $500,000 requirements in Australian Accounting Standards. This could beCr Equity $500,000 problematical for small proprietary companies or non-reporting entities that do not comply with all recognition and measurementThe interpretation applies retrospectively, so comparatives will need to standards, e.g. accounting for derivatives, deferred tax liabilities etc.
5 accounting news• companies limited by guarantee - Small whICh sTANdARds dO I APPly? companies limited by guarantee (those that are not deductible gift recipients for tax purposes that have revenues less than $250,000) are no longer required to have an when ifrs was first adopted in 2005, the iasb tended to release new audit (refer full definition in s45B). Medium standards, and changes to existing standards, with a start date of 1 sized ones* can elect to have a review of JanuarY to align with manY european companies having 31 december their annual financial statements rather Year ends. this made deciding which accounting standards applied to than an audit. There are also streamlined directors’ report requirements included in Your financial Year fairlY easY. s300B, so companies limited by guarantee Having departed from this trend by issuing no longer prepare a directors’ report under AASB 3 Business Combinations (2008) with a sections 299 and 300. start date of 1 July 2009, the IASB now seem to*Medium-sized companies limited by guarantee are have a haphazard pattern of start dates, withthose that: some being 1 January and others being 1 July.• Are deductible gift recipients with revenues less To further complicate the situation, annual than $250,000; or improvements and ad hoc amendments• Have revenues less than $1 million. to standards and interpretations are oftenreduced disclosure requirements quickly compiled into the latest version thatFor years ending on or after 30 June 2010, you see under ‘Table of Standards’ or ‘TableTier Two entities described in AASB 1053 of Interpretations’ on the AASB web site. ThisApplication of Tiers of Australian Accounting means that the latest copy of a standard youStandards, that have previously prepared may be looking at on the AASB web site maygeneral purpose financial statements using full include requirements that are not yet effectiveIFRSs, now have a choice to prepare general and you could land up mistakenly adoptingpurpose financial statements using the Reduced things early without knowing it.Disclosure Requirements outlined in AASB So, to make sure you are referring to the2010-2 Amendments to Australian Accounting correct version of a standard or interpretationStandards arising from Reduced Disclosure that applies to your year end, it’s safest toRequirements. refer to www.aasb.com.au and then search byTier Two entities are those that are not reporting period.publicly accountable. So listed entities,unlisted disclosing entities, co-operativesthat issue debentures, registered managedinvestment schemes, superannuation plansregistered with APRA, authorised deposit-taking institutions (ADIs), etc cannot apply theReduced Disclosure Requirements. fAQsProvided there is nothing in their constitutions Question:or regulations that specifically require full how do we account for post-combination acQuisition costsIFRSs general purpose financial statements, (i.e. where investment increased from saY 60 percent to 80 percent)the following types of entities could consider in the financial statements of:applying the Reduced Disclosure Requirements: • the parent entitY• Large proprietary companies that are not • the group? contemplating an IPO in future answer:• Charities PARENT ENTITY• Clubs Investments in subsidiaries accounted for under AASB 127 Consolidated and Separate Financial• Schools Statements are scoped out of AASB 139 Financial Instruments: Recognition and Measurement.• Public sector entities that are not Federal, AASB 127.38(a) permits an investment in a subsidiary to be measured using ‘cost’. Our view is State and territory Governments, local that ‘cost’ includes all costs associated with the investment, including transaction costs. This is governments or universities. consistent with the accounting treatment for investments in subsidiaries accounted for under AASB 127.38(b), i.e. under AASB 139. AASB 139.43 requires that financial assets be recognisedIf you wish to apply the Reduced Disclosure initially at fair value plus transactions costs.Requirements,www.aasb.com.au includes a ‘Table of GROUPRDR versions’ in which each standard AASB 3 Business Combinations (2008), paragraph 53 only provides guidance on the expensingincludes shaded grey paragraphs to indicate of acquisition-related costs when these relate to a business combination. A group that increasesdisclosures not required for reduced its share in a subsidiary from say 60 percent to 80 percent is not undertaking a businessdisclosures. combination and therefore AASB 3.53 is not relevant.For further information on Reduced AASB 127.30 requires that changes in a parent’s ownership interest in a subsidiary that doesDisclosure Requirements, refer to Accounting not result in a loss of control are accounted for as equity transactions, i.e. transactions withNews, July 2010. owners in their capacity as owners. It is therefore our view that any acquisition-related costs for additional tranches should also be accounted for as equity transactions and therefore debited to equity.