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Clarity in financial reporting – December 2021 monthly newsletter

December 2021 models, ASIC reporting extensions, financial reporting impacts of inflation, supply chain disruption and labour shortages and more.

Our monthly Clarity in financial reporting newsletter informs you of key focus areas in financial reporting for the month: actions, developments, and dates.

Key actions

December 2021 models

Key actions: Want to understand the key financial reporting issues for the upcoming reporting season? Need a basis to develop transparent and technically correct disclosures? Want to know your reporting deadlines and other compliance aspects of reporting? Our models have got you covered.

Tier 1 models and reporting considerations publication

Our Tier 1 models and reporting considerations publication assists entities with public accountability and those choosing to prepare Tier 1 financial statements with an illustrative guide when developing their own disclosures for the December 2021 reporting season.

The publication also provides an easy-to-read and focused summary of key considerations for the December 2021 reporting season, including our popular ‘what’s new in financial reporting’ analysis.

We’ve made the following updates to make the publication more user-friendly

  • A reorganised structure that clearly separates guidance about financial reporting considerations from the illustrative disclosures
  • Introduced a detailed table of contents to easily locate content, summaries of standards and other developments and cross references
  • Added additional guidance on the Appendix 4E requirements for ASX listed entities
  • Clearly delineated information that applies only to not-for-profit and public sector entities
  • Providing downloads of each section of the publication in addition to the entire publication.

Access the publication to learn more.

Model half-year report

Our Model half-year report is a great tool for your half-year reporting. It provides a summary of key matters to consider, reporting deadlines and illustrative disclosures. Want to know how to handle the impacts of the IFRIC agenda decision on Software-as-a-Service (SAAS) arrangements in half-year reports? The report has illustrative disclosures that can help.

Model special purpose financial statements

We’ve issued the 16th edition of our model special purpose financial statements which includes illustrative disclosures for an entity that has a non-legislative requirement to prepare financial statements. With the imminent move to Australian Accounting Standards – Simplified Disclosures, this document can assist entities that fall outside that regime.

Entities preparing special purpose financial statements under the Corporations Act 2001 should refer to the 15th edition.

Early adoption of Simplified Disclosures

Entities applying Australian Accounting Standards – Simplified Disclosures (AASB 1060) at December 2021 should refer to our Tier 2 Simplified Disclosures model financial statements.

We will release an updated version of the Tier 2 model financial statements in 2022 which will include the impacts of the various amendments currently being contemplated by the AASB.

More information: All our models can be found here.

ASIC provides limited reporting extensions for December 2021

Key actions: Entities need to ensure they comply with reporting deadlines in the upcoming reporting season and be aware that deferral arrangements at December 2021 are different to previous periods.

What’s happened?

On 30 November 2021, ASIC announced that it would extend reporting deadlines for December 2021 unlisted entity financial reports. Subsequently, ASIC made ASIC Corporations (Amendment) Instrument 2021/976 to give effect to the announcement.

ASIC expects the extended deadlines will assist with any pressures on resources for the audits of smaller entities and provide adequate time for the completion of the audit process considering challenges presented by COVID-19 conditions.

Which entities benefit?

The reporting extensions only apply to unlisted entities. Therefore, listed entities will not have access to automatic deferral relief, but could apply to ASIC if they chose to do so.

What is the effect?

The one month extension to lodge financial reports with ASIC applies to unlisted entities with reporting dates from 24 December 2021 to 7 January 2022 (both inclusive).This means that:

  • Unlisted disclosing entities and registered schemes will have four (rather than three) months to lodge their financial reports with ASIC
  • Other entities will have five (rather than four) months to lodge their financial reports with ASIC.

Consequential amendments give a one month extension to other deadlines, e.g. the sending financial reports to members, for groups of wholly-owned entities reporting under a deed of cross guarantee, and in relation to grandfathered proprietary companies.

Unlisted public companies will be given an additional month to hold AGMs, so that such meetings must be held within six months of the reporting date (an increase from the normal five months, but less than the seven month relief previously given). Unlisted public companies taking advantage of the extension will still need to ensure they send their financial reports to members at least 21 days before the AGM.

More information: ASIC media release 21-323MR ASIC to extend deadlines for 31 December 2021 unlisted entity financial reports, ASIC Corporations (Amendment) Instrument 2021/976.

Financial reporting considerations of inflation, supply chain disruptions and labour shortages

Key actions: Entities should address the financial reporting considerations arising from inflation, supply chain disruptions and labour shortages.

Why now?

Inflation, supply chain disruptions and labour shortages are all affecting increasingly large number of entities in different industries to varying degrees. If an entity’s business model and operations are affected, its accounting and financial reporting are likely to be as well.

Forecasting

As cost structures change with higher inventory and freight costs and pressure to increase employee compensation, entities should:

  • Consider how they expect the altered cost structures to continue into the future
  • Evaluate whether they will be able to offset any increased costs with pricing adjustments.

Inflation, supply chain constraints and labour shortages all affect an entity’s forecasts, which are used in a variety of accounting estimates. These include the assessment of recoverable amount in impairment testing, the recoverability of deferred tax assets and liquidity and going concern analyses.

Inflation

Where inflation is driving up costs of acquiring goods and inventory, packaging materials and employee wages, entities need to consider whether those costs can be passed onto customers.

Where costs cannot be passed onto customers, such as under some long-term revenue contracts, this may impact forecast profitability and may also result in the recognition of an onerous contract.

Where contracts such as leases and supply contracts are renegotiated, appropriate accounting for the modification of such contracts should be considered.

Inflation may also impact the forecasts and discount rates used in the measurement of the recoverable amount in impairment tests, employee liabilities and provisions.

Supply chain disruptions

It has been well publicised that since manufacturers, suppliers and distributors in a supply chain are interconnected, disruption in one part of the chain has a ripple-down effect on all parts of the chain and ultimately affects consumers and economic growth.

Entities affected by such disruption may experience significant cost increases in moving goods through the supply chain. Accounting considerations include:

  • Whether costs capitalised into inventory may result in the need for inventory to be written down to net realisable value
  • That appropriate cut-off procedures in respect of revenue recognition and accruals are in place where inventories are in transit at year end
  • The impacts of the use of substituted inputs or manufacturing techniques on inventory costings and accounting for associated warranties.

Labour shortages

Labour shortages may manifest themselves in the form of employee turnover, resignations and demands for higher wages at all levels of the organisation. Accounting considerations include:

  • The impact on the measurement of employee liabilities (including any defined benefit plans)
  • The recoverable amount of assets into which higher employee costs may be capitalised and the net realisable value of inventories into which compensation costs have been capitalised
  • Where production is reduced due to lack of resources, impacts on inventory costing
  • Impacts on forecasts and internal control environments.

Communication with stakeholders 

Entities should consider disclosing the current effects of these matters on the business, expected future impacts and how management is responding. This may be included in the operating and financial review (OFR) and also in the financial statements disclosures around critical judgements and estimation uncertainties and sensitivity analyses.

Entities should tailor these disclosures to their specific circumstances and avoid generic boilerplate disclosures in relation to inflation, supply chain disruptions, and labour shortages.

Key developments

Moving toward standardised ESG reporting

Key actions: Entities need to respond to a continuing global push for standardised environmental, social and governance (ESG) reporting and be aware of recent Australian developments exploring how global developments might be implemented in the Australian context.

Standard-setters explore voluntary TCFD

The Financial Reporting Council, AASB and AUASB have issued Position Statement Extended External Reporting and Assurance. In the Position Statement, the Boards recognise there is a desire for authoritative guidance on extended external reporting in Australia and are taking steps to ensure Australia adopts a reporting regime that meets the needs of users of financial and non-financial reporting information and supports Australia’s international competitiveness.

Operating within the existing institutional framework, the AASB intends to develop reporting requirements for non-financial information and the AUASB intends to simultaneously update relevant assurance standards, which are already capable of addressing current voluntary disclosures.

The AASB has issued Invitation to Comment ITC 48 Extended External Reporting which seeks feedback on the AASB's proposed position that, as an initial step, the voluntary adoption of the recommendations put forward by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) should be used as the basis for extended external reporting. Comments on the AASB's Invitation to Comment close on 28 January 2022.

Council of Financial Regulators

Earlier this year, as part of its 2021/22 priorities, the Council of Financial Regulators Working Group on Financial Implications of Climate Change (comprising APRA, ASIC, RBA and Treasury) announced that agencies will also consider how international developments in standards for climate-related disclosures, including moves to mandate disclosures in some jurisdictions, may affect Australia, noting that any policy decisions are a matter for Government.

Two minute update

Why does it matter? Ensure you are aware of the latest developments.

A summary of recent developments:

ASIC focus areas for 31 December 2021

ASIC has announced its focus areas for financial reports at 31 December 2021, which are broadly consistent with previous periods. ASIC calls on directors, preparers of financial reports and auditors to focus on various topics, including asset values, provisions, solvency and going concern assessments, subsequent events, and disclosures in the financial report and Operating and Financial Review (OFR).

We will provide further analysis in our January 2022 monthly email.

ASIC releases consolidated JobKeeper report

ASIC has announced the public availability on its website of Jobkeeper information required to be disclosed by listed entities under the Corporations Act 2001. The initial consolidated report is available here

Revised ACNC reporting requirements enacted

The Federal Government has given effect to increased reporting thresholds and other reporting requirements for charities and not-for-profit entities registered with the Australian Charities and Not-for-Profits Commission (ACNC) through the making of Australian Charities and Not-for-profits Commission Amendment (2021 Measures No. 3) Regulations 2021.

More information about the changes can be found in our October not-for-profit newsletter (the final regulations are largely equivalent, with minor amendments around the related party disclosures). The ACNC has also issued a media release discussing the changes.

Revised proposals on liability classification

The IASB has issued Exposure Draft ED/2021/9 Non-current Liabilities with Covenants (AASB equivalent is ED 316) that proposes:

  • Entities would classify liabilities as current or non-current based on compliance with covenants required on or before the reporting date
  • The existence of covenants that are required to be complied with within 12 months of the reporting date would not affect classification of liabilities at the reporting date
  • Liabilities classified as non-current which have covenant requirements to meet in the 12 months after reporting date should be presented separately in the statement of financial position and detailed information about the covenants provided in the notes to the financial statements
  • The existing amendments on the classification of liabilities would be deferred to be applicable no earlier than annual periods beginning on or after 1 January 2024.

The deadline for comments is 3 February 2022 for ED 316 and 22 March 2022 for ED/2019/9. Entities preparing to implement the existing amendments should be aware of these proposals. For more information, see IFRS in Focus IASB proposes amendments to IAS 1 regarding the classification of liabilities with covenants.

Further disclosures on supplier finance arrangements proposed

The IASB has also issued Exposure Draft ED/2021/10 Supplier Finance Arrangements (AASB equivalent is ED 317) which proposes to require new disclosures by entities participating in supplier finance arrangements as the buyer. The proposals would:

  • Require entities that are purchasers in a supplier finance arrangement to provide information in the notes (including qualitative and quantitative disclosure) that enables users of financial statements to assess the effects of supplier finance arrangements on their liabilities and cash flows
  • Amend IFRS 7 Financial Instruments: Disclosures to add supplier finance arrangements as an example within the requirements to disclose information about an entity’s exposure to concentration of liquidity risk.

The deadline for comments is 3 February 2022 for ED 317 and 28 March 2022 for ED/2021/10. For more information, see IFRS in Focus IASB proposes amendments to IAS 7 and IFRS 7 to address supplier finance arrangements.

Easing transition to Simplified Disclosures

The AASB has released Exposure Draft ED 315 Extending Transition Relief under AASB 1. These proposals will allow more entities to apply AASB 1 First-time Adoption of Australian Accounting Standards and to apply aspects of AASB 1 where a foreign parent prepares financial statements in accordance with IFRS.

The proposals will particularly benefit CBC reporting entities which have previously prepared unconsolidated RDR general purpose financial statements as a result of the 'GPFS requirements' under the Tax Administration Act 1953 on the basis they were not a reporting entity and had a foreign parent preparing financial statements under IFRS.

Comments on the proposals close on 27 January 2022.

 

Published : December 2021

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