Clarity in financial reporting monthly newsletter

Article

Clarity in financial reporting monthly newsletter

February 2021 edition

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

Key questions for December 2020 reporting

Action: Consider each of these questions during the December 2020 reporting season.

Continuing uncertainty, economic developments and evolving government responses mean that a high level of judgement continues to be required in financial reporting in response to COVID-19 and broader developments.

It is important the financial report and Operating and Financial Review (OFR) “tell the story” of how the business is impacted by COVID-19 (positively or negatively), or for half-year financial reports, how the impacts have changed.

Furthermore, entities must ensure that COVID-19 impacts are not inappropriately adjusted in financial results, e.g. presenting sub-totals pre and post COVID-19 and ensuring non-IFRS information is not misleading, adequately explained and reconciled to statutory information.

Set out below are questions where disclosure is important. Our Tier 1 model financial statements also provide specific guidance.

1. How have events impacted liquidity?

Investors and other users of the financial report seek to ensure the ongoing financial viability of the entity. Considerations include:

  • Going concern: Appropriately consider going concern and subsequent events in preparing the financial report, and ensure transparent disclosure is made where needed (see also the recent IASB education material and AASB/AUASB publication)
  • Unusual events: Clearly disclose the impacts of unusual events and items, e.g. government assistance, impairments and material movements in fair values, non-cash transactions and impacts of refinancing
  • Financing arrangements: Transparently explain financing arrangements in place, changes in those financing arrangements, debt modifications, and how liquidity risks are monitored and measured (including supplier financing arrangements discussed below)
  • Current vs. non-current classification: Carefully consider the classification of liabilities and ensure all relevant information is taken into account in classification, such as considering compliance with banking covenants, and consider disclosure of covenants in place if material to the understanding of the financial statements.

2. Have supplier financing arrangements been put in place?

Supplier financing arrangements continue to be a hot topic and can significantly impact an entity’s financing arrangements and creditors.  The IFRS Interpretations Committee has recently finalised its Agenda Decision Supply Chain Financing Arrangements—Reverse Factoring providing further guidance on these arrangements.  Users and creditors will expect to understand the impact of supplier finance arrangements on the entity and its business partners.  Considerations include:

  • Disclosure: Where material supplier financing arrangements are in place, ensure transparent disclosure of the:
    • Existence of the arrangement, key terms, and which creditors are involved
    • Size of the facility, amount used and impact on working capital
    • Key accounting judgements applied
    • Process used to monitor and manage risks and exposures

    Example disclosures can be found in our Tier 1 model financial statements (including notes 3 and 38)

  • Other information: Where supplier financing arrangements are not in place in industries and sectors where they are common, disclose this fact and explain other pertinent information
  • Consistency: For entities subject to the Payment Times Reporting Scheme, ensure consistency between information disclosed in financial reports and reports lodged under the scheme (after allowing for definitional differences).  In particular, the scheme requires details of supply chain finance that is provided or used with their small business suppliers.

3. Has the entity been impacted by government assistance programmes or other support?

There has been a strong focus on government support payments (such as JobKeeper, JobMaker, grants and other support) from the media and other commentators and the expectation that assistance programs may cease or be limited to particular industries, geographies or situations.  Key considerations include:

  • Telling the story: Ensure the financial report and OFR clearly explains whether or not the entity has benefited from material levels of support or assistance from government, lenders, landlords and others
  • Key disclosures: Transparently disclose the nature of assistance received, amounts received (or voluntarily returned), when support expires and the expected impacts once that support ceases.

4. Can users understand how key amounts have been measured?

Uncertainty and volatility are a key feature of current financial reporting.  Transparent and clear disclosure will assist users to evaluate the impacts on critical balances in the financial reportFor example:

  • Impairment testing: Clear disclosures about impairment tests, including key assumptions, periods of projected cash flow, sensitivity analysis and scenario analyses
  • Expected credit loss calculations: Explain how expected credit loss calculations have been performed, including key assumptions, the impact of COVID-19 and model overlays
  • Fair value measurements: Describe how fair values included in the financial report have been determined, especially where ‘level 3’ measurements have been used
  • Inventory write downs: Consider providing explanations of write downs or reversals of write downs of inventories where material to the understanding of the financial statements
  • Deferred tax assets: Detail the basis for the recognition of (net) deferred tax assets, particularly where the entity has suffered a tax loss in the current or prior period.

5. What judgements and uncertainties were considered in preparing the financial report?

Changes in economic conditions, government support and budgetary arrangements can have widespread impacts on impairment, expected credit losses, fair value measurement, provisions and going concern.  Transparency of how judgements around estimates have been determined and key uncertainties arising is important for users to understand how the entity is responding to changed conditions. For example, key disclosures of:

  • The nature of material changed estimates and the reason for changes and the relevant key judgements made
  • Sources of estimation uncertainty, key judgements made and sensitivity and scenario analyses.

6. How do climate change and other emerging issues impact the entity?

With increasing investor, regulatory and standard-setter focus on climate change and other emerging risks, entities need to ensure appropriate consideration and disclosure of relevant matters in their financial reports.  For more information, see our Clarity publication Disclosure of climate risks and Appendix 1 to our Tier 1 model financial statements.

Additional considerations for half-year financial reports

The guiding principle in presenting half-year financial reports is that the interim disclosures are those that are useful in understanding the changes in the financial position and performance of the entity since the last annual reporting period.  In addition, AASB 134 Interim Financial Reporting requires certain mandatory disclosures and the level of detail required may be greater in volatile times.

It is important that the half-year is a continuation of the last full year report. Therefore, it is necessary to consider any changes or developments and provide clear disclosures that explain items such as those listed below:

  • The impact of changes in government assistance
  • Significant impairments or reversals of impairment, or the effects of other material changes in estimates as discussed above
  • Changes in financing arrangements (e.g. the introduction of supplier financing arrangements or debt factoring arrangements, material new financing arrangements, or other significant changes to financing arrangements)
  • Fair value disclosures in respect of financial instruments
  • Other matters discussed above where significant changes or developments have occurred.

Our model half-year financial statements provide further guidance.

More information:  The following general resources will be particularly helpful:

New publication on GPFS for ‘CBC reporting entities’

Action: Refer to our updated publication on general purpose financial statements under the Tax Administration Act 1953 when addressing financial reporting obligations arising under tax law.

As noted in our January newsletter, in late December 2020, the Australian Tax Office has published updated guidance on how ‘CBC reporting entities’ can meet their obligations for general purpose financial statements under the Tax Administration Act 1953.  Additional guidance has also been provided on determining whether an entity is a CBC reporting entity and/or a significant global entity.

We have updated our comprehensive Clarity publication Understanding the GPFS requirements for CBC reporting entities.  This publication:

  • Explains the ‘GPFS requirements’ arising under the Tax Administration Act 1953
  • Provides guidance on how to determine if an entity is subject to the GPFS requirements
  • Analyses the requirements and options in meeting the GPFS requirements
  • Explains what GPFS can be prepared under Australian Accounting Standards, the various ‘tiers’ of reporting, the differences between them, and the impact of the removal of the reporting entity concept for many private sector for-profit entities
  • Provides a series of frequently asked questions
  • Outlines many common examples to assist entities in understanding and applying the requirements.

More information: Clarity publication Understanding the GPFS requirements for CBC reporting entities.

Key developments

Two minute update

Why now?  Ensure you are aware of the latest developments and consider whether they may impact you.

A quick summary of recent developments:

  • IASB proposes to fast-track extended COVID-19 lease concession accounting  – The IASB has proposed to extend the time period for COVID-19 rent concessions that do not need to be treated as lease modifications for an additional 12 months to 30 June 2022.  This may mean some lease concessions not previously eligible for the concession will need to be retrospectively restated.  The IASB has issued an urgent exposure draft with a 14 day comment period and expects to finalise the amendments by the end of March 2021.  For more information, see our IFRS in Focus publication IASB proposes amendment to IFRS 16 to extend the practical relief on rent concessions
  • Not-for-profit models update – We have released an Appendix to our Tier 1 model financial statements which provides additional guidance on Tier 1 reporting by not-for-profit entities.

IASB proposes to require recognition of certain regulated assets and liabilities

Why now?  Entities operating in regulated industries, such as electricity, gas, water and others should be aware of recent proposals to require the recognition of certain regulated assets and liabilities. 

The proposals create a new accounting model that:

  • Would adopt an underlying principle that total compensation to which rate regulated entities are entitled for the goods or services supplied in a period is recognised as part of their reported financial performance for that period
  • Recognise regulatory assets, regulatory liabilities, regulatory income and regulatory expense to achieve this underlying principle.

Comments on the proposals are due to the AASB on 10 May 2021 and to the IASB on 30 June 2021.

More information: IFRS in Focus IASB proposes new Standard on regulatory assets and regulatory liabilities.

Did you find this useful?