New accounting standards - Local Government Financial Professional's CFO Forum 20 July 2018 - Local Government Finance Professionals
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Engage
Challenge
New accounting standards Deliver
Care
Local Government Financial Professional’s
CFO Forum
20 July 2018
Welcome
Revenue (AASB 15) and Income for NFPs (AASB 1058)
Leases (AASB 16)
Agenda
Financial Instruments (AASB 9)
Service Concession Arrangements (AASB 1059)
Transition Options
Q&A
2018–19 2019 Beyond
AASB 15 Revenue +
AASB 15 Revenue AASB 17 Insurance
AASB 1058 Income
Upcoming For-profits contracts
for NFPs
changes
AASB 9 Financial
AASB 16 Leases RDR
Instruments
AASB 1059 Service Reporting entities/
concessions SPFRs
How far progressed are you (e.g. completed, well advanced, just starting)
If completed, what is the quantitative impact and any qualitative impacts?
If not completed:
Required • What are the areas or sources of revenue that you think will have no
Disclosures material impact?
2017-18 • What are the areas or sources of revenue that you are still assessing?
• What issues are you assessing?
• When do you expect to be completed?
• What are the qualitative impacts?
What transition method do you propose to use?
Have you tailored the above disclosures to your situation?
Revenue and Income for NFPs
▪ Not-for-profit and public sector — to use same model
▪ Delayed 1 year – For-profit entities apply from 2018-19
▪ Core principle
Revenue—
AASB 15 ‘an entity shall recognise revenue to depict the transfer of
promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services.’
▪ May affect when entities recognise revenue, and how much
they can recognise as revenue
Retrospective – restate prior period
New standard New standard
Modified retrospective
Transition –
first year Old standard New standard
In notes:
Old standard
1 July 2018 1 July 2019 1 July 2020
• Grants—Recurrent • Performance management fees
• Grants—Special purpose • Contributed services
Revenue • Grants—Capital • Developer contributions /
and income contributed assets
sources • Fees
• Sponsorship
• Levies
• Rates
• User charges
• Taxes
• Fees for service
• Fines
• Sale of goods
• Interest
• Licences
• Dividends
• Grants—Recurrent • Performance management fees
• Grants—Special purpose • Contributed services
Revenue • Grants—Capital • Developer contributions /
and income contributed assets
sources • Fees
• Sponsorship
• Levies
• Rates
• User charges
• Fines
• Fees for service
• Taxes
• Sale of goods
• Interest
• Licences
• Dividends
Utilitywise (UK AIM listed)
Independent utility cost management consultancy
Year end 31 July 2017, Financials due 31 Jan 2018
2017.07.31 Announcement of early adoption of IFRS 15 from 1 August 2017 – one
year early
Taking longer Effect on profits expected to be material
than expected
Example Effect on retained earnings - becomes negative
Utilitywise Dividend suspended
2017.10.12 Results delayed 1 month due to finalising IFRS 15 impact
2017.11.15 Results further delayed. Appointing another firm to review methodology.
2018.01.17 To amend current IAS 18 accounting
2018.01.29 Suspends shares as financials will be late
2018.03.22 Results for year ended 31 July 2017 released
Policy changes (IAS 18) results in negative net assets
Still no quantification of effect of IFRS 15.
2018.04.13 Effect early adoption IFRS 15 released
Source: Utilitywise announcementsAccounting for grant income
Conceptual change from AASB 1004
Revenue Under new standards, the
recognition Grantor grant may be eligible for
Under AASB
changes 1004, it must be
deferral where the grantor
directs the benefits provided
a reciprocal
Grant to the public/third parties
transfer for the Benefits
funds
grant income to
be deferred
Benefits
Grantee/ Public/
Recipient Third partiesCapital grants
Source: Income of not-for-profit entities – Getting to know AASB 1058,
http://www.aasb.gov.au/admin/file/content102/c3/AASB%201058_Apr2017.pdfFive steps:
Identify
Identify contracts performance Determine price
Revenue obligations
recognition
process
Recognise revenue Allocate
when performance transaction price to
obligation is performance
satisfied obligationsBroadly all funding to NFPs is intended for the entity to deliver
goods or services to beneficiaries.
When is there an obligation / liability (for deferral of revenue)?
Not-for- • Enforceable arrangement
Profits • Need to transfer goods or services
• Sufficiently specific to enable the entity to determine when it has
satisfied that obligation
If resources provided for use in an entity’s operations, without
imposing an obligation for an outflow of resources to another party
is not a performance obligation
• Consumption-based stipulationsPerformance obligations satisfied over time
35 An entity transfers control of a good or service over time … if
one of the following criteria is met:
(a) the customer simultaneously receives and consumes the
benefits … (e.g. cleaning and security);
(b) the entity’s performance creates or enhances an asset (for
Grants example, work in progress) that the customer controls as the
asset is created or enhanced …; or
(c) the entity’s performance does not create an asset with an
alternative use to the entity … and
the entity has an enforceable right to payment for
performance completed to date …▪ Principal versus agent ▪ Warranties
▪ Contract costs ▪ Repurchase agreements
▪ Options and material rights ▪ Bill-and-hold arrangements
AASB 15—
additional
▪ Breakage ▪ Right of return exists
issues ▪ Significant financing ▪ Onerous contracts
component ▪ Licences of intellectual
▪ Non-cash consideration property
▪ Payments to customersWill disclosures increase or decrease with the new
standards?
Disclosures Have you prepared pro-forma disclosures?Slater and Gordon Limited June 2016
Variable consideration (including on a No Win – No Fee
basis) – subject to constraint
Reviewed methodology for measuring stage of completion
Early adopters Academies Australasia Group Limited June 2015
Tuition over time (vs most when student enrolled)
Capitalise recruitment costs
Spring FG Limited June 2016
Property development commissions – now based on
exchange of unconditional contracts
Previously based on expectation that the property
transactions will proceedNetcomm Wireless June 2016
Capitalise costs to obtain contracts and costs to fulfil contracts
The Village Building Co. Limited June 2015
Property sales from unconditional contract to settlement
Early adopters Some sales recognised in 2014 under AASB 118, recognised
“again” in 2015 under AASB 15Review of selected early reporters disclosure of effect of AASB 15
Ambition Group Limited Dec 2017 Assessment
Cimic Group Limited 2 Still on going
G8 Education Limited 2 Material, with quantification
Invocare Limited 6 Not material
AASB 15 effect Scentre Group Stapled
disclosures
Spookfish Limited 1 AASB 15 assessment added
Sydney Airport Limited to KAM
Tempo Australia Limited
Think Childcare Limited
Touchcorp Limited (now
Afterpay Touch Group Limited)
Source: Annual reportsCIMIC – Expected changes Dec 2017
Various changes
Construction revenue
Revenue constraint - Variable consideration such as
incentives, as well as accounting for claims and
variations as contract modifications
Examples
Invocare – Expected changes Dec 2017
Prepaid funeral service contracts
Upfront fee to be deferred until service provided
Significant financing component
Capitalise selling costs + fulfilment costs
Cemetery & Crematorium memorial products
Defer until customer gains control
Changing contracts from 1 Jan 2018 for controlFinancial Instruments
Classification and measurement
Impairment (provision for doubtful debts)
AASB 9 —
what has Liabilities (at fair value through P&L)
changed? Hedging
Reclassifications
Disclosures
Financial instrument definition
DerecognitionOld
New
Loans and receivables Tests
Amortised cost • SPPI
Classification ‒ the odd ones
and • Business model
measurement Held to maturity
Fair value through OCI
(recycling)
Available for sale
Fair value through P&L
Fair value through P&L Fair value through OCI
(no recycling)Loans – the odd ones Investments
• Interest free • Available for sale removed
• Non-recourse • Designated as FVTPL
• Limited recourse • Are they debt securities (SPPI)?
Classification
and • Contingent payments ‒ Impairment
measurement
• Profit share / equity kickers ‒ FVOCI (recycling)
• Are they equity securities?
‒ FVOCI (no recycling)
• Transition?
‒ SPPI – Initial recognition • Transition?
‒ Business model – Initial appln. ‒ SPPI – Initial recognition
‒ Business model – Initial appln
‒ DesignationsTrade receivables will have provision matrix where:
• expected credit losses for each ageing bucket need to be estimated
Impairment • all ageing buckets cannot have same expected credit loss. Longer the
—simplified term, higher the expected loss.
approach
Current 1–30 31–60 61–90 Over
90
Historical default rate % 0.30% 1.0% 3.5% 7.0% 12.0%
Forward-looking estimate 0.03% 0.1% 0.2% 0.3% 0.8%
adjustment
Expected loss % 0.33% 1.1% 3.7% 7.3% 12.8%Three buckets: Impairment —general approach
Usually retrospective, usually no comparatives
Significant increase in credit risk
• From origination date
Transition - • If undue cost or effort – lifetime losses
Impairment
Probability of defaults matrix
• FRRs 2017-18 (guidance)Leases
Leases - Why did we need the change?
‘One of my great ambitions before I die is to fly in
an aircraft that is on an airline’s balance sheet’
AASB 16
Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB),
April 25, 2008Same accounting treatment as for finance leases
• Determine term
Putting
operating • Determine rental payments (cash flows)
leases on • Determine discount rate
balance
sheet Recognise
• Lease liability
‒ lease interest
• Lease asset (right-to-use asset)
‒ depreciation
Parallel universeLeases— profit or loss effect
Lease— balance sheet effect
Lease—the right to use an identified asset
Exemptions—short-term, low value
Building and office PCs
Storage and IT facilities Software licences
What
operating
leases go on Specialised equipment Software as a service
balance sheet?
Embedded leases Server capacity
Cars Pot plants
Car parks Water coolers
Mobile phones Peppercorn leases2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22
2015-16 Budget Queensland 2.25 2.5 2.5 2.5
CPI 2015-16 Actual Queensland 1.6
adjustments 2016-17 Budget Queensland 2.0 2.5 2.5 2.5
2016-17 Actual Queensland 1.8
2017-18 Budget Queensland 2.0 2.25 2.5 2.5
2017-18 Actual Queensland Est 1.75
2018-19 Budget Queensland 2.0 2.5 2.5 2.5
Source: ABS Publication 6401.0, State budgetsWhen should you include option renewals?
• Probable (>50% - more likely than not)
• Highly probable
Lease term –
Renewals and • Reasonably certain
options
• Virtually certain
• When exercise option
• Significant economic incentive
• Probability weighted (i.e. 30% likely, use 30% payments)Lease asset Lease liability
• Can extend without lessor • Is there an obligation to exercise?
Lease term – consent
Reasonably • What if not profitable?
certain • If an asset, then include • Should the payments be included
obligation to pay as a liability?
• Management intention?Incremental borrowing rate – adjusted for the terms and conditions
of the lease
• Currency
• Type of asset
• Term - Ensuring that the borrowing rate is for similar term
Discount rate • “Amount” (size of the “loan”)
• Security
- Bank borrowings not usually for 100% of the asset
- Lease asset is fully secured.
• The rental arrangement
- Different rental arrangements (fixed vs CPI)How many data points do you need to perform lease
calculations?
a) Less than or equal to 10
Lease
calculations
b) Greater than 10 and less than or equal to 20
c) Greater than 20 and less than or equal to 30
d) Greater than 30• Location • Rent free period (length)
• Asset class • Lease incentives (description)
• Asset code • Initial rent (including currency)
• Asset name • How does rent change over the term?
Leases – • Lessor – This includes changes for fixed
Selected – External to group? increases, CPI increases and market
resets.
data points • Original agreement (link)
– When do these occur and how?
to consider • Amendments since start of agreement
• CPI Index used (Yes / No)
– Amendment agreement (link)
• Commencement Date – Which CPI is used, and at what date?
• Expiry Date • Is an index other than CPI used?
• Initial Term • What is the other index, and how is it
referenced?
• Option to extend? (Yes / No)
• Does the rent include other costs paid to
– Terms for option extension lessor?
• Option to terminate early by lessor? • Discount rate (to be determined
– Terms for early termination • + Others
• Option to terminate early by lessee?
– Terms for early terminationRetrospective Cumulative catch-up
Modified retrospective
Comparatives
Historical discount rates No comparatives
Transition Recalculate asset e.g. CPI adjustments Transition date discount rate
Lease-by-lease (group roll-up)
Asset = Liability Recalculate asset
Lower future profitsTransition
Lease – commences - 1 July 2015 Asset 4,708,481
$1,000,000 pa., 10 years, 5% discount rate Liability 5,179,109
Transition date – 1 July 2019 R/Earnings -470,628Will disclosures increase or decrease with the new
standards?
Disclosures Have you prepared pro-forma disclosures?Review of selected retailers disclosure of effect of AASB 16
Baby Bunting Myer Holdings
Beacon Lighting Nick Scali
Cash Converters Noni B
Domino’s Premier Invest
Lease Flight Centre Retail Food Group
disclosures
Godfreys Shaver Shop Group
Greencross Super Retail Group
Harvey Norman The Reject Shop
JB Hi Fi Thorn Group
Kathmandu Holdings (NZ$) Vita Group
Mantra Wesfarmers
Metcash Woolworths Group
Michael Hill10 Linked to lease commitments note
15 Did not
Nil Other quantitative calculation (e.g. NPV)
Observations 2 No discussion AASB 16
3 Stated progress as advanced / well advanced / significant
analysis
Many describe gross-up of balance sheet
Few specifically draw out consequences on profit e.g. front-loading,
EBIT, NPAT
One stated having checked with banks and covenants will be
calculated without AASB 16 adjustmentsWoolworths Domino’s
25 June 2017 02 July 2017
22,915,800 1,132,793 Total assets
13,039,700 717,729 Total liabilities
Examples 3,030,500 329,240 Loans and borrowings
3,099,300 320,989 (?) Commitments loans and borrowings
24,438,800 280,730 Lease commitments
Source: Annual reportsService Concessions
Queensland Transition
• Toll roads • Valuation 1 July 2018
AASB 1059
Service o Incl. land under roads, bridges, • Calculating the liability
Concession land under bridges, tunnels
Arrangements
• Gold Coast rapid transport
Lifecycle payments
• Airport rail link
• Identifying from the
• Rail rolling stock Quarterly Service Payment
—
• Buildings - education • Diversity in approaches
• Buildings
— - hospital • What has been included in
• Buildings
— - car parks the valuation?
• Child care centre
• Student accommodationTransition Requirements
In relation to the transition policies, the proposed policies that we
expect will be the most helpful in easing implementation costs for
you are:
• Not retrospectively restating 2017–18 results on commencement
of AASB 9.
• Not retrospectively restating 2018–19 results on commencement
Transition of AASB 15, AASB 1058 and AASB 16.
• Permitting entities to measure, on a lease–by-lease basis, the
right-of-use lease asset carrying value on transition as being
either the lease liability, or a recalculation from lease
commencement.
• Using cost and not revaluing the right-to-use lease asset for
existing operating leases (for example, office accommodation).The proposed policies that we suggest you should consider
whether they will have an onerous impact on you are:
• Removing the practical expedients on completed contracts
(under AASB 15 or AASB 1058 definitions), and therefore you will
need to determine the contract liability (unearned revenue) for
those contracts on transition. An example is sufficiently specific
grants.
Transition
• Using cost and not revaluing the right-to-use lease asset for
existing finance leases already on balance sheet (for example,
leases of land).
If you do not have to follow the FRR s, you will need to select your
own transition policies. The list in Part 1A is a good starting point
to identify the policies you need to make, even if you make a
different choiceQ&A
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Disclaimer attribute the work to the State of Queensland (Queensland Audit Office)
[New Accounting Standards – Revenue and leases – June 2018]
© The State of Queensland (Queensland Audit Office) 2018.Any questions please contact us T: (07) 3149 6000 M: qao@qao.qld.gov.au W: qao.qld.gov.au Queensland Audit Office
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