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Topic \\ Date Financial Statements and Accounting Standards September 2012.

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1 Topic \\ Date Financial Statements and Accounting Standards September 2012

2 This document contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. It does not purport to be comprehensive or to render professional advice. The reader should not act on the basis of any matter contained in this publication without first obtaining specific professional advice. We believe that the statements made by us in this document are accurate but no warranty of accuracy or reliability is given. Our conclusions are based on interpretations of accounting standards and other relevant professional pronouncements and legislation current as at the date of this document. Should the interpretations, accounting standards, other relevant professional pronouncements or legislation change, our conclusions may not be valid. We are under no obligation to update the matters considered in this document after its publication. © Hanrick Curran, September 2012 All rights reserved Disclaimer Liability limited by a scheme approved under professional Standards Legislation

3 Your Presenter – Matthew Green CA Over 15 years accounting and auditing experience Prepared financial statements for ASX listed companies Registered Company Auditor Contact details: 0447 724 595 (07) 3218 3900 Twitter: @matthewjgreenca LinkedIn: Financial Statements & Accounting Standards Update

4 Objectives for today A refresher in Australian key accounting standards and Corporations Act 2001 (the “Act”) requirements. Overview of company reporting requirements A look at topical issues Some pointers on common mistakes We will not cover applied topics such as errors & restatements and estimates & judgments Financial Statements & Accounting Standards Update

5 Who Cares & Why Directors Because getting it wrong can have consequences See “ ASIC v Healey” (The Centro case) Market Analysts Shareholders ATO Because they use the information as the basis for price recommendations Because financial statements are the basis for investment decisions… or they should be Financial Statements are the prima facie record of transactions undertaken by an entity Financial Statements & Accounting Standards Update

6 Corporations Act 2001 Sets the requirements for company accounting. Section 286 requires that companies keep written financial records that: 1.Correctly explain its transactions and financial position and performance; 2.Would enable true and fair financial statements to be prepared and audited. As a profession we generally determine that financial information prepared in accordance with accounting standards presents a true and fair view. Therefore accounting standards are a nice place to start from. ASIC’s view is that company accounts should comply with the recognition & measurement requirements in Accounting Standards. Financial Statements & Accounting Standards Update

7 Corporations Act 2001 – s.286 “Securency exec spared jail over false accounts” By online business reporter Michael Janda and staff (ABC News On-line)Michael Janda “A former executive with a subsidiary of the Reserve Bank has avoided jail for his part in an alleged foreign bribery scandal. David Ellery, 56, was the chief financial officer and secretary of the company Securency, which is alleged to have bribed foreign officials in Vietnam, Malaysia and Indonesia to win currency contracts. Ellery pleaded guilty in the Victorian Supreme Court to falsifying accounting of nearly $80,000 for a commission to a Malaysian broker. He signed off on the payment as representing marketing, meeting, materials, hospitality and travel expenses even though the amount was worked out as a commission and not a reimbursement of expenses. "You were well aware, when you forwarded it with a request for payment, that the invoice was false, in that no such marketing expenses had been incurred," said Justice Elizabeth Hollingworth in her judgment. "Your knowledge that what you were doing was dishonest at that time is evidenced by the steps you subsequently took to try to conceal what had actually occurred.“ However, Justice Hollingworth also found that, unlike most cases of false accounting, Ellery's offence was not motivated by personal financial gain. Financial Statements & Accounting Standards Update

8 Types of Companies Disclosing entities: generally ASX listed, have raised funds under a prospectus or offer document and have more than 100 shareholders (see Part 1.2A of the Act) Public companies: Minimum of three directors with two resident in Australia. Can have many shareholders/members. Liability may be limited by shares or guarantee and may be unlimited. (s.112) Public companies with No Liability: restricted to companies with the sole purpose of mining. Proprietary companies: Limited to no more than 50 non-employee shareholders Financial Statements & Accounting Standards Update

9 Company Reporting Obligations Disclosing entities: Must prepare & lodge audited financial statements. Public companies: Must prepare & lodge audited financial statements. Proprietary companies: Lodgment obligations depend on large vs. small test in s.45A. (An audit may be required.) Financial Statements & Accounting Standards Update

10 Large vs. Small test (s.45A) A company is large if it meets two of the following three criteria: 1.More than 50 FTE employees 2.More than $25 million gross revenue 3.More than $12.5 million gross assets All tests are on a consolidated basis (determined in accordance with accounting standards). (NB: structuring opportunities are presented by this!) If it fails to meet the tests above a company is a small proprietary company Financial Statements & Accounting Standards Update

11 Large companies must lodge financial statements A large company must lodge financial statements with ASIC. “10-186AD Large proprietary companies must lodge financial reports Wednesday 8 September 2010 A recent decision of the Federal Court in Brisbane has affirmed the primacy of the statutory obligation of large proprietary companies to lodge financial reports with ASIC.” (in the matter of ASIC & Dynamic Supplies Pty Ltd. After the Federal Court decision was handed down, Dynamic Supplies lodged all outstanding financial reports dating back to 2002.) (source: ASIC website) Financial Statements & Accounting Standards Update

12 Large companies must lodge financial statements “12-212MR Subsidiaries of global gold company fined $127,000 for failing to lodge reports Friday 31 August 2012 Eight Western Australian public companies have been fined a collective total $127,000 for failing to lodge required documents with ASIC. The companies are all subsidiaries of the Barrick Gold Corporation of Canada. An ASIC investigation found that each company had failed to lodge one or more of a number of important documents, such as financial reports, director’s reports, auditor’s reports or a concise report for the relevant period for each of the companies, in breach of the Corporations Act 2001. The eight companies are: 1) Barrick (Cowal) Ltd; 2) Barrick (Plutonic) Ltd; 3) Barrick (Lawlers) NL; 4) Barrick (Darlot) NL; 5) Barrick (Australia Pacific) Ltd; 6) Barrick Mining Company (Australia) Ltd; 7) Barrick (PD) Australia Ltd;8) Grants Patch Mining Ltd. The companies each pleaded guilty (refer: 12-122MR) to the various offences with which each had been charged, being a total of 15 offences which were laid by ASIC. The companies were each convicted of their various offences on 27 August 2012 in the Perth Magistrates’ Court.”12-122MR (source: ASIC website) Financial Statements & Accounting Standards Update

13 Accounting Standards – Key concepts Reporting entity General purpose vs. Special purpose Elements of accounting standards Definitions of financial statements Underlying assumptions Financial Statements & Accounting Standards Update

14 Reporting Entity Concept Statement of Accounting Concept (SAC) 1 Definition of the reporting Entity Commonly: “An entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general propose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of scare resources” Examples of users are given in the AASB Frameworks and include: InvestorEmployees LendersSuppliers CreditorsCustomers Government Public entities Financial Statements & Accounting Standards Update

15 Reporting Entity Concept: A quick test Q. Who decides if a company is a reporting entity? Remember: Have the client document the decision in a directors minute. “In considering the attached documents, it has been noted by the Directors that the directors have considered potential users of the financial report and note that there are unlikely to be users who will base resource allocation decisions on the reports who do not have specific rights to information. RESOLVED THAT the Company is a non-reporting entity and that the financial report has been prepared as a special purpose financial report as outlined in Note 1 to the report.” If a party has specific rights to information they are generally not considered when assessing the reporting entity concept. Financial Statements & Accounting Standards Update

16 General Purpose vs. Special Purpose If a company is a reporting entity they need to prepare a general purpose financial report (GPFR or GPFS). All non-reporting entities can prepare special purpose financial reports. General purpose reports include the disclosure of all accounting standards (if material). Special purpose reports only need specific items. Financial Statements & Accounting Standards Update

17 A Financial Statements Hierarchy GPFS (Tier 1) GPFS – Reduced Disclosure (Tier 2) SPFS (Corps Act) SPFS The complexity and completeness of financial statements depends on the scope of the requirements and the basis for accounting. Tier 2 (generally “non-publicly accountable entities”) can give reduced disclosure using the “Reduced Disclosure Requirements” set out in AASB 1053. Applies from 1 July 2013 but may be early adopted.

18 Definition of Financial Statements Financial statement are generally defined as being each of the: Name:Also called Statement of Financial Performance*Income Statement/ Profit or Loss Statement of Other Comprehensive Income* Statement of Financial PositionBalance Sheet Statement of Charges in Equity Statement of Cash Flows A complete financial report includes all the above statements and the notes to the accounts (AASB 101.10) s.295 – defines a financial report as the above elements and the directors declaration about the statement, therefore this is the minimum for a Corporations Act 2001 compliant report s.314 – the annual report to members includes the above and the director’ report (s.298 – s.3004) and the auditors’ report (s.307 – s.308) * Can be combined into one statement Financial Statements & Accounting Standards Update

19 Some changes in naming conventions “Financial report” and “balance sheet” are use in the Corporations Act 2001 AASB 2007–8 implemented changes in terminology, for example: Some years later we are still seeing the old terminology in use OldNew Australian equivalents to IFRSAustralian Accounting Standards Financial ReportFinancial Statements Balance sheet dateEnd of the reporting period Reporting dateEnd of each reporting period Equity holdersOwners On the face ofIn Financial Statements & Accounting Standards Update

20 Underlying Assumptions for Financial Statement Going concern: a presumption that the entity is a going concern and will continue in operation for the foreseeable future. Consider ASIC RG 22 & AICD Guide to Concern Issues Example disclosure if there is a prima facie issue with going concern: The directors have prepared the report on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business. This is deemed to be appropriate not withstanding that the company has incurred losses for the year of $480,747 (2010: profit of $283,587) and that as at 30 June 2011 the company has a deficiency of current assets of $894,131 (2010: surplus of $153,000) and a deficiency of total assets of $619,984 (2010: surplus of $182,095). The ability of the company to continue as a going concern is dependant on its ability to obtain further funding, manage cash flows, restructure borrowings and recover funds loaned to borrowers that have currently been provided against or recover collateral that secured those loans. There is significant uncertainty whether the company will be able to continue as a going concern and therefore, whether it will continue its normal business activities and realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial statements. These financial statements do not include adjustments relating to the recoverability and classification of recorded assets amounts or to the amounts and classification of liabilities that might be necessary should the company not continue as a going concern. Financial Statements & Accounting Standards Update

21 Underlying Assumptions for Financial Statement Accrual basis of accounting: The effects of transactions and events are recognized when occur and are recorded and reported in the period to which they relate. Example disclosure: The directors have prepared the financial statements on the basis that the company is a non-reporting entity because there are no users dependent on general purpose financial statements. The financial statements are therefore special purpose financial statements that have been prepared in order to meet the requirements of the Corporations Act 2001. The company is a for-profit entity for financial reporting purposes under Australian Accounting Standards. The financial statements have been prepared in accordance with the mandatory Australian Accounting Standards applicable to entities reporting under the Corporations Act 2001 and the significant accounting policies disclosed below, which the directors have determined are appropriate to meet the needs of members. Such accounting policies are consistent with the previous period unless stated otherwise. The financial statements, except for the cash flow information, have been prepared on an accruals basis and are based on historical costs unless otherwise stated in the notes. The amounts presented in the financial statements have been rounded to the nearest dollar. The financial statements were authorised for issue on _____________ by the directors of the company. Financial Statements & Accounting Standards Update

22 Elements of Accounting Standards VS. Recognition & Measurement Presentation & Disclosure Financial Statements & Accounting Standards Update

23 Recognition & Measurement Give the “What to account for” and “How to measure it” rules in accounting standards. ASIC’s view (see RG85) is that all Australian companies need to comply with the Recognition & Measurement requirements in accounting standards to comply with s.286. Of course, this is subject to the concept of materiality. And, not everyone in the profession agrees with ASIC’s view (but I’m not one of them!) NB: Don’t forget Materiality is an Accounting standard first and an Audit standard second. Financial Statements & Accounting Standards Update

24 Presentation & Disclosure Gives the rules around what must be disclosed & where For a company there are five mandatory disclosure standards, being: AASB 101Presentation of Financial Statements AASB 107Statement of Cash Flows AASB 108Accounting Policies, Changes in Accounting Estimates and Errors AASB 1048 Interpretation and Application of Standards AASB 1054 Australian Additional Disclosures Financial Statements & Accounting Standards Update

25 Decoding Mandatory vs. Optional Disclosure Requirements The Scope of mandatory AASB 101 reads: “… standard applies to each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporation Act…” The scope of the optional AASB 102 reads: “…in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity…” NB: The scope section is usually longer & more complex but this shows the key difference Financial Statements & Accounting Standards Update

26 Topical Issues Revenue recognition Leases Financial instruments Tax effect accounting Cash flow statement Debt & covenants Financial Statements & Accounting Standards Update

27 Revenue Recognition Is one of the common areas that companies make significant mistakes in and can be one of the easiest to manipulate. Auditing standards presume a risk of material misstatement in revenue because of history and ease of manipulation Whilst key concepts are relatively simple, their application can be complex and subject to judgment & uncertainty A nice rule of thumb is… “Revenue has to be earned” The conservative approach is to defer revenue over the period that goods/services are delivered Revenue is the subject of an ongoing project by the IASB. A revised standard is expected mid 2013. Financial Statements & Accounting Standards Update

28 Leases Another standard with simple concepts that can be difficult to apply. In the US, the SEC released a staff update to remind practitioners of the requirements of lease accounting because companies just simply got it wrong too often. Basic premise of current standard is two types of leases: 1.Operating lease: Off-balance sheet use of an asset for a defined period with no ownership. 2.Finance lease: On-balance sheet financing of the use of an asset resulting in effective or economic ownership of the asset. Key issue is the transfer of “risks & rewards of ownership” Is also the subject of an ongoing project by the IASB that will see all leases capitalised. No date set for the release of this standard yet. Financial Statements & Accounting Standards Update

29 Financial Instruments Complexity rules! Over 280 pages of dense standards to read. Governed by: AASB 7Financial Instruments: Disclosures AASB 9Financial Instruments AASB 132Financial Instruments: Presentation AASB 139Financial Instruments: Recognition & Measurement Various interpretations such as Int 9, Int 16 and Int 19. If in doubt > phone a friend Financial Statements & Accounting Standards Update

30 Tax Effect Accounting Commonly not applied by SMEs If material, would required recognition and measurement of all deferred tax assets (DTA) and deferred tax liabilities (DTL) Disclosures can generally be avoided in SPFS If calculated, should apply a balance sheet approach, which is mechanically similar to the old income statement approach but is conceptually wider in application For example, provision for employee entitlements will generally create a DTA under both methods, while an asset revaluation would create a DTL under the balance sheet approach but not under the income statement approach R&M necessary for a Corporations Act 2001 compliant report? Financial Statements & Accounting Standards Update

31 Cash Flow Statements Mandatory for financial reports under the Corporations Act 2001 and for all general purpose reports. Voluntary disclosure for everyone else. Two types of disclosure: direct vs. indirect, generally the direct method is used. Easiest way to prepare them is to use a spreadsheet model that adjusts changes in balance sheet items against income statement items to calculate a cash flow. Financial Statements & Accounting Standards Update

32 Debt and Covenants Topical because getting it wrong can have significant consequences. See ASIC vs. Healey (Centro). Per AASB 101 – All debt is current, unless the entity has an unconditional right to defer settlement for at least twelve months after reporting period. Usually governed by the terms and conditions of the borrowing agreements. Understanding definitions is key! Management should focus on and monitor compliance with conditions. Financial Statements & Accounting Standards Update

33 Debt and Covenants Financial Statements & Accounting Standards Update

34 Some pointers on common mistakes Generally missing key disclosures, such as accounting policies for material balances and transaction streams Not including the cash flow statement Incorrect calculation of cash flows and tax effect accounting Continuing to recognize non-assets (i.e., establishment costs) Internal inconsistencies (i.e., numbers don’t agree) Compilation reports Financial Statements & Accounting Standards Update

35 Compilation reports (APES 315) New standard reissued November 2009, effective for engagements commencing on or after 1 January 2010. Significantly expanded the scope of the accountant’s responsibility and the format of the accountant’s report. The new version should refer to APES 315. Requirement to consider obvious misstatements and communicate significant matters on a timely basis. Misstatements includes: a) material mistakes; b) non-disclosure of the reporting framework and departures therefrom; c) non-disclosure of significant matters. We were still seeing old format reports in late 2011. Financial Statements & Accounting Standards Update

36 Other things to watch out for… Dividends Change to s.254T Now paid based on solvency Solvency determined based on accounting standards. Financial Statements & Accounting Standards Update

37 New (now current) Corporations Act 2001 requirements LEGISLATION 254T Circumstances in which a dividend may be paid (1) [Payment of dividend] A company must not pay a dividend unless: (a) the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and (b) the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and (c) the payment of the dividend does not materially prejudice the company's ability to pay its creditors. Note 1: As an example, the payment of a dividend would materially prejudice the company's ability to pay its creditors if the company would become insolvent as a result of the payment. Note 2: For a director's duty to prevent insolvent trading on payment of dividends, see section 588G. (2) [Accounting standards] Assets and liabilities are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned). OUR COMMENT Payment of the dividend is only able to be made when the company’s assets are greater than the liabilities. Directors must maintain a solvent company, being mindful of their obligations to not trade when insolvent. The wording of the Act requires the application of Australian Accounting Standards.

38 So what should you do before you pay a dividend:  Check your company constitution  Confirm the net asset position at the date declared exceeds the amount of the dividend  Consider if any adjustments are required to net assets to ensure compliance with Australian Accounting Standards  Consider the tax issues associated with payment of the dividend

39 A quick example Can a company with this balance sheet pay a dividend? $ Assets100,000 Liabilities 200,000 Equity-100,000 Answer No... Its assets do not exceed its liabilities before it pays a dividend, therefore, it doesn’t meet the requirements of s.254T

40 Topic \\ Date Questions? Hanrick Curran t. (07) 3218 3900 f. (07) 3218 3901 Level 11 307 Queen Street Brisbane Qld 4000 GPO Box 2268 Brisbane Qld 4001

41 About Hanrick Curran Our client base is mainly located in South East Queensland, but also extends to Northern New South Wales, Western Queensland, Sydney, Melbourne, Darwin, Townsville and Mackay as well as other regional areas. We have a strong position with clients in Papua New Guinea and we also serve a growing Asian business sector. While these international connections may not be of immediate interest but we believe they are important in enabling us to effectively serve our clients. Hanrick Curran’s Client Base

42 Topic \\ Date Thank you Hanrick Curran t. (07) 3218 3900 f. (07) 3218 3901 Level 11 307 Queen Street Brisbane Qld 4000 GPO Box 2268 Brisbane Qld 4001

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