1. 1 Financial Reporting Update CPA Congress – ACT 2015 Peter Gibson Assistant Secretary Budget Estimates and Accounting Department of Finance

2. 2 Topics for discussion Overall trends in financial reporting What happened in 2014-15 ? What’s new for 2015-16 ? Revenue from contracts with customers – application to sales Revenue from contracts with customers – application to grants Financial Instruments – AASB 9 Over the horizon

3. 3 Peter Gibson Overall trends in financial reporting General trends in accounting standard development Complexity vs simplification Finance approach to simplification Simpler FMOs – the FRR materiality approach and more meaningful grouping of items PRIMA Reduced disclosure requirements AASB initiatives

4. 4 Peter Gibson What happened in 2014-15 ? AASB 1055 - Budgetary Reporting. AASB 10,11,12 – new standards for consolidated reporting, joint venture accounting and disclosures of interests in entities. Superannuation and other long term liabilities of for-profit entities now discounted using corporate bond rates rather than government bond rates. AASB 2015-7 - Some reductions in the text disclosures required for fair values – late breaking news and not applied by everyone in 2014-15.

5. 5 Peter Gibson What’s new for 2015-16 ? Reduced disclosure requirements – what could this mean for Commonwealth entities ? Superannuation Funds – AASB 1056 Several new developments that will benefit some pre-planning for the future AASB 124 Related Party Disclosures Accounting for significant investments AASB 15 Revenue from Contracts with Customers (especially the not for profit application) AASB 9 Financial Instruments (possibly)

6. 6 Peter Gibson AASB 1056 – Superannuation Entities Replaces AAS 25 which is over 20 years old Applies to the accounting and reporting by superannuation entities themselves (not the superannuation liability reported by the related employer) Applies for the 2016-17 reporting year, but.... Will require comparatives for most items for the 2015-16 year Requires a more modern style of reporting – all the face statements, plus adoption of nearly all current accounting standard requirements Some departure from accounting standard requirements to require fair value

7. 7 Peter Gibson Related Party Disclosures AASB 124 Related Party Disclosures Will require additional disclosures of transactions with “related parties” Related parties include “key management personnel” - senior management, all directors (or equivalent), and possibly the Minister. Key Management personnel – remuneration also needs to be disclosed New disclosure considerations likely to be in place for 2016-17 (with no comparatives in first year).

8. 8 Peter Gibson Revenue from contracts with “customers” – where an entity sells goods or services AASB has recently issued AASB 15 Revenue from Contracts with Customers which applies to for-profit entities, but.... Is currently in the process of issuing guidance about how this will apply to not-for-profit entities. This is unlikely to have much impact on the amount of revenue recognised, or when it is recognised. However, it does establish a more sophisticated process for assessing revenue, involving five steps. Applies wherever there is a sale of goods or services, irrespective of whether there is a “customer”, and with a liberal interpretation of “contract” Proposals currently apply from 2017-18, with 2016-17 comparatives. However, this is likely to be deferred an extra year.

9. 9 Peter Gibson Revenue from contracts with “customers” – where an entity makes grants The new standard, and one associated with it, will deal with revenue from grants. Traditionally the government has applied the standard about grant revenue to accounting for grant expenses. The application of this standard is a significant change from current requirements, which are in AASB 1004 Contributions. Requires assessment of whether a grant is to be used for the provision of goods and services; or if it does not. It doesn’t matter who the underlying goods and services are provided to.

10. 10 Peter Gibson Revenue from contracts with “customers” – where an entity makes grants (continued) The goods and services component is accounted for as a sale (recognition could be deferred) Any remaining component is accounted for as a donation (immediate recognition in many but not all cases) This will have consequences not only for accounting, but may also necessitate a change to grant documentation, because the wording about the purpose of the grant will become important to determine accounting treatment.

11. 11 Peter Gibson Other standards The AASB is also proposing to replace AASB 1004 Contributions This has implications for many agencies because: AASB 1004 currently deals with revenue that is “non-exchange” – taxes, grants, donations, fees, fines, appropriations. The current draft of the changes does not contain the existing guidance on recognising appropriations AASB 1004 also deals with “contributions by owners” (i.e. equity injections and restructures – incl MoG changes). The current draft of the changes proposes changing the guidance on equity classifications that would potentially have the effect of making most transfers/contributions equity

12. 12 Peter Gibson Accounting for significant investments AASB 2014-9 Accounting for significant investments from 2016-17 will allow optional use of the equity method. This could simplify accounting for such investments – they are usually recorded at fair value, and fair value methods may vary and include cost or income methods. The equity method is closest to the “cost” method, and easier to apply than some other methods. Difficulty in current application is that AASB 1049 has not been amended for whole-of-government reporting, meaning that there may be no saving of effort. Efforts to align AASB 1049.

13. 13 Peter Gibson Financial Instruments – AASB 9 AASB 9 Financial instruments has now been completed and supersedes AASB 139 and previous versions of AASB 9. Mandatory application from 2018-19. Standard is very long (207 pages including all attachments) and very complex. Summary of the international version of the standard (IFRS 9) is here: http://www.ifrs.org/Current-Projects/IASB-Projects/Financial- Instruments-A-Replacement-of-IAS-39-Financial-Instruments- Recognitio/Documents/IFRS-9-Project-Summary-July-2014.pdf

14. 14 Peter Gibson Financial Instruments – AASB 9, continued Will have implications for every Commonwealth entity, even those that only have simple financial instruments such as receivables and payables: While it only has minor changes to classifications, these nevertheless exist (e.g. fair value through comprehensive income) Changes to hedge accounting (although few Commonwealth entities) Clarification of derecognition and embedded derivative accounting

15. 15 Peter Gibson Financial Instruments – AASB 9, continued Potentially the biggest change for most entities will be......... Changes to recognition of “doubtful debts” (impairment allowances) – “expected loss” model Difficulty for large or complex loan/debt portfolios (those that are financial instruments rather than statutory receivables) Even simple instruments such as trade receivables will be affected – short cut method requires full lifetime assessment Extent of changes means that work needs to be planned in advance – leaving it until 2018-19 is not going to work.

16. 16 Peter Gibson Over the horizon – what standard setters are working on but don’t have standards completed yet Close to finalisation Service concessions – accounting for grantors Reporting Service Performance Information Further away Conceptual Framework – international and national Leases Insurance A simpler RDR The IPSASB agenda – social benefits, public sector specific financial instruments, non-exchange expenses