ACCOUNTING Wayne Basford Partner - BDO

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1 ACCOUNTING 2020 Wayne Basford Partner - BDO

2 ACCOUNTING 2020 Do you intend to still be an accountant involved in financial reporting in 2020? 1. How many new standards are becoming applicable before 2020? 2. What are these standards? 3. When do you intend to gain an overall awareness of these standards? 4. When do you intend to gain an adequate knowledge of these standards to fulfil your role as an accountant? 5. How will you gain an adequate understanding of these new standards? 6. What is your plan to get your organisation ready for these new standards? Page 2

3 ACCOUNTING 2020 Page 3

4 ACCOUNTING 2020 AASB 9 - periods beginning on or after 1/1/2018 AASB 15 - periods beginning on or after 1/1/2018 AASB 16 - periods beginning on or after 1/1/2019 Page 4

5 ACCOUNTING 2020 When will you get round to understanding these new standards? 1. Is it worth early adopting any of these new standards? 2. How complex will the required change to internal processes and systems be? 3. When is the date of transition? Page 5

6 AASB 9 Page 6

7 AASB 9 AASB 9 Financial Instruments Effective date Applies to annual periods beginning on or after 1 January 2018 Four parts 1. Classification & measurement of financial assets (2009) 2. Classification & measurement of financial liabilities and derecognition (2010) 3. Hedging (2013) 4. Impairment of financial assets and limited amendments to classification & measurement(2014) Page 7

8 AASB 9 AASB 9 Financial Instruments Early adoption 31 December year ends are basically last chance to early adopt piecemeal Complete AASB 9 (2014) must be early adopted for financial years beginning on or after 1 February 2015 Piecemeal approach Early adopt say AASB 9 (2009) without early adopting later versions Various combinations possible Page 8

9 LEASES STATUS UPDATE Page 9

10 LEASES STATUS UPDATE Leases Main changes to current practice Operating leases of lessees (IASB) Right of use (ROU) asset to be capitalised on the balance sheet (except if < 12 months) Front-end loaded expense (interest > lease expense in early years) Leases of small assets (laptops etc.) will not need to be capitalised Page 10

11 EXAMPLE Company ABC took out a 5 year lease of a building Interest rate is 10% Lease payments are CU100,000 p.a. Question: How should Company ABC account for the transaction under the forthcoming Leases standard? Answer: Present value of lease payments: = 100,000/ ,000/1.1.^ ,000/1.1^ ,000/1.1^ ,000/1.1^5 = CU379,079 Recognise liability and right of use asset of CU379,079 on initial recognition Leases Project Update Page 11

12 EXAMPLE Year Lease Liability (B/S) Interest (P/L) (10%) Cash flow ROU Asset (B/S) Amortisation Expense (P&L) P&L Impact under new Standard Lease expense under IAS , , ,987 37,908 (100,000) 303,263 75, , , ,685 31,699 (100,000) 227,447 75, , , ,554 24,869 (100,000) 151,631 75, , , ,910 17,355 (100,000) 75,816 75,816 93, , ,090 (100,000) 0 75,816 84, ,000 Leases Project Update Page 12 Total 500, ,000

13 EXAMPLE Assume that at the beginning of year 1, Company ABC has: Other assets of CU2,000,000 No other liabilities Balance sheet beginning of Year 1 IAS 17 New Leases Standard Right of use asset - CU379,079 Other assets CU2,000,000 CU2,000,000 Total assets CU2,000,000 CU2,379,079 Lease liability - CU379,079 Equity CU2,000,000 CU2,000,000 Leases Project Update Page 13

14 EXAMPLE Assume during Year 1 Company ABC has: Revenues of CU800,000 Other operating costs of CU400,000 Income statement Year 1 IAS 17 New Leases Standard Revenue CU800,000 CU800,000 Other operating costs CU(400,000) CU(400,000) Operating lease expense CU(100,000) - EBITDA CU300,000 CU400,000 Amortisation right of use asset - CU(75,816) Operating profit CU300,000 CU324,184 Finance costs - CU(37,908) Profit or loss CU300,000 CU286,276 Leases Project Update Page 14

15 EXAMPLE During Year 1 Company ABC has CU500,000 cash flows from operating activities, and no other cash flows from investing or financing activities Cash flow statement IAS 17 New Leases Standard Cash outflow from operating leases CU(100,000) Other operating cash flows CU500,000 CU500,000 Total operating activities CU400,000 CU500,000 Principal repayments Interest payments CU(62,092) CU(37,908)* Total financing activities - CU(100,000) Total investing activities - - Total cash inflows CU400,000 CU400,000 * Alternatively this amount can be shown under operating activities Leases Project Update Page 15

16 LEASES STATUS UPDATE Leases Practical expedients Short-term leases < 12 months Lessee small ticket leases if value as new is $5,000 or less, even if material in aggregate (USA no exemption) Page 16

17 LEASES STATUS UPDATE Leases Impacts Bank covenants Employee bonus schemes Need to create right of use asset registers for operating lease assets and calculate finance charges & depreciation Page 17

18 AASB 15 REVENUE Page 18

19 BACKGROUND RECAP Remember It is difficult! Needs attention now!!!! Changes pattern of revenue recognition Changes pattern of profit Far more disclosures Page 19

20 BACKGROUND RECAP What may be impacted? Bonus schemes Share-based payment schemes Earnings per share Earn outs Deferred payments Bank covenants Dividends payments What are your action plans between now and 1 January 2018 (retrospective application date)? Page 20

21 BACKGROUND RECAP Types of entities that may be impacted Software companies Construction companies Residential real estate Manufacturers Professional services Licensors Retailers and consumer industries Media companies Telecommunication companies Everyone else? Page 21

22 FIVE STEP MODEL Five step model Page 22

23 FIVE STEP MODEL Five step model Page 23

24 FIVE STEP MODEL Five step model Page 24

25 FIVE STEP MODEL Five step model Page 25

26 STEP THREE DETERMINE THE TRANSACTION PRICE Transaction price is the amount of consideration the entity expects to be entitled in exchange for transferring goods/services Consideration Fixed Variable Page 26

27 VARIABLE CONSIDERATION An entity shall include in the transaction price some, or all, of an amount of variable consideration, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Title Page 27

28 STEP THREE: DETERMINE TRANSACTION PRICE Example Volume discounts Widget Co signed a one year contract with BMW to supply widgets for the following prices: Price per widget Sales volume CU10 CU9 CU ,000 widgets 100, ,000 widgets 200,001 widgets and above Based on past experience, Widget Co estimates total sales volume will be 150,000 widgets Question: As a at reporting date Widget Co has sold 30,000 widgets how much revenue do Widget Co recognise? Title Page 28

29 STEP THREE: DETERMINE TRANSACTION PRICE Example Volume discounts Question: As a at reporting date Widget Co has sold 30,000 widgets how much revenue do Widget Co recognise? Answer : The average transaction price is CU9.67 per widget CU10 per widget X 100,000 widgets CU1,000,000 CU9 per widget X 50,000 widgets CU450,000 Total consideration Estimated total volume Average price per widget CU1,450, ,000 widgets CU9.67 (CU1,450,000/150,000) Title Page 29

30 STEP THREE: DETERMINE TRANSACTION PRICE Example Volume discounts Question: As a at reporting date Widget Co has sold 30,000 widgets how much revenue do Widget Co recognise? Answer (cont): DR Cash (CU10 per widget X 30,00 widgets) CR Revenue (CU9.67 per widget X 50,000 widgets) CR Contract liability * The contract liability will reverse when sales >100,000 and the amount billed is CU9 DR CU300,000 CR CU290,100 CU9,900 Title Page 30

31 FIVE STEP MODEL Five step model Page 31

32 STEP FOUR ALLOCATE PRICE TO OBLIGATIONS Relative standalone selling prices What if I don t sell item separately? Estimate selling price customers would be willing to pay Estimate expected cost + appropriate margin Residual approach (transaction price less other observable standalone selling prices) - only appropriate when: - There is a broad range of selling prices or - The price is not yet established and the goods or service has not been previously sold on a stand-alone basis Page 32

33 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Club G is a golf club it charges a non refundable admission fee of CU5,000 Membership fee is CU12,000 per year Club G estimates the average period of membership is 10 years Question: How should the admission fee be accounted for? Title Page 33

34 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Question: How should the admission fee be accounted for? Answer: One performance obligation to allow the member to play golf Admission fee: - Not a separate performance obligation - Recognised over the average membership period Day 1 Year 1 Year 2 Year 3 Revenue (IFRS 15) Revenue (IAS 18) - CU12,500 (12,000+(5,000/10)) CU12,500 (12,000+(5,000/10)) CU12,500 (12,000+(5,000/10)) CU5,000 CU12,000 CU12,00 CU12,000 Title Page 34

35 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Practical implications Delays revenue Require systems and processes to: - Recognise a liability on day 1 - Allocate liability to revenue in subsequent periods Title Page 35

36 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Same facts as previous example Club G is also currently doing a promotion when a new member signs up it will receives the following: - Golf umbrella - 10 hours of golf lessons - 30% discount on competition fees for the next year Question: How should Club G account for the transaction? Title Page 36

37 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Question: How should Club G account for the transaction? Answer: There are four performance obligations: - Play golf - Golf umbrella - 30% discount on competition fees for the next year - 10 hours of free golf lessons The total transaction price is CU125,000 ((CU12,000x10)+(CU5,000)) Transaction price allocated to each obligation Recognise revenue as each of these obligations are performed Title Page 37

38 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Question: How should the admission fee be accounted for? Answer (cont): Play golf for 10 years Standalone Selling Price CU120,000 (1,200x10) Allocate transaction price CU124,121 (120,000/120,850X125,000) Golf umbrella CU50 CU52 (50/120,850X125,000) 30% discount on competition fees for the first year CU300 CU310 (300/120,850X125,000) 10 hours of golf lessons CU500 CU518 (500/120,850X125,000) Total CU120,850 CU125,000 Title Page 38

39 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Question: How should the admission fee be accounted for? Answer (cont): Day 1 Year 1 Year 2 Year 3 Revenue (IFRS 15) Revenue (IAS 18) CU52* CU13,240** CU12,412*** CU12,412*** CU5,000 CU12,000 CU12,000 CU12,000 *Day 1 revenue consists of the free umbrella (CU52) ** Year 1 revenue consists of: (1) play golf for 12mths (CU12,412), (2) 30% discount competition fees (CU310) and (3) golf lessons (CU518) *** Year 2-10 revenue consists of play golf for 12mths Title Page 39

40 STEP FOUR: ALLOCATE TRANSACTION PRICE Example Allocating transaction price Practical implications Most likely delays revenue Identify distinct performance obligations Determine the standalone selling price for each performance obligation Require systems and processes to track delayed revenue Title Page 40

41 FIVE STEP MODEL Five step model Page 41

42 STEP FIVE - RECOGNISE REVENUE Recognise revenue over time If one of the following apply (a) Customer simultaneously receives and consumes the benefits as the entity performs OR (b) Asset that is created or enhanced is controlled by the customer OR (c) Vendor has no alternative use of the asset and an enforceable right to payment for performance to date Examples: Cleaning services Access to golf/gym memberships Page 42 Examples: Some work in progress (WIP) Construction on customer s premises Building software on customer s server Examples: Residential real estate apartments Designing advertisements

43 STEP FIVE - RECOGNISE REVENUE Point in time If performance obligation not satisfied over time, recognise when customer has control, e.g. when: Supplier has right to be paid for asset Customer has legal title Entity transferred physical possession (but not always) Customer has significant risks & rewards of ownership Customer has accepted the asset Page 43

44 ACCOUNTING 2020 AASB 9 - periods beginning on or after 1/1/2018 AASB 15 - periods beginning on or after 1/1/2018 AASB 16 - periods beginning on or after 1/1/2019 Page 44

45 CONTACTS Wayne Basford, Partner 38 Station Street Subiaco, WA 6008 AUSTRALIA Office Fax wayne.basford@bdo.com.au Page 45

IFRS 16: Leases; a New Era of Lease Accounting!

IFRS 16: Leases; a New Era of Lease Accounting! The journal is running a series of updates on IFRS, IAS, IFRIC and SIC. The updates mostly collected from different sources of IASB publication, seminars, workshop & IFRS website. This issue is based on