ACCOUNTING STANDARDS UPDATES GBEs

1. ACCOUNTING STANDARDS UPDATES GBEs/SOCs Mike Blake Auditor-General of Tasmania

2. 2 Welcome My presentation will address theory surrounding the following following Key risks in implementing the new standards Those standards with greatest likely impact Other standards under development by AASB Implementation strategies Treasury has developed implementation plans and illustrative examples for Agencies - may be useful Purpose behind AASB 1048 � Interpretation and Application of Standards

3. 3 Reporting Framework Sector neutral Key concepts remain � accruals basis, going concern, substance over form Elements of financial statements remain � eg., current assets/current liabilities Additional primary statement � statement of changes in equity

4. 4 For-profit/not-for-profit The need to classify each entity as either for-profit or not-for-profit is a very significant issue, particularly for GBEs and SOCs and for preparation of the State�s whole of Government Financial Reports. This has little relevance to Councils other than for Authorities (Hobart Water) established under the LGA. Relevant to Councils? Any regarded as �for profit�?

5. 5 What is a �not-for-profit� entity, and what are the implications of being classified �not-for-profit�? The standards define a not-for-profit entity as an entity �whose principal objective is not the generation of profit�. Some Aus clauses permit not-for-profit entities to apply IFRS standards in a different manner than for-profit entities. For example, not-for-profit entities may continue to treat revaluations according to classes of asset, whereas for-profit entities must revalue assets on an individual asset basis.

6. 6 Implications for whole of government reporting Entities classified as �for profits� will have to maintain two ledgers to facilitate consolidation on a single �not for profit� basis of accounting.

7. 7 What might be the key criteria for determining the classification? ACAG has developed criteria for determining this classification which has tentatively been agreed by HOTARAC and is now under review by the UIG Focus must be on substance over form

8. 8 ACAG criteria (cont) Is the intention for the establishment of the entity to generate profits included explicitly in legislation, associated regulations or in its constitution? Is the entity funded from the state budget to deliver goods, and/or services for no or nominal cost to the citizen (i.e. the entity is budget dependent)? Do the financial targets of the entity reflect profit concepts, or aim to be commercially successful with explicit rates of return etc?

9. 9 ACAG criteria (cont) Is the entity self-funding in the longer-term, including raising sufficient revenue to meet maintenance? Does the entity pay tax, or is it subject to tax equivalent reporting to the state? Does the entity pay dividends and are the dividend targets set at equal to, or greater than, the long-term bond rate when expressed as a rate on equity or contributed capital.

10. 10 Significant issues facing public sector entities Valuation of long lived assets � fair value or cost Related parties standard, however AASB 124 is specifically relevant to �for profits� Segment reporting � only relevant to FPs Remuneration disclosures = ditto Transitional arrangements Each standard includes source and changes

11. 11 Public sector and other issues A number of options are available and dealt with in this presentation. Eg., Employee Benefits (119) Significance of Aus paragraphs Compliance statement to be made � dealt with later

12. 12 Key implementation requirements Assess the compliance of GBE/SOC general purpose financial statements with AEIFRS and with IFRS Review the format of the GPFS in accordance with model AEIFRS statements publicly available, Decide on accounting policies; Comply with AASB 1047; and Review charts of account to ensure that the information required can be readily provided.

13. 13 AASB 2004-1 AASB1 � First time adoption AASB 116 PP&E AASB 138 � Intangible assets

14. 14 AASB 2004-2 AASB 1 � �First Time Adoption� AASB 121 � �The effects of Changes in Foreign Exchange Rates� AASB 132 � �Interests in Joint Ventures� AASB 134 � �Interim Financial Reporting�

15. 15 AASB 2004-02 (cont) AASB 139 � �Financial Instruments: Recognition and Measurement� and AASB 141 � �Agriculture�

16. 16 AASB 2004-3 The AASB Standards impacted are: AASB 1 � �First Time Adoption� AASB 101 � �Presentation of Financial Statements� and AASB � �Related party Disclosures�

17. 17 First Time Adoption of AE to IFRS (AASB 1) Entities to apply AEIFRS in measuring all recognised assets and liabilities; Adjustments between old GAAP and AEIFRS to be made directly against Retained Earnings (or other relevant category of equity); Election of a number of exemptions listed in para 13. For example - an entity may elect to measure an item of PP&E at its fair value and use that fair value as its deemed cost at that date. However, it is my view that entities should continue to fair value account;

18. 18 AASB 1 (cont) Inclusion of comparative information also prepared under AEIFRS although some exemptions apply � see para 36A; Inclusion of an explanatory statement showing how the transition from GAAP to AEIFRS affected its reported financial position, financial performance and cash flows � suggest that this reconciliation be prepared based on the position at 30 June 2005. The Standard provides illustrations on how this can be reported.

19. 19 First time adoption adjustments to be taken directly to equity: Opening AEIFRS balance sheet Recognise all assets and liabilities whose recognition is required Not recognise assets and liabilities if not permitted Reclassify items previously recognised per new standards

20. 20 (cont) Apply AEIFRS in measuring all assets and liabilities Retrospective application Targeted exemptions Must apply latest version of the standard Estimates at the same date Transitional provisions not applicable to first time adopter Enhanced disclosure

21. 21 Presentation of Financial Statements (AASB 101) Terminology is different, and at times confusing � reverts to Operating Statement, Balance Sheet and Cash Flow Statement 101 includes a statement of differences Statement of changes in equity is a new requirement No distinction between ordinary and extraordinary income of expenditure

22. 22 (cont) Current assets/liabilities definition reinforces use of the operating cycle/or liquidity basis. New definition of a current liability Recycling seems possible in some standards, e.g. financial instruments, increments/decrements through P&L. Report by function or nature Gains and losses on disposals of non-current assets can now be netted

23. 23 AASB 102 - Inventory New class of inventory introduced � of relevance to the NFP sector � �held for distribution�; Valued at lower of cost and net replacement cost (previously lower of cost and NRV; Additional disclosure requirements apply � Aus 36.1; For FPs, no change � lower of cost and NRV

24. 24 AASB 5 Non-current assets held for sale and discontinued operations To be measured at lower of its carrying amount and fair value less costs to sell Decide whether a current or non-current asset A number of disclosures required

25. 25 AASB 107 Cash flow statements New definition of cash equivalents: Previously � highly liquid investments with short periods to maturity which are readily convertible to cash on hand at the investor�s option .. Therefore, effectively only �at call� deposits were included as cash equivalents. Now � short term, highly liquid investments that are readily convertible to known amounts of cash .. Therefore, such items as short term money market investments that are convertible to cash but not at the investor�s option (I.e., at the purchaser�s option) may also be recognised as cash. So, more items likely to be considered as cash.

26. 26 Various standards 108 � Accounting Policies, Changes in Accounting Estimates and Errors � voluntary changes in accounting policy and correction of prior period errors are to be accounted for retrospectively. 110 - Events after Balance Date � no changes of relevance to Local Govt. 111 � Construction Contracts � no changes. 112 � Income Taxes � balance sheet approach. Prepare accounting B/S and tax B/S. Gives rise to temporary differences. 114 � Segment reporting � no changes. Only relevant to FPs

27. 27 Property, Plant & Equipment standard (AASB 116) The new Standard requires that, where the revaluation basis is adopted by a For-Profit entity, revaluation increases and decreases are treated on an individual (not class) of asset basis For For-Profits, any revaluation decrease must be charged directly against any related revaluation reserve to the extent that the decrease does not exceed the amount held in the revaluation reserve in respect of that same asset Give consideration to increasing capitalisation threshold but asses impact on repairs and maintenance cost

28. 28 (Cont) Where a deferred settlement arrangement is entered into, 116 applies to deferred settlement of all types of consideration (not just the cash settlement consideration) and does not specify a discount rate to be applied;

29. 29 (Cont) Ceasing to revalue � both the old AASB 1041 and 116 allow changes between the cost basis and the fair value basis. However, 116 limits the choices to either: Fair value or Cost where cost is the original historical cost less any accumulated depreciation and accumulated impairment losses. (Note that on transition deeming cost provisions apply) Can choose deemed cost if on valuation but valuation must be current at transition � see AASB 1 paras 16 and 17

30. 30 (Cont) Measurement on initial recognition of assets acquired at no or nominal amount � for-profits � 116 requires cost to be used even if this is nil or a nominal amount. Not for profits � position unchanged by inclusion of para Aus15.1. It is likely that this will make irrelevant the application of UIG Interpretation 1017 �Developer and Customer Contributions for Connection to a Price Regulated Network� to for-profit entities

31. 31 (Cont) 116 para 35 permits two alternatives in accounting for accumulated depreciation where an item of PP&E is revalued � what I refer to as the gross or net approaches Enhancements that do not directly increase future economic benefits can be capitalised to the extent that the cost is recoverable � 116.11 chemical manufacturer example given);

32. 32 (Cont) Major inspection costs can be capitalised � 116.14 � but any remaining carrying amount from a previous major inspection to be de-recognised; and Restoration costs � to be added to cost � 116.16 (c).

33. 33 Leases and Revenue Standards 117 Leases � there are no significant differences. See minor differences on page 30 of this standard. Quantitative tests for a finance lease have not been retained. 118 Revenue � primary difference is the definition of revenue: Now � the gross inflow of economic benefits from ordinary activities. Previously encompassed all an entity�s inflows. Also, some asset gains/losses can be shown net.

34. 34 AASB 119 � Employee benefits Focuses on post employment benefits that are superannuation (in particular defined benefit plans) or medical benefits. Actuarial gains and losses via P&L Different actuarial methods may apply and expert advice will be needed. Change in measurement and disclosure for superannuation liabilities � corporate bond rate Discuss current v non-current short term employee benefits � A/L Updated standard released in December 2004 effective 1 Jan 2006 (can early adopt). Allows movements: Via P&L; (TAO preference) or Directly to retained earnings; or Corridor approach. Revised standard not adopted early for Agencies

35. 35 AASB 119 � Employee benefits cont Actuary to provide information needed for disclosure � Value of fund assets PV of obligations Interest rates Contributions to be paid Expected return on assets Actuarial assumptions

36. 36 AASB 120 Accounting for Government Grants Only applies to For Profits. Requires that grants: Recognised as revenue only once reasonable assurance that entity will comply with grant conditions and grant will be received Recognised as income over periods necessary to match them with related costs Receivable as compensation or for immediate support to be recognised as income when receivable Related to assets to be presented in B/S as deferred income and recognised as income on a systematic basis over the useful life of the asset Repayments are to be treated as revisions to accounting estimates Various other disclosures needed. Could give rise to the need for two sets of books

37. 37 Other Standards 121 The effects of changes in Foreign Exchange Rates Whilst there have been changes, likely to be of little relevance. Discuss issues with TAO where relevant 123 Borrowing costs Standard allows a choice � expense in the period incurred, or capitalise into qualifying asset. What are GBEs/SOCs doing? 124 Related Party Disclosures Only applies to For Profits Directors and Senior Officers� (Key management personnel) remuneration in aggregate by type of compensation

38. 38 Other Standards 127 Consolidation and Separate Financial Statements � no real changes 128 Investments in Associates � see discussion by Ric 129 Financial Reporting in Hyperinflationary Economies � not relevant 130 Disclosures in the financial statements of banks ..- not relevant 131 Joint Ventures � not dealt with here . Matters are generally very specific and should be addressed with TAO on case by case.

39. 39 Other Standards 132 Financial Instuments: Disclosure and Presentation Main difference is that the new standard may change the classification of some convertible financial instruments from equities to liabilities Notes strict conditions for offsetting assets and liabilities Note TAO�s view that employee entitlements are not financial liabilities 133 Earnings per share and 134 Interim Financial reporting � not relevant.

40. 40 Impairment of Assets (AASB 136) Impairment applies to all assets every year (excludes inventories, deferred tax assets, employee benefit assets if any and most financial assets Impairment loss recognised where carrying amount exceeds recoverable amount Assessment required each reporting date as to indications of impairment including: Decline in market value Changes in technology, market, economic environment Evidence asset is obsolete or damaged

41. 41 Impairment of Assets (AASB 136) cont Definition of a cash generating unit in the contexts of For Profits � is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. Discuss perhaps using wind farms as an example Value in use � NFPs can use depreciated replacement cost where not cash flow dependent and if deprived of the asset the entity would replace it. Additional disclosures where impairment write down material Circumstances leading to write down, nature of asset and amount of impairment If recoverable amount is FV pr VIU, basis for FV etc

42. 42 Contingent Liabilities and Contingent Assets (AASB 137) The main changes introduced by 137 relevant to the Public Sector are: Regarding contingent assets and reimbursements, introduces the virtual certainty (rather than probability) test. Best example of this is reimbursement by the Commonwealth of superannuation costs of Universities; Where a restructuring involves the sale of an operation, no obligation arises for the sale of the operation until there is a binding sale agreement (previously allowed for constructive obligation);

43. 43 (cont) Dividends are not to be recognised as a liability if still to be approved at the reporting date � previously could book a liability if determined or publicly recommended before the reporting date; and Provisions associated with costs of disposal or retirement of long lived assets are within 127�s scope � not so previously

44. 44 AASB 138 Intangible assets A single standard to replace sections in various current standards An intangible asset is an identifiable non-monetary asset without physical substance Definitions include internally generated computer software Development costs may be capitalised, research costs to be expensed

45. 45 Financial Instruments: Recognition and Measurement (AASB139) Because no standard previously, FIs not on balance sheet Much broader scope than what people think, e.g. look at terms of trade. No public sector dispensation Classification is important, eg hold to maturity portfolios. Because �financial instruments� is broadly defined, standards AASB 132 and AASB 139 will have a significant impact on financial reports. It covers cash, debtors, creditors and a broad range of financial contracts, including derivatives. Hence, not only the treasury corporations of the public sector should be impacted, but also all departments and agencies, even if not dealing in derivatives � get advice from Treasury/TAO

46. 46 (Cont) Presentation and disclosure: Both private and public sector entities will be affected. Principal changes include limiting the valuation of compound instruments with outstanding debt components to valuing the debt component, with equity being the residual difference. The move to AASB 132 will result in more instruments being classified as debt.

47. 47 (Cont) Recognition and measurement: The most significant change will be to bring financial instruments on to the balance sheet at fair value, with changes in the fair value being recognised as income or expense. Financial instruments will be classified into four categories, being loans/receivables, held-to-maturity, available for sale, or trading. The classification, in turn, will determine which valuation methodology applies, being either amortised cost or fair value, hedge accounting can only be implemented if tight criterion are met, otherwise all gains must be transferred to income or expense. Standard spells out how to value particular types of assets and liabilities eg � loans and receivables � at amortised cost Hedge accounting � two types � cash flow and fair value � accounting is complex

48. 48 AASB 140 Investment Properties and AASB 141 Agriculture AASB 140 Has little relevance (Hobart Port?) � discuss with TAO AASB 141 Impacts Forestry Tasmania only