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Financial Reporting Developments

Another financial year has ended. This time last year, no one could have anticipated that within the year we would be dealing with a health and economic crisis that has devastated so many Australians. Our thoughts are with all those who have been affected by COVID-19 and our appreciation goes to our amazing health workers and all those who have worked tirelessly behind the scenes to keep us all safe.  When I see the effects COVID-19 is having on other countries, even with our faults, I believe we really do live in the lucky country.

While the current focus for many of you is on managing cash flow, the health and safety of your staff and customers, and plotting a path out of the current environment, the last thing on your radar is likely to be accounting standards.  So, in this edition, we will highlight the key changes in 2020 financial reporting and provide links to where you can obtain more information

Our first online Financial Reporting Update was held during May and was very well attended.  Some of the topics covered included financial reporting implication of COVID-19, changes to the large proprietary company thresholds for 30 June 2020, the removal of the ability of certain companies from preparing special purpose financial statements from 2021 and the replacement of the Tier 2 Reduced Disclosure Regime (RDR).  A recording of our webinar and further information on those topics can be accessed via our website here.

The biggest change for the 30 June 2020 financial year is the first time application of the new leases accounting standard AASB 16. AASB 16 requires that lessees recognise most operating leases on balance sheet as an asset and liability.  These calculations can be complex and there are numerous accounting estimates and judgements that need to be made, not only on initial application of the standard, but on an ongoing basis. We strongly suggest that clients carefully consider whether their approach and method to calculate the initial AASB 16 balances are scalable and capable of managing future changes to rent payments, lease terms, option periods and discount rates while maintaining historical data.  A short-term solution may not be the best long-term one.

For lessees that have negotiated rent concessions as a result of COVID-19 impacts on their business, the AASB has provided an optional short-term exemption from assessing whether a specific COVID-19-related rent concession is treated as a lease modification, which would otherwise require detailed analysis and remeasurement complications.  Where applicable, the exemption permits a COVID-19-related rent concession to be treated as variable lease payments and recognised as an adjustment to the lease liability in profit and loss. Lessees must disclose that they have applied the exemption as well as the financial effects of COVID-19 rent concessions in their financial statements.  More information on the relief can be found on our website here.

COVID-19 lockdowns and business disruptions are having significant effects on many businesses and some have been wondering whether they can highlight COVID-19 effects in how they report their financial results. Those effects should be incorporated into the measurement of recoverable amounts and asset values, according to the Australian Securities and Investments Commission (ASIC), “non-IFRS profit measures that purport to show the result had the impact of the COVID-19 pandemic not occurred are likely to be misleading. They will be hypothetical and may not show the actual performance of an entity. It may also not be possible to reliably identify and separately quantify the impact of the COVID-19 pandemic. Any non-IFRS profit measures should be unbiased and not used to avoid presenting ‘bad news’ to the market.  Further discussion can be found on our website here. Entities should consider disclosures of the effects of COVID-19 on their key accounting estimates and judgements.

Not-for-profit entities will be applying the new revenue standards AASB 15 and AASB 1058 Income of Not-for-Profit Entities for the first time at 30 June.

Where a not-for-profit entity is preparing special purpose financial statements, AASB 2019-4 requires them to disclose whether or not the financial statements comply with the recognition and measurement requirements in Australian Accounting Standards and whether or not its subsidiaries and investments in associates or joint ventures have been consolidated or equity accounted. Our publication on this new disclosure requirement can be found here.

The Australian Securities and Investments Commission (ASIC) has provided a one month extension of the reporting deadlines for companies to lodge their audited financial reports under Chapters 2M and 7 of the Corporations Act 2001.  The extension applies to both listed and unlisted companies with a balance date up to and including 7 July 2020.

As a result, the ASIC deadline to lodge an annual financial report for a listed company or registered scheme with a 30 June balance date has been extended from 3 months to 4 months, that is, from 30 September to 30 October 2020.  The deadline for lodging half-year financial reports, directors’ reports and audit/review reports for listed entities and unlisted disclosing entities with ASIC is extended from 75 days to 106 days (14 October 2020).

Proprietary companies with a 30 June 2020 balance date will now have until 30 November 2020, from 31 October previously, to lodge their financial statements with ASIC.  Where a grandfathered proprietary company uses the extended deadline relief, it will continue to retain its grandfathered status.

The directors’ report must disclose that the company has applied the ASIC relief.

The Australian Securities Exchange (ASX) has also issued a Class Waiver which provides equivalent one month extensions to lodge audited or reviewed financial information under the ASX Listing Rules.  An entity, other than exploration entities, is still required to give to ASX its Preliminary Final Report (Appendix 4E) by 31 August, but that financial information may be unaudited. The Class Waiver allows the entity to lodge its final audited financial statements with ASX by no later than 30 October 2020.  If the entity is a mining exploration entity or an oil and gas exploration entity, the Class Waiver permits it to lodge its unaudited financial statements with ASX no later than 30 September.  It is then required to lodge its audited annual report with ASX by no later than 30 October 2020.

If a listed entity intends to extend the lodgment date for its audited or reviewed half-year accounts with ASX, it must disclose to the market before the normal reporting deadlines that it is applying the relief.

Many companies have accessed JobKeeper and other government support packages which has raised questions regarding their accounting treatment.  In relation to JobKeeper, our view is that where the entity meets the eligibility rules the amounts received at balance date should be recognised in profit and loss in accordance with either AASB 120 for for-profit entities or AASB 1058 for not-for-profit entities.  In addition, we believe that the eligible entities are entitled to accrue JobKeeper receipts under both AASB 120 and AASB 1058 for eligible wages paid or accrued at 30 June.

Normally, the amounts disclosed as remuneration of Key Management Personnel in the notes to the financial statements and a company’s Remuneration Report would mirror those amounts recognised in the entity’s profit and loss statement.  However, where a for-profit entity receives JobKeeper payments we believe it is appropriate that those remuneration disclosures show the actual amounts paid or payable by the company even if the entity offsets the JobKeeper grants against the related remuneration expense in its profit and loss statement as permitted by AASB 120.  Where there is an inconsistency between the two amounts disclosed the entity should describe the existence JobKeeper grants and the effects of the accounting policy adopted.

Nexia Edwards Marshall is focussed on assisting our valued clients during these difficult times. If you require any further information or assistance on any of the matters in this article, please contact your Nexia Edwards Marshall Advisor.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.

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