NEWS ACCOUNTING WHAT DO I NEED TO KNOW TO PREPARE DECEMBER 2015 FINANCIAL STATEMENTS?

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1 DECEMBER ACCOUNTING NEWS WHAT DO I NEED TO KNOW TO PREPARE DECEMBER 2015 FINANCIAL STATEMENTS? Although there are only minor changes to accounting standards for this reporting season, increased ASIC financial reporting surveillance, and decluttering required for December 2016 financial statements, mean that there are still several issues that require attention in your December 2015 financial statements. The good news for preparers is that there are no new accounting standards, and only two amending standards (with minor changes), that could impact your 31 December 2015 annual financial statements for the first time. In addition, there is only one amending standard that applies from 1 July 2015, but it will not impact your 31 December 2015 half-year financial statements (AASB Amendments to Australian Accounting Standards Financial Reporting Requirements for Australian Groups with a Foreign Parent). However, you should note that the Australian Securities and Investments Commission (ASIC) is stepping up their financial reporting surveillance programme, focussing on particular risk areas in both listed and unlisted entities, and naming and shaming entities required to restate financial statements as a result of these surveillance enquiries. Also, we have seen more than half of the ASX Top 100 listed entities starting to declutter their 30 June 2015 financial statements. This process becomes mandatory for 31 December 2016, so you may want to test run your decluttering process when compiling your December 2015 annual financial statements. Issues you should therefore be considering when preparing 31 December 2015 annual financial statements include: Changes to discount rates used to discount employee benefit liabilities Annual improvements cycle Transitioning between Tiers of financial statements ASIC focus areas for 31 December 2015 financial statements Impact of new standards on financial instruments and revenue Decluttering. Changes to discount rates used to discount employee benefit liabilities The change from using the national government bond rate, to using the corporate bond rate will impact the discounted employee benefit provisions in your December 2015 annual financial statements for the first time. In May Accounting News we summarised how recent research conducted by the Group of 100 (G100) and the Actuaries Institute of Australia show that Australia does have a sufficiently deep corporate bond market, so corporate bond rates must be used instead of government bond rates to discount employee benefit liabilities under AASB 119 Employee Benefits. IN THIS EDITION P1 What do I need to know to prepare December 2015 financial statements? P2 New BDO publications P4 ASIC focus areas for 31 December 2015 financial statements P6 Exposure Draft IFRS Practice Statement Application of Materiality to Financial Statements P8 Significant global entities with transfer pricing issues to prepare general purpose financial statements P9 Comments sought on exposure drafts While there are not many changes to accounting standards for December 2015, in this edition we highlight issues requiring your attention when preparing your December financial statements, including ASIC focus areas (particularly impairment assumptions). We also remind you that the first stage of the IASB s disclosure initiative applies to December 2016 financial statements, and you will need to commence work on your decluttering process early in the new year. Our article on the IASB s Draft Practice Statement Application of Materiality to Financial Statements will assist you to apply judgement when determining material items to be included in, and immaterial items to be excluded from, your financial statements. Lastly, we look at recent changes to the Income Tax Administration Act 1953 which will require general purpose financial statements (GPFS) for all significant global entities that do not otherwise lodge general purpose financial statements (GPFS) with ASIC under deadlines prescribed by s319(3) of the Corporations Act 2001.

2 2 ACCOUNTING NEWS This means that from June 2015, all entities, other than not-for-profit public sector entities, must use corporate bond rates, instead of government bond rates, to discount employee benefit liabilities such as annual and long service leave expected to be settled more than 12 months after reporting date, and defined benefit obligations. Not-for-profit public sector entities will continue to use government bond rates. Where do I find these corporate bond rates? Yield curves and rates are available monthly on the Milliman Australia (Milliman) web site and will be updated for 31 December Is the change in rate a change in accounting policy or change in estimate? The change to the corporate bond rate must be accounted for as a change in estimate under AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. This means that the impact of the catch-up adjustment will be accounted for during the 31 December 2015 reporting period. If material, you will need to disclose the following in your 31 December 2015 financial statements: The nature of change (from government to corporate bond rates) Amount of the change. For many entities with only annual and long service leave liabilities, changes will not be material. Action points Refer to the November 2015 discount rates on Milliman Australia (Milliman) web site to establish whether the impact of using the corporate bond rate, rather than the government bond rate, is material to your 31 December 2015 financial statements. Annual improvements cycle As a result of the International Accounting Standards Board s and annual improvements cycles, AASB Amendments to Australian Accounting Standards includes amendments that apply for the first time to years ending 31 December Except for the additional disclosures required by listed entities that aggregate operating segments for their segment reporting under AASB 8 Operating Segments (refer to table below for details), these are not expected to have a major impact on current practice and are summarised in the table below: Standard AASB 2 Share-based Payment AASB 8 Operating Segments AASB 116 Property, Plant and Equipment AASB 138 Intangible Assets AASB 124 Related Party Disclosures AASB 13 Fair Value Measurement AASB 140 Investment Property Impact of amendments Performance targets for share-based payments based on metrics of another group entity (rather than the issuing entity) must be treated as vesting conditions. Additional disclosures required about your judgements regarding aggregation criteria used to assess whether your segments have similar economic characteristics. Only need to disclose a reconciliation of reportable segment assets to the entity s total assets if segment assets are regularly provided to the chief operating decision maker. How proportionate restatement of accumulated depreciation is calculated when assets are revalued (mainly impacts public sector entities). Payments for key management personnel (KMP) services provided by a management entity must be disclosed as a related party transaction, not as KMP compensation. Note: This mainly impacts funds where a responsible entity provides KMP services generally. Where KMP services are provided by an individual employed by the entity, via a service company, KMP services comprise KMP remuneration and must be disclosed as such. The portfolio exception applies to all contracts within the scope of AASB 139 Financial Instruments: Recognition and Measurement / AASB 9 Financial Instruments, regardless of whether they meet the definition of financial assets and financial liabilities under AASB 132 Financial Instruments: Presentation. If a property acquired on or after the beginning of the first period to which these amendments apply (1 January 2015) meets the definition of investment property, AASB 3 Business Combinations still needs to be considered to determine whether you have purchased an asset or a business. NEW BDO PUBLICATIONS The Audit section of our website includes a range of publications on IFRS issues. Look for the Global IFRS Resources link which includes resources such as: IFRS at a Glance one page and short summaries of all IFRS standards IFRS News at a Glance provides high-level headlines of newly released documents by the IASB and IFRS related announcements by securities regulators Need to Knows updates on major IASB projects and highlights practical implications of forthcoming changes to accounting standards. Recent Need to Knows include IFRS 9 (2014) Financial Instruments Classification and Measurement (April 2015), IFRS 9 Financial Instruments - Impairment of Financial Assets (Dec 2014), IFRS 15 Revenue from Contracts with Customers (Aug 2014) and Hedge Accounting (IFRS 9 Financial Instruments) (Jan 2014) IFRS in Practice practical information about the application of key aspects of IFRS, including industry specific guidance. Recent IFRS in Practice include IFRS 9 Financial Instruments (Oct 2015), IFRS 15 Revenue from Contracts with Customers - Transition (April 2015), IFRS 15 Revenue from Contracts with Customers (Oct 2014), IAS 7 Statement of Cash Flows (May 2014), Distinguishing between a business combination and an asset purchase in the extractives industry (March 2014), IAS 36 Impairment of Assets (Dec 2013) and Common Errors in Financial Statements Share-based Payment (Dec 2013) Comment letters on IFRS standard setting - includes BDO comments on various projects of international standard setters, including Exposure Drafts and other Discussion Papers, when it is considered that the issue is significant to the BDO network and its clients. Latest comment letters include IASB ED Conceptual Framework for Financial Reporting, ED Proposed amendments to IAS 19 and IFRIC 14, IASB Clarifications to IFRS 15, IASB ED Classification of Liabilities, Basel Committee on Banking Supervision Guidance on accounting for expected credit losses, IASB ED Disclosure Initiative, IASB ED Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value, and IASB ED Recognition of Deferred Tax Assets for Unrealised Losses.

3 3 ACCOUNTING NEWS Action points Segment reporting draft wording about your judgements regarding aggregation criteria used to assess whether your segments have similar economic characteristics Key management personnel (KMP) compensation ensure payments to management entities are disclosed as ordinary related party transactions and ensure all payments made to KMPs via personal companies are included as KMP compensation Depreciation calculations on revalued property, plant and equipment and intangible assets recalculate proportionate accumulated depreciation on revalued assets for the current and prior period where there has been a change in useful life or residual value as being the revalued gross carrying amount less net carrying amount Investment property acquisitions ensure acquisitions on or after 1 January 2015 are assessed as meeting the definition of an investment property asset, and then also whether there is a business combination More information on new or amending standards for 31 December 2015, refer to our recent Financial Reporting Standards Update. Transitioning between Tiers of financial statements AASB 1053 Application of Tiers of Australian Accounting Standards contemplates two tiers of Australian Accounting Standards as follows: Tier 1 Australian Accounting Standards all recognition, measurement and disclosure requirements Tier 2 Australian Accounting Standards Reduced Disclosure Requirements all recognition and measurement requirements but reduced disclosures. AASB 1053 outlines when and whether AASB 1 First-time Adoption of Australian Accounting Standards must / can be applied when transitioning between special purpose financial statements, Tier 1 and Tier 2. Applying AASB 1 allows the choice to measure certain items on transition date at amounts that are not fully IFRS compliant, e.g. being able to reset foreign currency translation reserves to zero, and adopting recent fair valuations as deemed cost for property, plant and equipment and investment properties. However, some entities may prefer to retain measurements at amounts as if they had always applied IFRS (AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors). The AASB amendments provide you with more guidance when transitioning between Tiers, including: You must apply AASB 1 when transitioning from SPFS to Tier 1 (AASB 1 must be applied, irrespective of whether full recognition and measurement had been applied beforehand) You must apply AASB 1 when transitioning from Tier 2 to Tier 1 for the first time When transitioning from SPFS to Tier 2, and you have not previously applied full recognition and measurement, you can choose to apply AASB 1 (limited exemptions) or AASB 108 (full retrospective restatement unless standards permit prospective application). If you have previously applied full recognition and measurement, AASB 1 cannot be applied When resuming application of Tier 1 (after having applied Tier 2 which assumes all recognition and measurement requirements have been complied with), you can choose to apply AASB 1 (limited exemptions) or AASB 108 (continue with accounting policies as if you had never stopped preparing Tier 1 financial statements) You do not apply AASB 1 when transitioning from Tier 1 to Tier 2. For more transition options and whether you can or cannot apply AASB 1, refer to Appendix D of AASB Action points If you will be changing financial reporting frameworks in your 31 December 2015 annual financial statements, we recommend you refer to the charts included in Appendix C to AASB 1053 to determine whether AASB 1 First-time Adoption of Australian Accounting Standards must / can be applied when transitioning between special purpose financial statements, Tier 1 and Tier 2. Impact of new standards on financial instruments and revenue Even though AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers only apply from 1 January 2018, and 31 December 2015 falls before the opening balance sheet date for retrospective restatement, one of ASIC s focus areas for 31 December 2015 is the disclosure of impacts of these new standards. Paragraph 30 of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors requires disclosure of the impact of new/amended accounting standards issued but not effective at the date the financial statements are authorised for issue. This includes known or reasonably estimable information to assess the possible impact of the new / amending standard in the period that it is first adopted. Unless the full retrospective transition method is not being adopted when AASB 15 is first applied, 31 December 2016 (next year s financial statements) will generally be the opening balance sheet date for these two standards. Action points Complete assessment of AASB 9 and AASB 15 impacts as soon as possible because some implications may require changes to systems, bank covenants, employee bonus schemes etc. For more information, please refer to: Revenue and Financial instruments section of our Issues and Trends page on our web site Financial Reporting Standards Update. Decluttering Our research shows that more than half of the ASX Top 100 listed entities started the process of decluttering their 30 June 2015 financial statements in line with the IASB s Disclosure Initiative. The aim of the IASB s Disclosure Initiative project is to make financial statements more relevant to investors and to reduce the burden on preparers by allowing them to apply judgement when deciding which disclosures are relevant, and which are not. Since relevant changes have been made to AASB 101 Presentation of Financial Statements, examples of typical decluttering includes: Steps to improve the financial statements Remove Reorder Re-group Re-emphasise Remove unnecessary accounting policies Tailor boilerplate wording on accounting policies to suit client circumstances Remove redundant disclosures Remove any disclosures duplicated in multiple places Make use of cross references. Move the accounting policies to the relevant note Move key accounting estimates and judgements to relevant note Move key information to the beginning of the financial statements. Group similar information within the same note Group related notes together Consider introducing sections to the financial statements. Highlight key changes in the financial statements Emphasise key information Consider use of non-technical language for certain disclosures.

4 4 ACCOUNTING NEWS Action points We remind you that this process is mandatory for your 31 December 2016 financial statements. Read ED IFRS Practice Statement Application of Materiality to Financial Statements Conduct a parallel test run on your 31 December 2015 financial statements start thinking about what the final product will look like For more information, please refer to Accounting News articles: November Decluttering your financial statements The ASX Top 100 experience October 2015 Decluttering your financial statements easy starting point your accounting policies September Are your financial statements overweight? March To disclose or not to disclose - Materiality is the question February 2015 IASB paves the way for decluttering financial statements by finalising amendments to IAS 1. ASIC FOCUS AREAS FOR 31 DECEMBER 2015 FINANCIAL STATEMENTS On 12 November 2015 the Australian Securities and Investments Commission (ASIC) issued Media Release MR which outlines its focus areas for 31 December 2015 financial reports of listed entities and other entities of public interest. Directors and auditors should continue to focus on values of assets and accounting policy choices. We continue to see companies using unrealistic assumptions in testing the value of assets or applying inappropriate approaches in areas such as revenue recognition ASIC Commissioner, John Price Role of directors In its Media Release, ASIC stresses that even though directors do not need to be accounting experts, they should seek explanation and professional advice supporting the accounting treatments chosen. Directors should be challenging accounting estimates and treatments applied in the financial report and seeking advice where a treatment does not reflect their understanding of the substance of an arrangement. Resources ASIC has compiled Information Sheets to assist directors: With their general financial reporting obligations (Information Sheet 183 Directors and financial reporting) When considering whether non-financial assets shown in the financial statements are impaired and reviewing impairment models and calculations (Information Sheet 203 Impairment of non-financial assets: The role of directors and audit committees). Our article from June 2015 Accounting News provides a summary of ASIC Information Sheet 203 of the issues directors should be questioning when assessing management s impairment models and calculations. Not only listed entities It is important to note that not only listed entities will be affected by ASIC s focus areas and its financial reporting surveillance programme. ASIC continues to review a sizable number of financial reports of private entities and groups with numerous stakeholders. In its June 2015 surveillance programme, ASIC reviewed 220 listed entities and 20 unlisted entities. ASIC indicated in its media release that it will continue to review financial reports of proprietary companies and unlisted public companies based on complaints and other intelligence. It also indicated that it will continue to follow up serial non-lodgers, i.e. entities required to lodge accounts that fail to lodge.

5 5 ACCOUNTING NEWS Over the past six months, the largest penalty to an unlisted group of companies that failed to lodge its financial statements was to Hancock Prospecting (MR ) for $130,000. Results of ASIC s enquiries also resulted in Sapphire Aged Care Pty Ltd restating its accounts for what appears to be errors in business combination accounting, inappropriate revaluation of intangible assets (bed licences) and cash flow statement errors (MR ). Focus areas ASIC s seven focus areas impacting accounting estimates, accounting policy choices and key disclosures are the same as for June 2015 and include: Impairment testing and asset values Off-balance sheet arrangements Revenue recognition Expense deferral Tax accounting Disclosure of key estimates and judgements Disclosure of the impact of the new revenue and financial instruments standards. These are summarised briefly in the table below. We recommend preparers and directors review these focus areas in detail and pay attention to the reasonableness of assumptions used when compiling impairment testing calculations and models. Accounting estimates Impairment testing and asset values Recoverability of the carrying amounts of assets such as goodwill, other intangibles, and property, plant and equipment continues to be an important area of focus. Recommend directors to apply the guidance in ASIC Information Sheet 203 when reviewing management s impairment models. Ensure: a. Cash flows and assumptions are reasonable compared to historical cash flows, economic and market conditions, and funding costs. Where prior period cash flow projections have not been met, need to consider whether current assumptions are reasonable and supportable b. Discounted cash flows are only used to determine fair value less costs of disposal (FVLCD) where forecasts and assumptions are reliable. FVLCD is not a means to use unreliable estimates that could not be used under a value in use (VIU) model c. VIU calculations must: Use cash flow estimates that are sufficiently reliable Not use increasing cash flows after five years that exceed long term average growth rates, and Not include cash flows from restructurings and improving or enhancing asset performance d. Cash flows used are matched to carrying values of all assets that generate those cash flows, including inventories, receivables and tax balances e. Different discount rates are used for cash generating units (CGUs) where the risks are different (e.g. located in different countries) f. CGUs are not identified at too high a level, including where cash inflows for individual assets are not largely independent. CGUs must not be at a higher level than the operating segments g. The impairment test in AASB 136 Impairment of Assets is used for exploration and evaluation assets after technical feasibility and commercial viability have been demonstrated. Extractive industries and support services Given current economic conditions and commodity prices, directors need to pay attention to asset values in the extractive industries and those providing support services to extractive industries. Digital disruption Directors also need to pay attention to the values of assets that may be affected by the risk of digital disruption. Financial instruments Directors should pay attention to values of financial instruments, particularly where they are not based on quoted prices or observable market data. This includes the valuation of financial instruments by financial institutions.

6 6 ACCOUNTING NEWS Accounting policy choices Off-balance sheet arrangements Revenue recognition Expense deferral Tax accounting Key disclosures Estimates and accounting policy judgments Impact on new revenue and financial instruments standards Review the treatment of off-balance sheet arrangements, the accounting for joint arrangements and disclosures relating to structured entities (AASB 10 Consolidated Financial Statements). Review revenue recognition policies to ensure that revenue is recognised in accordance with the substance of the underlying transactions. Revenue should only be recognised when: Services to which the revenue relates have been performed Control of relevant goods has passed to the buyer, and It has been appropriately allocated to appropriate components (e.g. sale of goods and provision of services). Financial instruments should be appropriately classified and revenue recognised according to the appropriate class. Some industries with complex sale and licensing arrangements and ongoing obligations (e.g. software providers) require careful consideration to ensure revenue is being recognised appropriately. Ensure that expenses are only deferred where the item meets the definition of an asset under Accounting Standards, it is probable that future economic benefits will arise, and the requirements of AASB 138 Intangible Assets have meet met, i.e.: Start-up costs, training, relocation and research costs have been expensed, and The six strict tests for deferral in paragraph 57 have been met. Ensure a proper understanding of both the tax and accounting treatments, and how differences between the two affect tax assets, liabilities and expenses. Consider changes to tax legislation if relevant. Review the recoverability of deferred tax assets at each reporting date. Ensure disclosures are made for all key areas of uncertainty and judgment. Disclosures should be specific to the assets, liabilities, income and expenses of the entity. Disclosure of key assumptions and a sensitivity analysis are important. These enable users of the financial report to make their own assessments about the carrying values of the entity s assets and risk of impairment given the estimation uncertainty associated with many asset valuations. Ensure that the impact of the new revenue standard, AASB 15 Revenue from Contracts with Customers and the new financial instrument standard, AASB 9 Financial Instruments on the future financial position and results are disclosed. Example of impacts: New hedge accounting requirements and loan provisioning. EXPOSURE DRAFT IFRS PRACTICE STATEMENT APPLICATION OF MATERIALITY TO FINANCIAL STATEMENTS The International Accounting Standards Board (IASB) recently issued Exposure Draft IFRS Practice Statement Application of Materiality to Financial Statements to provide guidance to assist management when applying the concept of materiality to general purpose financial statements. Information is material if omitting or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. Guidance is proposed in the following three main areas: Characteristics of materiality How to apply the concept of materiality when making decisions about presenting and disclosing information in the financial statements, and How to assess whether omissions and misstatements of information are material to the financial statements. Materiality is a matter of judgement that depends on the facts involved and the circumstances of a specific entity, so the draft

7 7 ACCOUNTING NEWS Practice Statement merely aims to illustrate the types of factors that management should think about when considering whether information is material. The proposed guidance does not aim to provide a complete list of things to consider when making judgements about materiality when preparing the financial statements. Some of the main issues highlighted in the ED include: The primary users to whom the financial report is directed include existing and potential investors, lenders and other creditors Regulators and other members of the public are not primary users of financial statements Preparers of financial statements need to identify characteristics of primary users to identify their information needs. This includes assuming a reasonable knowledge of business and economic activities, but not that users would be financial reporting experts Both quantitative and qualitative materiality needs to be considered The Practice Statement does not propose bright line quantitative thresholds as a measure of materiality but acknowledges that quantitative thresholds, for example, a percentage of profit, may be a useful tool in assessing materiality Qualitative materiality should be used to assess whether accounting policies need to be disclosed (or not), and whether they need to be tailored rather than using verbatim wording from the relevant accounting standard Qualitative materiality also applies to small numbers, but where transactions may be with related parties, or regarding contingencies, or where small misstatements could trigger noncompliance with bank covenants or regulatory requirements The materiality assessment includes applying judgement regarding whether to include or exclude information, how best to present information, and whether information should be included in the primary financial statements, or in the notes. Can the audit report be qualified for including too much information in the financial statements? While IFRS does not specifically prohibit disclosing immaterial information, we need to consider whether including such information obscures material information in the financial statements, making it too hard to find material information, and increasing the overall pages of the financial report. This results in more time having to be spent by: Preparers having to prepare the immaterial information Users trying to find material information among the overload of immaterial information, and Auditors having to audit this extra information. In extreme cases it may therefore be necessary for the auditor to modify their audit opinion because the financial statements obscure material information. Is it appropriate to include negative disclosures? While not generally advocating including negative statements in the financial statements (i.e. we do not have any leases, we do not have any share-based payment arrangements, etc.), the ED proposes that, in some cases, it may be appropriate to include a limited amount of information to assure users that the entity is not exposed to a particular type of risk. For example, an international bank during the Greek debt crisis may wish to note that it is not exposed to that particular risk. Aggregating and disaggregating information The ED provides examples to demonstrate when it might be appropriate to aggregate or disaggregate disclosures. Example 1: Entity A has 500 similar leases of similar assets. However, if a subset of these leases had different risk characteristics (e.g. residual value guarantees or extension options), it could be inappropriate to aggregate disclosures about the 500 leases. Example 2: Entity B has a small net foreign exchange loss on transactions during the year, comprising numerous small gains and losses on recurring transactions. In such cases, it may be appropriate to disclose the net foreign exchange loss. However, if part of net loss included a large speculative foreign exchange trading loss, not related to the ordinary operations of the entity, then it would be unlikely that aggregation would be appropriate and the speculative loss should be disclosed separately. Lose the checklist mentality The ED also proposes that disclosure checklists should be used having regard to the entity s circumstances. This means that the entity should not mechanically include every single possible disclosure popped out by a checklist, even if the entity has such transactions and balances. Example 1: Entity C has property, plant and equipment (PPE) on its balance sheet. It need not disclose contractual commitments if these are not material. It also need not disclose a full reconciliation of movements of each category of PPE during the current period, if movements during the current period are not material. Example 2: Entity D has numerous small share-based payment transactions with employees. It need not disclose all information required by AASB 2 for each grant to each employee. It could consider aggregating some information and including ranges, e.g. for valuation inputs and vesting periods. Do we need to include all comparative disclosures from last year s financial report? No, not necessarily. The ED proposes that material information from the previous year can be omitted from the current period financial statements if it is not material to the current period, or in some cases, repeated but in a summarised format. This could include, for example, leaving out PPE reconciliations from prior years, business combinations from prior years, and disclosures relating to impairment losses incurred in prior years. However, you would need to be careful omitting information where it enables users to understand the current period results, e.g. a fall in sales of a major revenue stream down to an immaterial amount shows poor performance for that stream. Next steps Comments on this exposure draft are due to the Australian Accounting Standards Board by 25 January 2016 and to the IASB by 26 February 2016.

8 8 ACCOUNTING NEWS SIGNIFICANT GLOBAL ENTITIES WITH TRANSFER PRICING ISSUES TO PREPARE GENERAL PURPOSE FINANCIAL STATEMENTS Anti-tax avoidance measures pass through Parliament As part of the Government s commitment to ensure companies that earn income in Australia, and benefit from the Australian economy, pay their fair share of tax here, just prior to the summer recess, the Tax Laws Amendment (Combining Multinational Tax Avoidance) Bill 2015 passed through both Houses of Parliament received Royal Assent on 11 December After much debate and amendments by the Senate to appease the Greens, the final Bill was amended to require multinational corporations with global revenue of $1 billion or more (significant global entities) to prepare and give to the Commissioner with their annual income tax return, general purpose financial statements (to apply to income years commencing on or after 1 July 2016). Multinationals to lodge general purpose financial statements New s3ca of the Taxation Administration Act 1953 requires that significant global entities that do not otherwise lodge general purpose financial statements (GPFS) with the Australian Securities and Investments Commission (ASIC) within deadlines prescribed by s319(3) of the Corporations Act 2001: Must lodge GPFS with the Tax Commissioner with their annual tax return, and The GPFS must be for the financial year that most closely corresponds to the income year for tax purposes. The Commissioner must give a copy of the GPFS to ASIC. At time of writing it was not clear whether: These GPFS would need to be audited Reduced disclosures would be permitted (Tier 2), and Consolidated financial statements of the overseas parent could be lodged. Note that the significant global entity is only required to lodge these GPFS with ASIC if they are Australian resident or a foreign resident that operates an Australian permanent establishment. These changes would apply to income years beginning on or after 1 July Why GPFS? This late amendment was a result of a deal with The Greens to facilitate passage of the amending legislation. At present, many Australian subsidiaries of foreign multinational enterprises produce special purpose financial statements (SPFS), with limited disclosure requirements. The amendments supported by The Greens are designed to prevent these Australian subsidiaries from avoiding more detailed financial disclosures by preparing SPFS. The Greens argued that the additional requirements of GPFS will provide disclosures which may highlight further tax minimisation practices of these multinational enterprises. How are these GPFS prepared? The GPFS must be prepared in accordance with: Accounting principles, or If accounting principles do not apply in relation to the entity (e.g. it is a small proprietary company not otherwise required to prepare, have audited and lodge financial statements with ASIC) commercially accepted principles relating to accounting. If the entity is a member of a group of entities that are consolidated for accounting purposes, GPFS can be provided to the Commissioner, either for the: Entity itself, or The entity, and some or all of the other members of the group (which could be, but may not necessarily be, the consolidated group). The Income Tax Assessment Act 1997 says that a matter is in accordance with accounting principles if it is in accordance with Accounting Standards and Interpretations. While not defined, the Explanatory Memorandum suggests that commercially accepted principles relating to accounting are those that ensure that the financial statements give a true and fair view of the financial position and performance of the entity. These would usually be the Accounting Standards in use in the country in which an entity is resident or carries on its principal business activities. Next steps We recommend that affected entities not already preparing GPFS begin the process as soon as possible because comparative information may be required for the year ended 30 June 2016.

9 9 ACCOUNTING NEWS COMMENTS SOUGHT ON EXPOSURE DRAFTS At BDO, we provide comments locally to the Australian Accounting Standards Board (AASB) and internationally to the International Accounting Standards Board (IASB). We welcome any client comments on exposure drafts that are currently available for comment. If you would like to provide any comments please contact Wayne Basford at DOCUMENT ED 270 Reporting Service Performance Information ED 271 IFRS Practice Statement: Application of Materiality to Financial Statements ED 272 Transfers of Investment Property Proposed amendments to AASB 140 PROPOSALS Proposes to establish principles and requirements for entities to report service performance information that is useful for accountability and decision making. Proposes to provide guidance to assist management when applying the concept of materiality to general purpose financial statements. Guidance is proposed in following three main areas: Characteristics of materiality How to apply the concept of materiality when making decisions about presenting and disclosing information in the financial statements, and How to assess whether omissions and misstatements of information are material to the financial statements. As materiality is a matter of judgement that depends on the facts involved and the circumstances of a specific entity, the proposals aim to illustrate the types of factors that management should think about when considering whether information is material. The proposals do not aim to provide a complete list of things to consider when making judgements about materiality when preparing the financial statements. Proposes to amend AASB 140, paragraph 57 to clarify that: Property can be transferred to and from investment property when, and only when, there is a change in use of the property supported by evidence that a change has occurred, and The examples in paragraph 57(a) to (d) comprise a list of examples of evidence that a change in use has occurred, and not an exhaustive list. COMMENTS DUE TO AASB BY 29 April 2016 N/A COMMENTS DUE TO IASB BY 25 January February February March 2016 This means that property under construction classified as inventory could be transferred to investment property when there is evidence of change in use.

10 10 ACCOUNTING NEWS DOCUMENT ED 273 Annual Improvements to IFRSs Cycle Draft Interpretation DI/2015/1 Uncertainty over Income Tax Treatments Draft Interpretation DI/2015/2 Foreign Currency Transactions and Advance Consideration PROPOSALS Proposes the following changes to accounting standards: AASB 1 First-time Adoption of Australian Accounting Standards deletes old short-term exemptions that are no longer applicable AASB 12 Disclosure of Interests in Other Entities clarifies that all AASB 12 disclosures (except B10-B16) apply to investments in subsidiaries, associates and joint ventures classified as held for sale, held for distribution to owners in their capacity as owners, or discontinued operations, in accordance with AASB 5 Noncurrent Assets held for Sale and Discontinued Operations AASB 128 Investments in Associates and Joint Ventures clarifies that the election by venture capital organisations to measure investments in associates and joint ventures at fair value through profit or loss is made, on initial recognition, on an investment-byinvestment basis. Proposes similar requirements to those contained in Financial Accounting Standards Board (FASB) Interpretation FIN 48 dealing with uncertain tax positions. Proposes to require entities to calculate the current tax liability in their financial statements as if the tax authorities were going to perform a tax audit, and the tax office knew all the facts about the entity s tax position. Likely to have a significant impact on the quantum of income tax liabilities for entities subject to judgemental tax areas such as transfer pricing. Proposes to clarify what spot rate to use to translate an asset, expense or income when consideration is received or paid in advance of recognising the related asset, expense or income. COMMENTS DUE TO AASB BY COMMENTS DUE TO IASB BY 22 January February December January December January 2016 FOR MORE INFORMATION ADELAIDE PAUL GOSNOLD Tel paul.gosnold@bdo.com.au BRISBANE TIM KENDALL Tel timothy.kendall@bdo.com.au CAIRNS GREG MITCHELL Tel greg.mitchell@bdo.com.au DARWIN CASMEL TAZIWA Tel casmel.taziwa@bdo.com.au HOBART DAVID PALMER Tel david.palmer@bdo.com.au MELBOURNE DAVID GARVEY Tel: david.garvey@bdo.com.au NEW SOUTH WALES GRANT SAXON Tel: grant.saxon@bdo.com.au PERTH PHILLIP MURDOCH Tel phillip.murdoch@bdo.com.au This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity s acts and omissions. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees. BDO is the brand name for the BDO network and for each of the BDO member firms BDO Australia Ltd. All rights reserved.