Finance today and tomorrow

Finance today and tomorrow Financial Reporting Update March 2017 #PwCFRU

www.fru2017.participoll.com

www.fru2017.participoll.com A genie grants you one wish what would it be? a) World peace b) Riches beyond compare c) An accounting standard I can understand A B C 0

Here and Now ASIC surveillance Accounting changes Trust and transparency

ASIC surveillance Headlines from ASIC media releases [1 March 2017] Pacific Star Network writes down intangible assets [6 March 2017] Spotless writes down goodwill in half-yearly disclosure [22 February 2017] Seven West writes down Yahoo7 investment [27 February 2017] Nine Entertainment writes down Nine Network goodwill [30 August 2016] Energy Resources Australia writes down the carrying value of non-current assets [23 May 2016] Cardno Limited writes down goodwill [6 September 2016] Evolution Mining writes down Pajingo mine [7 March 2017] MMA Offshore writes down property, plant and equipment [3 March 2016] Spring FG Limited changes revenue recognition [30 August 2016] Melbourne IT Limited amends accounting for convertible notes

ASIC surveillance Current ASIC focus areas Asset values (e.g. impairment) Accounting policy choices (rebates, revenue recognition, tax, off balance sheet, cost capitalisation) Client monies Enhanced audit reports (judgements and estimates) Impact of new accounting standards ASIC Legislative Instrument 2016-785 Wholly-owned Companies APRA regulated entities no longer relief from deed of cross guarantee

Accounting standards AASB 116/138 clarifies revenue-based amortisation or depreciation is generally not appropriate AASB 127 allows entities to use the equity method in their separate financial statements to measure investments AASB 11 business combination accounting should be applied to acquisition of a joint operation A summary of all changes can be found in our March 2017 IFRS Reporting Essentials publication

Building trust with transparency Tax reporting Tax return information published by the ATO Voluntary tax transparency code over 75 companies Lodgment of general purpose financial statements with the ATO Refer to Straight Away article (3 Nov 2016)

Building trust with transparency www.fru2017.participoll.com Are you considering voluntary tax transparency reporting? a) Yes have already released/committed on Board of Taxation register b) Yes in discussions c) Will not be releasing d) Haven t even thought about it e) Not applicable A B C D E 0

Building trust with transparency Disclosure initiative, Amendment to AASB 107, effective from 1 January 2017 Remuneration reporting - clearly explain link between remuneration and performance - refer to PwC-G100 report (Dec 2016)

What s next? Revenue Leasing Financial Instruments

Adoption dates of new standards is approaching... It is reasonable for the market to expect that quantitative information will be available and disclosed for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report. Will you be ready to provide quantitative impacts of the new standards in the year prior to adoption? a) Yes final numbers are locked and loaded b) Yes some estimates will be provided c) No providing qualitative disclosures only d) Not sure if we ll be ready ASIC Media release 16-442MR www.fru2017.participoll.com A B C D 0

What information should you consider disclosing? The estimated quantitative impact even if for a particular aspect or sub-set of adoption Specific qualitative discussion of how financial statements may be affected When you expect to adopt the new rules Whether comparatives will be restated What you re doing to manage implementation of the new standards Which areas of your business you expect to be particularly affected Specific areas that haven t yet been assessed Whether you intend to apply any transitional relief or practical expedients Disclosure examples: Rio Tinto, AT&T, Microsoft

What does an analyst think? Craig Woolford Head of Research and Lead Consumer Analyst, Citi Australia

Analyst s top tips 1 2 3 Be prepared Be transparent so investors and analysts understand Think about broader implications so there are no surprises Craig Woolford, Head of Research and and Lead Consumer Analyst, Citi Australia

Revenue

The 5 step model A quick refresher Step 1 Identify the contract Step 2 Separate performance obligations Step 3 Determine transaction price Step 4 Allocate transaction price Step 5 Recognise revenue

The profitability of Rolls-Royce will be significantly reduced... There won t be much of a profit for the next year or two which calls into question the sustainability of their current dividend Russell Solomon Moody s Investors Service analyst Source: Wall Street Journal 16 November 2016 New accounting standard will hurt Rolls- Royce results, CFO says Wall Street Journal 16 November 2016 Rolls-Royce profits to be hit by accounting rule Financial Times 14 November 2016

Steps 1 & 4 Rolls-Royce plc 1bn reduction in 2015 revenue and 3.5bn impact on the balance sheet Sells engines at a cash loss which is recouped on subsequent maintenance Revenue based on contractual rights and obligations Need to allocate consideration in a bundle based on stand alone selling price

Step 5 Vault Intelligence Adopted for 31 December 2016 half year Bundled arrangements with software licenses Deferral of revenue for software licenses

The Village Building Co. Limited Step 5 Adopted for 30 June 2015 Revenue deferred when moving from risk and rewards to control model Also need to consider: right to payment, legal title, physical possession and customer acceptance

The Village Building Co. Limited Step 5 Comparative year Old GAAP Current year New GAAP Contract life cycle Risks & Rewards transfer Control transfers Revenue recognised under old GAAP Revenue recognised under new GAAP

Aldar Properties PJSC Emaar Properties PJSC Step 5 Move to recognising revenue over time No alternative use Right to payment Adoption positively received by ratings agencies

Where to next? For further information on the impact of the new standard visit our revenue recognition webpage

What does the board think? Arlene Tansey Non-Executive Director

Audit Committee expectations 1 2 3 Be well progressed with implementation plan Expectation management is across the detail Provide quantifications of impact as soon as possible Arlene Tansey, Non-Executive Director

Leasing

How is lessee accounting changing? Presentation Asset Operating lease accounting No asset recognised Finance lease accounting Property Plant & Equipment IFRS 16 (in scope leases) Right-of-use asset The median increase in entities debt loads would be around 22% Liability Income statement No liability recognised Straight line single lease expense Lease liability Depreciation & interest expense Lease liability Amortisation & interest expense The median increase in Earnings Before Interest, Tax, Depreciation and Amortisation ( EBITDA ) would be around 13% Current accounting Accounting under new standard Source: PwC Global Lease capitalisation study

Discount rates for lessees Present value of Implicit rate in the lease is the rate that makes Lease payments Unguaranteed residual = Fair value of underlying asset Lessor's initial direct costs

Discount rates for lessees Present value of Implicit rate in the lease is the rate that makes Lease payments Unguaranteed residual = Fair value of underlying asset Lessor's initial direct costs Incremental borrowing rate = Lessee's base rate Lease term Type of asset and level of security Value Economic environment

Systems and data Imagine the future Integration of operational processes with the accounting calculations Consider need for systems particularly assess new technology and cloud based solutions New decision points portfolio approach?

Transition Comparatives Lease liability Full retrospective transition method Restate prior year as if AASB 16 had always applied Remaining cash flows at historical discount rate Cumulative catch-up transition method No restatement of comparatives Remaining cash flows at transition date incremental borrowing rate

Transition Comparatives Lease liability Requirements Full retrospective transition method Restate prior year as if AASB 16 had always applied Remaining cash flows at historical discount rate Limited practical expedients Cumulative catch-up transition method No restatement of comparatives Remaining cash flows at transition date incremental borrowing rate Various practical expedients Reconcile your operating lease commitments disclosure to the new lease liabilities. Right-of-use asset Calculated as if AASB 16 had always applied Lease by lease decision ( hybrid ) Calculated as if AASB 16 had always applied use of hindsight allowed; OR at same value as transition liability Full simplified Measured based on transition liability

Financial Instruments

Refresh on financial instrument changes Classification & Measurement AASB 9 Expected Credit Losses Hedging

Expected credit losses on trade receivables What challenges have we seen? Challenges What forward looking data is relevant? How to include forward looking data? What s the impact? Provisions recognised earlier Larger provisions expected Transition to the new standard Expected loss provision does not equal incurred losses Expected loss rates to be disclosed

Challenges in determining expected loss rates Risk grouping Historical loss rate Forward looking data Wage growth Unemployment rates Expected loss rate AASB 139 AASB 9 What forward looking data do I include? Interest rates Unemployment rates Economic growth Wage growth Inflation rates

What do the new credit loss disclosures look like? Trade and Other Receivables Total $'000 < 30 days $'000 31-60 days $'000 61-120 days $'000 > 120 days $'000 31 Dec 2016 Trade Other Trade Trade Trade Consolidated Expected loss rate 0.50% - 5% 30% 75% Gross carrying amount 60,500 27,100 20,000 8,700 2,900 1,800 Loss allowance provision (2,790) (135) - (435) (870) (1,350) Net receivables 57,710 26,965 20,000 8,265 2,030 450 (i) Other receivables are neither past due nor impaired and relate to fully secured employee loans.

How will my hedging disclosures be impacted? As at 31 Dec 2016 CASH FLOW HEDGES Fuel costs (up to 2 years) barrels 40 Revenue (up to 2 years) AUD 10 Capital expenditure (up to 2 years) AUD 550 Interest (up to 5 years) AUD 400 FAIR VALUE HEDGES Nominal Amount Hedge Rates Carrying amount Change in hedging instrument used for ineffectiveness Change in hedged item used for ineffectiveness Change in value recognised in OCI Ineffectiveness recognised in profit or loss Reclassified from reserve to profit or loss $M $M $M $M $M $M $M $M Asset Liabilities AUD/Barrel 50 117 250 (195) (265) 265 (265) (301) AUD/JPY 85 (7) (5) 5 (5) 7 AUD/USD 0.70 0.74 14 (11) (1) 1 (1) Fixed 4.40% 6% (60) (3) 3 (3) Asset Liabilities Interest (up to 5 years) AUD 20 Floating 2 The carrying amount of the hedged item equals the nominal amount of the hedging instrument. OCI, other comprehensive income

How will my hedging disclosures be impacted? As at 31 Dec 2016 CASH FLOW HEDGES Fuel costs (up to 2 years) barrels 40 Revenue (up to 2 years) AUD 10 Capital expenditure (up to 2 years) AUD 550 Interest (up to 5 years) AUD 400 FAIR VALUE HEDGES Nominal amount Nominal Amount Hedge Rates Carrying amount Change in hedging instrument used for ineffectiveness Change in hedged item used for ineffectiveness Change in value recognised in OCI Ineffectiveness recognised in profit or loss Reclassified from reserve to profit or loss $M $M $M $M $M $M $M $M Asset Liabilities AUD/Barrel 50 117 250 (195) (265) 265 (265) (301) AUD/JPY 85 (7) (5) 5 (5) 7 AUD/USD 0.70 0.74 14 (11) (1) 1 (1) Fixed 4.40% 6% (60) (3) 3 (3) Asset Liabilities Interest (up to 5 years) AUD 20 Floating 2 The carrying amount of the hedged item equals the nominal amount of the hedging instrument. OCI, other comprehensive income

How will my hedging disclosures be impacted? As at 31 Dec 2016 CASH FLOW HEDGES Fuel costs (up to 2 years) barrels 40 Revenue (up to 2 years) AUD 10 Capital expenditure (up to 2 years) AUD 550 Interest (up to 5 years) AUD 400 FAIR VALUE HEDGES Nominal Amount Hedge Rates Carrying amount Change in hedging Change in hedged used item used for instrument for ineffectiveness ineffectiveness Change in value recognised in OCI Ineffectiveness recognised in profit or loss Reclassified from reserve to profit or loss $M $M $M $M $M $M $M $M Asset Liabilities AUD/Barrel 50 117 250 (195) (265) 265 (265) (301) AUD/JPY 85 (7) (5) 5 (5) 7 AUD/USD 0.70 0.74 14 (11) (1) 1 (1) Fixed 4.40% 6% (60) (3) 3 (3) Asset Liabilities Hedging ineffectiveness Interest (up to 5 years) AUD 20 Floating 2 The carrying amount of the hedged item equals the nominal amount of the hedging instrument. OCI, other comprehensive income

How will my hedging disclosures be impacted? As at 31 Dec 2016 CASH FLOW HEDGES Fuel costs (up to 2 years) barrels 40 Revenue (up to 2 years) AUD 10 Capital expenditure (up to 2 years) AUD 550 Interest (up to 5 years) AUD 400 FAIR VALUE HEDGES Nominal Amount Hedge Rates Carrying amount Change in hedging instrument used for ineffectiveness Change in hedged Change in value item used for recognised in ineffectiveness OCI Ineffectiveness recognised in profit or loss Reclassified from reserve to profit or loss $M $M $M $M $M $M $M $M Asset Liabilities AUD/Barrel 50 117 250 (195) (265) 265 (265) (301) AUD/JPY 85 (7) (5) 5 (5) 7 AUD/USD 0.70 0.74 14 (11) (1) 1 (1) Fixed 4.40% 6% (60) (3) 3 (3) Asset Liabilities Hedged item ineffectiveness Interest (up to 5 years) AUD 20 Floating 2 The carrying amount of the hedged item equals the nominal amount of the hedging instrument. OCI, other comprehensive income

How will my hedging disclosures be impacted? As at 31 Dec 2016 CASH FLOW HEDGES Fuel costs (up to 2 years) barrels 40 Revenue (up to 2 years) AUD 10 Capital expenditure (up to 2 years) AUD 550 Interest (up to 5 years) AUD 400 FAIR VALUE HEDGES Nominal Amount Hedge Rates Carrying amount Change in hedging instrument used for ineffectiveness Change in hedged item used for ineffectiveness Change in value recognised in OCI Ineffectiveness recognised in profit or loss Reclassified from reserve to profit or loss $M $M $M $M $M $M $M $M Asset Liabilities AUD/Barrel 50 117 250 (195) (265) 265 (265) (301) AUD/JPY 85 (7) (5) 5 (5) 7 AUD/USD 0.70 0.74 14 (11) (1) 1 (1) Fixed 4.40% 6% (60) (3) 3 (3) Asset Liabilities Interest (up to 5 years) AUD 20 Floating 2 The carrying amount of the hedged item equals the nominal amount of the hedging instrument. Hedge ratio OCI, other comprehensive income

www.fru2017.participoll.com Are you prepared for the new AASB 9 disclosures? a) Done some thinking about the disclosures b) Completely not thought about them c) Already done some proforma disclosures A B C 0

Wrap up new standard changes Don t wait Keep stakeholders informed Don t forget broader implications Consider your transition strategy Don t forget disclosures

www.fru2017.participoll.com After hearing all this, how do you feel? a) We re in good shape! b) We have some work to do and need to get moving! c) We have some work to do but have plenty of time. A B C 0

Finance tomorrow

www.fru2017.participoll.com Is digital having an impact on your teams and if so how well are you prepared? a) Digital is impacting our business but not Finance b) Digital is impacting our business and Finance. We have some work to do c) Digital is impacting our business and Finance. We are all over it. A B C 0

The digital challenge in Finance 81% 69% of CFOs believe the impact of digital will change the role of the CFO and finance of CEOs believe that technology advancement is the key mega-trend that will transform business over the next 5 years <20% of CFOs believe they are ready to deal with this impact Source: PwC 17 th Annual Global CEO survey

Digital trends are changing customer needs and how organisations must adjust, so enablers are required This is what organisations want to deliver This is how organisations are trying to deliver Customer & Colleague Experience Channels Labour-Centric Structure and Process Systems and Data Fast, painless, end-to-end experience Real-time personalisation Seamless, through mobile Self-service Traditional, siloed Large labourcentric teams High cost, Poor turn around times Complicated landscape of legacy systems Lack of scalability

Enablers of finance improvement Technological capability Robotics Process Automation Digital Workforce Computers Internet Workflow ERP Business Process Outsourcing Shared Service Centers Cloud AI/ Machine learning 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 Operating Model change today Technology change

What is Robotic Process Automation? Low Automation High Business Process Automation Platforms Robotic Process Automation (RPA) Natural Language Programming (NLP) Artificial Intelligence / Cognitive Computing Algorithmic Business RPA is not. tasks RPA is software or a bot that sits on top of existing systems and interprets existing applications to perform repeatable rule-based and processes that currently require a person.

RPA benefits Reduced costs 20% of onshore and 30% of offshore Scalable virtual workforce capable of operating 24/7 Improved customer experience Value Error rates typically less than 0.05% Improved employee experience Improved governance, compliance and auditability

Some recent examples in Finance Period End Close Cycle time reduction from 3 weeks to just 30 minutes Control account reconciliations 30% to 40% reduction in required effort Customer Query Management Reduction in turnaround time from 8 hours to 1 hour and error rate of 0% Order Management Optimisation Average handling time from 30 to 10 minutes and reduces costs by 80% Final Pay Calculations: (Complex Enterprise Agreements) 5 week PoC has quantified a ROI of over 200% and 6 month payback

www.fru2017.participoll.com Over the past 15 mins I have developed a better understanding of RPA and a) I can t see its application in my organisation b) It may be applicable and I would like to know more c) I can think of a number of real opportunities and want someone to help me make it happen d) We are implementing/have implemented RPA Learn more at www.pwc.com.au/rpa A B C D 0

Need more information Visit us at http://www.pwc.com.au/ ifrs/events.html Briefing Materials Download our 365 app Talk to your PwC contact #PwCFRU

Thank you for joining us Financial Reporting Update March 2017 2017 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. #PwCFRU