Public Sector Accounting and Reporting Issues 11 November 2016
Looking back… England win three out of four Ashes series
Australia reclaims The Ashes convincingly after three Tests
Obama Wins Re-Election The Sun: Massacre in Paris
Royal wedding gives £2bn boost to UK tourism © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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Where to from here? AASB 124 Related Party Disclosures
AASB 15 Revenue / AASB 10XX Income for Not-forprofits (ED 260)
AASB 16 Leases
Other considerations
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Presenters - KPMG Matthew McDonnell
Emma Pratt
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AASB 124: Related Party Disclosures
AASB 124 – how did we get here? NFP public sector exemption
2004
AASB 124 first released as part of AIFRS
2009
IASB releases update and AASB starts to reconsider exemption
2015
AASB releases amendments to AASB 124 removing exemption
2017
First year of application for most NFP QLD public sector entities
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AASB 124 scope extended to include NFP public sector entities Disclosure requirements apply unamended to individual agency financial reports, consolidated financial reports and to the Total State Sector Accounts
Implementation guidance included on identification of KMP, KMP compensation and identification of related party transactions Implementation guidance includes examples applying the requirements of AASB 124 © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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Who are related parties? Who are your KMP? - KMP of your entity - KMP of parent entities?
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.
Who are your related parties? - Person or an entity that is related to the entity - KMP and their close family members (spouse/partner, children/dependents, others?) - Parent entities, subsidiaries, fellow subsidiaries, associates, joint ventures, others?
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What do you need to disclose? A. Disclose KMP compensation (paragraph 17):
Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments
B. Disclose related party transactions (paragraph 18):
Nature of the relationship Transactions and outstanding balances
Partial disclosure exemption for government-related entity (paragraph 25 and 26):
The name of the government and nature of relationship Nature and amount of each individually significant transactions For other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent
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Summary of AASB 124 on a page Disclose KMP compensation (paragraph 17): Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments
Disclose related party transactions, include nature of the relationship, transactions and outstanding balances (paragraph 18)
Partial disclosure exemption for government-related entity (paragraph 25 and 26)
Areas of difficulty
■
Identifying your KMPs and related parties
■
Instructions to, and obtaining required information from, KMPs and related parties
■
Exercising judgment to determine the materiality and the extent of disclosure
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High level practical challenges in applying AASB 124 for the first time – 2016/2017 issues Application of KMP concept – reassessment of whether responsible ministers are KMP Need for new systems and processes for collecting relevant data, whilst not duplicating existing processes, in order to identify related party transactions that are not connected with KMP. Limited experience in applying AASB 124 Sensitivities of stakeholders not used to requirements. Start communications with KMP as soon as possible. Agencies will need to come up with their own guidance to ensure consistent application of requirements, for example in determining materiality and other areas of judgment.
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What wil be the approach for adoption in QLD? Treasury will standardise and agree with QAO as much as possible regarding related party information collection for those affecting KMP individually. Treasury have prepared and circulated a (Draft) self-declaration form for completion by KMP, including guidance. Agencies are only required at this stage to collect information from their agencyspecific KMP. Treasury, together with Department of Premier and Cabinet will coordinate the collection of information from Ministers. Agencies need to understand the requirements of AASB 124 and start informing their KMP as well as implementing an approach to identify other related party transactions. Agencies will need to co-ordinate the collection process for internal KMP’s declarations. Comparative information (relating to 2015-2016) will not be required, however, by virtue of the FRRs, comparative period KMP remuneration will be required.
Consider collection process & implementation plan
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Revenue AASB 15: Revenue ED 260: Income for NFPs
Revenue recognition - Recap What is new?
The new revenue standard AASB 15 - Revenue is effective for annual periods beginning on or after 1 January 2018
A new Exposure Draft 260 – Income of Not-For-Profit Entities outlines the requirements to be applied by NFP entities in recognising income: - Part A: Guidance for NFPs in implementing AASB 15 - Part B: Income for NFPs (outside of AASB 15)
New Standard – AASB 10XX – and Appendix F to AASB 15. Fatal Flaw review (October 2016), NFP 1 January 2019 effective date
Change in applicable Standards
For-Profit entities AASB 111 – Construction contracts
AASB 15 - Revenue
AASB 118 – Revenue
Not-For-Profit entities AASB 1004 – Contributions (majority sections) AASB 111 – Construction contracts AASB 118 – Revenue
AASB 15, with NFP specific guidance AASB 10XX – Income of NFPs
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AASB 15: Impact on Not-for-Profit entities NFP Income project based on AASB 15 Revenue from contracts with customers
Recognise revenue
1 5
Identify the contract with a customer
Revenue
2
Allocate the transaction price Identify the performance obligations
4
3
Determine the transaction price © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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How this project has evolved AASB 15 (including NFP application guidance Appendix F)
AASB 15
“Contract” for transfers goods and service
Legally enforceable
Recognise revenue when performance obligations satisfied
Arrangement enforceable? “Legal” or “Equivalent” test Performance obligations? Sufficiently specific - defer recognition
No performance obligation / not sufficiently specific - Consider whether AASB 10XX Income of Not-for-Profit Entities applies
For profit application
Not for profit application
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Hot topics Enforceability of arrangement Arrangements in NFP = descending levels of formality: What constitutes an “enforceable by equivalent” process (court / tribunal / administrative) Is moral / social / economic compulsion enough to create enforceability? Could AASB 137 be drawn upon for what is “enforceable”? Continuum of enforceability… Enforceability depends solely on the customer’s capacity to enforce its rights
At which point is the arrangement enforceable? Legal enforceability
Not enforceable
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Hot topics Performance obligations: Sufficiently Specific Can the entity determine when the obligation is satisfied? Nature / Amount / Timing / Quantum Link to “distinct”?
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How might this translate into issues for us? Are we in AASB 15?
Recognising revenue when performance obligations are satisfied
Apply AASB 10XX Income of Not-for-Profit
Transactions where the consideration to acquire an asset is significantly less than fair value – pursuit of furthering objectives; or
The receipt of volunteer services
Timing: Income is recognised immediately in profit or loss when the asset is controlled Amount: Difference between the fair value of the asset recognised and the consideration received after deducting related amounts recognised (contribution by owner, a liability (AASB 9 and AASB 16) or performance obligation under AASB 15) © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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Peppercorn rentals – lessee example Example facts
Charity A leases a facility from local government (the lessor) for a period of 30 years for $100 per year
The lease is non cancellable
Ownership of the land remains with the lessor at the end of the lease
Assume a finance lease
Assume no guaranteed / unguaranteed residual value
Charity A determines:
The right-of-use asset is an asset acquired for consideration significantly below fair value
It controls a leased asset in the scope of AASB 16
FV of right to use facility for 30 years at inception PV of actual lease payments of ($100 pa) discounted at incremental borrowing rate of 5% - represents actual liability of lessee)
$360,000 $1,537
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Peppercorn rentals – lessee example Lessee accounting – at commencement
Dr Leased asset*
$360,000
Cr Lease liability
$1,537
Cr Income
$358,463
Recognise the difference between the fair value of leased asset and lease liability as income at inception of the lease in terms of paragraph 9 of AASB 10XX * If leased asset has a term then leased asset would need to be depreciated
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Accounting for Government Grants - example Charity B receives a government grant of $2.4 million on 31 May 20X0, which is refundable if the money is not spent in the period 1 July 20X0 to 30 June 20X1 Charity B determines: ■ The $2.4 million grant is an asset that the charity acquired to further the objectives of the charity; and ■ It controls a financial asset ($2.4 million) within the scope of AASB 9 Facts scenario 1 ■ Charity B’s charter states its purpose is to provide counselling to victims of violence and emergency accommodation ■ Charity B has an agreement with the grantor that specifies the grant must be spent providing crisis counselling services for a given number of hours per week for the entire year ending 30 June 20X1. Charity B expects to fulfil its promise to provide counselling services. Contract with the grantor is a contract with a customer as defined in AASB 15. Agreement is enforceable and sufficiently specific. The related amount for the $2.4 million is accounted for by Charity B in accordance with AASB 15 on recognition. Dr Cash
$2,400,000 Cr Unearned Revenue
$2,400,000*
* As Charity B provides counselling services, and fulfils its promise, revenue will be recognised © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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Accounting for Government Grants – example Facts scenario 2 ■ This scenario contains an additional fact that Charity B’s agreement with the grantor specified that the grant must be used in accordance with the charity’s overall objectives. The agreement does not specify the service that the grant must be used. ■ The agreement is enforceable as the grantor can enforce its rights in the contract to require Charity B to return the cash if they do not spend the amount in the year ■ The required use of funds is not sufficiently specific to know when goods or services have been transferred ■ Charity B does not have a liability under AASB 9 for the potential breach of contract, as it has the discretion not to spend the grant money before 1 July 20X0. If Charity B breaches the contract by spending the money, the breach is the obligating event giving rise to the liability Contract with the grantor is not a contract with a customer as defined in AASB 15. The related amount for the $2.4 million is accounted for by Charity B in accordance with paragraph 9 pf AASB 10XX. Dr Cash
$2,400,000 Cr Income
$2,400,000
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Key points to remember In the scope of AASB 15 or not? - Arrangement enforceable? - Performance obligations sufficiently specific?
What can you do now? Changes are coming!
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AASB 16: Leases
Why is this important? Most organisations lease assets Under AASB 16, lessees will bring leases on balance sheet New lease definition becomes the new on/off-balance sheet test Changes many financial metrics Your stakeholders will want to understand the impact on your numbers © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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Lessees face major changes Leases on balance sheet Balance sheet
P&L
Asset
Lease expense
= ‘Right-of-use’ of underlying asset
Depreciation + Interest
Liability = Obligation to make lease payments
= Front-loaded total lease expense
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Impact on balance sheet Organisations with operating leases will appear to be more assetrich, but also more heavily indebted Asset
Liability
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Impact on profit / loss Total lease expense will be front-loaded even when cash rentals are constant
Depreciation
Interest
Cash rental payments
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Lease classification test
ON
OFF
NEW STANDARD
Lease
Service
OLD STANDARD
Finance lease
Operating lease
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Contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration (Appendix A)
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Is there an identified asset?
The new definition increases focus on who controls the asset and may change which contracts are leases
Asset can be specified explicitly or implicitly No identified asset if supplier has substantive right to substitute asset • Practical ability (right & availability) • Benefits economically from exercising right to substitute asset Identified asset is physically distinct
No
Contract does not contain a lease
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No Is there an identified asset? Yes No Customer has right to substantially all economic benefits? Primary output and any by-products Benefits from use – not ownership of asset
Contract does not contain a lease © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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No Is there an identified asset? Yes Customer has right to substantially all economic benefits? Yes Who directs how and for what purpose the asset is used?
No
Consider decision making rights that are most relevant to changing how and for what purpose Examples include: type of output, when, where and whether to produce Protective rights of the supplier do not prevent the customer from having right to direct the use Contract does not contain a lease © 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Document Classification: KPMG Confidential
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Who directs how and for what purpose the asset is used? Customer
Predetermined Yes
Customer Operates the asset or Has designed the asset?
Contract contains a lease
Supplier No
Contract does not contain a lease
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Two major optional exemptions make the standard easier to apply
Short term leases ≤ 12 months
Leases of low value items ≤ USD 5,000 for example
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Measuring the lease liability
Lease liability
=
Present value of lease rentals
+
Present value of expected payments at end of lease
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Variable lease payments Which variable lease payments are included in the lease liability?
Payments based on an index or rate
Payments based on turnover or usage
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Lessor accounting Lessor accounting remains similar to current practice…
…but lacks consistency with new lessee accounting model
Lease classification test
Finance leases and operating leases
Consistent accounting model for lessors and lessees
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Is there a sale?
IFRS 16 essentially limits sale-andleaseback as an offbalance sheet financing structure
Yes
On-balance sheet lease at cost
No On-balance sheet financing, potentially at fair value
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Transition New lease definition
New standard
Apply to all contracts
Retrospectively to all accounting periods
OR
OR
Grandfather existing contracts and apply only to new contracts
As a ‘big bang’ at the date of initial application
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Observations from those underway Some contracts have now been caught by the new standard as a lease and in other cases some leases have fallen out Substantial effort in: - Collating all lease contracts - compiling lease data Assessing transition options along with when the leases are renewed Considering impacts on key financial metrics for entity KPIs, employee KPIs and any covenant considerations Internal leases – lessor and lessee accounting is not reciprocal. Additional system and manual processes to address.
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Key points to remember Effective Date: periods beginning on or after 1 January 2019 Grandfathering of existing structures available Completeness of leases will be an audit issue Consider the “front-loaded” P&L effect, and consider whether this can be “managed” System implications KPMG has a Lease Accounting Tool (KLT) that can assist you with implementation
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Other considerations
Other considerations – AASB projects
Exposure Draft 270 requires Not-for-profit (NFP) entities in both public and private sectors to report service performance information annually
Comment letter closed April 2016
Exposure Draft 261 proposes guidance for public sector entities who enter into service concessions
Standard expected to be issued in 2017
Service performance reporting for NFPs
Service concessions: grantor accounting
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AASB 9 Financial Instruments
Overview of AASB 9
Low impact
Legend:
Medium impact High impact
Impact Topic
AASB 9 Financial sector
Recognition and derecognition
AASB 139 model
Classification and measurement
New model
Expected credit losses (Impairment)
New model
Hedge accounting
Amended model
Other corporates
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Any questions?
Thank you
kpmg.com.au
kpmg.com.au/app
© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).
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