QUEENSLAND TREASURY. Financial Reporting Requirements for Queensland Government Agencies

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1 QUEENSLAND TREASURY Financial Reporting Requirements for Queensland Government Agencies For reporting periods beginning on or after 1 July 2015

2 The State of Queensland (Queensland Treasury) 2016 Licence This document is licensed under a Creative Commons Attribution (CC BY 4.0) International licence. Except where otherwise noted you are free to copy, communicate and adapt this work, as long as you attribute the authors. To view a copy of this licence, visit 34TUhttp://creativecommons.org/licenses/by/4.0/ For permissions beyond the scope of this licence, contact 34TUfmbregistrations@treasury.qld.gov.auU34T Attribution To attribute this work, cite the Financial Reporting Requirements for Queensland Government Agencies, The State of Queensland (Queensland Treasury) May References to Australian Accounting Standards have been reproduced with permission from the Australian Accounting Standards Board (AASB) and are not covered by the CC BY licence. Contact the copyright owner AASB directly to request or inquire about reproduction and rights of this material. Translating and interpreting assistance The Queensland Government supports and encourages the dissemination and exchange of information. However, copyright protects this publication. The State of Queensland has no objection to this material being reproduced, made available online or electronically but only if it is recognised as the owner of the copyright and this material remains unaltered Fiscal Strategy Division Issued: May 2016

3 Contents PART FRR 1A Introduction and Prescribed Accounting Standards Introduction Application Legislative Basis of Requirements The Financial Reporting Framework Australian Accounting Standards Board Pronouncements Treasury requirements re Australian Accounting Standards to apply to Reporting (based on standards issued as at April 2016) Treasury requirements re Australian Interpretations to apply to Reporting (based on interpretations issued as at April 2016) Treasury requirements re New and Amended Accounting Standards and Interpretations to apply to Reporting Periods beginning on or after 1 January 2016 (based on standards and interpretations issued as at April 2016) Significant Impacts on and Subsequent Reporting Periods Related Party Disclosures Leases Revenue from Contracts with Customers and Income of Not-for-Profit Entities Financial Instruments Changes in Liabilities arising from Financing Activities PARTS 2 to 6 of the Financial Reporting Requirements for Queensland Government Agencies are available from Queensland Treasury s website at Fiscal Strategy Division 4 Issued: May 2016

4 PART 1 FRR 1A Introduction and Prescribed Accounting Standards 1.1 Introduction These Financial Reporting Requirements for Queensland Government Agencies (FRRs), including the Sunshine Department Model Financial Statements and Future Bay Regional Health Foundation Model Financial Statements, have been issued to assist agencies in the preparation of their annual financial statements and to ensure consistency in presentation across agencies. The FRRs are not intended to duplicate or replace the Australian Accounting Standards Board (AASB) pronouncements, nor requirements of the Financial Accountability Act 2009 and the Financial and Performance Management Standard Therefore it is imperative that agencies comply with all relevant requirements in those documents when preparing their annual financial statements. In instances where additional disclosures or modification of the model financial statements are imposed through an alternative authority, or would enhance transparency, accountability and user relevance, agency statements should be varied to the extent necessary but so as to still comply with the policies identified as mandatory throughout Parts 2-5 of the FRRs. If an agency believes that the requirements inhibit transparency and accountability or represent a departure from Australian Accounting Standards, the matter should be referred to Queensland Treasury s Financial Management Help Desk at 34TUfmhelpdesk@treasury.qld.gov.auU34T. These FRRs consist of six distinct parts including this introductory part (Part 1). Part 2 Basis of Preparation containing mandatory policies and non-mandatory guidance on fundamental presentation matters regarding financial statements as a whole. Part 3 Financial Performance containing mandatory policies and non-mandatory guidance on matters pertaining to the Statement of Comprehensive Income. Part 4 Financial Position - containing mandatory policies and non-mandatory guidance on matters relating to the Statement of Financial Position. Part 5 Other Disclosure Requirements mandatory policies and non-mandatory guidance on topics beyond the scope of Parts 2-4. Part 6A - Provides an example set of financial statements, the Sunshine Department Model Financial Statements, for those agencies that are consolidated into the whole-of-government financial statements. These model statements comply with the FRRs and AASB pronouncements. To assist agencies in the preparation of their annual financial statements, a reference is located in the left hand margin of the Sunshine Department Model Financial Statements to the relevant FRRs, AASB standard or Australian Interpretation as the authority for the accounting or reporting treatment adopted in the model statements. Part 6B - Provides an example set of financial statements, the Future Bay Regional Health Foundation Model Financial Statements, for statutory bodies that elect to adopt the AASB s reduced disclosure requirements (Tier 2), in accordance with FRR 2A.5. These model statements comply with the FRRs and Australian Accounting Standards Reduced Disclosure Requirements. Consistent with the Sunshine Department Model Financial Statements, a reference is located in the left hand margin of the Future Bay Regional Health Foundation Model Financial Statements to the relevant FRRs, AASB standard or Australian Interpretation, as the authority for the accounting or reporting treatment adopted in the model statements. Fiscal Strategy Division 5 Issued: May 2016

5 The suite of documents comprising the FRRs is set out in the following table: PART 1 INTRODUCTION AND PRESCRIBED ACCOUNTING STANDARDS FRR 1A PART 2 FRR 2A FRR 2B FRR 2C FRR 2D FRR 2E FRR 2F FRR 2G FRR 2H FRR 2I PART 3 FRR 3A FRR 3B FRR 3C FRR 3D FRR 3E PART 4 FRR 4A FRR 4B FRR 4C FRR 4D FRR 4E FRR 4F PART 5 FRR 5A FRR 5B FRR 5C FRR 5D PART 6 Introduction and Prescribed Accounting Standards BASIS OF PREPARATION Basis of Financial Statement Preparation Materiality Changes in Accounting Policies and Estimates Form and Content of Financial Statements Controlled and Administered Items, Trust Transactions and Agency Arrangements Machinery-of-Government Changes Consolidated Financial Statements and Controlled Entities Interests in Associates and Joint Arrangements Management Certificate FINANCIAL PERFORMANCE Statement of Comprehensive Income Income Employee Benefit Expenses and Key Management Personnel Remuneration Expenses Distinction between Grants and Procurement Revenue and Expense FINANCIAL POSITION Statement of Financial Position Assets Employee Benefit Liabilities Liabilities Financial Instruments Equity, Contributions by Owners and Distributions to Owners OTHER DISCLOSURE REQUIREMENTS Statement of Cash Flows Related Party Transactions Budgetary Reporting Disclosures Service Concession Arrangements ILLUSTRATIVE MODEL FINANCIAL STATEMENTS FRR 6A Sunshine Department Model Financial Statements (Tier 1) FRR 6B Future Bay Regional Health Foundation (Tier 2) Fiscal Strategy Division 6 Issued: May 2016

6 1.2 Application These FRRs apply to all departments. To the extent relevant, statutory bodies within the Queensland public sector must have regard to the policies identified as mandatory throughout Parts 2-5 i.e. statutory bodies must comply with the contents of the FRRs when they apply to statutory body circumstances. The FRRs do not apply to entities subject to the reporting requirements of the Corporations Act For the purpose of the FRRs, all applicable reporting entities are referred to as agencies Legislative Basis of Requirements The Financial Accountability Act 2009 (FA Act) and its subordinate legislation, the Financial and Performance Management Standard 2009 (FPMS), provide the legislative basis for the requirement for departments and statutory bodies to prepare general purpose financial statements and prescribe the requirements under which these statements are prepared The Financial Reporting Framework The FRR disclosure requirements and model financial statements are based on AASB pronouncements including: the Framework for the Preparation and Presentation of Financial Statements ( The Framework or Conceptual Framework ); SACs; Australian Accounting Standards; and Interpretations. The Sunshine Department Model Financial Statements (Tier 1) and Future Bay Regional Health Foundation Model Financial Statements (Tier 2) are example general purpose financial statements. General purpose financial statements are intended to meet the needs of external users who rely on the information contained in the statements to assess the agency s financial performance, financial position and cash flows. The model statements are based on three key principles: Accountability - The accountable officer/chief executive officer/chairperson of each agency is responsible for the efficient and effective use of the agency s resources. An agency may also undertake trustee duties or duties as an agent for other entities. The financial statements of the agency are intended to fairly and truthfully represent such activities for the financial year. Compliance - Financial statements must comply with relevant legislation, applicable AASBs and other prescribed requirements, and the minimum reporting requirements (included in Parts 2-5) to the extent these apply to departments and statutory bodies. Comparability - Financial statements must provide information that is comparable between the current and previous financial years and on a cross-agency basis. Fiscal Strategy Division 7 Issued: May 2016

7 The Framework The Framework sets out the: objective of general purpose financial reporting; and qualitative characteristics of useful financial information. The various Australian Accounting Standards expand on the conceptual framework set out in the Framework and SAC 1 and addresses key issues on accounting and reporting that agencies must comply with. SAC 1 Definition of the Reporting Entity SAC 1 describes a reporting entity as an entity for which it is reasonable to expect the existence of users dependent on general purpose financial statements for the information which will be useful to them for making and evaluating decisions about the allocation of scarce resources. SAC 1 also states that if an entity qualifies as a reporting entity, it should prepare general purpose financial statements in accordance with the SACs and AASBs. Australian Accounting Standards The AASB implemented the Financial Reporting Council s (FRC) policy of adopting the standards of the International Accounting Standards Board (IASB) for application to reporting periods beginning on or after 1 January The AASB continues to issue sector-neutral standards, that is, like transactions and events should be accounted for and reported in the same manner by all entities, regardless of their for-profit (FP) or not-for-profit (NFP) status. Some accounting standards contain Australian-specific paragraphs, indicated at the start of the paragraph as Aus. These Aus paragraphs provide additional guidance for NFP entities whilst others contain alternative treatment to those in the corresponding IASB standard. If an entity adopts an Aus accounting treatment, the entity will comply with the Australian Accounting Standards, in accordance with paragraph 7 of AASB 1054 Australian Additional Disclosures, but depart from the corresponding IASB standard. As such, the entity will not be able to make an explicit and unreserved statement of compliance with IFRS. A qualified statement of compliance with IFRS is not appropriate. AASB Interpretations The AASB has direct responsibility for developing and approving all Interpretations, including the formation of topicspecific advisory panels with the purpose of making recommendations for consideration by the AASB. All Australian Interpretations have equal authoritative status and must be applied where relevant. Fiscal Strategy Division 8 Issued: May 2016

8 1.3 Australian Accounting Standards Board Pronouncements This section clarifies which Australian Accounting Standards and Interpretations are applicable to the current reporting period, and which new and amended standards and interpretations have future application dates. Where new or amended accounting standards or interpretations contain any provisions likely to require early consideration and preparation/planning by most agencies, early advice of such amendments is also set out. Agencies must comply with the latest prescribed accounting standards issued by the Australian Accounting Standards Board (AASB). Prescribed accounting standards is defined in s.59(6) of the Financial Accountability Act 2009 to include the following documents published by the AASB: Australian Accounting Standards; Statement of Accounting Concepts; Interpretations; and the Framework for the Preparation and Presentation of Financial Statements. This section lists those accounting standards and interpretations that must be complied with by agencies. Note that only limited detail has been provided regarding significant accounting changes. Each agency is expected to review all new/amended accounting standards and interpretations for the full ambit of changes and the consequences for their agency s circumstances Treasury requirements re Australian Accounting Standards to apply to Reporting (based on standards issued as at April 2016) Refer to the AASB website (34TUhttp:// for clarification of the version of these standards applicable to this financial year. No. Standard Title --- Framework for the Preparation and Presentation of Financial Statements AASB 1 First-time Adoption of Australian Accounting Standards AASB 2 Share-based Payment * AASB 3 Business Combinations AASB 4 Insurance Contracts AASB 5 Non-current Assets Held for Sale and Discontinued Operations AASB 6 Exploration for and Evaluation of Mineral Resources * AASB 7 Financial Instruments: Disclosures AASB 8 Operating Segments * AASB 10 Consolidated Financial Statements AASB 11 Joint Arrangements AASB 12 Disclosure of Interests in Other Entities AASB 13 Fair Value Measurement AASB 101 Presentation of Financial Statements AASB 102 Inventories AASB 107 Statement of Cash Flows AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors AASB 110 Events after the Reporting Period Fiscal Strategy Division 9 Issued: May 2016

9 P Financial Reporting Requirements for Queensland Government Agencies No. Standard Title P P AASB 111 Construction Contracts AASB 112 Income Taxes AASB 116 Property, Plant and Equipment AASB 117 Leases AASB 118 Revenue AASB 119 Employee Benefits AASB 120 Accounting for Government Grants and Disclosure of Government Assistance AASB 121 The Effects of Changes in Foreign Exchange Rates AASB 123 Borrowing Costs AASB 124 Related Party Disclosures AASB 127 Separate Financial Statements AASB 128 Investments in Associates and Joint Ventures AASB 129 Financial Reporting in Hyperinflationary Economies * AASB 132 Financial Instruments: Presentation AASB 133 Earnings per Share* AASB 134 Interim Financial Reporting * AASB 136 Impairment of Assets AASB 137 Provisions, Contingent Liabilities and Contingent Assets AASB 138 Intangible Assets AASB 139 Financial Instruments: Recognition and Measurement AASB 140 Investment Property AASB 141 Agriculture AASB 1004 Contributions AASB 1023 General Insurance Contracts AASB 1038 Life Insurance Contracts AASB 1039 Concise Financial Reports * AASB 1048 Interpretation of Standards AASB 1049 Whole of Government and General Government Sector Financial Reporting * AASB 1050 Administered Items AASB 1051 Land Under Roads AASB 1052 Disaggregated Disclosures AASB 1053 Application of Tiers of Australian Accounting Standards AASB 1054 Australian Additional Disclosures AASB 1055 Budgetary Reporting AASB Amendments to Australian Accounting Standards Disclosure Initiative: # Amendments to AASB 101 [AASB 7, AASB 101, AASB 134 & AASB 1049] AASB Amendments to Australian Accounting Standards Fair Value Disclosures of Not-for- # Profit Public Sector Entities [AASB 13] AAS 25 Financial Reporting by Superannuation Plans * Not applicable/relevant to departments or statutory bodies # PAgencies are required to early adopt the amendments in this standard Fiscal Strategy Division 10 Issued: May 2016

10 1.3.2 Treasury requirements re Australian Interpretations to apply to Reporting (based on interpretations issued as at April 2016) Refer to the AASB website (34TUhttp:// for clarification of the version of these interpretations applicable to this financial year. No. Interpretation Title Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities Interpretation 2 Members Shares in Co-operative Entities and Similar Instruments * Interpretation 4 Interpretation 5 Interpretation 6 Interpretation 7 Interpretation 9 Determining whether an Arrangement contains a Lease Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment * Applying the Restatement Approach under AASB 129 Financial Reporting in Hyperinflationary Economies * Reassessment of Embedded Derivatives Interpretation 10 Interim Financial Reporting and Impairment * Interpretation 12 Service Concession Arrangements Interpretation 13 Customer Loyalty Programmes * Interpretation 14 Interpretation 15 Interpretation 16 Interpretation 17 Interpretation 18 AASB 119 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Agreements for the Construction of Real Estate Hedges of a Net Investment in a Foreign Operation Distributions of Non-cash Assets to Owners Transfers of Assets from Customers Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments * Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine * Interpretation 21 Interpretation 107 Interpretation 110 Interpretation 115 Interpretation 125 Interpretation 127 Interpretation 129 Interpretation 131 Interpretation 132 Interpretation 1003 Interpretation 1019 Interpretation 1030 Interpretation 1031 Interpretation 1038 Levies Introduction of the Euro Government Assistance No Specific Relation to Operating Activities Operating Leases Incentives Income Taxes Changes in the Tax Status of an Entity or its Shareholders Evaluating the Substance of Transactions Involving the Legal Form of a Lease Service Concession Arrangements: Disclosures Revenue Barter Transactions Involving Advertising Services Intangible Assets Web Site Costs Australian Petroleum Resource Rent Tax The Superannuation Contributions Surcharge Depreciation of Long-Lived Physical Assets: Condition-Based Depreciation and Related Methods Accounting for the Goods and Services Tax (GST) Contributions by Owners Made to Wholly-Owned Public Sector Entities Fiscal Strategy Division 11 Issued: May 2016

11 No. Interpretation Title Interpretation 1042 Subscriber Acquisition Costs in the Telecommunications Industry * Interpretation 1047 Professional Indemnity Claims Liabilities in Medical Defence Organisations * Interpretation 1052 Tax Consolidation Accounting Interpretation 1055 Accounting for Road Earthworks * Not applicable/relevant to departments or statutory bodies Treasury requirements re New and Amended Accounting Standards and Interpretations to apply to Reporting Periods beginning on or after 1 January 2016 (based on standards and interpretations issued as at April 2016) No. AASB 9 Financial Instruments AASB 14 Regulatory Deferral Accounts AASB 15 Revenue from Contracts with Customers AASB 16 Leases AASB 1056 Superannuation Entities AASB 1057 Application of Australian Accounting Standards AASB Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 16, 19, 107 & 127] Title AASB AASB AASB Amendments to Australian Accounting Standards Amendments to Australian Accounting Standards Accounting for Acquisitions of Interests in Joint Operations [AASB 1 & AASB 11] Amendments to Australian Accounting Standards Clarification of Acceptable Methods of Depreciation and Amortisation [AASB 116 & AASB 138] AASB Amendments to Australian Accounting Standards arising from AASB 15 AASB Amendments to Australian Accounting Standards Agriculture: Bearer Plants [AASB 101, AASB 116, AASB 117, AASB 123, AASB 136, AASB 140 & AASB 141] AASB Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) AASB AASB Amendments to Australian Accounting Standards Equity Method in Separate Financial Statements [AASB 1, AASB 127 & AASB 128] Amendments to Australian Accounting Standards Sale or Contribution of Assets between an Investor and its Associate or Joint Venture [AASB 10 & AASB 128] Fiscal Strategy Division 12 Issued: May 2016

12 No. AASB AASB AASB Title Amendments to Australian Accounting Standards Annual Improvements to Australian Accounting Standards Cycle [AASB 1, AASB 2, AASB 3, AASB 5, AASB 7, AASB 11, AASB 110, AASB 119, AASB 121, AASB 133, AASB 134, AASB 137 & AASB 140) Amendments to Australian Accounting Standards Investment Entities: Applying the Consolidation Exception [AASB 10, AASB 12 & AASB 128] Amendments to Australian Accounting Standards Extending Related Party Disclosures to Not-for-Profit Public Sector Entities [AASB 10, AASB 124 & AASB 1049] AASB Amendments to Australian Accounting Standards Effective Date of AASB 15 AASB AASB AASB AASB Amendments to Australian Accounting Standards Scope and Application Paragraphs [AASB 8, AASB 133 & AASB 1057] Amendments to Australian Accounting Standards Effective Date of Amendments to AASB 10 and AASB 128 Amendments to Australian Accounting Standards Recognition of Deferred Tax Assets for Unrealised Losses [AASB 112] Amendments to Australian Accounting Standards Disclosure Initiative: Amendments to AASB Significant Impacts on and Subsequent Reporting Periods Related Party Disclosures AASB Amendments to Australian Accounting Standards Extending Related Party Disclosures to Not-for- Profit Public Sector Entities will take effect for reporting periods beginning on or after 1 July This amending standard removes the exemption (that not-for-profit public sector entities currently have) from a range of disclosures about remuneration of key management personnel (KMP), transactions with related parties/entities, and relationships with parent and controlled entities. Key Management Personnel Despite the existing KMP disclosure requirements (now in FRR 5B Related Party Transactions), Queensland Treasury has been re-assessing, and liaising with the Queensland Audit Office, regarding how the KMP definition should be applied by agencies with the adoption of AASB 124. This re-assessment has been prompted by the new guidance in AASB 124 and the expected application by other States/Territories and the Australian Government. Treasury is presently contemplating a scenario whereby many agencies would include their portfolio Minister in their KMP as from In respect of most agencies treated as departments, this reflects the responsibilities of Ministers as per the Queensland Cabinet Handbook. Other agencies would need to make their own assessment based on the role of their Minister as per the agency s enabling legislation (where applicable) and other relevant circumstances. This is not expected to change the existing application of the KMP definition by agencies for their KMP disclosures. Fiscal Strategy Division 13 Issued: May 2016

13 If a Minister is considered to be a KMP of an agency, it is not expected that quantitative remuneration disclosures would be included in that agency s KMP disclosures as from All Ministers are likely to be KMP of the Whole-of-Government and General Government Sector, and therefore KMP remuneration disclosures in respect of Ministers would be included in the WoG/GGS statements. Related Party Transactions More significant implications arise from the disclosures required about transactions between the agency and its related parties. The related parties of an agency will potentially encompass a very broad range of individuals and entities including: KMP of the agency - which is likely to include the agency s portfolio Minister(s); KMP of the agency s parent (i.e. Whole-of-Government) who are expected to be all Ministers; and any close family members (as defined by AASB 124) of any person who falls into either of the above two categories. Treasury intends developing a standard declaration form for completion by each KMP to collect necessary information about related party transactions. This standard declaration form will be negotiated by Treasury with QAO, and will include guidance on key concepts to facilitate reliable completion by each KMP. In respect of Ministers, Treasury is aiming to centralise the information collection process. Treasury also hopes to centralise the process of analysing the information collected from Ministers, and negotiating with QAO about the exact disclosures that will be necessary in the relevant agencies financial statements. In respect of all other (agency-specific) KMP, individual agencies will be responsible for the collection of related party information and negotiation with QAO about necessary disclosures. Agencies will therefore need to allocate resources to the ongoing collection and education/liaison with their agency-specific KMP about related party disclosures. Treasury will attempt to establish some broad parameters for agencies about the information to be disclosed. However, agencies will inevitably need to make their own judgements and negotiate with QAO about disclosure of actual transactions with agency-specific KMP. AASB 124 allows aggregated disclosures about related party transactions with government-related entities. Other Comparative information (i.e. relating to ) regarding related party transactions will not be required for the first year of adoption of AASB 124. However, as agencies are already disclosing KMP information by virtue of the FRRs, comparative period KMP remuneration disclosures will continue to be required. Treasury will issue an update to agencies in the coming months regarding the above matters, after agreeing on key aspects with the Queensland Audit Office and briefing high levels in Government of the implications. In particular, Treasury plans to develop, and separately distribute, a suggested narrative disclosure for agencies financial statements about the future implications of AASB 124. This is hoped to be released during June In the meantime, agencies are urged to carefully review AASB 124 and AASB , particularly the Implementation Guidance and the Basis for Conclusions. Agencies should also start briefing key management personnel on the general implications of adoption of this standard. Fiscal Strategy Division 14 Issued: May 2016

14 1.4.2 Leases AASB 16 Leases will become effective for reporting periods beginning on or after 1 January 2019 and will replace AASB 117 Leases, AASB Interpretation 4 Determining whether an Arrangement contains a Lease, AASB Interpretation 115 Operating Leases Incentives and AASB Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. In due course, Queensland Treasury will analyse the detail of AASB 16 to assess the full range of potential implications for agencies, and possible Treasury policies required. AASB 16 allows different approaches to the transition to the new accounting treatments. Queensland Treasury will consider standardising the transitional approach to be adopted by all agencies. In the meantime, agencies should commence reviewing AASB 16 to become familiar with the new requirements. Impacts for Lessees Unlike AASB 117, AASB 16 introduces a single lease accounting model for lessees. Lessees will be required to recognise a right-of-use asset (representing the right to use the underlying leased asset) and a liability (representing the obligation to make future lease payments) for all leases with a term of more than 12 months, unless the underlying assets are of low value. (Closer to the effective date, Treasury will consider developing guidance on applying these latter carve outs from AASB 16). Therefore, the majority of (what are currently classified as) operating leases will be reported on the Statement of Financial Position under AASB 16, potentially resulting in a significant increase in assets and liabilities for agencies. The scale of the increase in assets and liabilities would be somewhat in proportion to the scale of the agency s operating leases. The right-of-use asset will be initially recognised at cost, reflecting the initial amount of the associated lease liability, plus any lease payments made to the lessor at or before the commencement date, less any lease incentive received, the initial estimate of restoration costs and any initial direct costs incurred by the lessee. The right-of-use asset will give rise to depreciation expense. The lease liability will be initially recognised at an amount equal to the present value of the lease payments during the lease term that are not yet paid. Expenses for operating lease payments will no longer be reflected in the Statement of Comprehensive Income. Instead, these payments will be apportioned between a reduction in the lease liability and the implicit finance charge (the effective rate of interest) in the lease. The finance cost will be recognised as an expense. Impacts for Lessors Lessor accounting under AASB 16 remains largely unchanged from AASB 117. For finance leases, the lessor will continue to recognise a receivable equal to the net investment in the lease. Lease receipts from operating leases will continue to be recognised as revenue either on a straight-line basis or another systematic basis where appropriate. Fiscal Strategy Division 15 Issued: May 2016

15 1.4.3 Revenue from Contracts with Customers and Income of Not-for-Profit Entities As amended by AASB Amendments to Australian Accounting Standards Effective Date of AASB 15, AASB 15 Revenue from Contracts with Customers will be effective from reporting periods beginning on or after 1 January 2018 (instead of 1 January 2017). AASB 15 sets out a comprehensive model for accounting for all revenue from contracts with customers (i.e. contracts involving the delivery of goods and/or services). Therefore, AASB 15 will replace the following pronouncements: AASB 111 Construction Contracts; AASB 118 Revenue; Interpretation 13 Customer Loyalty Programmes; Interpretation 15 Agreements for the Construction of Real Estate; Interpretation 18 Transfers of Assets from Customers; Interpretation 131 Revenue Barter Transactions Involving Advertising Services; and Interpretation 1042 Subscriber Acquisition Costs in the Telecommunications Industry. A contract will be outside the scope of AASB 15 if it falls within the scope of other specific standards (e.g. leases, insurance, financial instruments, etc.). AASB 15 introduces a five-step revenue recognition model (identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognise revenue progressively as individual performance obligations are satisfied). The model specifies that revenue should be recognised when an entity transfers control of goods/services to a customer, at the amount to which the entity expects to be entitled. Depending on specific contractual terms, the new model may result in a change in the timing and/or amount of revenue to be recognised. For example, some revenue may be recognised at a point in time (e.g. when control is transferred to the customer) and other revenue may be recognised over the term of the contract (e.g. when the entity satisfies its performance obligations progressively over a period of time). There may be a need to implement new information gathering and/or system processes to enable compliance with the more comprehensive accounting and disclosure requirements. Therefore, agencies are strongly advised to undertake a careful review of AASB 15 to assess how it may apply to them. The AASB issued exposure draft AASB ED 260 Income of Not-for-Profit Entities in April 2015, outlining proposed requirements/guidance to apply the principles of AASB 15 to income from transactions of not-for-profit entities. Subject to the eventual outcomes of that exposure draft, the AASB is expected to incorporate into AASB 15 the finalised Australian Implementation Guidance (similar to the approach taken with AASB 10). Much of the material in AASB 1004 is expected to be replaced by material included in AASB ED 260. Subject to that, the potential impact of AASB 15 on individual agencies will depend on the types of goods/services they provide, and whether/how the various concepts of AASB 15 (e.g. contract, performance obligations, etc.) would apply to existing arrangements. The most likely financial statement impact is the deferred recognition of certain revenue (i.e. recognition as unearned revenue (liability) in the meantime) to the extent that the agency has received cash but not met its associated performance obligation under this arrangement. Fiscal Strategy Division 16 Issued: May 2016

16 If AASB 15 applies to an agency s revenue, there may be a need to implement new information gathering and/or system processes to enable compliance with the more comprehensive accounting and disclosure requirements. Therefore, agencies are strongly advised to undertake a careful review of AASB 15 and ED 260 to assess how they may apply to them Financial Instruments For a number of years, the International Accounting Standards Board has been progressing a project to replace the requirements currently contained in AASB 139. The new requirements have been progressively incorporated into AASB 9 Financial Instruments, and this project is now complete. The current version of AASB 9 will be applicable from reporting periods beginning on or after 1 January 2018 and it supersedes earlier versions of AABS 9 (issued prior to December 2014) AASB 9 now deals with the recognition, classification, measurement and de-recognition of financial assets and financial liabilities, impairment of financial assets, hybrid contracts, and hedging. The following sets out the key issues that will impact on most agencies. Agencies should undertake a comprehensive review of AASB 9 as soon as practicable to determine if there are any other consequences for their own (current or possible future) circumstances. Recognition and Measurement On initial recognition of financial assets or financial liabilities that are UnotU at fair value through profit or loss, AASB 9 will require initial measurement to be at fair value plus Uor minusu transaction costs that are directly attributable to the acquisition of the financial asset or financial liability (AASB 139 only refers to adding transaction costs for such financial instruments). Financial assets and financial liabilities must be initially recognised at fair value. The most significant impact of AASB 9 for financial assets will be that the existing four category approach to measurement after initial recognition will reduce to three categories amortised cost, fair value through other comprehensive income, or fair value through profit or loss. Measurement of a financial asset after initial recognition will be required to be at amortised cost if UbothU the following criteria are met: the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Measurement of a financial asset after initial recognition will be required to be at fair value through other comprehensive income if UbothU the following criteria are met: the asset is held within a business model whose objective is both to hold assets in order to collect contractual cash flows, and to sell those assets; and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Fiscal Strategy Division 17 Issued: May 2016

17 Queensland Treasury s preliminary assessment is that the measurement of cash and cash equivalents and shortterm receivables held by departments and statutory bodies are Unot likelyu to need to change under the new requirements. Debt instruments and investments will need to be measured at amortised cost if they meet both the business model test (i.e. managed with a view to collecting contractual cash flows) and cash flow characteristic test (i.e. agreed contractual cash flows are payments on the principal amount outstanding). Appendix B to AASB 9 contains substantial guidance about the circumstances where the business model and contractual cash flows criteria would and would not be met. Otherwise, in most circumstances, financial assets will need to be measured at fair value with subsequent changes in fair value generally being recognised in the operating result. Despite the new criteria, an agency may, at initial recognition, irrevocably designate a financial asset as at fair value through profit or loss if this would eliminate or significantly reduce a measurement or recognition inconsistency (an accounting mismatch) that would otherwise result from measuring related assets and liabilities, or gains and losses on them, on different bases. Agencies should conduct their own analysis of their financial assets to determine the appropriate classification and measurement requirements under AASB 9. All investments in equity instruments (e.g. shares in subsidiaries/special purpose vehicles) and contracts on those instruments will need to be recognised at fair value. For that purpose, agencies may find it useful to refer to an education paper issued by the International Financial Reporting Standards (IFRS) Foundation, titled IFRS 13 Fair Value Measurement - Unquoted equity instruments within the scope of IFRS 9 Financial Instruments 34TUhttp:// In relation to equity instruments that are not held for trading, AASB 9 allows an agency to make an irrevocable election at the date of initial recognition to present in other comprehensive income subsequent changes in the fair value of that instrument. In due course, Treasury will consider the merits of mandating this accounting treatment. In such circumstances, any dividends on those instruments must be recognised in the operating result (as normal). Reclassification of financial assets will only be possible if an agency changes the business model for those financial assets, which is expected to be very infrequent. Appendix B to AASB 9 contains guidance about the circumstances that would and would not constitute a change in business model that would warrant reclassification of the associated financial assets. Any reclassifications will need to be accounted for prospectively from the reclassification date which is the beginning of the first reporting period after the change in the associated business model becomes effective. AASB 9 sets out the new accounting requirements that apply in those limited situations where a reclassification is appropriate. The measurement requirements for financial liabilities are largely unchanged from those in AASB 139. The only differences are: derivative financial liabilities that are linked to and must be settled by delivering unquoted equity instruments will no longer be able to be measured at cost; and contingent consideration recognised arising from a business combination will need to be measured at fair value, with changes recognised in the operating result. AASB 9 allows an agency to make an irrevocable election at the date of initial recognition to present in other comprehensive income subsequent changes in the fair value of such a liability. Fiscal Strategy Division 18 Issued: May 2016

18 Aside from the new requirements for hybrid contracts, AASB 9 will allow an agency at initial recognition to irrevocably designate a financial liability as at fair value through profit or loss if: this would eliminate or significantly reduce a measurement or recognition inconsistency (an accounting mismatch) that would otherwise result from measuring related assets and liabilities, or gains and losses on them, on different bases; or a group of financial liabilities - or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis in accordance with a documented risk management or investment strategy. To meet this criterion, such performance information about that group would also need to be provided internally to the agency s key management personnel. AASB 9 will not allow reclassification of financial liabilities. The most significant impact of AASB 9 for financial liabilities relates to changes in credit risk for financial liabilities designated as at fair value through profit or loss. In such circumstances: the amount of a change in fair value of the liability that is attributable to changes in the credit risk of that liability generally must be presented in other comprehensive income (refer below); and the remainder of the total change in fair value must be presented in the operating result. However, if an accounting mismatch would be created or enlarged by recognising in other comprehensive income an amount in respect of changes in credit risk, AASB 9 will require all gains and losses on that liability to be recognised in the operating result. In relation to financial liabilities that are loan commitments or financial guarantee contracts, UallU gains and losses must be recognised in the operating result. Appendix B to AASB 9 contains substantial guidance for the fair value measurement of financial instruments. It also contains substantial guidance about the option to designate a financial asset or financial liability as at fair value through profit or loss, and guidance on applying the new requirements for changes in credit risk. On initial application of AASB 9, all existing financial instruments will need to be classified according to the AASB 9 criteria and transitional requirements, based on the facts and circumstances that exist at the date of initial application of that standard (i.e. as at the start of the first reporting period beginning on or after 1 January 2018). Impairment of Financial Assets AASB 9 includes a new expected credit loss model for determining impairment losses for financial assets. This new impairment model will be based on reasonable and supportable forward-looking information. Under the new model, a loss allowance will need to be recognised for all assets. On initial recognition of a financial asset, that loss allowance should reflect the expected credit losses during the following 12 months. If there is a significant increase in credit risk, the impairment amount will need to reflect lifetime expected losses. Appendix B to AASB 9 contains guidance to consider when assessing whether the credit risk on a financial asset has increased significantly since initial recognition. Agencies may assume the credit risk has not increased significantly if the financial asset is determined to have low credit risk at reporting date. A simplified impairment approach is available for receivables without a significant financing component. In those circumstances, the impairment allowance can reflect lifetime expected credit losses. Agencies will need to determine the credit risk at the date that their financial assets were initially recognised, and compare that to the credit risk at the date of initial application of AASB 9, based on reasonable and supportable information that is available at the date of initial application. Fiscal Strategy Division 19 Issued: May 2016

19 Agencies should conduct their own assessment of the application of the new impairment requirements to their circumstances. Agencies may need to implement new internal processes to identify changes in credit risk of their financial assets. Hedging The revised hedge accounting requirements included in AASB 9 reflect a substantial change from the corresponding requirements in AASB 139. The objective of hedge accounting is to represent in the financial statements the effect of an entity s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect the operating result. The revised requirements are more principlesbased rather than rules-based, and focus on an entity s risk management. Chapter 6 of AASB 9 sets out the new principles and requirements for: identifying qualifying instruments and items; how hedging instruments are designated; the revised qualifying criteria for hedge accounting; accounting for hedging relationships; hedges of a net investment in a foreign operation; accounting for the time value of options; hedges of a group of items; and credit exposures. The cost of hedging approach has now been expanded to include accounting for the forward element of forward contracts and foreign currency basis spreads of financial instruments. There is a new objective-based hedge effectiveness assessment and further guidance has been provided for hedges of credit risk using credit derivatives. When an agency first applies AASB 9, it may choose to account for qualifying hedging relationships under AASB 139 by either: treating them as continuing hedges under AASB 9; or discontinuing hedge accounting under AASB 139 and starting hedge accounting under AASB 9. Transitional Arrangements Agencies should carefully review the comprehensive range of transitional requirements included in AASB 9 and AASB Amendments to Australian Accounting Standards arising from AASB 9 (December 2014). AASB outlines the consequential amendments arising from the release of the complete AASB 9. The most significant changes of this amending standard relate to AASB 7. Fiscal Strategy Division 20 Issued: May 2016

20 The required disclosures about financial assets and financial liabilities will change, depending on the measurement and accounting treatment of those assets and liabilities after application of AASB 9. The most significant impacts on disclosures will be in respect of: the credit risk of financial assets (to which the impairment requirements in AASB 9 apply), agency credit risk management practices, quantitative and qualitative information about expected credit losses, and information about an agency s credit risk exposure; investments in equity instruments designated to be measured at fair value through other comprehensive income, and de-recognition of these; reclassifications of financial assets resulting from a change in business model; de-recognition of financial assets measured at amortised cost - an analysis of gains versus losses recognised in the operating result will be required to be disclosed, together with reasons for the derecognition; and changes in the credit risk of financial liabilities designated as at fair value through profit or loss. A number of one-off disclosures will also be needed in the first reporting period in which AASB 9 is applied. Agencies should refer to AASB for all the detailed disclosures required for the initial application of AASB Changes in Liabilities arising from Financing Activities AASB Amendments to Australian Accounting Standards Disclosure Initiative: Amendments to AASB 107 will take effect from reporting periods beginning on or after 1 January This Standard amends AASB 107 Statement of Cash Flows and will require agencies preparing Tier 1 financial statements to disclose information to enable evaluation of changes in liabilities arising from financing activities. This information will include both changes arising from cash flows and non-cash changes. These amendments will not change the recognition or measurement of assets, liabilities, income and expenses, but will result in additional disclosure for the Statement of Cash Flows. The changes in liabilities arising from financing activities will most likely be disclosed by way of a reconciliation between the opening and closing balance of the relevant liabilities. Fiscal Strategy Division 21 Issued: May 2016

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