ACCOUNTING

NEWSAPRIL 2011

www.bdo.com.au

IN THIS EDITIONP1 Listed entities still struggling to meet

reporting deadlines

P4 Non-conforming financial information

P5 FAQs

P6 Comments sought on exposure drafts

In this edition, we analyse filing statistics for listed entities for the December 2010 reporting season. We are seeing that listed entities are still struggling to meet reporting deadlines. We also look at ASIC’s Consultation Paper on non-conforming financial information and some FAQs.

LISTED ENTITIES STILL STRUGGLING TO MEET REPORTING DEADLINES

AT BDO, WE CONTINUE TO GATHER DATA ABOUT THE IMPACT OF REPORTING DEADLINES ON LISTED ENTITIES.

Filing statistics for the 31 December 2010 reporting season suggest that the tight reporting deadlines continue to put a huge strain on the financial reporting systems of listed Australian entities.

The various ASX lodgement deadlines for 31 December 2010 were:

PERIOD END TYPE OF REPORT DEADLINE

31 December 2010 year ends

Appendix 4E - Preliminary Final Report (all listed entities other than explorers)

28 February 2011

Annual report (all listed entities) 31 March 2011

31 December 2010 half-year ends

Appendix 4D and half-year financial statements (all listed entities other than explorers)

28 February 2011

Half-year financial statements - explorers 16 March 2011

CONTINUED OVER PAGE...

2 ACCOUNTING NEWS

Year endsTable 1 below includes the filing statistics for listed entities with 31 December 2010 year ends.

Table 1

FINANCIAL REPORTS FOR LISTED ENTITIES WITH 31 DECEMBER YEAR ENDS

APPENDIX 4E PRELIMINARY FINAL REPORTS (LISTED ENTITIES OTHER THAN EXPLORERS)

ANNUAL REPORTS

Deadline 28-Feb-11 26-Feb-10 31-Mar-11 31-Mar-10

Total No. of lodgements 138 126 200 181

Total No. of listed entities suspended due to failure to meet lodgement deadline Data not available Data not available 3 4

The day of the deadline

No. of lodgements 53 54 57 50

No. of lodgements as % of total lodgements 38% 43% 28% 28%

The day after the deadline before 10am 3 3 8 6

Week of the deadline 80% 76% 51% 49%

1 week before the deadline 11% 13% 8% 10%

2 weeks before the deadline 4% 5% 8% 6%

3 weeks before the deadline 0% 1% 2% 1%

These statistics continue to show:• A large number of reports are being lodged on the day of the deadline (38% for Appendix 4Es and 28% for annual reports) • Some entities still seem to work through the night and lodge their reports before 10am on the day after the deadline when the markets open, thus

avoiding suspension (3 Appendix 4Es and 8 annual reports)• Approximately 80% of entities lodged their Appendix 4Es, and 51% of entities lodged their annual reports, in the week of the deadline.

Most of the statistics are consistent with the previous year. Given that there have been no significant new Accounting Standards for this period, and more entities seem to lodge during the week of the deadline than before, the question remains whether entities are really struggling to meet the tight reporting deadlines, or whether they are just complacent and leave things to the last minute.

Half-year endsTable 2 below includes the filing statistics for listed entities with 31 December 2010 half-year ends.

Table 2

HALF-YEAR FINANCIAL REPORTS FOR LISTED ENTITIES WITH 31 DECEMBER HALF-YEAR ENDS

LISTED ENTITIES OTHER THAN EXPLORERS

LISTED EXPLORERS

Deadline 28-Feb-11 26-Feb-10 16-Mar-11 16-Mar-10

Total no. of lodgements 906 864 656 594

Total no. of listed entities suspended due to failure to meet lodgement deadline 18 13 2 Data not available

The day of the deadline

No. of lodgements 211 213 176 146

No. of lodgements as % of total lodgements 23% 24% 27% 25%

The day after the deadline before 10am 22 30 10 6

Week of the deadline 63% 63% 65% 70%

1 week before the deadline 21% 23% 12% 13%

2 weeks before the deadline 7% 6% 12% 9%

3 weeks before the deadline 2% 2% 4% 4%

3 ACCOUNTING NEWS

Similar to trends illustrated above for 31 December 2010 year ends, these filing statistics continue to show:• Approximately 25% of all listed entities, both explorers and entities that are not explorers, continue to lodge on the day of the deadline• Despite explorers having an extra 16 days to lodge, and their businesses and financial statements being relatively straight forward, 27% are still only

managing to lodge their half-year financial statements on the day of the deadline• Half-year financial statements lodged with the ASX must be reviewed by the auditor and include the auditor’s review report, whereas the Appendix

4E is generally lodged as being ‘unaudited. Given the two month deadline, a significant number of listed entities work through the night to avoid suspension from the ASX by lodging them before the market opens at 10am on 1 March 2011 (22 in 2011 and 30 in 2010). The number lodging before 10am on the day after the deadline is higher in 2010 at 30 because the deadline was the close of business Friday, 26 February 2010 so many would have worked the weekend to lodge before 10am on Monday, 1 March 2010

• More than 60% of listed entities lodge their Appendix 4D in the week of the deadline and similar trends exist for explorers lodging their half-year financial reports.

Market capitalisationSimilar to the trends we have identified in previous newsletters, the graph below shows annual reports grouped by market capitalisation and illustrates, in particular, the impact of the tight reporting deadlines on smaller listed entities. You can see that most smaller listed entities (below the Top 500) lodge in the week, if not, the last day, of the deadline. Very few smaller listed entities lodge two or three weeks before the deadline.

Figure 1: Annual Report lodgements grouped by market capitalisation

100

90

80

70

60

50

40

30

20

10

0

Tota

l per

cent

ages

(%) o

f log

emen

ts

Lodgement Date

9/02/2

011

16/0

2/2011

23/02/2

011

2/03/2

011

9/03/2

011

16/0

3/2011

23/03/2

011

30/03/2

011

Top 200

200 – 500

<500

SummaryBased on the filing statistics showing very little improvement, despite there being very few new Accounting Standards to apply, we continue to believe that tight reporting deadlines are not good for the market. In particular, we have major concerns on the impact of these deadlines on smaller listed entities, their auditors, and their directors.

The tight reporting deadlines have the following negative impacts:• Clustering of lodgements by smaller listed entities results in them not getting adequate analyst attention and media coverage because analysts

would be hard pressed to review all but a handful of results in detail• Clustering places significant strain on auditors and technical departments of audit firms, increasing the risk of errors in financial statements, as well

as inappropriate/inadequate disclosure• Clustering increases the risk of auditor burn out. Many of the most talented auditors leave the profession after one too many ‘all nighters’ to get

reports lodged on time• Clustering increases governance risk because the process for finalising the annual report is rushed, allowing insufficient time for directors and audit

committees to review them properly prior to release.

Whilst the amendment to section 323D(2A) has resulted in some companies changing their year ends away from 30 June, at this stage this is not significant enough to notice a reduction in the clustering impact and significant number of lodgements made to the ASX in June and December each year. This means that we are yet to see a reduction in stress for auditors and directors during the June and December reporting seasons.

We therefore support the concept of different reporting deadlines for listed entities based on their market capitalisation, similar to that applied in the United States.

4 ACCOUNTING NEWS

NON-CONFORMING FINANCIAL INFORMATIONENTITIES ARE INCREASINGLY INCLUDING FINANCIAL INFORMATION THAT DOES NOT CONFORM TO ACCOUNTING STANDARDS (NON-CONFORMING FINANCIAL INFORMATION), E.G. ALTERNATIVE PROFIT DISCLOSURES, IN PUBLIC DOCUMENTS SUCH AS ANNUAL REPORTS, MARKET ANNOUNCEMENTS AND TRANSACTION DOCUMENTS.

In response, the Australian Securities and Investments Commission (ASIC) have therefore released for public comment, a Consultation Paper and Draft Regulatory Guide, ‘Disclosing financial information other than in accordance with accounting standards’, which provides guidance on when it may, or may not be, appropriate to disclose non-conforming financial information in documents that contain financial information prepared in

accordance with Accounting Standards.

ASIC’s concern is that users of financial information are used to receiving financial information that has been prepared in accordance with Accounting Standards, and that presenting non-conforming financial information in the same documents may mislead users. Some of the proposals included in the Draft Regulatory Guide include:

Financial reports• Alternative profit figures (not prepared in accordance with Accounting Standards) may not be included as an additional table at the foot of the

statement of comprehensive income (hereafter referred to as ‘income statement’) detailing adjustments to arrive at an alternative profit number, nor may they be referred to in a note included as part of the financial statements. It appears that quoting additional subtotals on the income statement, e.g. EBITDA (not in a bold fashion), would still be permitted

• Non-conforming financial information may only be included in the notes to the financial statements in exceptional cases where the information is necessary to give a true and fair view.

Operating and financial review• Non-conforming financial information may be presented in the directors’ report operating and financial review. Section D to the Draft Guide

includes guidelines to reduce the possibility that such information will be misleading.

Reconciliations to other GAAPs• Such reconciliations should be presented as part of the annual report, but not as part of the financial statements. Entities may choose to have this

additional information audited.

Concise financial reports• Non-conforming financial information should also not be included in concise financial reports.

The table below includes examples of non-conforming financial information that is, and is not, permitted:

TYPE OF NON-CONFORMING FINANCIAL INFORMATION

EXAMPLES

Allowed to be included in financial statements

• Segment profit/loss figures which are based on amounts reported internally to management under AASB 8 Operating Segments, rather than the profit/loss determined in accordance with Accounting Standards.

• Alternative EPS amounts permitted by AASB 133 Earnings per Share.

Not allowed to be included in financial statements – likely to contravene Corporations Act

• Including non-conforming financial information in additional columns• Including an additional table at foot of income statement, detailing adjustments to arrive at an alternative, non-conforming,

profit number• Note to the financial statements containing another income statement showing an alternative profit number• Measuring and highlighting an item in the income statement on a basis not permitted by Accounting Standards (e.g.

extraordinary or exceptional items)• Restating the financial statements as if there had been no foreign currency movements since the previous year (constant

currency adjustments).

Other non-conforming financial information that may be included in financial statements

• Information about compliance with regulatory financial condition requirements• Details of breach of lending covenants where the covenant is determined by referring to a non-conforming financial ratio• Explanation of basis for determining director and executive remuneration where based on measures other than statutory profit.

Section D to the Draft Guide includes guidelines for presenting non-conforming financial information where it is permitted outside the financial statements. These include:• Do not present with greater prominence, emphasis or authority• Explain how it has been calculated and why it is necessary to include it

• Reconcile back to statutory numbers provided in the financial statements – itemise and explain each significant adjustment• Adopt a consistent approach from period to period. If there has been a change, explain change in approach, reason for the change, and financial

impact of the change• Ensure comparative non-conforming information has also been adjusted. For example, an unrealised foreign exchange gain in the prior year should

be deducted off statutory profit to arrive at alternative profit if the current year excludes unrealised losses from alternative profit• Alternative amounts should be unbiased. For example, do not exclude ‘bad news’ expenses, such as impairment losses or particular expenses. Both

negative and positive adjustments should be made• Clearly identify as non-conforming financial information• Clearly state whether non-conforming financial information has been audited or reviewed.

5 ACCOUNTING NEWS

Transaction documents (pro forma disclosures)Section E to the Draft Guide includes guidelines for presenting non-conforming financial information in transaction documents, including pro forma information. The basic requirement is that the recognition and measurement requirements of Accounting Standards should be applied. Other guidelines include:• Pro forma statements of comprehensive income should not stop at

EBIT, EBITDA or FFA (funds from operations). Preparers may argue that it is appropriate to stop at EBIT, EBITDA or FFA because the method of funding and required amortisation of assets is not known. ASIC‘s view is that if assumptions can be made about other impacts of the acquisition/merger, then it should be possible to come up with assumptions to complete the profit position.

• Statements of financial position should include the equity section• When a range of prospective financial information is disclosed, more

favourable figures in the range should not be given undue prominence• Include a detailed reconciliation of all statutory numbers to pro forma

numbers• Clearly identify whether pro forma information has been audited or

reviewed• Ratios calculated based on pro forma information should use same

formulas that would be used for ratios calculated based on statutory information

• Disclose all material assumptions underpinning the pro forma information

• Financial information for overseas entities must be translated, at least using a ‘convenience translation’ if actual translation is impractical

• If presenting information for foreign entities that have used overseas GAAP, and that overseas GAAP is significantly different to Australian Accounting Standards, information should be presented using Australian Accounting Standards.

ASIC are seeking feedback on the Consultation Paper by 12 May 2011.

FAQSQuestion One: ABC Australia Pty Limited is an Australian large proprietary company that is 100% owned by UK Company Pty Limited. ABC Australia Pty Limited lodges special purpose financial statements with ASIC. It has a 30 June year end.

In May 2011, ABC Australia Pty Limited acquires 100% of the shares in DEF Australia Pty Limited, a small proprietary company, which has never lodged any financial statements before with ASIC. DEF Australia Pty Limited currently has a 31 December year end.

Is ABC Australia Pty Limited able to use the synchronisation provisions in s323D(3) of the Corporations Act to change the year end of DEF Australia Pty Limited to June?

Answer One:S323D(3) of the Corporations Act requires that an entity that has to prepare consolidated financial statements must do whatever is necessary to ensure that the financial years of the consolidated entities are synchronised with its own financial years. It must achieve this synchronisation by the end of 12 months after the situation that calls for consolidation arises.

S323D(3) only applies where the entity has to prepare consolidated financial statements. Therefore, this section can only be used where the Australian parent entity is preparing general purpose financial statements, i.e. they have to prepare consolidated financial statements.

This means that ABC Australia Pty Limited cannot use s232D(3) to change the year end of DEF Australia Pty Limited to June. S323D(2A) will need to be used, however, the year of change will need to be less than 12 months, rather than a period up to 18 months as permitted by s323D(4). This means that ABC Australia Pty Limited could change the year end of DEF Australia Pty Limited using s323D(2A) from 31 December 2011 to 30 June 2011.

Question Two:ABC Australia Pty Limited is an Australian large proprietary company and has a 30 June year end. In November 2011, Foreign Co Pty Limited acquired 100% of the shares in ABC Australia Pty Limited. Foreign Co Pty Limited has a 31 December year end.

Is Foreign Co Pty Limited able to force ABC Australia Pty Limited to change its year end, and extend the 30 June 2011 year end to 31 December 2011?

Answer Two: As the parent entity is based overseas, s323D(3) synchronisation provisions do not apply in this case.

Class Order 98/96However, Class Order 98/96 “Synchronisation of financial year with foreign parent company” can be used to change ABC Australia Pty Limited’s year end if all the requirements of the Class Order are met.

The requirements of Class Order 98/96 are as follows:1. The foreign company must be required by law in its place of origin to

cause the financial year of the entity to be changed

2. The financial year of the entity is changed in accordance with the requirement in 1 above

3. The period during which the change takes place (relevant financial year) is not longer than 18 months

4. If the relevant financial year will be greater than 12 months, the directors must have formed the opinion, no earlier than 12 months after the beginning of the relevant financial year and no later than 15 months after the beginning of the relevant financial year that there are reasonable grounds to believe that the entity will be able to pay

6 ACCOUNTING NEWS

its debts as and when they become due and payable

5. If the relevant financial year is for a period of less than 12 months, the requirements in s45A to determine whether the company is a large or small proprietary company are based on a 12 months period, not on the shorter period (i.e. entity cannot be deemed small in relevant financial year just because it was shortened).

If all the requirements are met, ABC Australia Pty Limited can change its year end to either 31 December 2011 (6 month period) or 31 December 2012 (18 month period).

It is not necessary to seek ASIC permission to change the year end if all these requirements have been met. The onus is on ABC Australia Pty Limited itself to determine whether it meets the conditions of the Class Order.

S340 applicationIf the conditions are not all met, ABC Australia Pty Limited can make individual application to ASIC to change their year end under s340. However, they would have to demonstrate that to comply with the current year end would impose an unreasonable burden. When preparing such an application, they would need to refer to:

• ASIC Regulatory Guide 43 ‘Financial reports and audit relief’• ASIC Regulatory Guide 51 ‘Applications for relief’.

S323D(2A)As a last resort, if ASIC refuse permission to change year ends under the s340 application, ABC Australia Pty Limited can use s323D(2A) to shorten their 30 June 2012 year end to 31 December 2011, and then have a 31 December year end from then onwards.

S323D(2A) requires that a subsequent financial year may last for a period of less than 12 months determined by the directors if:

(a) The subsequent financial year starts at the end of the previous financial year

(b) There has not been a period during the previous 5 financial years in which there was a financial year of less than 12 months in reliance on this subsection

(c) The change to the subsequent financial year is made in good faith in the best interests of the company, registered scheme or disclosing entity.

However, using s323D(2A) is the last resort because the company would not be able to change its year end again under this subsection within five years.

Question Three:An entity has issued convertible notes for $2 million. The notes convert automatically to ordinary shares upon the company listing on the ASX. If the company fails to list on the ASX, the notes are repayable in cash (if any is left). The conversion terms are that the number of shares the note holder receives is based on a formula being:

No. Shares to be issued = $1/Conversion Price (for each note)Face value of each note is $1.

Conversion price is 50% of the offer price of shares pursuant to the IPO.

There is no equity component on initially accounting for the convertible note as it fails the fixed for fixed test, the number of shares being variable.

Does the note contain an embedded derivative that needs to be fair valued?

Answer Three:We not believe that there is an embedded derivative in this scenario. If the face value of each convertible note is $1, and we have 2 million notes:

a) IPO price is $1.50, it will issue: 2,000,000 x 1 / 0.75= 2,666,666 shares. The shares are worth $4 million (2,666,666 x $1.5)

b) IPO price is 80c, it will issue: 2,000,000 x 1 / 0.40=5,000,000 shares. The shares are worth $4 million (5,000,000 * 80c)

The fact that the number of shares to be issued is linked to the conversion price, does not change the value of the instrument, only the number of shares, and therefore does not meet the definition of a derivative and accordingly does not meet the definition of an embedded derivative.

AASB 139 defines a derivative as a financial instrument or other contract with all three of the following characteristics:

(a) Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’)

(b) It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors

(c)It is settled at a future date.

As the value does not change, characteristic a) is not met.

7 ACCOUNTING NEWS

FOR MORE INFORMATION

NSW/ACT

WAYNE BASFORDTel +61 2 9286 5452 wayne.basford@bdo.com.au

NORTH QUEENSLAND

GREG MITCHELLTel +61 7 4046 0044 greg.mitchell@bdo.com.au

NORTHERN TERRITORY

CASMEL TAZIWATel +61 8 8981 7066 casmel.taziwa@bdo.com.au

QUEENSLAND

TIM KENDALLTel +61 7 3237 5948 timothy.kendall@bdo.com.au

SOUTH AUSTRALIA

PAUL GOSNOLDTel +61 8 8224 5264 paul.gosnold@bdo.com.au

TASMANIA

CRAIG STEPHENSTel +61 3 6324 2499 craig.stephens@bdo.com.au

VICTORIA

MATTHEW HINGELEYTel +61 3 8320 2168 matthew.hingeley@bdo.com.au

WESTERN AUSTRALIA

BRAD MCVEIGHTel +61 8 6382 4670 brad.mcveigh@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) in each State or Territory other than Tasmania.

BDO is the brand name for the BDO network and for each of the BDO member firms.

© 2011 BDO (Australia) Ltd. All rights reserved.

COMMENTS SOUGHT ON EXPOSURE DRAFTSAt BDO, we provide comments locally to the AASB and internationally to the IASB. We welcome any client comments. If you like to provide any comments please contact Wayne Basford.

DOCUMENT PROPOSALSCOMMENTS DUE TO AASB BY

COMMENTS DUE TO IASB BY

ED 209 Offsetting Financial Assets and Financial Liabilities (proposed amendments to AASB 7 and AASB 132, and proposal relating to Tier 2 disclosure requirements)

Proposes that recognised financial assets and financial liabilities be offset in the statement of financial position when:• Entity has an unconditional and legally

enforceable right of set-off• Intends to either settle the asset and liability

on a net basis or to realise the asset and settle the liability simultaneously.

The right of set-off must be legally enforceable in all circumstances, i.e. including default by, or bankruptcy of, a counterparty.

11 April 2011 28 April 2011

ED Tier 2 Supplement to ED 195 Defined Benefit Plans (proposed amendments to AASB 119)

Proposes various disclosure exemptions for the Reduced Disclosure Requirements.

9 May 2011 N/A

ED Tier 2 Supplement to ED 208 Hedge Accounting (proposed amendments to AASB 7)

Proposes various disclosure exemptions for the Reduced Disclosure Requirements.

2 June 2011 N/A

ED 211 Proposed Amendments to AASB 1049

Proposes enhancements to AASB 1049 based on the AASB’s post-implementation review of AASB 1049, and has regard to the experiences, at an operational level, of each jurisdiction applying AASB 1049 to its 2008-2009 or earlier financial years.

6 June 2011 N/A

ED Tier 2 Supplement to ED 210 Financial Instruments: Impairment (proposed amendments to AASB 7)

Proposes various disclosure exemptions for the Reduced Disclosure Requirements.

27 June 2011 N/A