Financial Management Forum IFRS Opening Balance Sheet

Department of Treasury and FinanceGovernment of Western Australia

Financial Policy Division

July 2004

Financial Management ForumFinancial Management ForumIFRS Opening Balance SheetIFRS Opening Balance Sheet


Structure of presentationStructure of presentation

Introduction

Overview of transition to IFRS

Audit expectations

Balance sheet - key areas of change

AASB 1047 – 30 June 2004 disclosures

Conclusion


IntroductionIntroduction Status:

AASB Standards

DTF analysis (www.dtf.wa.gov.au/ias2005)

Focus: Preparation of opening balance sheet

Not For Profit (NFP) entities


Overview of transition to IFRSOverview of transition to IFRS

AASB 1 requirements Opening Balance Sheet consistent IFRS

– Same accounting policies in this and all periods presented in first IFRS financial report

– Retrospective application

Opening adjustments to equity

Treasurer’s Instruction 1106


Overview of transition to IFRSOverview of transition to IFRS AASB 1048 Interpretation and Application of

Standards Applies to annual reporting periods beginning on or after 1

January 2005

‘Service Standard’ listing UIG Abstracts applicable

– to be updated by re-issuing AASB 1048 when new or revised Abstracts are released

UIG Abstracts to be called Interpretations

Applies to opening balance sheet

– adjustments to accumulated surplus (deficit) or, if appropriate, another category of equity


Audit expectationsAudit expectations

Opening balance sheet Significant accounting policies notes

Other notes:

– Supporting information – where further breakdown of line items is appropriate

– Notes to explain material adjustments from30 June closing balance sheet


Balance sheet - identifying key Balance sheet - identifying key areas of changeareas of change Summary checklist in handout


Opening IFRS Balance Sheet –Opening IFRS Balance Sheet –

AssetsAssets


Property, Plant and Equipment Property, Plant and Equipment (PPE)(PPE)

GAAP IFRS

PPE PPE

Intangibles

Assets Held for Sale

Investment Property


Property, Plant and EquipmentProperty, Plant and Equipment AASB 116 Property, Plant and Equipment

AASB 136 Impairment of Assets

AASB 123 Borrowing costs

– allows borrowing costs on qualifying assetsto be expensed or capitalised

TI 954 Revaluation of Non-Current Assets

– land and buildings at fair value by 30 June 2005

TI 1106 Transition to IFRS

– deemed cost not permitted (AASB 1)

– assume asset will be replaced unlessidentified as surplus (AASB 136)


Property, Plant and EquipmentProperty, Plant and Equipment AASB 116 does not change:

Initial recognition at cost (fair value is acquiredat no cost or for nominal cost)

Assets at cost or fair value (FV)

Consistent measurement within class

FV = market value or depreciated replacement cost for specialised assets

Frequency of revaluation - no material variance from FV

Accounting for revaluations

Treatment of depreciation on revaluation - gross or net

Depreciation


Property, Plant and EquipmentProperty, Plant and Equipment

Key changes under AASB 116 that do not impacton the opening balance sheet: Gains and losses on disposal of items of PPE to be

recognised in Income Statement on net basis

Additional note disclosure for revalued assets



Key changes under AASB 116 that impacton the opening balance sheet: Costs of dismantling, removal and restoring

to be recognised in the cost of PPE

Change in recognition criteria for subsequent costs

– replacement parts

– major inspections

Derecognition of replacement parts and inspections

No progressive revaluations


Property, Plant and EquipmentProperty, Plant and Equipment Costs of dismantling, removal and restoring

to be recognised in the cost of PPE

Refer AASB 116 paragraphs 16 (c) and 18, AASB 1Implementation Guidance paragraph IG13, UIG 1 Changes in Existing Decommissioning, Restorative and Similar Liabilities

Present value of obligation recognised as provision under AASB 137

Initial estimate of provision added to cost of the related asset and depreciated over the useful life of the asset

Unwinding of the discount is interest expense

Other changes to the provision added to the cost of the asset

Costs retained for revalued assets - see UIG 1



Costs of dismantling, removal and restoring to be recognised in the cost of PPE

Where an agency has a provision in the opening balance sheet, the following opening balance sheet adjustments are required where an expense was previously recognised when the liability was incurred:

DR Asset present value of the liability at the date the liability was incurred

CR Acc Depreciation depreciation to 30 June 2004

CR Acc Surplus (deficit) the difference


Property, Plant and EquipmentProperty, Plant and Equipment No progressive revaluations

Transitional provisions in AASB 1041 allow a progressive revaluation over the 5 years to 30 June 2005

Consequently, a class of PPE may have assets measured at of cost and assets measured at fair value (FV) at 30 June 2004

No equivalent transitional provisions in AASB 116 - a classmust be all at cost or FV in the opening balance sheet

TI 1106 does not permit deemed cost option



No progressive revaluations

Where a class has assets at cost and FV, all assets in the class must be measured at FV in the opening balance sheet

Revaluation increments and decrements are adjusted against accumulated surplus (deficit) or the asset revaluation reserve

Where a class of assets is measured at cost there is no requirement to revalue to FV – except land and buildings



Land and buildings Land and building at FV by 30 June 2005 (TI 954)

AASB 1 requires consistent accounting policies to be applied during transition (1 July 2004 to 30 June 2006)

Therefore, all land and buildings must be measured at fair value in the opening balance sheet

Valuations provided by the Valuer General are consistent with fair value

TI 954 will be amended to exclude land and buildings subject to AASB 5 – non-current assets held for sale or AASB 102 – inventories from the fair value requirement



AASB 136 Impairment of Assets

Assessment of PPE in opening balance sheet for indications of impairment

Measure recoverable amount where indication of impairment exists

Recoverable amount is the higher of FV less costs tosell and depreciated replacement cost

Write-down to recoverable amount where this is less thanthe carrying amount



AASB 136 continued

For PPE at cost, impairment losses are adjusted against accumulated surplus (deficit),

For PPE at FV, impairment losses are accounted for as revaluation decrements and are adjusted against asset revaluation reserve and/or accumulated surplus (deficit)

Limited impact expected



AASB 136 continued Assets at cost

– depreciated replacement cost would normally exceed depreciated cost

– risks are insufficient depreciation recognised and falling replacement costs

Assets at FV

– for specialised assets FV is depreciated replacement cost (recoverable amount)

– where FV is market value, maximum impairment is selling costs



AASB 136 continued Surplus assets

– recoverable amount is higher of FV less costs tosell and the present value of cash flows expectedto be derived from an asset

– if reclassified as ‘Held for sale’ in accordance withAASB 5, AASB 136 does not apply

Agencies required to assess assets for impairment


Intangible AssetsIntangible Assets AASB 138 Intangible Assets

Identification criteria

– must be separable, or

– arise from contractual or legal rights

Additional recognition requirements for internallygenerated intangible assets

– all research expenditure expensed

– specific rules for development expenditure

– brands, mastheads, publishing titles, customer list and items similar in substance cannot be recognised

– only expenditure incurred from date when the recognition criteria met can be capitalised


Intangible AssetsIntangible Assets AASB 138 continued

Initial recognition at cost

Subsequent measurement at cost or fair value (FV)

Revaluation only permitted where there is an active market to determine FV

Active market

– homogenous items

– willing buyers and sellers at any time

– prices available to the public

Software not integral to the related hardware is an intangible asset


Intangible AssetsIntangible Assets

AASB 138 continued

Opening balance sheet adjustments:

– intangibles assets must be reported on theface of the balance sheet

– software reclassified as intangibles

– derecognise revaluations (no active market)

– derecognise assets that do not meet additional recognition criteria

AASB 136 also applies to intangible assets


Non-Current Assets Held for Non-Current Assets Held for SaleSale AASB 5 Non-Current Assets Held for Sale

and Discontinued Operations New class of asset

Recovery principally through sale

Must be available for immediate sale

Sale must be highly probable

Disclosed on the face of the balance sheet

Assets not depreciated once classified as held for sale

AASB 136 does not apply


Non-Current Assets Held for Non-Current Assets Held for SaleSale AASB 5 continued –

Measurement

– measured at the lower of carrying amount and fair value (FV) less costs to sell

– assets measured at FV must be revalued immediately prior to reclassification

– any initial or subsequent write-down of an asset tofair value less costs to sell must be recognised as an impairment loss

– a gain is recognised for any subsequent increase infair value less costs to sell (only to the extent of impairment losses under this Standard or AASB 136)


Non-Current Assets Held for Non-Current Assets Held for SaleSale

Opening balance sheet adjustments:

Consider item of PPE at cost that would have met the sale criteria at 1 July 2003 (and is unsold at 30 June 2004)

– asset must be reclassified

– derecognise the depreciation for the 12 month period

– where carrying amount at 1 July 2003 is higher than estimated FV less costs to sell, recognise an initial impairment loss

– recognise any gains or other impairment losses for a subsequent write-down to FV less costs to sell or changes in FV less costs to sell


Non-Current Assets Held for Non-Current Assets Held for SaleSale

Opening balance sheet adjustments continued:

For PPE carried at FV, any revaluations during the year would need to be derecognised


InventoriesInventories AASB 102 Inventories

Inventory held for distribution

– new class of assets held for distribution at no or nominal consideration

– lower of cost and current replacement cost

– separate disclosure (notes)

Requirement for opening balance sheet

– identify and reclassify assets from current class to inventory

– remeasure, adjustments to accumulated surplus (deficit)


Opening IFRS Balance Sheet –Opening IFRS Balance Sheet –

LiabilitiesLiabilities


Employee Benefit ObligationsEmployee Benefit Obligations AASB 119 Employee Benefits

• Recognition & measurement

– post-employment benefits such as defined benefit plans

– other long-term employee benefits

• Requirement for opening balance sheet

– Defined benefit superannuation plans

- Departments & Budget-funded statutory authorities

- superannuation liabilities assumed by the Treasurer will not require recognition


Employee Benefit ObligationsEmployee Benefit Obligations AASB 119 continued

– Defined benefit superannuation plans

- Other statutory authorities

- fair value of the proportionate share of the plan assets (if any), less

- present value of the proportionate share of the gross obligation to pay the defined benefits

- discount rate to be used is based on government bonds

- agencies to liaise with GESB and their actuary

- remeasure, adjustments to accumulated surplus (deficit)


Employee Benefit ObligationsEmployee Benefit Obligations AASB 119 continued

– Other long-term employee benefits

- if payable later than 12 months, to be discounted and now include:

- annual leave, sick leave, deferred salary scheme, non-monetary benefits

- discount rate used to calculate PV of long-term employee benefits to be based on government bonds

- remeasure, adjustments to accumulated surplus (deficit)


Provision for Other LiabilitiesProvision for Other Liabilities AASB 137 Provisions, Contingent Liabilities and

Contingent Assets Provision for dividends

– applies to Public Corporations that are required to return a dividend to Government

– AASB 110 ‘Events after the Balance Sheet Date’ clarifies that a provision for dividend liability is not recognised if approved after reporting date

Requirement for opening balance sheet– may need to adjust provision for dividends for those

approved after 30 June 2004

– adjustments to accumulated surplus (deficit)


Income TaxesIncome Taxes AASB 112 Income Taxes

– applies to agencies subject to the ‘income tax equivalent regime’

‘Balance sheet approach’– current and deferred tax liabilities and assets

– “tax base” and “temporary differences”

Requirement for opening balance sheet– current tax liabilities and assets recognised for tax

payable for the current year

– deferred tax assets or liabilities for temporary differences

– remeasure, adjustments to accumulated surplus (deficit)


AASB 1047 Disclosing the AASB 1047 Disclosing the Impact of Adopting IFRSImpact of Adopting IFRS Applies to annual or interim reporting periods

ending on or after 30 June 2004– requires agencies to disclose:

• an explanation of how the transition to Australian equivalents to IFRSs is being managed; and

• a narrative explanation of the key differences in accounting policies that are expected to arise from adopting Australian equivalents to IFRSs

– guidance and example disclosures provided in IFRS package sent to PAOs in June 2004


DTF ActionDTF Action

Complete gap analysis for all new standards – almost final now

Policy position on some individual issues (e.g. treatment options)

Resolve whole-of-government reporting issues – collection of comparatives

Prepare new model financial statements for IFRS


Contact detailsContact detailsWebsite www.dtf.wa.gov.au/ias2005

John Stanley 9222 9280

email: [email protected]

Phillip Forward 9222 9282


Anthony Smith 9222 9368



Questions ???Questions ???

Financial Management Forum IFRS Opening Balance Sheet

Economy & Finance

Transcript of Financial Management Forum IFRS Opening Balance Sheet