Aasb 108 materiality

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Slides by Miranda Dyason

Workshop 3

Financial statement disclosures

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Interpret and apply the requirements of AASB 110 regarding events after the

reporting period.

Interpret and apply the requirements of AASB 108 regarding the selection of

accounting policies, changes in accounting estimates and errors; and

A

B

C

Learning Objectives

1

Explain the disclosures required by AASB 101 and AASB 1054 in the notes to financial

statements;

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▸ Notes enhance the understandability of the other statements.

▸ Each item in the statements is cross-referenced to any related information in the notes.

Notes

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Note disclosures required

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▸ “An entity shall disclose in the summary of significant accounting policies: the measurement basis (or bases) used in preparing the

financial statements; and other accounting policies used that are

relevant to an understanding of the financial statements”.

(AASB 101 paragraph 117)

Disclosure of accounting policies

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What are accounting policies? • Are the principles, bases or rules adopted by a company in preparing and

presenting its financial reports.

• Most accounting policies are contained in the accounting standards, and

cover recognition, measurement and disclosure of financial information.

• For example:

– AASB 102 Inventories requires that ‘inventories shall be measured at the lower of

cost and net realisable value’.

– AASB 116 Property, plant and equipment requires that ‘the depreciable amount of

an asset shall be allocated on a systematic basis over its useful life’.

• Where no accounting standard has been issued, or where the standard

allows a choice of policies, management must choose an accounting policy.

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Review questions:

6

Loftus et al (Chapter 16):

• Comprehension question 10:

Why might a summary of accounting policies be

important to ensuring the understandability of financial

statements to users of general purpose financial

statements?

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Review questions:

7

Loftus et al (Chapter 18):

• Application and analysis exercise 18.1.

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▸ Accounting policies used in the preparation of financial statements are usually disclosed in note 1 or 2.

▸ The note will usually disclose the following information: • Statement of compliance:

1. A statement that the financial statements are general purpose financial statements,

2. The statutory basis or other reporting framework, if any, under which the statements are prepared, and whether the

statements are prepared in accordance with the accounting standards,

3. Whether the entity is for-profit or not-for profit.

• Measurement basis or bases used

• Significant accounting policies

• Judgments made by management in applying the accounting policies

• Information about assumptions made concerning the future, and other major

sources of estimation uncertainty

Disclosure of significant accounting policies

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Example: Notes

9

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Woolworths Group Ltd for the year ended 26 June 2016

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Woolworths Group Ltd for the year ended 26 June 2016

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Woolworths Group Ltd for the year ended 26 June 2016

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Woolworths Group Ltd for the year ended 26 June 2016

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Woolworths Group Ltd for the year ended 26 June 2016

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Review questions:

16

Loftus et al (Chapter 18):

• Application and analysis exercise 18.2.

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▸ “An entity shall disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving

estimations (see paragraph 125 on next slide), that management has

made in the process of applying the entity’s accounting policies and that

have the most significant effect on the amounts recognised in the

financial statements.”

(AASB 101 paragraph 122)

Judgements made

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▸ An entity shall disclose in the notes, key assumptions about the future and other major sources of estimation uncertainty that are material.

(AASB 101 paragraph 125)

▸ Examples include:

• Future interest rates;

• Useful lives of non-current assets.

Sources of estimation uncertainty

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Review questions:

19

Loftus et al (Chapter 16):

• Comprehension question 11:

Provide an example of a judgement made in preparing

the financial statements that can lead to estimation

uncertainty at the end of the reporting period. What

disclosures would be required in the notes?

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Example: Notes

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Woolworths Group Ltd for the year ended 26 June 2016

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▸ Disclosures relating to the entity’s objectives, policies and processes for managing capital: AASB 101 paragraph 134-136

▸ Disclosures relating to puttable financial instruments classified as equity: AASB 101 paragraph 136A

▸ Disclosures relating to dividends: AASB 101 paragraph 137

▸ Disclosures relating to the domicile and legal form of the entity, its principal activities etc: AASB 101 paragraph 138

Other disclosures

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Review questions:

23

Loftus et al (Chapter 18):

• Comprehension question 1:

Summarise the disclosures required by AASB 101

regarding accounting policies.

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AASB 1054 Australian Additional

Disclosures

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▸ “An entity whose financial statements comply with Australian Accounting

Standards shall make an explicit and unreserved statement of such

compliance in the notes. An entity shall not describe financial

statements as complying with Australian Accounting Standards unless

they comply with all the requirements of Australian Accounting

Standards.”

(AASB 1054 paragraph 7)

Compliance with IFRSs and Australian

Accounting Standards

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▸ “An entity shall disclose in the notes:

a) the statutory basis or other reporting framework, if any, under which

the financial statements are prepared; and

b) whether, for the purposes of preparing the financial statements, it is a

for-profit or not-for-profit entity.”

(AASB 1054 paragraph 8)

Reporting framework adopted

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▸ “An entity shall disclose in the notes whether the financial statements are general purpose or special purpose financial statements.”

(AASB 1054 paragraph 9)

General purpose or special purpose

financial statements

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Audit fees

▸ “An entity shall disclose fees to each auditor or reviewer, including any network firm.”

(AASB 1054 paragraph 10-11)

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▸ “When an entity uses the direct method to present its statement of cash flows, the financial statements shall provide a reconciliation of the net

cash flow from operating activities to profit (loss).”

(AASB 1054 paragraph 16)

Reconciliation of net operating cash flow

to profit (loss)

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Imputation credits (or ‘franking credits’)

▸ “An entity shall disclose the amount of imputation credits available for the use in subsequent reporting periods.”

(AASB 1054 paragraph 12-15)

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AASB 108 Accounting policies,

changes in accounting estimates and

errors

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AASB 108

• AASB 108 Accounting Policies, Changes in Accounting Estimates and

Errors is the accounting standard which deals with:

– Setting accounting policies,

– Changing accounting policies,

– Changes in accounting estimates,

– Errors,

– Disclosures associated with the above.

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Selecting and applying accounting policies

• When an Australian Accounting Standard specifically applies to a

transaction, other event or condition, the accounting policy applied to that

item shall be determined by applying the Standard (AASB 108.7-9).

• In the absence of an accounting standard that applies to a transaction,

event or condition, management shall use its judgement in developing and

applying an accounting policy that results in information that is relevant and

reliable (AASB 108.10-12).

• Entities shall select and apply accounting policies consistently for similar

transactions, other events or conditions, unless an accounting standard

requires or permits categorisation of items for which different policies may

be appropriate (AASB 108.13).

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Changes in accounting policies

• An entity can only change an accounting policy if:

– The change is required by an accounting standard; or

– Results in financial statements providing reliable and more relevant

information about the effects of transactions, other events or conditions on

the entity’s financial position, financial performance or cash flows.

(AASB 108.14-27)

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Changes in accounting policies

• How do we apply changes in accounting policies?

– It depends (refer to AASB 108.19-27)...

• If the change in accounting policy is upon the initial application of an

accounting standard – follow the transitional provisions (if any) in the

standard; or

• If the change in accounting policy is voluntary, the change shall be applied

retrospectively where practicable.

• Disclosures that are required when there has been a change in

accounting policy are detailed in AASB 108.28-31.

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▸ When preparing financial reports, many items cannot be measured with precision, but can only be estimated. Eg.

• Bad debts

• Inventory obsolescence

• The useful lives of depreciable assets

• Warranty obligations.

▸ The effect of a change in accounting estimate shall be recognised prospectively (AASB 108.36-37).

▸ Disclosure requirements: AASB 108.39-40.

Changes in accounting estimates

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Review questions:

35

Loftus et al (Chapter 18):

• Comprehension question 2.

Why would an accounting estimate change and

how is the change accounted for?

• Application and analysis exercise 18.5.

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▸ Entities must correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery

by:

• Restating comparative amounts for the period(s) presented in which

the error occurred; or

• If the error occurred before the earliest period presented, restating

the opening balance of assets, liabilities and equity for the earliest

prior period presented.

(AASB 108.42)

▸ Refer to AASB 108.43-48 re limitations on retrospective restatement.

▸ Disclosure requirements: AASB108.49

Errors

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▸ Break up into pairs.

▸ Are the requirements for retrospective application of a change in accounting policy, retrospective restatement for the correction of errors, and prospective application of a change in accounting estimate reasonable and appropriate?

▸ Do you think that retrospective application of a change in accounting in accounting estimate is more appropriate, so that there is more consistency in how these three changes/corrections are accounted for?

Discussion Activity

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Review questions:

38

Loftus et al (Chapter 18):

• Comprehension question 5.

When is it impracticable to make a retrospective

change in accounting policy or a retrospective

restatement to correct an error?

• Application and analysis exercise 18.3 and 18.10.

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How does the concept of materiality fit into

the financial statement preparation

process?

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• The concept of ‘true and fair’ reporting does not mean

absolutely complete and accurate.

• Rather, it implies a notion of ‘reasonableness’.

– A user can expect that reports contain no material errors or

omissions.

Materiality

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• All accounting information is assessed against the concept of

materiality:

– What level of error is acceptable?

– What is the degree of precision required?

– How extensive do the disclosures need to be?

• There is very little guidance in the Conceptual Framework or

accounting standards:

– Professional judgement is required.

Materiality

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• AASB 101 paragraph 7 states that materiality depends on:

“…the size and the nature of the omission or misstatement

judged in the surrounding circumstances”.

• AASB 108 paragraph 5 states that:

“…omissions or misstatements of items are material if they

could, individually or collectively, influence the economic

decisions that users make on the basis of the financial

statements”.

Materiality

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• Materiality assessments require professional judgement:

– what is material for one entity might not be material for

another.

– consider both the size and the nature together.

– although it is possible that an item could be material based

purely on its size or its nature.

Materiality

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Review questions:

44

Loftus et al (Chapter 18):

• Comprehension question 6.

Outline the concept of materiality as it applies to

financial reporting.

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AASB 110 Events after the Reporting

Period

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▸ The objective of AASB 110 is to prescribe:

• when an entity should adjust its financial statements for events after

the reporting period, and

• what disclosures should be made about events after the reporting

period.

▸ “An event after the reporting date is one that occurs after the end of the reporting period but before the date on which the financial statements

are authorised for issue”.

(AASB 110 paragraph 3)

▸ Events are categorised as being either adjusting events or non- adjusting events.

Events after the reporting period

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▸ Adjusting events:

• An event that provides further evidence of conditions that existed at

the end of the reporting period.

• Amounts recognised in financial statements must be adjusted (AASB

110.8).

Events after the reporting period

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▸ Non-adjusting events:

• An event that indicates conditions that arose after the end of the reporting

period.

• Amounts recognised in financial statements are not required to be adjusted

(AASB 110.10).

• Disclosures are required for each material category non-adjusting event after

the reporting period (AASB 110.21). The entity must disclose:

o The nature of the event; and

o An estimate of its financial effect, or a statement that such an estimate cannot be made.

Events after the reporting period

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▸ Break up into pairs.

▸ List some examples of events that would be classified as:

• Adjusting events, and

• Non-adjusting events.

▸ What paragraphs in AASB 110 list examples of each of the above events?

▸ Why do you think that we need to prepare note disclosures for non- adjusting events? Shouldn’t we just account for these events in the next financial statements, since they relate to the next reporting period??

Discussion Activity

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Review questions:

50

Loftus et al (Chapter 18):

• Comprehension question 7.

Explain the difference between adjusting an non-

adjusting events occurring after the end of the reporting

period. Describe the difference in the way such events

impact on the preparation of financial statements.

• Application and analysis exercise 18.7.