• Accounting Alert June 2021

Things to remember when preparing 30 June 2021 annual financial statements

After a busy few years implementing the new revenue, financial instruments, and leasing standards, the good news for most preparers is that there are only minor changes to accounting standards to consider for 30 June 2021 reporting.

However, entities that have acquired businesses during the reporting period, may have some work to do, and COVID-19 continues to throw up many accounting issues that also need to be considered. This article summarises some things to remember when preparing 30 June 2021 financial reports.

 

New standards


Tier 1 and Tier 2 For-Profit Entities

The table below highlights new and amending standards that apply to annual reporting periods ending 30 June 2021 for the first time.

While many of these changes are unlikely to have a major impact on the majority of entities, businesses that have acquired other businesses or assets during the period will need to work through the new principles for determining whether you have acquired a ‘business’ under IFRS 3 Business Combinations, or individual assets under applicable Accounting Standards.  Please refer to our accompanying article for more on this amendment to IFRS 3.

 

XRB accounting standards requiring first-time application  Effective date
New Zealand Equivalent to the IASB Conceptual Framework for Financial Reporting (2018 NZ Conceptual Framework) 01 Jan 2020
Updating References to the Conceptual Framework in NZ IFRS 01 Jan 2020
Definition of a Business (Amendments to NZ IFRS 3) 01 Jan 2020
Definition of Material (Amendments to NZ IAS 1 and NZ IAS 8 01 Jan 2020
Definition of Material (Amendments to Conceptual Frameworks 01 Jan 2020
2019 Amendments to XRB A1 Appendix A – When is an Entity a Public Benefit Entity? 01 Jan 2020
2019 Omnibus Amendments to NZ IFRS 01 Jan 2020
Interest Rate Benchmark Reform 01 Jan 2020
Covid-19-Related Rent Concessions 11 Jun 2020
Going Concern Disclosure (Amendments to FRS-44)1 30 Sept 2020
1 Please refer to our February 2021 and August 2020 editions of Accounting Alert for more on going concern disclosures.
 


Tier 1 and Tier 2 Public Benefit Entities

The table below highlights new and amending standards that apply to annual reporting periods ending 30 June 2021 for the first time.

XRB accounting standards requiring first-time application  Effective date
Going Concern Disclosures (Amendments to PBE IPSAS 1)1 30 Sep 2020
2019 Amendments to XRB A1 Appendix A — When is an Entity a Public Benefit Entity? 01 Jan 2020
Uncertainty over Income Tax Treatments (Amendments to PBE IAS 12) 01 Jan 2020
PBE Interest Rate Benchmark Reform 01 Jan 2020
1 Please refer to our February 2021 and August 2020 editions of Accounting Alert for more on going concern disclosures.

New IFRIC agenda decisions - SAAS implementation costs & accounting for supply chain-financing arrangements


Entities should not overlook two important recent agenda decisions by the IFRS Interpretations Committee that could have a material impact on your 30 June 2021 financial statements. These are:

  • Configuration or customisation costs in a cloud computing arrangement (April 2021)
  • Supply chain financing (reverse factoring) arrangements (December 2020).


Configuration or customisation costs in a cloud computing arrangement

Entities using cloud-based software in a Software as a Service (SaaS) arrangement may incur significant costs in relation to configuration and customisation of the supplier’s application software to which they receive access.

SaaS arrangements are usually accounted for as service contracts and not as intangible assets (refer IFRIC agenda decision – March 2019. Even though no intangible asset has been recognised in the balance sheet for the SaaS arrangement, in the past, some companies have nevertheless capitalised configuration and customisation costs relating to these arrangements as ‘intangible assets’.

For 30 June 2021, many companies may need to remove these capitalised costs from their balance sheets (i.e. expense the costs), and retrospective adjustments will be required to prior year comparative information.

These retrospective adjustments are generally treated as a change in accounting policy because the IFRIC decision is merely clarifying the accounting treatment for a transaction that was previously contentious, i.e. it is not accounted for as an error.

Refer to our May 2021 Accounting Alert article for an explanation of the April 2021 IFRIC agenda decision regarding configuration and customisation costs in a SaaS arrangement.


Supply chain financing (reverse factoring) arrangements

This December 2020 IFRIC agenda decision outlines how IFRS standards already provide guidance on the appropriate accounting classification and disclosures for reverse factoring arrangements and considers the following questions:

  • Should the reverse factoring arrangements be classified as trade payables or as borrowings in the balance sheet?
  • How should these arrangements be presented in the cash flow statement?
  • What additional disclosures are required about reverse factoring arrangements?
Refer to our May 2021 Accounting Alert article for more information.  

Rent concessions


Many lessors have granted rent concessions to lessees during this COVID-19 pandemic period, resulting in either the waiver or deferral of lease payments (or both).

Implications for lessees

COVID-19 rent concessions have posed particular problems for lessees accounting for leases under IFRS 16 Leases where it is not clear whether the rent concession is a modification to the original lease contract (i.e., not part of the original terms and conditions of the lease contract).

The IASB therefore amended IFRS 16 by introducing a time-limited practical expedient (IFRS 16, paragraph 46A) so that lessees can assume there is no lease modification, which will save time because revised discount rates will not need to be determined. The original time limit for COVID-19-related rent concessions were those that affected lease rentals prior to 30 June 2021.

However, given extended lockdowns in many countries due to third and fourth waves and expected ongoing rent concessions, this time limited practical expedient has been extended, and will apply to rent concessions affecting lease payments originally due before 30 June 2022 if the original practical expedient had been used in a previous period. If the original practical expedient had not been applied to similar leases in the previous period then the extended practical expedient cannot be used.

The following Accounting Alert articles provide useful information about the accounting for rent concessions, including: 

Topic Title Source Accounting Alert
Eligible criteria for applying the practical expedient IASB provides accounting relief for lessees who receive rent concessions May 2020
NZASB approves accounting relief for lessees who receive rent concessions June 2020
Worked examples of how the practical expedient works for:
  • Waiver of rental payments
  • Deferral of rental payments
 Accounting relief for COVID-19-related rent concessions approved by the NZASB July 2020
Worked examples of how the practical expedient works for:
  • Deferral of rental payments for six months and lease term extended by six months
  • Deferral of rental payments for six months – recouped over remainder of lease with additional interest on deferred payments to compensate for time value of money
 More examples on accounting for COVID-19-related rent concessions by lessees August 2020
IASB extends practical expedient for COVID-19 rent concessions until 30 June 2022 IASB extends practical expedient for COVID-19 rent concessions until 30 June 2022 May 2021


Implications for lessors

COVID-19 rent concessions are also causing headaches for landlords trying to grapple with the appropriate accounting under IFRS 16. The following Accounting Alert articles summarise FAQs to assist in accounting for rent concessions within the context of existing IFRS 16 requirements.

Topic Title Source Accounting Alert
FAQs to assist in accounting for rent concessions Implications of COVID-19 for lessors - Your questions answered August 2020
Amendment to FAQ 1.2 in above article How should lessors account for operating lease straight-line rentals and lease incentive assets after initial recognition? NZASB approves accounting relief for lessees who receive rent concessions February 2021

Climate-related matters


Even though IFRS standards do not refer explicitly to climate-related matters, there is increasing awareness that such issues may have an impact on financial reporting. With this in mind, the IASB recently released educational materials summarising how companies must consider climate-related matters when applying IFRS standards. Businesses should consider the educational materials when preparing 30 June 2021 financial statements because these matters may have a material impact, including when determining values for assets, liabilities and provisions, and well as when making disclosures regarding estimates and judgements.

Please refer to BDO's IFRB 2020/14 for a summary of these materials.

Please contact BDO’s IFRS Advisory team if you require assistance on any of these issues.  

For more on the above, please contact your local BDO Representative.

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation 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 New Zealand to discuss these matters in the context of your particular circumstances.
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