Financial Policy Division

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Financial Management ForumIFRS Opening Balance
Sheet

• Financial Policy Division
• July 2004

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Structure of presentation

• Introduction
• Overview of transition to IFRS
• Audit expectations
• Balance sheet - key areas of change
• AASB 1047 30 June 2004 disclosures
• Conclusion

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Introduction

• Status
• AASB Standards
• DTF analysis (www.dtf.wa.gov.au/ias2005)
• Focus
• Preparation of opening balance sheet
• Not For Profit (NFP) entities

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Financial Reporting Timelines
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Overview 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
• Treasurers Instruction 1106

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Overview 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

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Audit 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

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Balance sheet - identifying key areas of change

• Summary checklist in handout

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• Opening IFRS Balance Sheet
• Assets

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Property, Plant and Equipment (PPE)

• GAAP IFRS
• PPE PPE
• Intangibles
• Assets Held for Sale
• Investment Property

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Property, 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)

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Property, 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

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Property, 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• Costs of dismantling, removal and restoringto 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• Change in recognition criteria for subsequent
  costs - replacement parts and major inspections
• Refer AASB 116 paragraphs 12 to 14
• Any existing replacement parts or inspections
  that have been expensed would need to be
  recognised and depreciated to 30 June 2004
• Opening balance sheet adjustments
• DR Asset cost
• CR Acc Depreciation depreciation to 30 June
  2004
• CR Acc Surplus (deficit) the difference

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Property, Plant and Equipment

• Derecognition of replacement parts and
  inspections
• Refer AASB 116 paragraphs 12 to 14 and 67 to 72
• Where an agency recognises a replacement part in
  the opening balance sheet, the estimated carrying
  amount of the part being replaced is derecognised
• Opening balance sheet adjustments
• CR Asset cost
• DR Acc Depreciation depreciation to replacement
  date
• DR Acc Surplus (deficit) the difference

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Property, 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• 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

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Property, Plant and Equipment

• 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

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Intangible 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

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Intangible 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

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Intangible 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

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Non-Current Assets Held for Sale

• 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

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Non-Current Assets Held for Sale

• 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)

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Non-Current Assets Held for Sale

• 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

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Non-Current Assets Held for Sale

• Opening balance sheet adjustments continued
• For PPE carried at FV, any revaluations during
  the year would need to be derecognised

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Inventories

• 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)

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• Opening IFRS Balance Sheet
• Liabilities

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Employee 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

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Employee 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)

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Employee 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)

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Provision 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)

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Income 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)

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AASB 1047 Disclosing the Impact 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

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DTF 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

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Contact details

• Website www.dtf.wa.gov.au/ias2005
• John Stanley 9222 9280
• email john.stanley_at_dtf.wa.gov.au
• Phillip Forward 9222 9282
• email phil.forward_at_dtf.wa.gov.au
• Anthony Smith 9222 9368
• email anthony.smith_at_dtf.wa.gov.au

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• Questions ???