AUDIT & ACCOUNTING BULLETIN Look after the basics

Two recent significant court judgements have implications for financial reporting and auditing. They highlight the importance of making sure basic procedures are performed correctly. Litigation over Centro Properties has been in two parts. In 2011, the Federal Court found directors guilty, without penalty, of breaches of directors duties after ASIC brought actions against them. The Chief Financial Officer and Chief Executive Officer were also found guilty and fined, with the CFO also banned from acting as a company officer for 2 years. In May 2012, class action litigation against the company, officers and auditors was settled for an approximately $200 million sum of damages plus costs. This action alleged the making of statements that were misleading or contained omissions. The legal action followed shareholder losses through a substantial decline in share price. This was said to be associated with lack of disclosed information about the need to refinance major amounts of debt, which became a difficult to achieve in the financial market and lending conditions of late 2007 and 2008. The Federal Court found directors had allowed financial statements to be issued that misclassified one and a half billion dollars of debt as non-current, when it should have been classified as current. They also failed to disclose a subsequent event of entering into guarantees when refinancing debt. Amongst the reasons for finding the directors and officers guilty were two matters of documentary evidence. Section 295A of the Corporations Act requires the CEO and CFO of a listed entity to make a declaration to the directors of their opinion on whether the financial statements comply with accounting standards and present a true and fair view. In the Centro case, the declaration given was copied from one used for the auditors. As it was in the wrong format it did not contain the required declarations.

JULY 2012
The directors were found to have breached their duties by not ensuring the right declaration was used. Further issues arose in respect of disputes over communications between the auditors, management and the directors. The absence of a record in the minutes of advice on the misclassification of debt said to have been provided caused a problem with a I did You didnt contradiction in evidence. Similar issues arise in recent litigation involving James Hardie Limiteds announcement to the market that an asbestos liability fund was fully funded. Directors claims about which documents they saw and what they did or did not approve were tested against the minutes. Their failure to correct the minutes was crucial to what the courts saw as the final position.

Current or non-current liability?

The Centro case referred to above arose from misclassification of debt liabilities. Accounting standard AASB 101 has four conditions which each require an item to be classified as current. The fourth is where an entity does not have the legal right to defer settlement beyond twelve months. This can create issues in relation to financial agreements. Judgement may need to be exercised on the meaning of terms and conditions. It is important that the detail in clauses in agreements be reviewed as a standard part of financial statement preparation. As the agreements may not always be clear, it may be necessary to obtain advice. Common issues include: The meaning of material adverse events which gives the lender the right to immediate repayment; The consequences of facility review clauses; The ability to avoid illegal acts clauses; and Which clauses require the bank to have reasonable grounds and which automatically apply.

Reporting rule changes applicable for 30 June 2012

If you are preparing general purpose financial statements for a financial year ending on 30 June 2012, these rules will apply to you for the first time. The impacts of rules with retrospective application must be presented as if applied in the opening balance sheet of the earliest comparative period shown. The changes are mainly improvements to existing standards. Area Corporations Act Details and title Remuneration report disclosures and non-binding member vote new disclosures about remuneration consultants, including fees and independence. Simplification of disclosure to cover just Key Management Personnel of a consolidated entity, and not require disclosure of the 5 most highly paid executives. Corporations Amendment (Corporate Reporting Reform) Act 2010, No 66 Changes the definition of related parties for clarity and consistency, especially around identifying related parties through control and significant influence. A subsidiary and associate with the same investor are now related.Control is defined to include joint control, so joint venture operations are related parties. Explicitly requires disclosures of commitments involving related parties AASB 124 Related Party Disclosures retrospective application Relocates disclosures required in Australian standards that are not in international accounting standards. Also changes some terminology and requirements so Australian and New Zealand standards are the same. Most requirements are unchanged, but capital and other expenditure commitments may be disclosed in total without showing time bands. Imputation credits must be disclosed separately for each different tax regime. The true and fair override is reinstated, but may still be prohibited by legislation (eg Corporations Act 2001 does not allow it). AASB 1054Australian Additional Disclosures retrospective application Adds disclosure requirements about transfers of financial assets so users understand any risks that may remain with the entity (e.g. securitisations, factoring transactions) AASB 2010-6 Amendments to Australian Accounting Standards Disclosures on Transfers of Financial Assets[AASB 1 & AASB 7] prospective application Fair value to be used where debt extinguished by issue of equity instruments other than in common control transactions or extinguishment was part of original contract Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments retrospective application Early payment of minimum funding to a defined benefits pension scheme may be recognised as an asset Amendment to Interpretation 14 AASB 119 - The Limit ona Defined Benefit Asset, Minimum Funding Requirements and their Interaction retrospective application. Amendments arising from the annual improvements project, including: Presentation of Other Comprehensive Income clarification that the analysis of OCI items may be in statement of changes in equity or in the notes Emphasis added that disclosures of significant events and transactions in interim financial reports should update related information in the previous annual report Customer loyalty schemes clarification that fair value should take into account discounts or incentives made available to non-loyalty scheme customers Financial instrument disclosures an amendment encourages qualitative disclosures in the context of the mandatory quantitative disclosures made Segment reporting requirement added to consider whether a government and entities it is known to control represent a single customer for segment reporting AASB 2010-3 Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 3, AASB 7, AASB 121, AASB 128, AASB 131, AASB 132 & AASB 139] AASB 2010-4 Amendments to Australian Accounting Standards arising from the Annual Improvements Project[AASB 1, AASB 7, AASB 101, AASB 134 and Interpretation 13 AASB 2010-5Amendments to Australian Accounting Standards[AASB 1, 3, 4, 5, 101, 107, 112, 118, 119, 121, 132, 133, 134, 137, 139, 140, 1023 & 1038 and Interpretations 112, 115, 127, 132 & 1042] Mix of prospective and retrospective application

Related party disclosures

Australian additional disclosures

Disclosure of transfers of financial assets Debt for equity swaps

Contributors to Defined Benefit pension schemes Various under improvements to standards

Standards made but not effective

There are some significant changes to accounting standards which become mandatory for periods beginning on or after 1 January 2013. For periods ending 30 June 2012, these standards are part of the group whose expected impacts must be disclosed in the notes to the financial statements if they have not already been adopted. The major changes to be assessed for disclosure are. AASB 10 Consolidated Financial Statements A new definition of control may change the composition of a group. Some entities may need to prepare consolidated financial statements where they previously did not. The definition of control requires more exercise of judgement. For example, the criteria of de facto control means an entity with less than 50% ownership interest may meet the control test because no combination of other owners is likely to be able defeat the largest owners will. Flow on effects include whether an entity is a small or large proprietary company with associated reporting and audit obligations, which is decided based on numbers in consolidated financial statements. AASB 11 Joint arrangements Revised definitions of joint arrangements are matched with possibly different accounting methods. The allowable methods are either equity accounting or direct accounting for a share of the assets, liabilities, revenue and expenses of joint ventures and joint operations. Clarified definitions and much expanded guidance on fair value may lead to changes in the values reported in statements. AASB 13 becomes a central reference point for other standards where fair value is used. Fair value now includes concepts of: highest and best use; and principal or most advantageous markets There are significantly increased disclosure requirements. The corridor method for accounting for defined benefit scheme obligations has been removed. The definition of long-term benefit has been amended , and the automatic classification of wages, annual leave and sick leave as short-term benefits has been removed.

AASB 13 Fair Value Measurement

AASB 119 Employee benefits

The disclosure is not required by entities that have early adopted the Reduced Disclosure Requirements. Standards setting RDR requirements are omitted from this list.

Not-for-profit reforms

entities to recognise how to prioritise their responses. Entities registered with the Australian Taxation Office as charitable organisations are the first affected. A new definition of charity is to be in place by 1 July 2013. If an entity no longer meets the definition of charity it will lose its tax concessional status. This is an issue that may need to be noted in June 2012 financial reports. Charities that undertake unrelated commercial activities, where profits are not applied to the charitable purpose, may also become taxable. Proposals for these reforms have been exposed and are currently under discussion.

The Federal and State Governments are combining in very substantial reform of the regulation and oversight of the not-for-profit sector. This involves changes in taxation status, accountability reporting including financial reporting and audit, and standards of governance. The Federal Government has moved to establish the Australian Charities and Notfor-Profits Commission as a one-stop regulator for not-for-profit entities. The ACNC will operate from 1 October 2012. However, the timing of other reforms will be staggered, and it is important for not-for-profit

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