19ru-006 the new financial reporting framework is coming · the new financial reporting framework...

The new financial reporting framework is coming Reporting Update 20 June 2019, 19RU-006

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© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Highlights • Applying the IASB’s Conceptual Framework in Australia • How does this impact me when effective? • In more detail…. • Remember disclosure of standards not yet effective

New Conceptual Framework

Only Tier 1 entities impacted

Applying the IASB’s Conceptual Framework in Australia The IASB issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. The AASB proposed a two-phased approach to adopt the RCF in Australia. As part of the AASB’s financial reporting framework project it is considering an entity’s ability to prepare financial statements in accordance with Australian Accounting Standards. The current proposal is to require entities to prepare general (not special) purpose financial statements (GPFS) in accordance with Australian Accounting Standards.

In May 2019 the AASB issued the RCF which effectively implements the first of the two-phased approach. The RCF incorporates the IASB’s meaning of ‘reporting entity’, which differs significantly from the reporting entity concept in current Australian pronouncements.

The RCF applies to annual reporting periods beginning on or after 1 January 2020.

Who is impacted?

The application of the RCF is at present limited to:

• for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards

• other for-profit entities that voluntarily elect to apply the RCF.

So, for-profit entities currently preparing GPFS – Tier 1 as defined in AASB 1053 Application of Tiers of Australian Accounting Standards will continue to do so. Other entities (not preparing GPFS – Tier 1) are not impacted by Phase 1 of the implementation in Australia. Refer to the Appendix for more detail.

The AASB did not intend to force any for-profit public sector entity to adopt the RCF for periods beginning on or after 1 January 2020. The Phase 1 amendments are intended to allow for-profit public sector entities to apply the RCF where they elect to do so.

Having the RCF in place is important so that entities that currently claim compliance with IFRS Standards can continue to do so.

The AASB is continuing to develop the second phase of the financial reporting framework project, which will extend the RCF to additional for-profit private sector entities.

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19RU-006 The new financial reporting framework is coming © 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

30 June 2021

Many elements to financial reporting reform

How does this impact me – when effective?

*- as defined by AASB 1053

If you currently prepare GPFS using Tier 1 – you will now report under the RCF, continuing to claim compliance with IFRS.

Other entities, whether preparing GPFS using Tier 2 or special purpose financial statement (SPFS) will continue to report under the existing Framework.

GPFS Tier 1 and Tier 2 is defined in AASB 1053.

“We support the Phase 1. It is important that entities preparing GPFS using Tier 1 can continue to claim compliance with IFRS in their financial statements.”

Michael Voogt Director, Department of Professional Practice

In more detail… In pursuing financial reporting reform the AASB is concurrently, but separately, undertaking consultation based on discussion papers in the following areas:

• ITC 39 Applying the IASB’s revised conceptual framework and solving the reporting entity and special purpose financial statement problems (May 2018)

• Improving Financial Reporting for Australian Charities (November 2017) • Improving Financial Reporting for Australian Public Sector (June 2018).

To implement the RCF in Australia the AASB has to work through a number of issues including addressing:

• the reporting entity concept clash between the RCF and current Australian requirements

• Australia’s unique SPFS accounting requirements that allow entities to self-assess as ‘non-reporting entities’ and prepare free form SPFS.

The overall project will run between 2-3 years. To date we are just over a third of the way through.

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19RU-006 The new financial reporting framework is coming © 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Further detail, if needed

AASB 108 disclosures

Attached is further discussion around the following topics in relation to for-profit private sector entities:

• AASB projects in implementing financial reporting reform

• For-profit entities – Two-phased approach

• What is the Conceptual Framework?

The attachments are a useful reference point in understanding all of the separate parts that go into implementing the RCF in Australia. As the separate projects progress KPMG will issue further updates and guidance.

Remember disclosure of standards issued but not yet effective

The RCF assists companies in developing accounting policies when no Australian Accounting Standard applies to a particular transaction. In addition it helps stakeholders more broadly to understand the standards better. We expect it to be rare for companies to use the RCF to select their accounting policies in the absence of specific requirements in the Australian Accounting Standards. Where this is the case the RCF may require a change in accounting policy. Companies will need to apply any changes in accounting policies retrospectively.

Examples were a company may use the RCF may include:

• determining whether a transaction with an owner is in their capacity as an owner or a trading partner

• prepayments for future services that do not meet the definition of property, plant and equipment, intangibles or leases.

If your entity does use the current framework to support some accounting policies then those policies will need to be considered in light of the RCF and AASB 2019-1. In accordance with AASB 108 Accounting policies, Changes in Accounting Estimates and Errors paragraph 30 and 31 current financial statements will need to consider the possible impact of the application of the RCF and AASB 2019-1.

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19RU-006 The new financial reporting framework is coming – Appendix © 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Appendix – AASB projects in implementing financial reporting reform To implement the Conceptual Framework for Financial Reporting (RCF) in Australia a number of separate projects are required. The image below highlights the most important changes that are required to transition to the RCF.

Conceptual framework

The IASB issued the RCF in March 2018. In the course of considering applying the RCF in Australia, the AASB identified an inconsistency in the definition of ‘reporting entity’ in the RCF and the widely used and understood Australian ‘reporting entity concept’. This also drew attention to the more emotionally-charged issue of special purpose financial statements (SPFS). The AASB proposed a two-phased approach to address the issues identified in ITC 39 Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems (ITC 39).

For-profit

This project applies to all for-profit private sector entities that have a statutory requirement to prepare financial statements that comply with Australian Accounting Standards. The aim is to develop a consistent, comparable, transparent and enforceable financial reporting framework. Once complete the ability of such entities to prepare SPFS will be removed.

Refer to the following section for further detail on the two-phased AASB implementation approach for for-profit entities.

Not-for-profit

The AASB decided that the proposals in ITC 39 would apply only to for-profit entities after hearing concerns from not-for-profit (NFP) entities, and considering the discussions with the ACNC and other State and Territory regulators regarding recommendations in the ACNC Legislative Review report. As recognition of the more significant impact of removing SPFS for NFP entities, a separate consultation document with targeted proposals for NFP private sector entities will be developed.

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GPFS – Tier 1

In May 2019 the AASB released the RCF and an amending standard AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework requiring for-profit entities preparing general purpose financial statements (GPFS) – Tier 1 financial statements (publicly accountable entities and entities voluntarily reporting compliance with IFRS) to apply the RCF. The standard is effective for financial years beginning on or after 1 January 2020. This ensures Tier 1 entities are able to maintain IFRS compliance.

Refer to the following Appendix for further detail on the two-phased AASB implementation approach for for-profit entities.

GPFS – Tier 2 Disclosures

The AASB decided to develop a separate IFRS for SMEs (Small and Medium-sized Entities) based disclosure standard. This will be a new Tier 2 disclosure standard which will replace the current Reduced Disclosure Requirements framework. The disclosure standard will contain a minimum prescribed set of disclosures. Additional disclosures may also be necessary to provide financial statement users with an understanding of the entity’s financial performance and position.

Entities preparing GPFS – Tier 2 financial statements will need to comply with the full recognition and measurement (R&M) requirements of Australian Accounting Standards.

GPFS – Tier 2 Transition relief

The AASB is proposing to provide relief from restating and presenting comparative information in the year of transition for entities transitioning from SPFS, where they did not comply with full recognition and measurement requirements of Australian Accounting Standards, to preparing GPFS under Tier 2 requirements for the first time.

Proprietary company thresholds

Statutory financial reporting thresholds for proprietary companies for financial years beginning on or after 1 July 2019 have been amended. The amended regulations doubles the thresholds for determining whether a company is a large or small proprietary company for a financial year. A proprietary company is large if it meets two of the three thresholds at the end of its financial year. Otherwise it is small.

New thresholds, based on the financial year, are:

• Consolidated revenue $50 million or more • Consolidated gross assets $25 million or more • Employees of the consolidated entity 100 FTE employees or more

Further details on the above are set out in 19RU-004 Proprietary company threshold: When large becomes small.

Public accountability

If an entity is publicly accountable the Australian accounting framework requires the preparation of GPFS – Tier 1. The AASB identified a separate public accountability sub-project, which will consider whether there should be any changes to who is deemed to have public accountability.

Public accountability is defined by the IASB but needs to be applied in an Australian environment. The AASB’s sub-project will contemplate whether exemptions from the IASB public accountability definition would be in the Australian public interest and whether additional guidance should be included to assist in interpreting the public accountability definition in an Australian context.

https://home.kpmg/au/en/home/insights/2019/04/19ru-004-proprietary-company-threshold-changes.html

https://home.kpmg/au/en/home/insights/2019/04/19ru-004-proprietary-company-threshold-changes.html

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Special purpose financial statements

SPFS continue to be able to be prepared during the implementation of the RCF. The AASB is proposing to require preparers of SPFS to disclose if all R&M requirements of Australian Accounting Standards have been complied with or not in preparing the SPFS. If not all R&M requirements have been complied with then sufficient information needs to be disclosed so users of the SPFS clearly understand the accounting policies.

Entities will also need to disclose whether they have subsidiaries and whether they have prepared consolidated financial statements. Where consolidated financial statements have not been prepared then an entity must disclose why not.

Finally, if an entity has investments in an associate or a joint venture, then disclosure of whether they have been accounted for in a manner consistent with AASB 128 Investments in Associates and Joint Ventures is proposed to be required.

Public sector

The AASB decided that it would pursue financial reporting reform in the public sector via consultation based on the AASB Discussion Paper Improving Financial Reporting for Australian Public Sector, which was issued in June 2018.

Timeline for projects

Project Status

Conceptual Framework RCF issued (May 2019)

F-P Private – Phase 1 AASB 2019-1 issued (May 2019)

F-P private – Phase 2 Exposure Draft expected Q3 of 2019 (application planned for 2021)

F-P public sector AASB still in outreach stage – Discussion Paper (June 2018)

Not-for-profits AASB still in outreach stage – Discussion Paper (May 2017)

Pty company thresholds Corporations Regulations amendments issued (April 2019)

Public accountability Exposure Draft expected Q4 of 2019 (application planned for 2021)

SPFS (R&M) Exposure Draft expected Q3 of 2019

F-P = For-profit

Watch this space for more on each of these separate projects as they develop.

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Appendix – For-profit entities – Two-phased approach Background

The IASB issued the Conceptual Framework for Financial Reporting (RCF) in March 2018. In response, to be consistent with the AASB’s strategy and the Financial Reporting Council’s directive, the RCF needs to be applied in Australia. In the course of considering applying the RCF in Australia, the AASB identified an inconsistency in the definition of ‘reporting entity’ in the RCF and the widely used and understood Australian ‘reporting entity concept’ set out in Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (SAC 1).

This drew attention to the more emotionally-charged issue of special purpose financial statements (SPFS). In response to the above the AASB issued ITC 39 Applying the IASB’s revised conceptual framework and solving the reporting entity and special purpose financial statement problems (ITC 39).

The AASB’s proposals would not impact reporting requirements of trusts and other entities (for example, self-managed superannuation funds) that are not currently required by legislation, deeds of constitution or otherwise to prepare financial statements in accordance with Australian Accounting Standards. They would also not impact the ‘grandfathered proprietary companies’ having lodgement relief under s1408 of the Corporations Act 2001.

Reporting entity issue

The RCF definition of a reporting entity determines a boundary for what economic activities need to be included in general purpose financial statements (GPFS). The SAC 1 definition of reporting entity determines who should prepare GPFS – all other entities can choose to prepare SPFS.

The concern is that the inconsistency between the two definitions could result in misinterpretation, the wrong application of Australian Accounting Standards or non-compliance with IFRS. Special purpose finance statements issue

The dissatisfaction with SPFS has been building for some time as the proposition from which it was developed has diminished over the past 30 odd years. AASB data notes that greater than 60% of companies required to publicly lodge with ASIC lodge SPFS. The AASB would question if this is what was intended when the Australian ‘reporting entity concept’ was developed.

The AASB has also noted its legislative requirements under the ASIC Act require it to facilitate consistency, comparability and transparent financial statements. Arguably this is not best achieved with SPFS.

* an entity required, or chooses, to prepare financial statements* can be a single entity/ portion of an entity/ comprise > 1 entity* not necessarily a legal entity an entity that is required to prepare

general purpose financial statements

IASB – RCF

AASB – SAC 1

Reporting entity definitions

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In making the move on SPFS, the AASB has acknowledged that this is an opportune time to deal with this issue. Australia is the only country permitting entities to self-assess what type of financial statements are required where financial statements are required by a regulator. The AASB sees this as a way to contribute to the current environment of building trust and comparability through transparency.

ITC 39 proposal

ITC 39 released in May 2018 put forward a preferred option for adopting the RCF in Australia – a two-phased approach.

Phase 1

In May 2019 the AASB released the RCF and an amending standard AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework. The pronouncements are effective for financial years beginning on or after 1 January 2020.

The application of the RCF is at present limited to:

• for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards

• other for-profit entities that voluntarily elect to apply the RCF.

Having the RCF in place is important so that entities that currently claim compliance with IFRS Standards can continue to do so.

AASB 2019-1 makes amendments to Australian Accounting Standards, Interpretations and other pronouncements to permit other entities to continue using the Framework for the Preparation and Presentation of Financial Statements adopted by the AASB in 2004 (Framework) and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity to determine whether they are a reporting entity that needs to prepare general purpose financial statements that comply with Australian Accounting Standards.

Some Australian Accounting Standards, Interpretations and other pronouncements contain references to, or quotations from, the Framework. AASB 2019-1 updates some of those references and quotations so that they refer to the RCF, and makes other amendments to clarify which version of the conceptual framework is referred to in particular pronouncements.

If an entity is required to apply the RCF, it cannot identify as a non-reporting entity under SAC 1. The entity will therefore need to prepare GPFS.

Under Phase 1, the AASB 2019-1 consequential amendments to existing standards and interpretations retain the Australian reporting entity concept for all entities not applying the RCF.

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How does this impact me – when effective (30 June 2021)?

*- as defined by AASB 1053 Application of Tiers of Australian Accounting Standards

If you currently prepare GPFS using Tier 1 – you will now report under the RCF, continuing to claim compliance with IFRS.

Other entities, whether preparing GPFS using Tier 2 or special purpose financial statement (SPFS) will continue to report under the existing Framework.

GPFS Tier 1 and Tier 2 is defined in AASB 1053.

Feedback on ITC 39 – Prepare financial statements that comply with Australian Accounting Standards (no legislative requirement)

Respondents to ITC 39 identified some entities that may be affected by the amendments proposed in Phase 1, including trusts that are required by their constitutional document (rather than legislation) to prepare financial statements that comply with Australian Accounting Standards. They do not have any legislative requirement to prepare such financial statements and may be preparing SPFS. This includes securitisation trusts and certain public sector trusts.

The AASB noted that while changing constitutional documents is possible, it can be onerous and if not done correctly can have tax consequences. Many trust deeds may have template wording referring to compliance with Australian Accounting Standards without the trustees or the beneficiaries having considered whether this would need to involve the preparation of general purpose financial statements. Based on feedback, these trusts may provide detailed information to their beneficiaries about their financial performance and position on a regular basis.

It was also observed that entities that do not have any legislative requirement to prepare financial statements and are required only by their constitution or trust deed to comply with Australian Accounting Standards:

• often will not need to confirm compliance with IFRS Standards • have members which in the past have been comfortable with the amount of information

provided in the form of SPFS.

As such the AASB did not consider it appropriate to mandate the preparation of GPFS – Tier 1 for such entities as part of Phase 1.

Consequently, Phase 1 will not extend the requirements for entities to prepare GPFS if they are not currently required by legislation to prepare financial statements. As such the AASB decided to limit

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Phase 1 to for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.

This ensures the reporting requirements of entities with public accountability that do not have a legislative requirement to prepare financial statements will not be affected by Phase 1.

The appropriateness of this limitation will however be reconsidered as part of Phase 2 after further research and outreach. The AASB also confirmed that those for-profit entities wanting to voluntarily comply with Tier 1 and IFRS Standards should be permitted to do so, including for-profit entities in the public sector.

Feedback on ITC 39 – Public accountability (securitisation trusts)

Public accountability is defined in AASB 1053 and is based on an IASB definition contained in the IFRS for SME’s (Small and Medium-sized Entities) guidance. If an entity is publicly accountable the Australian accounting framework requires the preparation of GPFS – Tier 1.

Appendix A of AASB 1053 defined public accountability as a for-profit private sector entity where:

• its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trade in a public market (stock exchange or over-the-counter market), or

• it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesse

While public accountability is defined by the IASB but needs to be applied in an Australian environment. The AASB identified a separate public accountability sub-project, which will consider whether there should be any changes to who is deemed to have public accountability. Exemptions from the IASB public accountability definition may be in the Australian public interest.

During feedback on ITC 39 specific comment was made around securitisation trusts and whether they may be publicly accountable. Securitisation trusts are listed, unquoted special purpose vehicles structured through a trust, established to facilitate the issue of asset-backed securities. Securitisation trusts are themselves unlisted, however they issue debt instruments which are listed on the ASX and/or another securities exchange. They have no legislative requirement to prepare financial statements. Their financial reporting obligations are governed by their trust deed and ASX listing rules, and they may be preparing SPFS if they have determined that they:

• are not public accountable, and • in accordance with SAC 1 that there are no external users dependent on their GPFS.

Securitisation trusts may undertake over-the-counter (i.e. unquoted) transactions, and while the trustee (a third party) is responsible for maintaining the register of investors, investment is often made via custodian entities, making the ultimate holder of asset-backed securities difficult to identify.

Respondents to ITC 39 sought clarification regarding whether securitisation trusts were considered to have public accountability. For the Board to determine whether or not securitisation trusts are publicly accountable would require an interpretation of facts and circumstances.

The AASB noted its decision to limit the scope of Phase 1 to entities required by legislation to prepare financial statements would mean that these trusts would be considered as part of Phase 2.

Phase 2

The AASB decided to develop a separate IFRS for SMEs based disclosure standard. This will be a new Tier 2 disclosure standard which will replace the current Reduced Disclosure Requirements framework. The disclosure standard will contain a minimum prescribed set of disclosures. Additional disclosures may also be necessary to provide financial statement users with an understanding of the entity’s financial performance and position.

Entities preparing GPFS – Tier 2 financial statements will need to comply with the full recognition and measurement (R&M) requirements of Australian Accounting Standards.

The AASB is currently working on an Exposure Draft (ED) for the implementation of Phase 2. At present it is anticipated that the ED will be released in the third quarter of 2019.

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Appendix – What is the Conceptual Framework? Overview

The Conceptual Framework for Financial Reporting (RCF) contributes to the stated mission of the AASB, including developing standards that bring transparency, accountability and efficiency to financial markets in Australia. The AASB’s work serves the public interest by fostering trust, growth and long-term financial stability in the Australian economy.

The RCF describes the objective of, and the concepts for, general purpose financial reporting. The purpose is to:

• assist the AASB to develop Australian Accounting Standards (Standards) that are based on consistent concepts

• assist preparers to develop consistent accounting policies when no Standard applies to a particular transaction or other event, or when a Standard allows a choice of accounting policy

• assist all parties to understand and interpret the standards.

The RCF is not a Standard. Nothing in the RCF overrides any Australian Accounting Standard or any requirement in an Australian Accounting Standard. This is consistent with s227(1) of the Australian Securities and Investments Commission Act 2001.

The RCF applies to periods beginning on or after 1 January 2020. In Australia, earlier application is permitted if at the same time an entity also applies the amendments made by AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework.

When applicable, this RCF supersedes:

• the Framework for the Preparation and Presentation of Financial Statements (July 2004) • Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (August 1990)

except as otherwise required by Australian Accounting Standards.

The RCF also assists companies in developing accounting policies when no Australian Accounting Standard applies to a particular transaction. In addition it helps stakeholders more broadly to understand the standards better. We expect it to be rare for companies to use the RCF to select their accounting policies in the absence of specific requirements in the Australian Accounting Standards. Where this is the case the RCF may require a change in accounting policy. Companies will need to apply any changes in accounting policies retrospectively.

Examples were a company may use the RCF may include:

• determining whether a transaction with an owner is in their capacity as an owner or a trading partner

• prepayments for future services that do not meet the definition of property, plant and equipment, intangibles or leases.

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Purpose of the Conceptual Framework?

The RCF sets out the fundamental concepts of financial reporting that guide the IASB in developing IFRS Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, providing useful information for investors and others.

The RCF sets out:

• the objective of general purpose financial reporting • the qualitative characteristics of useful financial information • a description of the reporting entity and its boundary • definitions of an asset, a liability, equity, income and expenses and guidance supporting these

definitions • criteria for including assets and liabilities in financial statements (recognition) and guidance on

when to remove them (derecognition) • measurement bases and guidance on when to use them • concepts and guidance on presentation and disclosure • concepts relating to capital and capital maintenance.

Why change?

The previous IASB Conceptual Framework was issued in 1989 and partly revised in 2010. It was incomplete and needed improvement – in particular:

• it was identified as a priority by stakeholders as part of the 2011 Agenda Consultation • there were gaps that needed to be filled – for example, guidance on measurement, presentation

and disclosure, including guidance on the use of profit/loss and other comprehensive income • there was a need to update some guidance – for example, the definitions of assets and liabilities • there was a need to clarify some guidance – for example, the role of measurement uncertainty

and the roles of stewardship and prudence in financial reporting.

In revising the Conceptual Framework the IASB has sought a balance between providing high-level concepts and providing enough detail for the Conceptual Framework to be useful to the IASB and others.

A practical tool that assists

Board

to develop Standards

Preparers

to develop consistent accounting policies

All

to understand and interpret Standards

Addresses fundamental issues

What is the objective of financial reporting?

What makes financial information useful?

What are assets, liabilities, equity, income and expenses, when should they be recognised and how should they be measured, presented and

disclosed?

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What’s changed?

New

Measurement Concepts on measurement, including factors to be considered when selecting a measurement basis

Presentation and disclosure

Concepts on presentation and disclosure, including when to classify income and expenses in other comprehensive income

Derecognition Guidance on when assets and liabilities are removed from financial statements

Updated

Definitions Definitions of an asset and a liability Recognition Criteria for including assets and liabilities in financial statements

Clarified

Prudence Stewardship Measurement uncertainty Substance over form

The RCF is more comprehensive than the old one. However, most of the concepts are not new – it codifies the IASB’s thinking adopted in recent standards (for example, IFRS 16 Leases).

The granularity of guidance differs. Some chapters only highlight a list of choices for the IASB to apply when setting Accounting Standards – for example, measurement, and presentation and disclosures. Conversely other chapters provide more direction on how the IASB should make those choices – for example, assets and liabilities. The distinction between liabilities and equity has been removed from the RCF. It will be dealt with as a separate project.

The main changes to the RCF’s principles have implications for how and when assets and liabilities are recognised and derecognised in the financial statements.

Some concepts are entirely new – for example, the practical ability approach to liabilities. It is unclear what challenges the IASB (and preparers) will encounter as new standards are developed.

19RU-006 The new financial reporting framework is coming – Appendix The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). © 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

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Change Impact and challenges

New ‘bundles of rights’ approach to assets

A physical object can be ‘sliced and diced’ from an accounting perspective. For example, in some circumstances a company would book as an asset a right to use an aircraft, rather than an aircraft itself.

The challenge will be determining to what extent an asset can be split into different rights and the impact on recognition and derecognition.

New ‘practical ability’ approach for recognising liabilities

The old recognition thresholds are gone – a liability will be recognised if a company has no practical ability to avoid it. This may bring some liabilities on the balance sheet earlier than at present.

However, if there is uncertainty over existence and measurement or a low probability of outflows, then this may result in no or delayed recognition in some cases.

The challenge will be determining which future actions/costs a company has no ‘practical ability’ to avoid.

New control-based approach to derecognition

A company will take an asset off balance sheet when it loses control over all or part of it – i.e. the focus is no longer on the transfer of risks and rewards.

The challenge will be determining what to do if the company retains some rights after the transfer.

Further details of changes to the RCF may be found in the IASB Project Summary.

https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-and-feedback-statement/conceptual-framework-project-summary.pdf?la=en&hash=654CC1DE384D992926C9DC50FD2AF49C18A489C6

19ru-006 the new financial reporting framework is coming · the new financial reporting framework...

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