Ten things to remember for 31 December 2023 annual and half-year reporting

This article highlights ten things to remember when preparing 31 December 2023 financial statements. Entities should also consider ASIC’s recently announced focus areas  for its surveillance of 31 December 2023 financial reports to address any areas of concern that are not addressed below.

The focus areas are:

  • Impairment of assets
  • Provisions
  • Subsequent events
  • New accounting standard for insurers
  • Disclosures in the Operating and Financial Review.

Accounting in times of uncertainty

Preparers must consider ongoing global economic and political uncertainty that could affect the measurement of items in their 31 December 2023 financial statements. Has the Russia-Ukraine and Israel-Gaza conflicts had a direct impact on your business? How do persistent increases in energy prices, interest rates and inflation, exchange rate volatility, and supply shortages, affect the measurement of your transactions and balances? Our publication on accounting in times of uncertainty contains more information about areas to watch out for when preparing your December 2023 financial statements.

Impact of recent interest rate increases

As interest rates in Australia continue to rise, so too will discount rates used to measure certain assets and liabilities. Increasing discount rates affect:

  • Impairment of assets (IAS 36 Impairment of Assets)
  • Fair value of financial assets and financial liabilities (IFRS 7 Financial Instruments: Disclosures and IFRS 9 Financial Instruments)
  • Fair value of investment property (IAS 40 Investment Property)
  • Fair value of biological assets (IAS 41 Agriculture)
  • Leases (IFRS 16 Leases)
  • Long service leave and other long-term benefits liability (IAS 19 Employee Benefits)
  • Defined benefit superannuation obligations (IAS 19 Employee Benefits)
  • Fair value of options issued (IFRS 2 Share-based Payment)
  • Appropriate measurement of provisions, including restoration provisions (IAS 16 Property, Plant and Equipment and IAS 37 Provisions, Contingent Liabilities and Contingent Assets).

Please refer to our article for more information.

Impairment testing where a cash-generating unit (CGU) contains right-of-use (ROU) assets

Many entities continue to perform impairment testing on CGUs that contain ROU assets using the old ‘IAS 17’ method. The new leases standard, IFRS 16 Leases has been effective for four years, and entities using the ‘IAS 17’ method should adapt impairment testing models as shown in the table below.

 

Correct method (IFRS 16)

Incorrect method (IAS 17)

Carrying amount

ROU assets included in the carrying amount of CGU assets

ROU assets and liabilities are not included as part of the carrying amount of CGU

Cash flows

  • Don’t deduct lease payments included in lease liabilities as cash outflows because they are financing cash flows
  • Deduct lease payments not included in lease liabilities (variable lease payments, short-term and low-value leases)
  • Deduct estimated lease payments after conclusion of leases (cost to replace ROU assets)

Cash flows assume lease payments are an operating expense and deducted from CGU cash flows

Discount rate

The lease liability is a financing liability – the discount rate should include the impact of additional gearing (expected to be lower than discount rate under IAS 17 because leases are secured borrowings)

No adjustment to the discount rate

Our previous article and publication contain examples to illustrate appropriate impairment testing methodology for CGUs with ROU assets.

The move to a more sustainable world is gaining momentum. The Australian Government has committed to reducing Australia’s greenhouse gas emissions by 43% below 2005 levels by 2030 and achieving net zero emissions by 2050. In light of these developments, preparers need to consider the implications of climate-related matters when preparing 31 December 2023 financial statements. IASB educational materials summarise how companies must consider climate-related issues when applying IFRS. This includes when determining values for assets, liabilities, and provisions, and making disclosures regarding estimates and judgements.

Please refer to our publication for a summary of these educational materials. ESMA’s ‘Heat is On’ Report also provides real-life, practical examples to illustrate how entities can improve their climate-related disclosures for areas where climate matters are likely to have the greatest impact. Our article contains more information on this. More resources on sustainability matters are available on our sustainability reporting web page.

The main changes in Accounting Standards for 31 December 2023 financial statement preparers impact insurers, and non-insurers that issue insurance contracts. All entities must ensure they comply with the new rules regarding disclosing material accounting policy information, and accounting for deferred tax related to assets and liabilities in a single transaction – this mainly affects leases and restoration provisions. Lastly, country-by-country reporting entities also need to take note of mandatory exemptions for deferred tax relating to Pillar Two income taxes and additional disclosures.

For 31 December 2023 annual financial statements, all entities will need to undertake an exercise to streamline their accounting policies. In particular, accounting policies should be deleted for:

  • Non-existent transactions or balances
  • Immaterial transactions and balances
  • Matters that merely duplicate or summarise the requirements of Accounting Standards and do not involve the exercise of judgement (i.e. remove boilerplate policies). An example would be removing accounting policy information that explains how increases or decreases in the carrying amount of property , plant and equipment measured at revalued amounts are accounted for.

We also recommend moving remaining material accounting policy information to the relevant financial statement note.

Our previous article will help you through the process of cleaning up your accounting policies.

A summary of new standards applying for the first time to 31 December 2023 annual and half-year periods is outlined in the table below. Please refer to the resources listed for more information or contact our IFRS & Corporate Reporting team for assistance.

Standard number

Topic

Applies to periods 

Annual periods

Half-year periods

Resources

AASB 17, AASB 2022-1, AASB 2022-8

Insurance contracts

Beginning on or after 1 January 2023

✔

✔

Website

AASB 2021-2 (amendments to AASB 101)

Disclosure of accounting policies and definition of accounting estimates

Beginning on or after 1 January 2023

✔

✔

Expect to see a reduction in the amount of accounting policy disclosures

IASB clarifies how to distinguish between a change in accounting policy and a change in accounting estimate

AASB 2021-5  (amendments to AASB 112)

Deferred tax related to assets and liabilities arising from a single transaction

Beginning on or after 1 January 2023

✔

✔

IASB clarifies accounting for deferred taxes relating to assets and liabilities arising from a single transaction (leases and decommissioning obligations)

How do lessees account for deferred taxes on leases when they have made advance lease payments and incurred initial direct costs?

AASB 2021-6 (amendments to AASB 1060) 

Disclosure of accounting policies (Tier 2)

Beginning on or after 1 January 2023

✔

N/A

Expect to see a reduction in the amount of accounting policy disclosures

AASB 2023-2
(amendments to AASB 112)

Pillar Two Model Rules

Beginning on or after 1 January 2023 that end on or after 30 June 2023

✔ 

✔ 

Pillar two disclosures in 30 June interim and annual financial statements
Note: Finland has published legislation which is not yet in force at time of writing. Check date of substantive enactment if your group has operations in Finland.

AASB 2023-4
(amendments to AASB 1060)

Pillar Two Model Rules (Tier 2)

Beginning on or after 1 January 2023 that end on or after 30 September 2023

✔ 

N/A

Simplified Disclosure introduced about International Tax Reform – Pillar Two Model Rules

N/A because there are no half-year reporting obligations for entities preparing Tier 2 (Simplified Disclosures) financial statements.

Please ensure you have considered the impact of these standards in your 31 December 2023 annual and half-year financial statements.

Standards issued but not yet effective

Entities preparing Tier 1 general purpose financial statements must disclose the anticipated effect of new standards issued, which are not effective at the reporting date (refer to IAS 8, paragraph 30). These include:

Standard number

Topic

Applies to periods beginning

Resources

All entities 

AASB 2020-1, AASB 2022-6, AASB 2023-3 (amendments to AASB 101)

Classification of liabilities as current or non-current

1 January 2024

New rules for classifying liabilities from 1 January 2024 
Refer to 'Changes to classification requirements for liabilities under IAS 1' for more information.

AASB 2022-5 (amendments to AASB 16)

Lease liability in a sale and leaseback

1 January 2024

Lease liabilities for sale and leaseback transactions to include variable lease payments that do not depend on an index or rate

AASB 2023-1 (amendments to AASB 107 & AASB 7) 

Supplier finance arrangements

1 January 2024

IASB approves changes to the accounting for supplier finance arrangements

How to account for reverse factoring/supply chain financing arrangements

AASB 2023-5 (amendments to AASB 121) 

Lack of exchangeability

1 January 2025

How to determine the exchange rate when a currency is not exchangeable into another currency

Public sector entities only 

AASB 2022-10 (amendments to AASB 13) 

Fair value measurement of non-financial assets of not-for-profit public sector entities

1 January 2024

AASB issues long-awaited fair value measurement guidance for not-for-profit public sector entities

AASB 2022-9 (amendments to AASB 17 & AASB 1050) 

Insurance contracts in the public sector

1 July 2026

- 

Disclosure is not required if the anticipated effect is not material, or the change relates to transactions and balances which the entity does not have.

IFRS Interpretations Committee (IFRIC) agenda decisions are those issues the Committee decided not to take onto its agenda. Although not authoritative guidance, these decisions are regarded as being highly persuasive in practice. All entities reporting under IFRS should be aware of these decisions, as they could impact how particular transactions and balances are accounted for. While agenda decisions have no start date, they are expected to be applied as soon as possible, usually by the next reporting date. Agenda decisions merely clarify existing accounting principles. Therefore, any adjustments required are generally treated as a voluntary change in accounting policy (with retrospective restatement), rather than an error.

Over the past twelve months, the IFRIC has issued the following agenda decisions:

  • Guarantee over a derivative contract – IFRS 9 Financial Instruments (October 2023)
  • Homes and home loans provided to employees (October 2023)
  • Premiums receivable from an intermediary (IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments) (October 2023)
  • Substitution rights in a lease (April 2023).

You can find more information about these agenda decisions in our two previous articles:

Listed entities need to be mindful of the ASX’s strict approach for enforcing lodgement deadlines. From 1 January 2023, listed entities will automatically be suspended from trading if they fail to lodge their reports on time. This includes entities that lodge reports after the market announcement office closes on the day the report is due, but before trading commences the next day. The market announcements office hours are 8:30am to 7:30pm Sydney time (8:30pm during daylight saving) on ASX trading days. Please read our previous article for more information.

We also remind oil and gas entities that revised Listing Rule 5 Additional reporting on mining and oil and gas production and exploration activities applies to your 31 December 2023 annual report. Disclosures about new and updated reserves made after 1 July 2022 must comply with the revised Listing Rule 5 and Guidance Note 32 Reporting on Oil & Gas Activities.

For years ending 30 June 2022 onwards, AFS licensees must prepare and lodge GPFS with ASIC to meet their reporting obligations under both Chapter 2M and Chapter 7 of the Corporations Act 2001.

Chapter 2M reporting

For Chapter 2M reporting purposes, AFS licensees must either lodge:

  • Tier 1 GPFS if the entity has ‘public accountability’ according to the definition in AASB 1053 Application of Tiers of Accounting Standards or
  • Tier 2 (Simplified Disclosures).

Chapter 7 reporting

For Chapter 7 reporting, in June 2022, ASIC deemed certain AFS licensees to have ‘public accountability’ under the certification section of Form FS 70. These entities must prepare Tier 1 GPFS, even though they do not have ‘public accountability’ under AASB 1053 and would ordinarily have prepared Tier 2 (Simplified Disclosures) GPFS.

Form FS 70 provides transitional relief for this additional reporting burden over two years, provided the licensee:

  • Was not a reporting entity and prepared special purpose financial statements (SPFS) for 31 December 2021
  • Does not have ‘publicly accountability’ according to the definition in AASB 1053.

The diagram below shows how entities applying the transitional relief and reporting only under Chapter 7, will prepare Tier 1 GPFS for 31 December 2023, but present SPFS comparatives for the year ended 31 December 2022.

Chapter 7 reporting transitional relief 

Entities applying the transitional relief but reporting under both Chapter 7 and Chapter 2M will prepare Tier 1 GPFS for 31 December 2023, but present Tier 2 comparatives for the year ended 31 December 2022. This is illustrated below.

Changes to classification requirements for liabilities under IAS 1 

You can find a more in-depth discussion on AFS licensee reporting requirements in our previous article.

Large grandfathered proprietary companies with financial years ending on or after 10 August 2022 are no longer exempt from lodging their audited financial statements with ASIC. We remind these entities that you are required to lodge your 31 December 2023 financial statements with ASIC.

The financial statements must be general-purpose financial statements prepared using, as a minimum, Tier 2 Simplified Disclosures. The financial statements must be audited and lodged with ASIC within four months of year-end (i.e. by 30 April 2024).

Please refer to our previous article for more information.

Australia has experienced low inflation levels for decades, and many entities may need to be aware of special accounting requirements when an entity operates in countries whose economy and functional currency are considered hyperinflationary.

Why does hyperinflation matter for your financial statements?

When an entity’s functional currency is ‘hyperinflationary’, IAS 29 Financial reporting in hyperinflationary economies requires the financial statements (including any comparative periods) to be stated in terms of the measuring unit current at the end of the applicable reporting period. This is because the currency of a hyperinflationary economy loses a significant amount of purchasing power from period to period, such that presenting financial information based on historical amounts, even if only a few months old, does not provide relevant information to users of financial statements.

Economies which were hyperinflationary at 31 December 2022

Economies which have become hyperinflationary during 2023

Watchlist for the future

  1. Argentina
  2. Ethiopia
  3. Iran
  4. Lebanon
  5. South Sudan1
  6. Sudan
  7. Suriname
  8. Turkey
  9. Venezuela
  10. Yemen
  11. Zimbabwe
  1. Ghana2
  2. Haiti3
  3. Sierra Leone2

 

  1. Angola
  2. Lao People’s Democratic Republic
  3. Liberia
  4. Malawi
  5. Pakistan
  6. Sri Lanka4
  7. Syria

1 South Sudan is no longer hyperinflationary by 31 December 2023
2 Ghana and Sierra Leone are considered hyperinflationary at 31 December 2023 and beyond
3 Haiti is considered hyperinflationary at 30 June 2023 and beyond
4 Sri Lanka is not currently hyperinflationary but its status should continue to be monitored 

Although these changes only become effective for the 31 December 2024 financial year, you must restate your opening balance sheet on 1 January 2024. IAS 8, paragraph 30 requires disclosure of the effect of accounting standards issued but not yet effective.

If you have any liabilities whose classification as current or non-current on 31 December 2023 will change due to these amendments, you will need to describe and quantify the impact in your 31 December 2023 financial statements.

Classification of your liabilities may be impacted by one or more of the changes to IAS 1, namely:

  1. The right to defer settlement need not be unconditional and must exist at the end of the reporting period
  2. Classification is based on rights to defer, not intention
  3. Early conversion options for convertible notes that can be settled before maturity by issuing the entity’s own equity instruments will result in the underlying liability being classified as CURRENT if the conversion feature is classified as a liability/derivative liability rather than as equity.  

Regarding a, if your entity has loan arrangements subject to covenants, the amendments clarify when the covenants affect classification at the reporting date. This is illustrated in the diagram below.

Right to defer settlement new paragraph 72B

Complications arise when the entity must comply with a covenant before the reporting date:

  • In anticipation of a breach, an entity may seek approval from its lender to waive the covenant test before the reporting date. The next covenant test will be performed sometime after the reporting date (i.e. the entity must comply with a future covenant test). The loan will be classified as a NON-CURRENT liability because the entity was not in breach of a loan covenant at the reporting date. It does not matter whether the next covenant test is in three months or twelve months.
  • However, if the entity breaches a loan covenant before the reporting date, IAS 1, paragraphs 74 and 75 apply. For the loan to be classified as a NON-CURRENT liability, the lender must provide a period of grace whereby it agrees not to test the covenant for at least twelve months after the reporting date.
  • Sometimes, there may be a breach, and the lender legally waives its rights to recall the loan until an additional (new) covenant test is performed in say six months. The profession is still considering the appropriate classification for this and other complex scenarios.

Please refer to our publication for more information.

NFPs should consider the following matters when preparing 31 December 2023 annual financial statements.

Related party disclosures

ACNC Regulation 60.30(2) includes AASB 124 Related Party Disclosures in the list of mandatory standards required for special purpose financial statements (SPFS). Charities preparing SPFS for years ending 31 December 2023 or later must therefore comply with the disclosure requirements contained in AASB 124. Comparative information is not required. This is because the ACNC Commissioner has exercised discretion to all such charities applying AASB 124 for the first time in their 31 December 2023 financial statements.

You can find more information about NFP related party disclosure in our articles:

Non-refundable upfront fees

There is diversity in the way that NFPs account for non-refundable upfront fees. Some recognise it as a contract liability and defer revenue until goods and services have been provided. Others recognise revenue on receipt because the amount is non-refundable. Illustrative Example 7A has been added to AASB 15 to illustrate the appropriate accounting.

Please refer to our previous article for more information.

Key management personnel (KMP) compensation

Large charities with more than one KMP were required to disclose aggregate key management personnel compensation for the first time at 31 December 2022. While comparatives were not required at 31 December 2022, they are required going forward. Large charities must include comparative KMP compensation information for the year ending 31 December 2022 alongside the 31 December 2023 compensation. Our article contains examples to help you decide if you need to disclose KMP compensation for your NFP:

  • Example 1 – One KMP this year, one KMP last year - exempt
  • Example 2 – One KMP position occupied by more than one individual during the year (regardless of whether they serve concurrently or not) - not exempt
  • Example 3 – Two KMPs, but one leaves during the year - not exempt.

Reminder – Reduced Disclosure Requirements (RDR) has been withdrawn

Tier 2 Simplified Disclosures general purpose financial statements (GPFS) are not mandated for NFPs. Nevertheless, if you previously prepared GPFS using the RDR, you need to redraft these using Tier 2 Simplified Disclosures. We noted several entities that continued to prepare Reduced Disclosures Tier 2 GPFS at 31 December 2022. This is no longer permitted because the RDR reporting framework has been withdrawn.

More information

Our recent webinar contains further useful tips to help you on your 31 December 2023 reporting journey. 

Need assistance?

Please contact our IFRS Advisory team if you require assistance with any financial reporting matters for your 31 December 2023 annual and half-year financial reports.