Consultation Paper 187 Effective disclosure in an operating and financial review (CP 187, link to ASIC website) sets out ASIC's proposed guidance on how to prepare an operating and financial review in a directors’ report for listed entities as is required under s299A of the Australian Corporations Act 2001.

The paper outlines ASIC's view that the OFR should contain an analysis and narrative to supplement and complement the information in the entity’s annual financial report. The paper explains that a high-quality OFR is important in meeting the information needs of current and prospective investors in the entity.

ASIC's view is the OFR should provide additional information to that in an entity's financial report, to allow users to assess the underlying drivers of the entity’s financial performance and to properly understand the reasons for the entity’s results, and also about expected future performance.

The draft guidelines indicates the OFR should present information in a single section, and in a manner that is complementary to and consistent with the annual financial report, balanced and unambiguous, and clear, concise and effective.

These are some examples of the items the guidance suggests the OFR should include:

• the total income and income for major operating segments
• the significant components of overall expenses and expenses for major operating segments
• disclosing the underlying drivers of the financial position of the entity
• disclosing exposures that are not reflected in the financial report (e.g. off-balance sheet arrangements)
• explaining the accounting information and other detail contained in the financial report (rather than simply repeating it).
• an outline of the entity’s key business strategies, and its plans that
  are a significant part of those strategies
• disclosure of the main risks that could adversely affect the successful fulfilment of the business strategies of the entity.

Click for ASIC press release (link to ASIC website).

AASB 2012-6 Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures (link to AASB website) amends the mandatory effective date of AASB 9 Financial Instruments so that AASB 9 is required to be applied for annual reporting periods beginning on or after 1 January 2015 instead of 1 January 2013.  AASB 2012-6 also modifies the relief from restating prior periods by amending AASB 7 Financial Instruments: Disclosures to require additional disclosures on transition from AASB 139 Financial Instruments: Recognition and Measurement to AASB 9 in some circumstances.  These change give effect to the amendments made by the IASB in December 2011 through Mandatory Effective Date and Transition Disclosures (Amendments to IFRS 9 and IFRS 7).

AASB 2012-7 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (link to AASB website) makes amendments for entities preparing general purpose financial statements under the RDR.  AASB 2012-7 is the culmination of the proposals in a number of exposure drafts issued by the AASB over recent months in response to developments by the IASB, such as change to the presentation of comprehensive income, the 'suite of five' standards on consolidation and joint arrangements, and the annual improvements process.

The amendments relate to amended disclosures in the following Standards:

• AASB 7 Financial Instruments: Disclosures
• AASB 12 Disclosure of Interests in Other Entities
• AASB 101 Presentation of Financial Statements
• AASB 127 Separate Financial Statements.

AASB 2012-7 applies to annual reporting periods beginning on or after 1 July 2013.

Highlights include:

• Deferral of consolidation and joint venture standards - an exposure draft will be issued proposing to defer the mandatory application date of AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures from 1 January 2013 to 1 January 2014 for not-for-profit entities (with early adoption from 1 January 2013 permitted) so that Australian not-for-profit implementation guidance can be finalised
• Pending standards - amending standards are expected shortly to enact the deferred application date of AASB 9 Financial Instruments (to bring it into line with the revised application date of 1 January 2015 of IFRS 9 Financial Instruments), and to implement reduced disclosure requirements (RDR) amendments for AASB 7 Financial Instruments: Disclosures, AASB 12 Disclosure of Interests in Other Entities, AASB 101 Presentation of Financial Statements and AASB 127 Separate Financial Statements.
• Comprehensive review of IFRS for SMEs - in its submission to teh IASB on its review of the IFRS for Small- and Medium-sized Entities, the AASB is to highlight matters noted as a result of the development of the reduced disclosure requirements (RDR), which in the AASB's view puts "Australia in a unique position to contribute to the review".  Matters to be raised include the differences in recognition and measurement between the IFRS for SMEs and IFRS, the suggestion that entities should be able to adopt an RDR approach or the IFRS for SMEs, and various other matters
• Defence weapons platforms - an exposure draft is expected to be issued to propose a further two-year period of transitional relief from the requirement to measure defence weapons platforms at fair value
• Superannuation entities - the AASB continues to push towards finalisation of a replacement standard for AAS 25 Financial Reporting by Superannuation Plans, but will consult on superannuation entities in the public sector.

For full details of all the matters discussed at the meeting, access the AASB Action Alert (link to AASB website).

The RDR applies to annual reporting periods beginning on or after 1 July 2013. Early application is permitted for annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013, provided that AASB 1053 Application of Tiers of Australian Accounting Standards is also applied to the relevant period.

The compiled versions of the standards contain all amendments that are mandatorily applicable for the 2011-12 financial year, and indicate by way of shading which disclosures have been removed for early adopters of RDR.  Entities adopting the RDR must still fully comply with the recognition and measurement requirements of all Australian Accounting Standards - in relation to for-profit entities, these requirements are equivalent to IFRSs (such entities are however unable to assert compliance with IFRS due to the lesser disclosure requirements).

Access to the RDR standards is available through the AASB's website.

Deloitte Australia also publishes model financial statements showing compliance with the RDR.

The origin of the Interpretation is the previous series of Australian Interpretations produced by the now disbanded Urgent Issues Group under Australian Accounting Standards before Australia's adoption of International Financial Reporting Standards (IFRS).  As part of the implementation of IFRSs in the Australian context, these pre-IFRS Interpretations were reviewed and updated to be made consistent with the requirements of IFRS.

The pre-IFRS version of Interpretation 1039, UIG 39, was put in place partly in response to calls for guidance on how to account for the effects of a series of linked Bills which together enacted Australia's tax-consolidation regime.

Accordingly, Australian Interpretation 1039 provides guidance on when "substantive enactment" referred to in paragraph 48 of AASB 112/IAS 12 is taken to have occurred in an Australian context, concluding it occurs once a non-linked Bill has been tabled in Parliament and there is majority support for the passage of the Bill through both Houses of Parliament, consistent with the operation of Australian constitutional law.

The AASB has decided to propose the withdrawal of Australian Interpretation 1039 on the basis that an Australian Interpretation is not necessary as the issue of whether a tax Bill is substantively enacted is not unique to Australia.

The proposed withdrawal is consistent with the AASB’s policy of IFRS adoption and only issuing a domestic Interpretation of an IFRS adopted for use in Australia in rare and exceptional circumstances, and then only after exploring with the IFRS Interpretations Committee whether that Committee should deal with the matter.  It also follows on from earlier amendments made to Australian Accounting Standards which in effect, undid the changes that the AASB had made to IFRS when it initially adopted them in the Australian context.  A number of other Australian-specific pronouncements remain in place, but these do not undermine the ability of an eligible for-profit entity to make an explicit and unreserved statement of compliance with IFRSs, and in fact, AASB 101 Presentation of Financial Statements (equivalent to IAS 1) requires an entity to make such statement.

The exposure draft notes that AASB Board members would not expect diversity in practice to arise in Australia in the absence of an Australian Interpretation on this topic.

The exposure draft, ED 226 Withdrawal of Australian Interpretation 1039 Substantive Enactment of Major Tax Bills in Australia, is open for comment until 19 November 2012.  Click for access to ED 226 (link to AASB website).

The AASB also:

• Expressed reservations with the IASB/FASB tentative decision in the leases project to distinguish between two types of leases
• Noted concern that the IFRS Interpretations Committee draft Interpretation on levies does not deal with levies that apply upon reaching a minimum revenue threshold.

For full details of the topics discussed, refer to the AASB Action Alert (link to the AASB website).

The standards, which were approved on 29 June 2012, are:

Click for AASB announcement (link to AASB website)

Australia's carbon pricing mechanism came into effect on 1 July 2011.  The mechanism has two phases:

• a fixed price phase in which permits (referred to in the law as 'carbon units') have a fixed price set by the Government, starting at $23 for the first year (2012-2013) and then increased in real terms annually by 2.5% until 2015
• a flexible price phase in which permits can be traded under an emissions trading scheme (ETS), running from 1 July 2015 onwards. The ETS is a cap and trade scheme, where the Government sets the cap on emissions and supply and demand in the market determines the price of permits (subject to floor and ceiling prices).

The paper observes that in the fixed price phase, a carbon tax does not appear to raise any recognition, measurement, presentation or disclosure issues for emitter entities beyond those dealt with under current Australian Accounting Standards for other non-income taxes.

However, the paper notes the following in relation to the ETS phase:

The financial reporting implications of the flexible price phase will need to be considered by the AASB when the IASB progresses its project on accounting for ETSs. The AASB may also need to consider providing assistance under Australian Accounting Standards in regard to the flexible price phase, should it be established that the IASB will not be forthcoming with any necessary pronouncement or guidance in time to provide a basis for accounting treatments in the flexible price phase.

The paper focuses on the following topics/issues:

• the nature and classification of permits
• recognition of a liability for emissions
• recognition of a liability on receipt of free permits
• capitalisation or expensing of carbon tax
• accounting for free permits in the Australian context
• presentation of assets and liabilities
• accounting for 'Australian Carbon Credit Units' (ACCUs)
• impairment
• accounting for shortfall charges
• onerous contracts and existing provisions
• the impact on income tax.

The AASB has stated that staff papers have no authoritative standing.  Click for access the the paper (link to AASB website).

In ASIC view, at 30 June 2012, directors and auditors should focus particularly on:

• Revenue recognition and expense deferral policies - directors and auditors should review an entity’s revenue recognition policies to ensure that revenue is recognised in accordance with the substance of the underlying transaction, and expenses should only be deferred where there is an asset
• Asset values and the disclosure of associated assumptions - including goodwill, other intangibles and property, plant and equipment, and the impact of Australia's pending carbon tax and mineral resource rent tax
• Off-balance sheet arrangements - particularly in relation to the non-consolidation of special purpose entities that appear to have been established for the entity’s benefit
• Going concern assessments - ensuring disclosures in the financial report give a balanced reflection of the seriousness of the situation
• Operating and financial review (OFR) - ensuring compliance with the law
• Current vs non-current classifications - directors should ensure that classification is consistent with accounting standards and their understanding of the business
• Estimates and accounting policy judgements - ensuring material disclosures of sources of estimation uncertainty and significant judgements in applying accounting policies are made
• Financial instruments - complying with disclosures such as ageing analysis of financial assets, and the methods and significant assumptions used to value financial assets for which there was no observable market data
• New accounting standards - need to make disclosures about AASB 10 Consolidated Financial Statements (equivalent to IFRS 10), AASB 11 Joint Arrangements (equivalent to IFRS 11) and AASB 12 Disclosure of Interests in Other Entities (equivalent to IFRS 12), which will apply for the first time to financial reporting periods beginning on or after 1 January 2013.

Most of the above focus areas have arisen from the findings of its review of financial reports at at 31 December 2011, which covered 120 financial reports of listed entities and those unlisted entities with larger numbers of users.

ASIC is also advising directors and auditors to also focus on disclosures of useful and meaningful information for investors and other users. This includes the disclosure of non-IFRS financial information in accordance with ASIC Regulatory Guide 230 Disclosing non-IFRS financial information (RG 230).

Click for ASIC press release (link to ASIC website).