Article by Steve Watson, Managing Director, National Audits Group.
Over the past 12 months, we’ve followed changes in the regulatory environment and worked closely with audit clients to ensure that they are prepared for the challenges in relation to governance and reporting activities. It’s clear that with more accounting firms outsourcing auditing services to specialist providers such as the National Audits Group, the need for strong proactive communication with audit clients has never been stronger.
Some of the key areas of current focus for the team at National Audits Group in our work with audit clients are outlined below:
1. New standard on income recognition for NFP entities
AASB 1058 is meant to simplify and clarify income recognition for NFPs, and supersedes all current income recognition requirements for private sector NFPs, and most of the requirements for public sector NFPs currently contained in AASB 1004 Contributions. AASB 1058 will apply to transactions where the consideration to acquire an asset is significantly less than fair value principally to enable a NFP to further its objectives (with some exceptions, refer to the standard).
Included within this Standard is changes in the recognition and measurement requirements for peppercorn leases and how they are treated. Due to its expected impact on NFP financial reporting, an exposure draft has been issued by the AASB proposing to provide temporary relief for new leases and permanent relief from existing leases.
This standard becomes effective for accounting periods commencing on or after 1st January 2019. Our experience suggests that NFP clients have generally not adopted this standard. We will need to continue to lead our clients in this regard to ensure that they are prepared for the reporting requirements over the next reporting period.
2. Related party disclosures
AASB 124 is of specific relevance to charities that undertake transactions with related people or organisations. It is important for charities to carefully manage these transactions, ensure that they are transparent and the details of them are recorded appropriately.
It’s clear that many NFP entities need assistance in establishing internal procedures to ensure that they document these disclosures. The NSW Department of Treasury has prepared a ‘best practice’ guide on AASB 124 which is available online.
3. Continued focus on General Purpose by Australian Taxation Office
The AASB (Australian Accounting Standards Board) is continuing to work with advisors, auditors and clients in relation to special purpose financial statements. Focus at present is on the conceptual framework for ‘for-profit’ private sector publicly accountable entities and those who voluntarily state IFRS compliance.
Our experience is that many of our clients are simply unaware of the new requirements and what they should be doing to prepare for them. In addition, smaller accounting firms are generally struggling with the transition to general purpose financial statements. The simplest solution is generally for the accounts to be prepared to trial balance stage and then outsourced to a specialist audit firm for completion.
4. New Leases Standard from 2019
The new leases standard (AASB 16) will bring the majority of leases onto the balance sheet from 2019, being one of the most significant changes to financial reporting since IFRS adoption. This standard introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
This new standard is still very much an unknown for many clients who are simply unaware of the changes or unsure how they will affect them. Key questions to consider include:
- What is a lease?
- What is the lease term?
- Can existing systems capture the relevant information?
- Can you use either of the lease accounting exemptions?
- What is the appropriate interest rate for the lease liability?
- What will be affected by the changes to financial statements?
- How should these changes be communicated to stakeholders?
- Consider agreements which are based on profit, EBIT or EBITDA such as debt covenants, management agreements, remuneration and share-based payment schemes
Whilst this standard is not yet in place, affected entities should prepare by having appropriate records and leasing commitment disclosures in place.
5. ACNC Legislative Review Final Report
The final report of the ACNC (Australian Charities and Not-for Profit Commission) legislative review tabled in August 2018 made 30 recommendations in relation to regulatory frameworks and reduction in red tape. Key recommendations were:
- Financial reporting thresholds lifted
- Small charities will have an option to provide a simplified balance sheet / statement of resources
- Registered charities will be required to disclose related party transactions
- Large registered charities will be required to disclose remuneration on an aggregated basis
- Basic religious charity exemption is to be reviewed.
Further consultation between the charitable sector and the government will be required to ensure that the government’s response to the review is prioritised.
6. Ongoing ASIC focus on financial reporting and audit
In the meantime, ASIC is continuing to focus on the following key areas:
- New requirements that can materially affect reported assets, liabilities and profits
- The roles of directors and management
- Operating and financial reviews
- Material disclosures
- Large proprietary companies (non-lodgement)
7. Data analytics is increasingly important
There is no doubt the future of audit lies with data analytics. These tools are enabling auditors to better identify financial reporting, fraud and operational business risks. Data analytics can also assist significantly with business intelligence and strategic decision-making.
One particular area where the value add of data analytics is prominent, is with the provision of internal audit services and the use of Computer Assisted Auditing Techniques (CAATs). The use of CAATs increases audit effectiveness, accuracy and efficiency by enabling the analysis of large populations of data and concentration on areas of highest risk. Examples of using CAATs during an internal audit program include the testing of payroll, accounts payable and accounts receivable, credit cards and fuel card expenditure.
Key challenges for both small and large firms are the significant up-front cost of implementing new technology solutions and the need to provide staff with training in new technical and communication skills. Whilst ‘real-time’ auditing is still some way away, firms that wish to grow revenue from audit services cannot afford to wait. Early adopters of technology are fast turning into mainstream users.
What is your firm’s auditor doing to prepare clients for these changes?
Ongoing education of clients is essential, not only from a regulatory perspective, but also in relation to value-added activities such as real time reporting that can help business leaders and owners make the right decisions for their firm and their shareholders.
The National Audits Group continues to evolve
The National Audits Group continues to evolve as an audit-only firm with a strong national presence and capabilities in relation to financial statement audits, compliance and regulatory audits, internal and IT audits and SMSF audits.
We’re always on the look-out for like-minded firms working in the audit, tax or business services arenas on a regional or national level.
Call Steven Watson or Stephen Prowse on 1300 734 707 if you’d like to discuss your future audit needs.