Useful hints when reviewing 2009/10 financial statements
As the financial year draws to a close, we have listed below some of the more pertinent matters which CEOs of Community Health Centres should focus on when reviewing their 2009/10 financial statements.
- Details
-
| Location: | Melbourne |
| Division: | Audit and Assurance |
| Publish Date: | 19/07/2010 |
As the financial year draws to a close, we have listed below some of the more pertinent matters which CEOs of Community Health Centres (“CHC”) should focus on when reviewing their 2009/10 financial statements.
1. Impact of Corporate Reporting Reform Act 2010
The Corporations Amendment (Corporate Reporting Reform) Act 2010 was passed by Parliament on 24 June 2010 and it is now awaiting Royal Assent (expected to be granted early next month). Some of the amendments arising from this which will affect CHC financial statements include:
- Directors’ report: Significant changes will need to be made to the Directors’ report, which will disclose for the first time information such as objectives of CHCs, the strategies used to achieve these objectives; performance measurement tools/indicators used to measure performance, etc.
- Directors’ declaration: If the accounting policies note to the financial statements includes an explicit and unreserved statement of compliance with International Financial Reporting Standards (“IFRS”), Directors of CHCs will need to make a declaration attesting to compliance with IFRS.
- Three-tier differential reporting: While unlikely to impact many CHCs, the regulatory burden on companies limited by guarantee, which typically have a not-for-profit purpose, is expected to be reduced significantly with the introduction of a three-tiered differential reporting framework as follows:
- Companies with revenue less than $250,000 and that are not a deductible gift recipient within the meaning of the Income Tax Assessment Act 1997 will no longer need to prepare or lodge financial reports.
- Companies with revenue more than $250,000 but less than $1 million will need to prepare and lodge a full financial report, but they can choose to have that report reviewed rather than audited.
- Companies with revenue of $1 million or more must continue to lodge an audited financial report.
- Other changes to consider are:
- Revised parent reporting requirements; and
- Allowing CHC to more easily change their year-end date to minimise the burden on them and their auditors during peak reporting periods.
2. Financial statements disclosure
A number of new accounting pronouncements are mandatory for the first time when preparing the 2009/10 financial statements, some of the more fundamental changes are:
AASB 101: Key changes include renaming of core statements and the inclusion of a new statement titled statement of comprehensive income. CHCs can choose to present the statement of comprehensive income using a one statement or two statement approach. If a CHC has made a prior period adjustment or has reclassified items in the financial statements, it will need to present a third balance sheet at the beginning of the comparative period.
AASB 8: A ‘management approach’ now applies to identifying and measuring the financial performance of an entity’s operating segments for financial reporting purposes. While this standard is unlikely to be applicable to most CHCs, this standard may impact on CHCs when they undertake impairment assessment, as a Cash Generating Unit (“CGU”) cannot be greater than a segment. See below for more comments.
AASB 7 & AASB 2009-2: Additional disclosure is required for financial instruments measured at fair value, including additional disclosures using the fair value hierarchy (a three-level hierarchy: level 1 quoted prices in active markets; level 2 input other than quoted prices included within level 1 that are observable either directly or indirectly; and level 3 valuation methodology using unobserved inputs.
3. Asset impairment
In light of the recent economic conditions, CHCs will need to ensure that the carrying values of their assets are not overstated given the magnitude of write downs reported by organisations over the past 18 – 24 months. CHCs will need to scrutinise their assets and ensure they are not overstated. As a general rule, any decrease in value will need to be recognised in the statement of comprehensive income.
AASB 136 Impairment of Assets requires recoverable amount to be determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, recoverable amount is determined for the cash-generating unit to which the asset belongs. Some CHCs may be able to argue that “their operation” is the CGU and perform an impairment assessment at the business level.
4. Interest rates
While lower interest rates may translate to lower finance costs, it may result in the following adverse impact:
- The inverse relationship between interest rate and long service liability (“LSL) balance may impact on the value of the year end balance.
- Reducing the return on term deposit investments.
5. Leave liability
CHCs will need to use the expected pay rates (likely to be higher) at which the liability will be settled when calculating their 30 June 2010 long service leave and annual leave balances. This will result in higher long service leave and annual leave liabilities. We have also observed that some not-for-profit entities have had to offer higher wage rates under the modern award, which will also impact on the leave liability.
6. Forward looking issues
Reduced Disclosure Regime (“RDR”) – at the 17 May 2010 Australian Accounting Standards Board (“AASB”) meeting, the AASB agreed that the RDR should be introduced as a second tier of reporting requirements for preparing general purpose financial statements. The aim is to attend to the immediate reporting needs of entities that currently apply full IFRS as adopted in Australia but which find the disclosures under full IFRS as adopted in Australia burdensome. The AASB agreed that when preparing general purpose financial statements:
- The following entities would continue to be required to apply full IFRS as adopted in Australia: for-profit private sector entities that have public accountability; and Federal, State, Territory and Local governments, including at the level of whole of government and the general government sector; and
- The following entities could apply the RDR (or, if they chose, full IFRS as adopted in Australia): for-profit private sector entities that do not have public accountability; all not-for-profit private sector entities; and public sector entities other than Federal, State, Territory and Local governments, including at the level of whole of government and the general government sector).
Reporting Entity Concept – the reporting entity concept will continue to be used for differential reporting purposes and a separate Application Standard will clarify the application of the two Tiers. Accordingly, in Stage 1, the focus of the application of Standards will remain unchanged.
The proposed Personal Property Securities Scheme (“PPS”) is likely to overhaul current laws in secured finance in Australia by providing largely uniform rules for all security interests in personal property. The PPS changes will affect retention of title arrangements, finance leases and commercial consignments, in addition to well established forms of secured finance such as floating charges. The PPS rules are likely to have a significant impact on traditional arrangements such as floating charges, title retention arrangements, leases and finance leases and reversible financing. CHCs should undertake an impact analysis as well as familiarising themselves with the requirements of these changes and ensure that their processes, procedures and documentation are updated in readiness for the new PPS rules.
Similar to the changes made to accounting standards, Australian Auditing Standards have been re-written as part of the “Clarity project”. These changes are expected to result in auditors and management having to spend more time attending to the audit and financial reporting process because auditors will require additional documentation and input from management in order to comply with these revised standards.
The audit of a CHCs’ 30 June 2011 financial statements will be conducted under these standards and it is important to commence discussions about the impact that these changes may have on the audit and financial reporting processes so that they can be properly managed and minimise any adverse impact, which may arise as result.
Modern awards CHC will need to consider the impact if any which may arise from employees having the ability to cash out their annual leave as well as the increase in wage rates under the Fair Work Act 2009.