Our series of questions and answers provide guidance on some of the more common questions arising from the amendments of AASB 4. The temporary exemption is applied at the reporting entity level. Each reporting entity will need to perform their own assessment. However, not all countries have incorporated the amendment. Group entities will need to assess, for insurance subsidiaries outside of Australia, whether those countries have adopted the amendment to IFRS 4.
For example, in New Zealand, life and general insurers are not allowed to use the temporary exemption. FAQ 3: For an entity applying the temporary exemption, is it required to assess the nature of the financial assets in accordance with AASB 9 for disclosures purposes? This is to enable users to compare entities that apply the temporary exemption with those that do not. To disclose this information, entities are required to assess the nature of the cash flows of financial assets and its business model even if they are applying the temporary exemption.
However, if the financial assets are not classified as FVTPL under the classification assessment, the entity can make a policy choice to designate the financial assets at FVTPL to eliminate accounting mismatches. FAQ 8: Are there any specific disclosures if the temporary exemption is applied? AASB 4 requires specific information to be disclosed if an entity applies the temporary exemption.
It has to provide disclosures that enable users of financial statements to:. Comparatives may, but are not required to be, provided in the first year of adoption. The disclosures are also not required in the interim financial statements. However, if by not including the information, the objective of AASB would not be met, then the disclosures should be included.
Reporting Updates are KPMG's way of communicating changes occurring within the Australian financial reporting environment to our clients. The challenge of adopting AASB 15 cannot be underestimated. The standard will change the pattern of revenue recognition for most entities. In a significant number of cases, adoption of AASB 15 will result in the recognition of revenue in a pattern that does not correspond to the amount invoiced to the customer.
Changes to processes and systems may be required so that the accounting system can recognise revenue in accordance with AASB 15 rather than when invoiced to the customer. Again, the implementation challenges should not be underestimated. One area of complexity is determining which contracts contain leases, as the requirements are pervasive and require a review of service contracts to see if they contain assets that are within the scope of AASB For contracts that contain leases, companies are required to set up a right-of-use asset register and calculate the lease liability for each leased asset.
Systems and processes are required to calculate asset amortisation and the finance costs arising from leased assets. This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. When the International Accounting Standards Board started reviewing the standard in it said: "The global financial crisis has led to criticism of the incurred loss model for presenting an initial over-optimistic assessment of no credit losses, only to be followed by a large adjustment once a trigger event occurs.
It will also make change in a bank's collective provision less volatile through an economic cycle. The criticism of the expected loss approach has always been that it introduces a large element of subjectivity into the process and could, in extreme circumstances, leave financial statements open to be gamed by management.
NAB held a briefing for analysts last week to explain the impact of the change. Under the incurred loss approach the bank could provision in overlays for economic downturns but under the new rule the bank will look three to five years ahead and make an assessment of expected losses.
The increase in the collective provision creates a deferred tax asset, which has an impact on capital.
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