Our regular feature of common queries received from clients highlights areas of challenge for many entities. We encourage readers to seek advice if they have any similar scenarios or are considering issuing any share-based payments or compound financial instruments.

Convertible notesConvertible notes are a compound financial instrument that may have characteristics of both debt and equity. They continue to present several accounting challenges, and in many instances the accounting outcome is different from that which was anticipated on signing of agreements. Entities should ensure that they consider:

- Bifurcation: These instruments require separation into debt and equity components, demanding precise valuation techniques and assumptions. In many cases, the instrument is classified as a liability rather than equity.
- Fair value determination: The determination of fair value elements of the instrument can be challenging and vary significantly depending on terms and conditions.
- Ongoing Assessment: Terms and fair values of convertible notes may change, requiring continuous reassessment and adjustment of their values carried in the financial statements.
Share-based paymentsAccounting for share-based payments (SBP) under AASB 2 Share-based Payments can introduce several complexities, particularly when dealing with cancellations, modifications of existing schemes, and the treatment of SBP schemes in acquisitions.

Modifications or cancellations of share-based payment arrangements require careful examination as they can affect the amount and timing of expense recognition, potentially leading to significant adjustments in financial statements in the period of cancellation.

Additionally, when an entity is acquired, the treatment of existing SBP schemes must be considered to determine whether it is part of the purchase price allocation. Therefore requiring valuation of the share-based payment awards as part of the overall acquisition accounting.

Entities need to assess the fair value of instruments issued at grant date. This can be complex and requires significant judgement.
Revenue – Principal v Agent The recent significant restatement of revenue and expenses prompted by ASIC’s surveillance (see ASIC Regulatory Activity article) underscores the critical importance of accurately assessing whether an entity acts as a principal or an agent in transactions involving third parties. Under AASB 15 Revenue from Contracts with Customers, this determination is often highly judgmental, impacting whether revenue is recognised on a gross or a net basis.

The distinction hinges on whether the entity controls the goods or services before they are transferred to the customer.
- If an entity is acting as a principal, it records gross revenue
- If acting as an agent, only the net fee or commission earned is recognised.

Entities must carefully evaluate their role in each transaction - considering factors such as inventory risk, pricing discretion and the nature of the promise to the customer - to ensure compliance with accounting standards and provide a true reflection of their economic activities.
Revenue v Income Staying on the theme of revenue, understanding the distinction between income and revenue is crucial in financial reporting.

Revenue, as defined under AASB 15, is specifically associated with income that arises from ordinary activities and involves performance obligations.

However, not all funds received by an entity fall under the scope of this standard. For example, proceeds from the sale of assets - such as property or equipment - do not meet the criteria for revenue under AASB 15 because they do not involve performance obligations towards customers. These proceeds are instead recognised as other income, reflecting the nature of the transaction separate from the entity’s primary business operations.
On-costs and employee benefit provisionsWhen calculating employee benefit provisions such as annual leave and long service leave, it is important to include all related on-costs that the employer is obligated to pay.

There is no explicit reference to on-costs incurred by Australian entities such as payroll tax and superannuation costs in the accounting standards, however the costs are included since these form part of the liability under AASB 119 Employee Benefits.

For assistance with your financial reporting requirements, contact your local Bentleys audit and assurance advisor.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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