It's final – From 2022, special purpose financial statements will be history, and RDR replaced by Simplified Disclosures
2022 will be the year that marks the death of special purpose financial statements (SPFS) in Australia for certain types of for-profit private sector entities. The main group of entities affected will be for-profit private sector entities lodging financial statements with the Australian Securities and Investments Commission (ASIC). From years ending 30 June 2022 onwards, these entities will not be able to prepare and lodge SPFS, but there is incentive to move to GPFS before that date because such entities will be relieved from having to restate comparative information.
In our September 2019 edition of Accounting News, we looked at the Australian Accounting Standards Board’s (AASB’s) exposure draft, ED 297, which proposed the scrapping of special purpose financial statements for certain types of for-profit entities operating in the private sector. These proposals were approved by the AASB on 18 March 2020 as amending standard AASB 2020-2 Amendments to Australian Accounting Standards - Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities.
The proposals were essentially adopted unchanged, although transitional relief proposed in ED 297 has been expanded, and further dispensation has been provided in the final amendments for entities that previously applied all the recognition and measurement requirements of Australian Accounting Standards, and prepared consolidated financial statements, but did not include all of the disclosure requirements.
Are special purpose financial statements (SPFS) being removed completely for all entities?
No. As evident in the name of the amending standard, at this stage, the ability of entities to prepare SPFS is only being removed for for-profit private sector entities.
The amendments only apply to for-profit private sector entities. Accordingly, the following types of entities will be able to prepare SPFS beyond 2022:
- Not-for-profit entities (private and public sector), and
- For-profit public sector entities.
Charities registered with the Australian Charities and Not-for-profits Commission (ACNC) are not-for-profit entities, and therefore will be able to continue preparing SPFS (if appropriate).
Which for-profit private sector entities will be impacted?
The changes only apply to for-profit private sector entities that are required by:
- Legislation to prepare financial statements in accordance with Australian Accounting Standards or ‘accounting standards’, or
- Their constitutions or other documents (e.g. lending agreements) to prepare financial statements in accordance with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
(e.g. Part 2M of Corporations Act 2001)
CONSTITUTIONS / OTHER DOCUMENTS (e.g. trust deeds) CREATED OR AMENDED ON OR AFTER 1 JULY 2021
Many constitutions and other documents presently contain a general requirement to prepare financial statements in accordance with Australian Accounting Standards, with the intention being that SPFS would suffice if there are no users dependent upon general purpose financial statements (GPFS). For this reason, the changes will only impact entities whose constitutions or other documents were created or amended on or after 1 July 2021, which is the date that the changes become effective. This gives such entities a chance to consider whether GPFS, applying Australian Accounting Standards are required, or whether SPFS will meet the needs of their users.
On this basis, for-profit private sector entities with the following features would not be impacted by these proposals, and would therefore, under the proposals, be able to prepare SPFS for 2022 and beyond:
- Not required by legislation to prepare financial statements in accordance with Australian Accounting Standards or accounting standards, e.g. small proprietary companies with no Part 2M financial reporting obligations under the Corporations Act 2001
- If there is only a non-legislative requirement to prepare financial statements complying with Australian Accounting Standards, for example, an entity with a constitution or other document such as a lending agreement created before 1 July 2021, and not amended on or after 1 July 2021.
Examples of entities reporting under the Corporations Act 2001 that will no longer be able to prepare SPFS include:
- Large proprietary companies (including ‘grandfathered’ large proprietary companies that don’t lodge financial statements with ASIC)
- Unlisted public companies (excluding companies limited by guarantee)
- Small proprietary companies controlled by a foreign company
- Financial services licensees (AFSL), and
- Small proprietary companies with crowd-sourced funding.
Will all entities currently preparing SPFS be required to prepare full Tier 1 GPFS in future?
No. Entities that are not publicly accountable entities as defined in AASB 1053 Application of Tiers of Australian Accounting Standards will be permitted to prepare general purpose financial statements (GPFS) applying the Tier 2 requirements.
What are the Tier 2 reporting requirements?
Currently, Tier 2 reporting means preparing GPFS applying reduced disclosures (RDR).
For periods beginning on or after 1 July 2021, RDR will be withdrawn and replaced with Simplified Disclosures for Tier 2 entities preparing GPFS. Simplified Disclosures were issued by the AASB on 19 March 2020, and are included in a new standard, AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.
This is good news for entities currently preparing GPFS with RDR because there are fewer disclosure requirements for Simplified Disclosures than for RDR. However, this is not such good news for entities currently preparing SPFS because there will be a significant number of new disclosures, including those relating to related party transactions, taxation, and financial instruments.
Do all recognition and measurement requirements apply to Tier 2 entities?
Yes. Preparing Tier 2 GPFS using Simplified Disclosures requires entities to apply all recognition and measurement requirements of Australian Accounting Standards (including consolidation).
However, instead of following the disclosure requirements in each Australian Accounting Standard, AASB 1060 is a separate disclosure standard for Simplified Disclosures that is followed instead.
Do Tier 2 entities need to apply consolidation and equity accounting?
Yes. One of the biggest impacts for entities preparing GPFS for the first time will be that consolidation accounting will be required for parent entities in a group (AASB 10 Consolidated Financial Statements), and equity accounting where the entity has significant influence over another entity (AASB 128 Investments in Associates and Joint Ventures).
Besides having to ‘step up’ the level of disclosure from SPFS to Tier 2, the biggest impact for most entities will be the need to comply with all recognition and measurement requirements of Australian Accounting Standards, which includes the preparation of consolidated financial statements.
AASB 10, paragraph 4 relieves intermediate parent entities in a group from having to prepare consolidated financial statements if certain strict criteria have been met. This could result, for example, in the ultimate Australian parent entity not having to prepare consolidated financial statements for lodgment with ASIC. AASB 10, paragraph Aus 4.2 therefore currently overrides this exemption if the ultimate Australian parent entity, or the Australian group, is a reporting entity.
When the ‘reporting entity’ concept is removed from 2022, AASB 10, paragraph Aus 4.2 will be amended so that Australian group financial statements will be required if the ultimate Australian parent is required by legislation to prepare financial statements in accordance with Australian Accounting Standards or accounting standards.
Must NFPs and for-profit public sector entities also apply the Simplified Disclosures?
Yes. Although NFPs and for-profit public sector entities will be able to prepare SPFS beyond 2021 (if appropriate), those preparing GPFS for Tier 2 entities will have to apply Simplified Disclosures from 2022 because the Reduced Disclosure reporting framework will be withdrawn and replaced by Simplified Disclosures.
How were the Simplified Disclosures developed?
The Simplified Disclosures are based on the disclosure requirements of the international standard, IFRS for SMEs, and are the same where the recognition and measurement requirements are the same or similar in full IFRS (and therefore Australian Accounting Standards) as compared to IFRS for SMEs. However, disclosures have been adapted or added where the recognition and measurement requirements in IFRS for SMEs are different to full IFRS.
It is important to note that the Simplified Disclosures are based on the IFRS for SMEs
disclosure requirements, even though the IFRS for SMEs
is not available for use in Australian as an alternative financial reporting framework for entities that fall within the scope of AASB 2020-2 as noted above
What are the main differences between RDR and Simplified Disclosures?
The main differences between the approach for RDR and ‘simplified disclosures’ include:
Existing Reduced Disclosure Requirements
Effectively a subset of total disclosures required by Australian Accounting Standards
Based on disclosures included in IFRS for SMEs standard
Disclosures not required are ‘greyed out’ in the body of Australian Accounting Standards
Simplified disclosures are included in a separate disclosure standard for Tier 2 entities (AASB 1060)
Financial reporting framework referred to as Australian Accounting Standards – Reduced Disclosure Requirements
Financial reporting framework referred to as Australian Accounting Standards – Simplified Disclosures
AASB 1060 is numbered consecutively from paragraphs 1 to 243 and is divided with subheadings for each topic. For example, ‘inventories’ is included at paragraphs 123 and 124, ‘Property, plant and equipment and investment property at cost’ is included at paragraphs 134 to 136, etc.
Specific NFP disclosures
ED 295 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities initially proposed denoting NFP-specific disclosures as ‘NFP’ paragraphs but in the final AASB 1060, NFP paragraphs are indistinguishable because they are included in the sequential numbering system discussed above.
Disclosures not included in IFRS for SMEs that have been added based on cost-benefit analyses or because they address matters of public policy include:
- Audit fees
- Franking credits
- Numerical reconciliation of income tax expense.
For more information, the AASB has produced a useful Fact Sheet which summarises:
- Disclosures removed from RDR
- Disclosures added to IFRS for SMEs disclosures
- Disclosures added for other reasons (e.g. audit fees noted above).
When are these changes effective?
The amending standards, AASB 2020-2 and AASB 1060 apply to annual periods beginning on or after 1 July 2021, with early adoption permitted. Depending on the year-end of your entity, general purpose financial statements (GPFS) will be required, at the latest, for:
- 30 June 2022 year-ends (for June balancing entities)
- 30 September 2022 (for September balancing entities)
- 31 December 2022 (for December balancing entities), and
- 31 March 2023 (for March balancing entities).
Are restated comparatives required when an entity prepares GPFS – Tier 1 (full IFRS) for the first time?
Entities moving from SPFS to Tier 1 GPFS must apply AASB 1 First-time Adoption of Australian Accounting Standards. Except for limited exceptions to the recognition and measurement requirements of Australian Accounting Standards, AASB 1 requires retrospective restatement of the financial statements, which means that at least one year of comparative information is required.
Are restated comparatives required when an entity prepares GPFS – Simplified Disclosures for the first time?
It depends. If these AASB 2020-2 and AASB 1060 changes are adopted from the effective date, i.e. for annual periods beginning on or after 1 July 2021 (i.e. 30 June 2022 year-ends), all comparative information must be presented. However, if adopting for an earlier period, there are some exceptions to the requirement to present full comparative information.
AASB 1 is amended such that the special exemption in Appendix E to AASB 1053 Application of Tiers to Australian Accounting Standards can be applied by entities adopting Simplified Disclosures early.
Basically, entities that adopt Simplified Disclosures before the effective date (periods beginning on or after 1 July 2021) do not need to restate information for comparative periods.
Is any additional transitional relief available on first-time adoption of Simplified Disclosures?
While the relief from restating comparatives is only available if Simplified Disclosures are adopted early, AASB 1053, Appendix E, provides further transitional relief as follows:
|Description of relief
||If adopted for annual periods beginning…
|Relief from distinguishing the correction of errors from changes in accounting policies
||Before 1 July 2022
|Relief from providing comparative information not previously disclosed in the notes to the SPFS
||Before 1 July 2021
It is important to note SAC 1 Definition of a Reporting Entity still applies to years ending 30 June 2020 and 30 June 2021. This means that all entities preparing SPFS for these reporting periods need to ensure that they do not meet the definition of a ‘reporting entity’. In other words, the delayed application date of AASB 2020-2 to 30 June 2022 is not a ‘free pass’ for entities to inappropriately continue with SPFS. Where SPFS have been prepared in the past, we recommend that management and preparers of financial statements revisit the reporting/non-reporting entity classification for 30 June 2020 and ensure that their reasoning for continuing SPFS are comprehensively documented. This is particularly important given that the doubling of the ‘large proprietary company’ thresholds for reporting to ASIC from 30 June 2020 may tick some of the boxes for primary factors to be considered if a reporting entity exists under SAC 1, including being an indicator of economic importance and financial characteristics.