New Conceptual Framework – Who will it apply to and when?
In May 2019, the Australian Accounting Standards Board (AASB) issued Conceptual Framework for Financial Reporting (the new Conceptual Framework).
When is it effective?
The new Conceptual Framework applies to periods beginning on or after 1 January 2020.
How will the new Conceptual Framework impact financial statements in future?
Australian Accounting Standards and Interpretations govern the accounting for many types of transactions and balances. Where there are ‘gaps’, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 10 requires management to apply judgement in developing an appropriate accounting policy. In making this judgement, where Australian Accounting Standards do not deal with similar and related issues, paragraph 11(b) requires management to then refer to the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses laid out in the new Conceptual Framework.
As the new Conceptual Framework is different to its predecessor, entities looking to the new Conceptual Framework to develop accounting policies under AASB 108, paragraph 11(b) will need to take note of the:
- Updated definitions of an ‘asset’ and ‘liability’
- Updated recognition criteria for including assets and liabilities in financial statements
- New concepts on measurement, including factors to consider when selecting a measurement basis (e.g. cost vs fair value)
- New concepts on presentation and disclosure, including classifying items as income vs other comprehensive income, and
- New guidance on derecognition of assets and liabilities.
Changes relating to ‘reporting entities’
The new Conceptual Framework applies to ‘reporting entities’, which paragraph 3.10 describes as effectively being all entities that are required, or choose, to prepare financial statements.
A reporting entity is an entity that is required, or chooses, to prepare financial statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity.
Conceptual Framework for Financial Reporting, paragraph 3.10
This is different to the concept of a ‘reporting entity’ in SAC 1 Definition of a Reporting Entity, which currently permits the preparation of special purpose financial statements if users are not dependent on general purpose financial statements for information to make and evaluate resource allocation decisions.
Who will it apply to?
Without any Australian-specific amendment, all entities that are required, or choose to prepare, financial statements in Australia would be required to apply the new Conceptual Framework because they would be considered ‘reporting entities’.
This means that special purpose financial statements would no longer be permitted for entities:
- Required to prepare financial statements applying Australian Accounting Standards (for example, as required by Part 2M of the Corporations Act 2001 or a trust deed/agreement), and
- That voluntarily prepare financial statements applying Australian Accounting Standards.
As part of its phased approach in scrapping special purpose financial statements, the AASB has therefore limited application of the new Conceptual Framework to only the following types of for-profit entities:
- Private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards, and
- Other entities that voluntarily elect to apply the new Conceptual Framework.
This scope limitation is effective for periods beginning on or after 1 January 2020 by:
- Adding scope paragraph Aus 1.1 in the Australian version of the new Conceptual Framework to limit application to the types of for-profit entities noted above, and
- AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework adding ‘Aus’ paragraphs to the Framework for the Preparation and Presentation of Financial Statements (old Framework) and SAC 1 Definition of a Reporting Entity such that the for-profit entities noted above cannot apply these documents from 1 January 2020.
What are publicly accountable entities?
In addition to entities whose debt or equity instruments are traded in a public market (or are in the process of issuing such instruments for trading in a public market), AASB 1053 Application of Tiers of Australian Accounting Standards (as amended by AASB 2019-1) clarifies that publicly accountable entities are those that hold assets in a fiduciary capacity for a broad range of outsiders as one of its primary businesses. These are likely to include banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.
The following types of entities that hold assets in a fiduciary capacity, but are doing so for reasons incidental to the primary business, are not automatically publicly accountable:
- Real estate agents
- Travel agents
- Charitable organisations
- Co-operatives requiring a nominal membership deposit
- Sellers receiving an advance payment for goods or services such as utility companies.
What other amendments does AASB 2019-1 address?
AASB 2019-1 also makes consequential amendments to various Australian Accounting Standards and Interpretations to update references and quotations so that they refer to the new Conceptual Framework rather than the old.