AASB issues Consultation Paper with respect to the future of special purpose financial reporting

As noted in our April Accounting News article, Days are numbered for special purpose financial statements in Australia, the publication in March 2018 by the International Accounting Standards Board (IASB) of the revised Conceptual Framework is likely to signal the end of special purpose financial statements (SPFS) for entities required to prepare financial statements applying Australian Accounting Standards.

Entities currently preparing SPFS should take note that these are likely to be phased out in the next few years, particularly if lodged with the Australian Securities and Investments Commission (ASIC) under Part 2M.3 of the Corporations Act 2001 or Part 3-2 of the Australian Charities and Not-for-profits Commission Act 2012. This means that in future, parent entities will be required to prepare and lodge consolidated financial statements with ASIC or the ACNC.

In order for Australian Accounting Standards to remain IFRS compliant for periods commencing on or after 1 January 2020, the Australian Accounting Standards Board (AASB) will need to adopt this revised Conceptual Framework, and in doing so, will also need to withdraw SAC 1 Definition of the Reporting Entity because its use of the term ‘reporting entity’ is not consistent with the definition of ‘reporting entity’ in the revised Conceptual Framework. Other Australian Accounting Standards will also need to be amended to remove references to ‘reporting entity’.

SAC 1 Revised Conceptual Framework
Reporting entities are all entities (including economic entities) in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources. An entity that is required, or chooses, to prepare financial statements.
SAC 1, paragraph 40 Definition of ‘reporting entity’, paragraph 3.10

Implications for entities currently preparing special purpose financial reports

Under existing Australian financial reporting frameworks, once SAC 1 is withdrawn, non-reporting entities (i.e. entities that are not ‘reporting entities’ under SAC 1) complying with ‘Australian Accounting Standards’ will need to:

  • Apply all recognition and measurement requirements in Australian Accounting Standards
  • Prepare general purpose financial statements – either Tier 1 (full GPFS) or Tier 2 reduced disclosures (RDR)
  • Prepare consolidated financial statements if they are a parent entity
  • Disclose perceived ‘sensitive’ information such as related party transactions, and
  • Include many additional disclosures to comply with Tier 2 RDR or full GPFS.

However, if there is no requirement to comply with ‘Australian Accounting Standards’ then there would be scope to prepare SPFS in their current form.

Why the need for a Consultation Paper?

Given that 1 January 2020 (commencement date for Conceptual Framework) is just over 18 months away, the AASB is aware that:

  • Many entities may not have the resources to ‘step up’ their financial statements from special purpose to general purpose, including for some entities, also having to prepare consolidated financial statements, and
  • An additional general purpose framework (alternative Tier 2 GPFS framework) may be needed.

On 14 May 2018, the AASB therefore published Invitation to Comment (ITC) 39 Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems which proposes potential solutions to solve the problems discussed above.

Five potential approaches

The AASB has considered five potential solutions as follows:

Option

Proposals

Comments

One

Two-phased approach to applying the IASB’s revised Conceptual Framework:

Short term (Phase 1)

Maintain IFRS compliance for ‘publicly accountable’ entities and entities voluntarily claiming IFRS compliance.

Medium term (Phase 2)

Maintain IFRS as a base by removing the Australian reporting entity concept, withdrawing SAC 1, and removing SPFS from Australian Accounting Standards.

Also revise the Tier 2 general purpose reporting framework in AASB 1053 Application of Tiers of Australian Accounting Standards to be either:

  • Reduced disclosures (RDR), or
  • Specified disclosure requirements (SDR) including consolidation and equity accounting and compliance with all disclosures in:
    • AASB 101 Presentation of Financial Statements
    • AASB 107 Statement of Cash Flows
    • AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
    • AASB 1048 Interpretation of Standards
    • AASB 1054 Australian Additional Disclosures
    • AASB 15 Revenue from Contracts with Customers
    • AASB 124 Related Party Disclosures
    • AASB 136 Impairment of Assets
    • AASB 112 Income Taxes.

This is the AASB’s preferred approach because only one framework will be applied in the long-term, i.e. the revised Conceptual Framework.

AASB is proposing actions to mitigate the additional reporting burden for entities currently preparing SPFS, including:

  • A new Tier 2 SDR framework to replace the current RDR framework, which will have fewer disclosures from only 9 standards
  • Transitional relief for entities having to apply consolidation and equity accounting
  • Possible staggered Phase 2 implementation.

ITC 39, Appendix B illustrates how the Application paragraphs in AASB 1057 Application of Australian Accounting Standards would be amended.

Two

Operate with two Conceptual Frameworks:

  • Apply the IASB’s revised Conceptual Framework to some entities in order to maintain IFRS compliance, and
  • Retain the existing Framework for others (i.e. retain the Australian reporting entity concept and SPFS for others).

Applying this approach would result in having two Frameworks, a position the AASB considers untenable.

It would also result in SPFS not complying with Australian Accounting Standards, but would provide regulators more time to determine which entities need to comply with Australian Accounting Standards.

Three

All entities to apply the IASB’s revised Conceptual Framework when it first becomes applicable to maintain IFRS compliance and IFRS as a base.

Also remove the Australian reporting entity concept and SPFS by 1 January 2020.

This option would not give entities currently preparing SPFS much time to upgrade to, as a minimum, GPFS – RDR, including consolidation & equity accounting.

Four

Do nothing and lose IFRS compliance.

Retain the existing Framework (i.e. retain the Australian reporting entity concept and SPFS).

Entities preparing full GPFS (Tier 1) would not be IFRS compliant.

Five

All entities to apply the IASB’s revised Conceptual Framework when it first becomes applicable (1 January 2020) to maintain IFRS compliance and IFRS as a base.

By 1 January 2020, also:

  • Change the name of the Australian reporting entity concept, and
  • Prescribe minimum requirements for SPFS (i.e. retain the self-assessment mechanism and SPFS but set minimum requirements for SPFS), such as SDR as discussed in Option one above.

The SPFS problem would be resolved because although entities could still self-assess as a non-GPFS reporter, the extent of disclosures required (e.g. SDR) would be mandated.

However, many entities currently preparing SPFS may not have sufficient time to prepare themselves for the new requirements by 1 January 2020.

It should be noted that no changes are proposed to the lodgement relief currently available to ‘grandfathered’ large proprietary companies.

AASB’s preferred approach

The AASB’s preferred approach is Option one above, largely because it facilitates having only one Framework in the long-term for all entities required to prepare financial statements using Australian Accounting Standards.

Interestingly, this approach is also proposing a different Tier 2 disclosure framework, Specified Disclosure Requirements (SDR), to possibly replace the current RDR framework. It appears that SDR will include disclosures from only nine standards (whereas currently RDR includes disclosures scattered amongst all standards), but that all disclosure requirements in those nine standards would apply. New disclosures in SDR currently not included for SPFS would include:

  • Related party disclosures (AASB 124)
  • Revenue (AASB 15)
  • Impairment of assets (AASB 136), and
  • Income tax (AASB 112).

The table below is an extract from the Consultation paper, illustrating the impacts for different types of for-profit entities under Option one:

  Short-term approach Medium-term approach
Alternative 1: RDR Alternative 2: SDR
For profit-entities

(RCF = revised Conceptual Framework)
Publicly accountable entities (Tier 1 GPFS)
Entities voluntarily adopting full IFRS
RCF - no impact N/A N/A
Reporting entities preparing GPFS – RDR N/A – no change RCF - no other impact RCF        disclosures
Non-reporting entities preparing SPFS (ASIC Regulatory Guide 85 compliant that are consolidating and equity accounting (or single entity that is RG 85 compliant) N/A – no change RCF
disclosures to RDR
RCF      
disclosures (4 additional standards)
Non-reporting entities preparing SPFS, RG 85 compliant only (i.e. are not consolidating or equity accounting) N/A – no change RCF
disclosures to RDR, plus consolidation & equity accounting
RCF
disclosures (4 standards), plus consolidation & equity accounting
Non-reporting entities preparing SPFS (non-RG 85 compliant) N/A – no change RCF – other changes depend on specific SPFS selections
to full recognition & measurement
disclosures to RDR, plus consolidation & equity accounting
RCF – other changes depend on specific SPFS selections
to full recognition & measurement
disclosures (9 standards), plus consolidation & equity accounting

Note that similar trends emerge for not-for-profit entities. Those currently preparing Tier 1 or Tier 2 (RDR) GPFS would not be impacted by proposed Option one. SPFS stepping up to Alternative 1: RDR would require additional disclosures whereas those stepping up to Alternative 2: SDR would only require disclosures from four additional standards. In all cases, SPFS would also require consolidation and equity accounting, if appropriate.

Comments sought

Phase 1

For the first phase of this project, the AASB is seeking comments by 9 August 2018 on whether respondents agree with the short-term approach (including Appendix A), which proposes adopting the revised Conceptual Framework in the short-term for ‘publicly accountable’ entities. This includes making amendments to the definition of ‘public accountability’ in AASB 1053 (i.e. by providing more guidance on what is meant by holding assets in a fiduciary capacity).

Phase 2

For the second phase of this project, the AASB is seeking comment on specific questions relating to changes to special purpose reporting by 9 November 2018, including on matters such as:

  • Which general purpose Tier 2 alternative do you prefer, i.e. RDR or the new SDR proposal (including disclosures from nine accounting standards rather than just five)?
  • Should there be only one Tier 2 alternative?
  • Do you have any other suggestions for Tier 2 alternatives?
  • Do you agree with AASB’s decision not to make IFRS for SMEs available for use in Australia as a Tier 2 alternative?
  • When entities prepare general purpose Tier 2 for the first time, what additional transitional relief should be available in addition to what is currently available in AASB 1?
  • What concerns do you have about consolidating subsidiaries and equity accounting associates and joint ventures, and what transitional relief should apply?
We highly recommend interested parties to make their own submissions on the proposals in this Consultation Paper. Alternatively, please contact Aletta Boshoff if you have any comments.