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.
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 |
Under existing Australian financial reporting frameworks, once SAC 1 is withdrawn, non-reporting entities (i.e. entities that are not ‘reporting entities’ under SAC 1) complying with ‘Australian Accounting Standards’ will need to:
However, if there is no requirement to comply with ‘Australian Accounting Standards’ then there would be scope to prepare SPFS in their current form.
Given that 1 January 2020 (commencement date for Conceptual Framework) is just over 18 months away, the AASB is aware that:
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.
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:
| 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:
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:
| 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:
| 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. |
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:
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.
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).
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:
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.