Scrapping special purpose financial statements becoming a reality but RDR is not the answer

At its February 2019 meeting, the Australian Accounting Standards Board (AASB) decided that it will proceed with proposals to remove the ability of for-profit private sector entities that currently prepare special purpose financial statements (SPFS) to self-assess their reporting entity status if they are required to lodge financial statements with ASIC and/or other regulators that would make the information publicly available.

These entities will, in future, be required to prepare general purpose financial statements (GPFS) using a Tier 2 general purpose reporting framework.

What is the AASB proposing?

Phase 2 of the AASB’s Consultation Paper ITC 39 Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems proposed two alternatives of what a general purpose reporting framework might look like for Tier 2 entities:

  • Alternative 1 – GPFS – Reduced Disclosure Requirements (RDR), or
  • Alternative 2 – GPFS – Specified Disclosure Requirements (SDR).

However, at its February 2019 meeting, the AASB decided not to proceed with either of these two alternatives.

The AASB has indicated that it will instead issue an Exposure Draft which proposes only one Tier 2 GPFS framework. This framework:
  • Will replace the existing RDR framework
  • Will require compliance with all recognition and measurement requirements of Australian Accounting Standards, including consolidation and equity accounting
  • Will include disclosures based on the existing IFRS for SMEs standard.

What would this IFRS for SMEs disclosure standard look like?

It is important to note that the AASB is not proposing to adopt IFRS for SMEs as the general purpose reporting framework for Tier 2 entities.

The extent of disclosures for Tier 2 entities will be based on, and similar to, the disclosures required by the IFRS for SMEs standard, but all recognition and measurement requirements of IFRS will be required. IFRS for SMEs does not include the latest recognition and measurement requirements of IFRS, for example as outlined in IFRS 9, 15 and 16.

Why not SDR?

It appears that SDR (specified disclosure requirements) proposed in Phase 2 of the AASB Consultation Paper with respect to the future of special purpose financial reporting did not gain traction as an alternative for general purpose financial reporting by Tier 2 entities because of the extensive disclosure requirements in some standards (revenue, impairment, related parties and income taxes), to the exclusion of possibly material disclosures in other standards.

Fewer disclosures under an IFRS for SMEs-based standard

If the same pattern of disclosure reduction continues from when RDR was first published in 2010 (i.e. in 2010, IFRS for SMEs had approximately half of the number of disclosures as RDR), the good news is that entities will likely have far fewer disclosure requirements in an IFRS for SMEs-based standard than under RDR.

Of course, the downside is that consolidation and equity accounting will involve a lot more work for preparers of financial statements.

What about transitional relief on first-time preparation of GPFS?

In order to ensure that transition from SPFR to Tier 2 GPFS is not unduly burdensome or costly, the AASB indicated that further research and outreach is required to determine what transitional relief is appropriate.

Other than an increased level of disclosure, we do not anticipate a difficult transition process for single entities preparing Tier 2 GPFS for the first time (on the assumption that all recognition and measurement requirements had been applied in the past). However, for groups requiring consolidation and/or equity accounting, information required to fully restate comparatives may not be available and could be costly to obtain.

Timing

No application date for scrapping SPFS was discussed at this AASB meeting. However, it was noted that a final staff analysis and draft Exposure Draft of the IFRS for SMEs-based disclosure standard will be discussed by the AASB at its next meeting (30 April – 1 May 2019). We will keep you updated on progress of this project in future editions of Accounting News.

Conclusion

At time of writing, it is unclear how these proposed changes will impact significant global entities (SGEs) or other Tier 2 entities currently preparing GPFS using RDR. In our view, it might lead to fewer disclosures being required.