Special purpose financial statements to be scrapped from 2021
On 15 August 2019, the Australian Accounting Standards Board (AASB) issued Exposure Draft ED 297 Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities.
Are special purpose financial statements (SPFS) being scrapped completely for all entities?
No. As evident in the name of the exposure draft, the AASB is proposing to scrap SPFS, but at this stage only for for-profit private sector entities.
The proposals in ED 297 to scrap special purpose financial statements only apply to for-profit private sector entities.
Accordingly, the proposals do not apply to:
- Not-for-profit entities (private and public sector), and
- For-profit public sector entities.
Which for-profit private sector entities will be impacted?
The changes will 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’, and
- 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 2020.
(e.g. Part 2M of Corporations Act 2001
CONSTITUTIONS / OTHER DOCUMENTS (e.g. trust deeds) CREATED OR AMENDED ON OR AFTER 1 JULY 2020
Many constitutions and other documents presently refer to 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 proposals will only impact entities whose constitutions or other documents were created or amended on or after 1 July 2020, which is the date that the proposals 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 2021 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 2020, and not amended on or after 1 July 2020.
Why are SPFS being scrapped?
ED 297 outlines the AASB’s rationale for the need to scrap SPFS. In summary, some of the main reasons for issuing the Exposure Draft, based on the AASB’s research, outreach and consultation to date, include:
- Australia is the only jurisdiction that permits entities to self-assess what type of financial reporting framework is applied in preparing financial reports.
- The reporting entity concept in SAC 1 Definition of a Reporting Entity is not well understood and not always applied as intended. Many entities lodge SPFS on the public record that are ultimately accessed from ASIC’s database, suggesting the existence of users that require general purpose financial information.
- Regulators cannot enforce the SAC 1 reporting entity concept because its application is subject to significant judgement.
- There is inconsistent application of the recognition and measurement requirements of Australian Accounting Standards by entities preparing SPFS. This leads to incomparability of results between entities preparing SPFS.
- Many entities preparing SPFS fail to identify whether they have complied with all the recognition and measurement requirements of Australia Accounting Standards, making it difficult for users to understand the accounting.
- Key related party information is frequently not disclosed because entities preparing SPFS under Part 2M of the Corporations Act 2001 are not specifically required to comply with AASB 124 Related Party Disclosures.
- Consolidated financial statements are often not prepared by parent entities that lodge financial statements with ASIC and that have groups with diverse trading operations.
When are the proposals expected to be effective?
The proposals are expected to be effective for annual periods beginning on or after 1 July 2020 (i.e. 30 June 2021 year-ends for June balancing entities and 31 December 2021 for December balancing entities).
Will all entities currently preparing SPFS be required to prepare full Tier 1 GPFS in future?
No. Such entities are not publicly accountable entities under AASB 1053 Application of Tiers of Australian Accounting Standards and are therefore able to produce general purpose financial statements (GPFS) applying the Tier 2 requirements.
What are the Tier 2 reporting requirements?
For entities currently preparing SPFS, the ED 297 proposals will require at a minimum Tier 2 financial statements in future. This involves applying all recognition and measurement requirements of Australian Accounting Standards, but a reduced level of disclosure compared to Tier 1 (full GPFS).
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, and also to prepare consolidated financial statements.
The reduced level of disclosure for Tier 2 entities is currently referred to as the Reduced Disclosure Requirements (RDR). However, ED 295 General Purpose Financial Reporting – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities, issued by the AASB on 1 August 2019, proposes to reduce the RDR disclosures even further. ED 295 proposes ‘simplified disclosures’, the extent of which fall somewhere between what is presently required by the five mandatory standards for Corporations Act (Part 2M) financial reporting, and the current RDR.
While NFP Tier 2 entities will benefit from these simplified disclosures if preparing Tier 2 GPFS, they will still be able to prepare SPFS beyond 2021 (if appropriate). However, for-profit private sector entities that are not publicly accountable entities under AASB 1053 will be required to apply the new ‘simplified disclosures’ in GPFS.
The main differences between the approach for RDR and ‘simplified disclosures’ include:
|Existing Reduced disclosure requirements (RDR)
||Proposed ‘Simplified disclosures’
|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 will be included in a separate disclosure standard for Tier 2 entities
|Financial reporting framework referred to as Australian Accounting Standards – Reduced Disclosure Requirements
||Financial reporting framework referred to as Australian Accounting Standards – Simplified Disclosures
Please refer to our August 2019 Accounting News article for more information on these ‘simplified disclosures’.
Are there any transitional requirements to assist in first-time preparation of GPFS – Tier 2 financial statements?
Yes. Amendments will be made to AASB 1 First-time Adoption of Australian Accounting Standards so that entities preparing GPFS under the Tier 2 requirements for the first time will be able to choose not to:
- Restate comparative information for adjustments made as a result of recognition and measurement differences, and
- Disclose information required for Tier 2 disclosures in the comparative period if that information was not required or disclosed in the previous SPFS.
If the transitional relief is applied, the date of transition will be the beginning of the reporting period (for example, 1 July 2020 for June year-ends) rather than the beginning of the earliest comparative period presented. Using a 30 June financial year-end as an example, this means that:
- Any measurement adjustments would be processed via opening retained earnings on 1 July 2020 (rather than 1 July 2019, which is the beginning of earliest period presented),
- Two balance sheets would be presented – one at the end of the reporting period (30 June 2021) and one on transition date (1 July 2020),
- Two statements of profit or loss and other comprehensive income are presented:
- One for the year ended 30 June 2021 (prepared under Australian Accounting Standards), and
- Another for the year ended 30 June 2020 (prepared on special purpose basis for the prior period),
- Full comparative information would therefore not be required. Instead, AASB 1 requires disclosure of adjustments when transitioning from SPFS on 1 July 2020 to Tier 2 GPFS. This is done by including in the notes to the financial statements:
- The prior year balance sheet (year ended 30 June 2020), and a description of the main adjustments required in preparing the opening balance sheet on 1 July 2020 (i.e. no quantification required), and
- A description of the main adjustments that would have been required to make the comparative special purpose statement of profit or loss and other comprehensive income compliant with Australian Accounting Standards (i.e. no quantification required), and
- Any comparative information presented must be prominently labelled as not being compliant with Australian Accounting Standards.
What changes will be made to Australian Accounting Standards in order for the removal of SPFS to take effect?
In order for the removal of SPFS to take effect, the application paragraphs of various documents will be amended as outlined below:
- Conceptual Framework for Financial Reporting (New Conceptual Framework) – currently only applicable to publicly accountable entities from 1 January 2020, application will be extended to include for-profit private sector entities as described above from 1 July 2020
- Framework for the Preparation and Presentation of Financial Statements (Old Framework) – application to for-profit private sector entities as described above will cease from 1 July 2020
- SAC 1 Definition of a Reporting Entity – application to for-profit private sector entities as described above will cease from 1 July 2020, and
- AASB 1057 Application of Australian Accounting Standards - application will be extended to include for-profit private sector entities as described above from 1 July 2020.
AASB 10 Consolidated Financial Statements
The AASB 10 Consolidated Financial Statements, paragraph Aus 4.2 requirement for the ultimate Australian parent entity to prepare consolidated financial statements (if it or the group is a ‘reporting entity’ under SAC 1) will be amended. Australian group financial statements will only be required if the ultimate Australian parent is required by legislation to prepare financial statements in accordance with Australian Accounting Standards or accounting standards.