Special purpose financial statements

Days are numbered for special purpose financial statements in Australia

Entities currently preparing special purpose financial statements (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.

For many years, thousands of Australian entities lodging financial statements with the Australian Securities and Investments Commission (ASIC) have been permitted to submit special purpose financial statements (SPFS) if management determine that the entity is not a ‘reporting entity’ as defined in Statement of Accounting Concept (SAC) 1.

Other entities preparing financial statements for other regulators such as the Australian Charities and Not-for-profits Commission (ACNC), associations and co-operatives, have also been able to submit SPFS.

What is a ‘reporting entity’?

SAC 1 Definition of the Reporting Entity (issued 1990 and still effective) introduced the concept of a ‘reporting entity’. It did not include an actual definition, but explains the concept of a ‘reporting entity’ as:

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.

SAC 1, paragraph 40

To identify whether there are users that are dependent on GPFS, SAC 1 requires entities to consider:

  • Whether there is a separation of management and shareholders
  • Whether the entity is of economic or political influence to society, and
  • The size or indebtedness of an entity (and in the case of non-business or not-for-profit entities, the amount of resources provided or allocated by governments or other parties).

Judgement is required when concluding whether an entity or group is a reporting entity or not, and this self-assessment process by entities has potentially led to more entities considering themselves ‘non-reporting’ than is probably appropriate.

Listed entities, disclosing entities, registered managed investment schemes, co-operatives issuing debentures, APRA regulated superannuation funds, and the Australian Government, State, Territory and Local Governments will always be considered ‘reporting entities’ under AASB 1053 Application of Tiers of Australian Accounting Standards and required to prepare GPFS.

Why is this distinction between ‘reporting entity’ and ‘non-reporting entity’ so important?

For most non-reporting entities, avoiding consolidation and disclosing related party transactions are deal breakers.

Australian Accounting Standards as issued by the AASB generally apply only to ‘reporting entities’, those preparing full general purpose financial statements (GPFS), and those preparing GPFS using the reduced disclosures (RDR). This means that ‘non-reporting entities’ are left to pick and choose which standards they apply and which they don’t.

Research has shown that in many cases, financial statements lodged with regulators are not comparable between entities because they do not apply all the recognition and measurement principles of Australian Accounting Standards.

For entities preparing SPFS that do follow ASIC’s Regulatory Guide 85 Reporting requirements for non-reporting entities, (i.e. they comply with all the recognition and measurement requirements of Australian Accounting Standards), the ‘deal breaker’ for them as to why they prefer SPFS over RDR or full GPFS is the ability to avoid consolidation and related party disclosures. RG 65 considers consolidation to be a presentation requirement and not related to recognition and measurement.

Why are things changing?

On 29 March 2018, the International Accounting Standards Board issued its revised Conceptual Framework (Framework) which applies to annual periods beginning on or after 1 January 2020. This revised Framework will be adopted by the AASB in Australia and has a different concept of ‘reporting entity’ than SAC 1.

The Framework, in paragraph 3.10 defines a ‘reporting entity’ as an entity that is required, or chooses, to prepare financial statements. It provides guidance on determining the boundaries of a reporting entity.

In anticipation of the revised Framework, the AASB noted in its February Action Alert that in order to be compliant with international accounting standards, the concept of ‘non-reporting entities’ in Australia would need to be removed in order for entities preparing financial statements using Australian Accounting Standards to be compliant with IFRS.

How will the ‘non-reporting’ entity concept be removed?

Firstly, SAC 1 will be withdrawn. The application paragraphs of all Australian Accounting Standards will also need to be amended to remove references to a ‘reporting entity’.

Are there any circumstances where SPFS could still be prepared?

It is envisaged that wherever financial statements are required to be prepared in accordance with Australian Accounting Standards (for example, for lodgement with a regulator), these will need to be general purpose. However, if there is no requirement to comply with ‘Australian Accounting Standards’ then there would be scope to prepare SPFS.

When will the ‘non-reporting entity’ concept be removed?

The revised Framework applies to annual periods beginning on or after 1 January 2020, so ideally, to be consistent, SPFS should no longer be permitted from this date. However, the AASB notes in its February Action Alert the following transitional approach:

Short-term approach

This involves the AASB having both the old and new Frameworks on issue. The new Framework will apply to all ‘publicly accountable entities’ (e.g. listed and disclosing entities) so that their financial statements remain IFRS compliant from 1 January 2020.

The old Framework will be retained in the short-term so entities that are not publicly accountable can continue to prepare SPFS.

Longer-term approach

In the longer term (although no date indicated), the ‘reporting entity’ concept will be removed and financial statements prepared in accordance with Australian Accounting Standards will be GPFS, either Tier 1 or Tier 2 as described in AASB 1053:

TierExamples of entitiesFinancial report required
  • Listed entities
  • Disclosing entities
  • Registered managed investment schemes
  • APRA regulated superannuation funds
  • Co-operatives issuing debentures
  • Australian Government
  • State and Territory Governments
  • Local Governments
  • Certain unlisted public companies
  • Private companies
  • Clubs
  • Charities
  • Independent schools
Reduced disclosures (RDR)

Consultation on Tier 2 financial reporting

While AASB 1053 currently requires, at a minimum, RDR for Tier 2 financial reporting, at the time of writing, the AASB is expected to issue a Consultation Paper seeking comment on two possible options for Tier 2 reporting, i.e.:

  1. RDR, and
  2. Something similar to ASIC’s Regulatory Guide 85 Reporting requirements for non-reporting entities,including compliance with all the recognition and measurement requirements, equity accounting and consolidation, as well as disclosures from:
    • AASB 101 Presentation of Financial Statements
    • AASB 107 Statement of Cash Flows
    • AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
    • AASB 15 Revenue from Contracts with Customers
    • AASB 124 Related Party Disclosures, and
    • AASB 136 Impairment of Assets.

Once issued, we highly recommend interested parties to make submissions on the proposals in this Consultation Paper.