If you are responsible for preparing a client’s SMSF’s annual Financial Report, a new accounting standard released by the Australian Accounting Standards Board (AASB) may affect its creation or amendment when the Standard comes into effect in July 2021.
This article was originally published 28 August 2020.
If you are responsible for preparing a client’s SMSF’s annual Financial Report, a new accounting standard released by the Australian Accounting Standards Board (AASB) may affect its creation or amendment when the Standard comes into effect in July 2021. It is important you understand these requirements prior to this date to ensure your clients understand what it means for their financial reporting needs – as in many cases there will be decreased flexibility and a higher level of reporting.
The bigger picture
Specifically, we are referring to the new Amendments to Australian Accounting Standards - Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (AASB 2020-2) standard.
This change is part of a broader fundamental change to ensure Australia’s Accounting Standards are under one framework and align with International Financial Reporting Standards (IFRS). This will ensure consistency and transparency in the way financial reports are made. Part of this change means the use of Special Purpose Financial Statements (SPFSs) will eventually become obsolete, in the scenario where an entity must comply with financial statements in line with Australian Accounting Standards (AAS). This means the application of a ‘reporting entity’ will no longer apply.
This drastically changes the reporting landscape in Australia and will require special planning and consideration of the new conceptual framework.
Special Purpose Financial Statements – which typically allow preparers to self-assess their reporting requirements in a free-form way - will be replaced with a General Purpose Financial Statement (GPFS). A GPFS must apply the AAS rules; are more rigid in their application, and include balance sheet, income statement, statement of owner’s equity/retained earnings, and statement of cash flows. Under the new model, depending on an entity’s circumstances, the GPFS financial reports will take a tiered approach.
How does this affect SMSFs and how can advisers be prepared for this change?
With the introduction of AASB 2020-2, reporting requirements of certain for-profit private entities will be affected. Australian SMSF advisers may no longer be able to prepare SPFS for their SMSF clients - depending on the clauses in the fund’s trust deed.
1 July 2021 is the key date in understanding whether your clients will be impacted by the changes or not. Any trust deeds set up or amended prior to this date, and which contain a clause that requires the preparation of financial statements in accordance with the AAS, will no longer be able to self-assess their financial reporting requirements and prepare SPFSs after this date.
Any trust deeds established after this date will must not contain this same clause.
Why does this clause now matter?
Any references to compliance with the AAS now relate to a defined set of accounting standards, according to the Australian Taxation Office (ATO). Trust deeds with this clause now require the preparation of GPFSs, either Tier 1 (complying with recognition, measurement and disclosure requirements) or the new Tier 2 (complying with recognition and measurement requirements, and simplified disclosures).
Self-assessed SPFSs will still be permitted in limited circumstances. For example, advisers producing financial statements that comply with “generally accepted accounting principles” - where these principles are not defined as meaning the same thing as the AAS - can still produce SPFSs. However, to produce a SPFS there must be a clear understanding of what your clients need so their statements can be appropriately tailored.
Is anyone excluded from these changes?
As many SMSF trust deeds do not actually refer to the AAS - rather to Australia’s super laws - these changes may not be an issue for your clients.
In addition, these rule changes do not apply to non-profits in the private sector, nor to public sector entities, as the reporting requirements of each will be subject to future consideration by the AASB - something to keep an eye on as the year progresses. In saying this, with a plan to change reporting requirements across the board, it is important these changes are considered when drafting documents for NFP entities.
How can you prepare for these changes?
For SMSF advisers and accountants preparing financial reports, the best way to prepare for these changes is to understand how they impact the requirements you are interpreting, and the documents you are drafting/amending.
This is a good opportunity to sit down with trustees, old and new, and discuss their financial reporting needs before finalising any new drafts or amendments to their SMSF trust deeds. While there is an exemption from the requirement to prepare GPFS for existing for-profit entities, it is important trust deeds are reviewed every few years to ensure they are in line with the trustee’s investments and new standards. At this point, trustees will need to comply with AASB 2020-2.
It is likely you will need to explain the options available to your clients in terms of financial reporting, as they may not know the difference between a SPFS and GPFS, nor the flexibility that has come with preparing a SPFS in the past. Some may still desire this flexibility, in which case you will need to be careful how you word their trust deed.
Advice on new wording
The ATO has provided a number of helpful examples for advisers to better understand how to work with the new rules around AAS clauses.
To use an example, for those SMSF clients who still wish for flexibility, instead of referring to accounting standards or accounting principles, the trust deed could instead require that the annual financial reports are prepared, “as specified by the beneficiaries,” or “in accordance with the directions of the trustee.”
For more detailed advice on the changes as well as a greater list of examples, see the ATO’s fact sheet on AASB 2020-2.
If you would like to discuss how these changes may impact your clients and the advice you provide, or you require further assistance implementing a robust plan in this changing economy, contact your local Partner today.