Since 2013 the International Accounting Standards Board (“IASB”) has been working to revise and update the Conceptual Framework for Financial Reporting – the document that sets out the overarching principles that underpin IFRS. Not very exciting, I hear you say. But stay with me because soon you will be.
You see, the IASB Conceptual Framework describes the objective of, and the concepts for, general purpose financial reporting under IFRS. It also defines the concept of a ‘reporting entity’. Those concepts and definitions in the revised Conceptual Framework are different to those currently defined in SAC 1 Definition of the Reporting Entity and referred to in each Australian Accounting Standard.
As the AASB is set on ensuring that Australian accounting standards are IFRS compliant, this means they are intending to change the Australian financial reporting framework as well.
The AASB believes that SAC 1 is not working well at the individual entity level and there is inconsistency in how entities self-assess whether they are a reporting entity and so does not provide a level playing field for all entities. A 2013 ASIC report on a review of 200 large proprietary company accounts found that 75% prepared special purpose financial reports on the basis that the company was not a reporting entity. This is consistent with a AASB Research Report issued in 2014 that found that approximately 80% of a sample of 394 large proprietary companies lodged special purpose financial reports.
In order to level the playing field, the AASB is proposing:
- that the ability of entities to prepare special purpose financial statements would be removed once the revised IASB Conceptual Framework is adopted in Australia, as it has a different notion of ‘reporting entity’;
- a longer-term approach of removing the current reporting entity concept, maintaining one Conceptual Framework and providing two tiers of general purpose financial reporting (“GPFR”) requirements - Tier 1 and Tier 2.
- Tier 1 would be consistent with current Tier 1 requirements under AASB 1053. That is, full GPFR complying with all requirements of Accounting Standards; and
- two options for Tier 2 GPFR:
- the existing Reduced Disclosure Requirements (RDR) described in AASB 1053; and
- a new option representing the requirements in ASIC Regulatory Guide RG85, with some additional disclosures.
The new option would comprise the full recognition, measurement, consolidation and equity method of accounting requirements in the Standards, and the disclosure requirements in AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, AASB 1048 Interpretation of Standards, AASB 15 Revenue from Contracts with Customers, AASB 124 Related Party Disclosures and AASB 136 Impairment of Assets.
In addition, service performance reporting, fundraising and administration cost disclosures could be made mandatory for not-for-profit private sector entities.
The AASB’s ideal long-term goal is to abolish special purpose financial statements by working with regulators to amend legislation so that entities that are required to publicly lodge financial statements do so by preparing general purpose financial statements.
This approach would capture all proprietary companies lodging financial statements with ASIC; all medium and large charities lodging financial statements with ACNC; as well as other entities required to lodge financial statements with any other regulator. Basically, any entity required to prepare financial statements in accordance with Australian Accounting Standards could be caught, resulting in the adoption of full recognition and measurement requirements of the Standards. For example, the current practice of not consolidating controlled entities by relying on the ‘non-reporting entity’ carve out in AASB 10 would no longer be permitted.
No one is underestimating the enormity of achieving coordinated, multi-jurisdictional change to the myriad of current legislative requirements relating to financial reporting. However, even a change affecting only ASIC and ACNC reporting requirements would have significant effects on hundreds of entities.
The AASB’s Consultation Paper is due to be issued soon. We strongly encourage you to view the detailed proposals at www.aasb.gov.au and submit your views to the AASB.
Special purpose financial reports are not quite dead yet, but they just might be on their last legs. To borrow a line from My Way, “and now the end is near..”.
There’s a lot of uncertainty regarding the practical effects of the proposed changes but, if implemented as proposed, will have a monumental change on the financial reporting framework in Australia.
Martin has been appointed to the AASB’s Conceptual Framework Project Advisory Panel.