Changes to special purpose financial statements – are you impacted?
Over the last couple of years, we have kept you informed of the Australian Accounting Standards Boards (AASB’s) progress on the updated Australian Reporting Framework project. In December 2019, we discussed the exposure drafts released by the AASB.
2020 has been an unprecedented year, which has resulted in significant focus on issues arising from the COVID-19 pandemic. Now that things are settling into a new normal in many states, it is time to turn our attention back to the AASB’s updated financial reporting framework project and our obligations.
2020 has seen the issue of two standards, and the release of a third standard – which relates to the eligibility of entities for preparation of special purpose financial statements – is imminent.
In this article, we describe the process so you can determine whether the changes will impact you in any way and the quantum of that impact, in particular thinking about the entities who will see changes and the timeframe for adoption.
In a nutshell, what is happening?
The number of entities able to prepare special purpose financial statements reduced when the AASB provided criteria for an entity to determine whether they are required to prepare general purpose financial statements (refer AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Entities.
This means that entities can no longer self-assess whether they are a reporting entity, and choose which accounting standards they will apply.
The impact for entities will depend on the financial statements currently being prepared. For example, an entity preparing special purpose financial statements, which comply with recognition, measurement, consolidation and equity accounting, will have much less impact than an entity that is not complying with recognition and measurement requirements.
Who is impacted?
General purpose financial statements must be prepared if the entity is subject to either of the following:
1. Legislative requirement
The diagram below states the criteria relating to legislation and provides some examples of entities, which will have to prepare general purpose financial statements.
Note that these are examples only and are not an exhaustive list of affected entities.
2. Non-legislative requirement
Many entities may not have any legislative requirement to prepare financial statements and the second criteria considers these entities.
An understanding of the constituting and other documents with which the entity is required to comply is needed to determine whether any of these documents include financial reporting obligations.
As shown in the diagram below, the range of entities potentially affected could be significant.
Grandfathering clause
In order to prevent entities incurring costs to change their constituting and other document, the AASB included a grandfathering provision in the criteria as follows:
Entities need to be aware that any change to the document after 1 July 2021 is a change and if that change has not removed the financial reporting requirements to comply with Australian Accounting Standards then the entity will be required to prepare general purpose financial statements.
Effective date
The mandatory effective date of this change is annual reporting periods beginning on or after 1 July 2021 (i.e. 30 June 2022) year ends.
The AASB has included an incentive in AASB 2020-2 for entities who early adopt.
Using a 30 June reporter to illustrate the incentive below:
| ADOPTION ON MANDATORY DATE OF 30 JUNE 2022 | EARLY ADOPTION AT 30 JUNE 2021 | |
|---|---|---|
| Current year figures | Fully comply with recognition, measurement, consolidation, and equity accounting requirements | Fully comply with recognition, measurement, consolidation, and equity accounting requirements |
| Comparative figures | Fully comply with recognition, measurement, consolidation, and equity accounting requirements | No restatement of comparative figures - present previously reported financial position and performance under special purpose framework |
| Opening balance sheet date (i.e. date to process adjustments to retained earnings) | 1 July 2020 | 1 July 2020 |
As seen, if an entity chooses to early adopt and move to general purpose prior to 30 June 2022 (31 December 2022 for December reporters), there is no requirement to restatement comparative figures.
If an entity has not previously complied with all recognition and measurement requirements and has not consolidated all of it’s subsidiaries and equity accounted all associates and joint ventures, then this restatement of comparatives and audit of the updated figures could be a time-consuming and costly exercise.
We encourage all entities who are potentially impacted by these changes to make contact with your Bentleys advisor to discuss the options for adoption.
We, at Bentleys, are doing everything we can to help businesses come out of this challenging time in good shape.
We will continue to update our COVID-19 resource hub with important developments, so please return soon.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.
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