Significant changes coming for special purpose financial statements

In preparation for the release of the IASB’s revised Conceptual Framework in early 2018, the AASB staff have been considering the impact of the new definition of reporting entities on Australian entities and potential conflicts in current Australian pronouncements, i.e. SAC 1 Definition of the Reporting Entity.

It is not possible to have two definitions of a reporting entity in Australia. Given that we operate under the IFRS regime, the revised definition of a reporting entity to be included in the forthcoming IASB Conceptual Framework document will need to be adopted and therefore SAC 1 will be removed.

This change would remove the ability for entities who report under legislation to prepare special purpose financial statements.

The Board decided to take a two-stage approach in adopting the revised IASB Conceptual Framework in Australia:

• Stage 1 – release the IASB Conceptual Framework in Australia after its international release but restrict its applicability to publicly accountable for-profit private sector entities and other entities who choose to state IFRS compliance within their financial statements. There will be no changes for these entities as the reporting entity concept is not relevant to them since they already prepare Tier 1 financial statements.
• Stage 2 – the Conceptual Framework will be released for all other entities. When this is released in Stage 2 entities who prepare financial statements under the legislation will be required to prepare general purpose financial statements.

Under this approach, there will be two Conceptual Frameworks in place over the same set of accounting standards. This is not sustainable for a significant period of time as it will lead to confusion and complexity. However, the Board believes that the two-stage approach is necessary to allow entities time to transition to general purpose financial statements.

The AASB was in the process of reviewing the Australian reporting framework to remove the ability of entities to self-assess their reporting status and ‘choose’ the content of their financial reports. However, the impending release of the revised Conceptual Framework has accelerated the timeframe for this project.

How will stage 2 be implemented?

The AASB preference is for legislative change where regulators require only those entities that should publicly lodge general purpose financial statements to prepare financial statements, however, this may take time.

As an alternative to changing legislation, the AASB will provide an option in its consultation paper on the Conceptual Framework that they could:

• Remove SAC 1; and
• Amend AASB 1053 Application of Tiers of Australian Accounting Standards to state that an entity required by legislation to prepare financial statements in accordance with Australian Accounting Standards must comply with a Tier 2 specified accounting framework.

In the consultation paper, there would be two Tier 2 options presented:

1. The current Tier 2, i.e. Reduced Disclosure Requirements being compliance with all recognition and measurement requirements and reduced disclosures as highlighted in the current accounting standards; or
2. Alternative Tier 2 – being all recognition and measurement criteria, disclosures from AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors and others based on feedback such as AASB 15 Revenue from Contracts with Customers, AASB 124 Related Party Disclosures. The requirement for the preparation of consolidated accounts will be addressed.

What do you need to do?

If you are currently lodging special purpose financial statements with a regulator, e.g. ASIC, ACNC, State Regulators then talk to your Bentleys Advisor in relation to potential changes to your reported financial position, performance and disclosures.