Are special purpose financial statements still required in Australia?

The days are numbered for special purpose financial statements (SPFS) in Australia. We are now moving to an SPFS-free framework, which is the result of extensive research, evidence-gathering and stakeholder engagement by the Australian Accounting Standards Board (AASB).

However, this change does not impact everyone; entities that don’t need to comply with Australian Accounting Standards (AAS) may still prepare SPFS.

AAS are based on International Financial Reporting Standards (IFRS), which have been developed primarily to cater to financial reporting by listed companies and others operating within global capital markets.

IFRS was incorporated into AAS in 2005. Since then, the Australian financial reporting framework has accommodated the preparation of SPFS in some circumstances.

In recent years, a tier 2 framework for general purpose financial statements (GPFS) has also been introduced, enabling reduced disclosures, while retaining all recognition and measurement requirements of AAS.

Going forward, the AASB will include a tier 1 framework based on all IFRS requirements, and a new tier 2 simplified-disclosure framework.

SPFS will no longer be an option. These changes are set to affect for-profit entities initially. Eventually, not-for-profit (NFP) private sector entities and public sector entities will also be covered.

What replaces SPFS, and when?

At the March meeting of the AASB, the board approved the proposal to remove the ability of certain for-profit entities to prepare SPFS, with effect from 1 July 2021.

Large proprietary companies, unlisted public companies and others with a statutory obligation to prepare financials in accordance with AAS will be among those affected.

These companies will no longer be able to prepare and lodge SPFS with the Australian Securities and Investments Commission (ASIC). However, not all companies currently lodging will be impacted by the change, as the financial reporting thresholds under the Corporations Act for large proprietary companies have been raised.

Initially, the AASB proposed to introduce the changes from 1 July 2020.

CPA Australia and Chartered Accountants Australia and New Zealand (CAANZ) made a joint submission requesting to defer the changes by two years.

Other stakeholders made similar requests, following which the AASB decided to delay implementation by a year to financial years commencing on or after 1 July 2021.

To encourage early adoption, the AASB is providing transitional relief from restating and presenting comparative information.

However, this is only available for early adopters, and not for entities that choose to implement the changes when they become effective for periods commencing 1 July 2021.

Entities that prepare SPFS for the year to 30 June 2021 will be required to make disclosures about compliance with recognition and measurement requirements.

Similar disclosure requirements are already in place for NFP entities preparing SPFS.

The AASB observed that since thresholds were recently raised for proprietary companies for accounting periods ending 30 June 2020 and beyond, there would be some regulatory expectation for large proprietary companies to be early adopters under the new thresholds.

Entities with a non-legislative requirement to prepare AAS-compliant financial statements are exempt.

This will mean, for example, that a for-profit trust or entity that prepares AAS-based financial statements – if required to do so by its constituting document – will be unaffected.

However, this exemption will only apply where such documents were created or amended before 1 July 2021.

What about private sector NFPs and public sector entities?

For-profit entities’ ability to prepare SPFS will be removed first, followed by that of private-sector NFPs, and finally the public sector. The AASB has acknowledged the challenges involved for NFPs in removing their ability to prepare SPFS.

One of the biggest challenges faced by the NFP sector is that statutory requirements start at far lower thresholds. For example, a charity registered with the Australian Charities and Not-for-profits Commission (ACNC) with revenue exceeding A$250,000 is required to prepare and lodge financial reports in accordance with AAS. Removing the ability to prepare SPFS could create an unnecessary impost on many smaller NFPs.

To address this, the AASB is considering a simpler tier 3 accruals-based reporting solution for smaller NFPs, and a further cash-based tier 4 solution for the smallest NFPs.

New Zealand has in place a similar four-tiered NFP financial reporting framework. There are numerous Commonwealth and state/territory regulators responsible for a diverse range of NFPs across Australia. The AASB is in consultation with these regulators in developing the reporting framework.

There would be some regulatory expectation for large proprietary companies under the new thresholds to be early adopters.

As an interim measure, the AASB has introduced AASB 2019-4, which requires NFPs preparing SPFS to make certain compliance disclosures with the recognition and measurement requirements of AAS. Disclosures relating to consolidation and equity accounting will also be required.

These requirements are effective for accounting periods ending on, or after 30 June 2020, and only apply to NFPs required to apply AASB 1054 Australian Additional Disclosures, such as those NFPs required to lodge financials with the ACNC or ASIC.

Most public sector entities across all three tiers of Australian Government prepare tier 1 or tier 2 GPFS. Although changes arising from the AASB’s last tranche of its Financial Reporting Framework project are not expected to significantly impact the public sector, we await publication of the detailed proposals to get a better understanding of the potential impact.

The AASB hopes to issue an exposure draft on its NFP financial reporting framework proposals later this year, with a finalised standard following in the second half of 2021. We expect any changes to the NFP reporting framework to come into effect after 2022.

The public sector reporting framework is expected to be developed and published once work on the NFP reporting framework is completed, but indicative timelines have not been published.

A new definition of "not-for-profit"

In order to implement a differential reporting framework for the for-profit and NFP (private and public) sectors, the AASB sought to revise its NFP definition in order to demarcate between the sectors. This is the approved definition:

“An entity whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.”

The AASB has also decided to include a statement in the implementation guidance to address feedback that some entities, currently classified as NFPs, may no longer be able to meet this definition. This states that “an entity is an NFP for financial reporting purposes, if an NFP for taxation purpose, unless its primary purpose is for the financial benefit of its equity holder(s)”.

There may be some entities that are currently considered NFPs, including some charities, that may not be able to meet this new NFP definition as they do provide financial benefits to their equity holders.

An example would be a trading subsidiary of a charity that is currently classified as an NFP, with the primary objective of generating profits that are all remitted to its charity parent in order for charitable activities to take place.

The AASB is considering developing additional implementation guidance and illustrative examples to address some of the challenges that may arise with this new definition.

The AASB has issued two standards to remove SPFS for some for-profit entities and new tier 2 simplified disclosures. These standards can be accessed at aasb.gov.au.

A new tier 2 reporting solution simplifying disclosures

The AASB has approved a new simplified disclosure standard (SDS) to replace the current tier 2 reduced disclosure requirements (RDR) framework. This is effective from 1 July 2021, to align with the removal of SPFS for certain for-profit entities.

The new SDS will impact entities reporting under the existing tier 2 RDR framework, including entities from the for-profit sector, the NFP private sector and the public sector.

For accounting periods commencing on or after 1 July 2021, for-profit entities that currently prepare SPFS will also be required to apply the new standard as a minimum, when preparing their GPFS.

This standard is based on the disclosures in the IFRS for small and medium-sized entities. In contrast to the current tier 2 RDR framework, which is spread out over the AAS suite of standards, the new Tier 2 SDS is a one-stop shop, covering all disclosure requirements within one standard.

Some Australia-specific modifications have also been made, including a tax reconciliation disclosure and disclosure of imputation credits.

Improved transparency, comparability and consistency of financial statements are the primary drivers behind this multi-pronged project. While this initiative is expected to contribute to economic integrity in the Australian market, achieving these improvements will require a balance between the cost of changes and anticipated benefits.

The extensive consultation process, research and outreach activities being undertaken are all aimed at achieving the right balance in bringing about the biggest change to financial reporting in Australia since the introduction of IFRS more than a decade ago.

Ram Subramanian is CPA Australia’s policy adviser – reporting.

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