At a glance
- Following a significant overhaul of Australia’s financial reporting framework, for-profit organisations with 30 June year-ends are advised to begin preparing for transition now.
- Early adopters can expect some transitional relief from having to restate comparatives in the first general purpose financial statements prepared after the transition.
- The first tranche of changes apply to for-profit entities, but the Australian Accounting Standards Board is progressing to the next phase, which involves private sector not-for-profit entities.
With the first of the three-phase Australian financial reporting framework project finalised in March 2020, the Australian Accounting Standards Board (AASB) approved the removal of the ability of certain for-profit companies to prepare special purpose financial statements (SPFS).
Legislative and non-legislative requirements
For-profit entities that are required by legislation to prepare financial statements in accordance with Australian Accounting Standards (AAS) will no longer be able to prepare SPFS for accounting periods beginning on or after 1 July 2021.
Affected entities include those required to prepare financial statements under legislation such as the Corporations Act 2001, including large proprietary companies, foreign-controlled small proprietary companies, financial service licensees and unlisted public companies among others.
Some entities with a non-legislative requirement to prepare financial statements may also be affected if they have to prepare financial statements in accordance with AAS under a constituting or other document (such as a trust deed, articles of association or a loan agreement).
To identify whether an entity subject to non-legislative requirements is is affected, two questions need to be considered:
- Is the entity required, in a constituting or another document, to prepare financial statements in accordance with AAS?
- Was the constituting or other document created, or changed for any reason, on or after 1 July 2021?
If the answer is “Yes” to both questions, then the affected entity is no longer able to prepare SPFS for periods beginning on or after 1 July 2021. However, if the answer is “No” to either question, then the entity is not affected.
Impact on affected entities
Entities that currently prepare SPFS and are affected by the changes discussed above must start preparing general purpose financial statements (GPFS) for accounting periods beginning on or after 1 July 2021 (for most, for the financial year ending 30 June 2022 and beyond).
It is expected that affected entities that currently prepare SPFS can prepare Tier 2 GPFS that include meeting the full recognition and measurement requirements of all AAS, but with the presentation and simplified disclosures set out in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060).
Full recognition and measurement requirements will include consolidation and equity accounting where relevant, applying the new revenue and lease accounting requirements and the more established requirements for fair value and impairment accounting where required.
There are some entities that currently prepare SPFS compliant with full recognition and measurement requirements, and these entities will only have to consider the additional disclosure requirements arising from AASB 1060.
AASB 1060 is based on the International Financial Reporting Standard for Small and Medium-Sized Entities issued by the International Accounting Standards Board (IASB).
The standard incorporates the disclosures needed for Tier 2 GPFS and prescribes the presentation of the primary financial statements. The presentation requirements in AASB 1060 are essentially those included in the full AAS.
Entities that are currently preparing SPFS that are not compliant with all recognition and measurement requirements of AAS and that will be transitioning to Tier 2 GPFS for the first time will need to either apply all the relevant requirements of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, or the requirements in AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors/.
A further category of affected entities, both for-profit and not-for-profit, is those that currently prepare Tier 2 GPFS.
Although the AASB changes are not expected to significantly affect such entities, from 1 July 2021 they will have had to move from preparing Tier 2 GPFS based on Reduced Disclosure Requirements to Tier 2 GPFS that include the simplified disclosures set out in AASB 1060.
CPA Australia Resource
Transitional relief for early adopters
Some transitional relief in relation to comparative information is available to entities that move to the new GPFS requirements early, for financial reporting periods beginning before 1 July 2021.
Early adopters currently preparing SPFS or Tier 2 GPFS will be exempt from providing comparative disclosures not previously made. In other words, they can choose not to restate their comparative figures for the previous year.
As part of the transitional relief provisions, the AASB has also indicated that early and on-time adopters will not need to distinguish accounting errors from changes in accounting policies in the first GPFS prepared following transition.
What about not-for-profits?
The AASB is currently progressing the next phase of its project, which involves removing SPFS for private sector not-for-profit entities, with the detailed proposals expected to be made available for public consultation in the second half of 2021.
Proposed reforms to the public sector financial reporting framework are expected down the line, when there is some certainty around the framework applying to private sector not-for-profit entities.