Special purpose financial reporting: its days may be numbered

In March this year, the International Accounting Standards Board (IASB) issued a revised conceptual framework (RCF) that underpins its International Financial Reporting Standards (IFRS). 

As Australian Accounting Standards (AAS) are based on IFRS, the Australian Accounting Standards Board (AASB) considered the implications of the RCF for Australian financial reporting in a consultation paper published in mid-May.

In its consultation, the AASB proposes to end special purpose financial reporting (SPFR) in Australia. This would be a seismic change to financial reporting with far-reaching implications. 

Reasoning behind the proposal

The AASB gives two main reasons why it considers that SPFR has a limited shelf life; the first point being Australia’s homegrown “reporting entity” concept described in Statement of Accounting Concept 1 (SAC 1) is at odds with the definition of the term “reporting entity” in the RCF. 

In very broad and simple terms, the AASB’s view is that there is a conflict between the use of the term in SAC 1 – which is in the context of who should prepare general purpose or special purpose financial reports – while the RCF defines the boundary for a reporting entity.

Secondly, the SAC 1 reporting entity concept is not applied as intended, resulting in a lack of comparability among similar entities of similar economic circumstances, which undermines the fundamentals of trust and transparency.

The preferred path: a two-phase approach

Consultation includes five options for change, and the AASB’s preferred option is a two-phase approach that will ultimately remove the option for entities to prepare SPFR. The first phase, proposed to come into effect from 1 January 2020, will continue in the short-term to allow SPFR for entities that do not have public accountability. 

This will mean any entities that do not meet the definition of having public accountability, but consider themselves non-reporting entities, will need to prepare general purpose financial reports (GPFR). A question remains over how many entities will be affected by this proposed change under phase one.

During phase two, the AASB proposes to discontinue SAC 1 and associated references to the reporting entity concept currently applied to GPFR/SPFR in Australia. 

Under the proposals, compliance with all recognition and measurement requirements (and consolidation and equity accounting if applicable) under AAS will be required, with some reduction in disclosures proposed for entities with no public accountability. 

The IFRS for small and medium-sized entities is not in the mix, as the AASB does not consider this a fit-for-purpose financial reporting solution. Further consultation and outreach is planned over the next two years, with an outcome expected in 2020.

The proposed changes will affect entities that state compliance with AAS when preparing their annual financial statements, either through a statutory requirement (e.g. Corporations Act 2001) or for other reasons. For example, there are several federal and state/territory laws that include a statutory threshold-based requirement for AAS compliant financial reports. 

Notably, there is no government proposal to review the Corporations Act financial reporting thresholds at this stage. Legislation applicable to charities registered with the Australian Charities and Not-for-profits Commission (ACNC) is currently being reviewed, and changes to reporting thresholds, if any, will become known later this year.

The AASB has stated that the proposals will not affect the ability of entities to prepare SPFR if they do not have to state compliance with AAS. Amongst others, this will include close to 2.5 million small proprietary companies registered with the Australian Securities and Investments Commission (ASIC) that are not required to prepare and lodge financial reports, and around 600,000 self-managed superannuation funds (SMSFs). 

Many such entities do prepare annual financial reports, and questions remain over what alternative financial reporting framework would be available to them.

CPA Australia's position

CPA Australia is of the view that the benefits of IFRS compliance are clearer for listed entities and others the IFRS framework is intended for. But the AASB and affected stakeholders will need to consider whether the benefits of applying the same framework to a range of other entities will outweigh the costs. 

CPA Australia is engaged in the review on behalf of members and has already hosted an AASB forum on the RCF. It also intends to make a submission in due course. Comments on phase one were due by 9 August 2018 and on phase two by 9 November 2018.

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