Special purpose financial reporting set to go under proposed AASB changes

The adoption of the IASB Revised Conceptual Framework could trigger a complete overhaul of the current tiered reporting system in Australia.

All registered companies and the not-for-profit sector could be required to prepare general purpose financial statements to comply with their statutory reporting obligations, under a proposal from the Australian Accounting Standards Board.

A radical proposal to streamline Australia’s financial reporting framework through the elimination of Special Purpose Financial Statements (SPFS) would have major implications for thousands of companies, registered charities and other not-for-profit organisations that prepare and lodge statutory financial reports.

The Australian Accounting Standards Board (AASB) has developed and issued these proposals following recent changes to the Conceptual Framework for Financial Reporting by the International Accounting Standards Board (IASB).

The adoption of the IASB Revised Conceptual Framework, which defines what constitutes a reporting entity internationally, could trigger a complete overhaul of the current tiered reporting system in Australia, requiring all registered companies and others to prepare and lodge General Purpose Financial Statements (GPFS).

The motives behind the AASB’s proposals

Many registered companies, charities and not-for-profits have determined that they can lodge SPFS because they do not meet the criteria of a reporting entity as set out in Statement of Accounting Concept 1 (SAC 1).

In a consultation paper released in mid-May, the AASB said it intended to address “the ‘reporting entity’ concept clash” between the current Australian reporting entity concept described in SAC 1, and the same term described in the IASB’s Revised Conceptual Framework.   The AASB also points to incorrect application of the reporting entity concept which undermines the fundamentals of trust and transparency in Australian financial reporting as another reason for this initiative.

5 options for financial statements

The AASB has proposed five options.

“This is one of those projects that has multiple moving parts to it,” says Ram Subramanian, CPA Australia policy adviser on reporting.

“At this stage we don’t necessarily have any detailed formulated opinions on what should and shouldn’t happen in this space. However, I do think we need to do more work on this at this stage to understand the consequences of what’s being proposed and the consequences in terms of the economic benefits and the costs that could arise.”

“The AASB believes any increase in costs is justifiable; whether the benefits exceed the costs is to be seen”.

“At this stage it’s still early, and there’s another major part to this in that, who actually looks at these financial statements and benefits from them? Do we know who the users of these accounts are and what their needs are?”

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Changes to charity reporting

Mel Yates, director reporting and red tape reduction at the Australian Charities and Not-for-Profits Commission (ACNC), says about 40 per cent of the 55,000 registered charities do not identify themselves as reporting entities and consequently produce SPFS.

He says the ACNC favours one of the AASB’s “compromise options” enabling Specific Disclosure Requirements, whereby charities would be required to meet minimum criteria as well as other accounting standards to meet reporting requirements.

Yates says another AASB option requiring all entities to prepare General Purpose Financial Reports, with the option of reduced disclosure, would be too onerous.“I think that is going too far and would impose a burden on the sector.

So, I think a compromise that is reasonable, all things considered, would be the option of specified disclosure requirements.

“We see that there needs to be a wider conversation about the reporting requirements for registered charities.”

Cutting red tape for charities

Yates points out that a key objective of the ACNC is to promote the reduction of unnecessary regulatory obligations, which includes terms of reporting.

“So, we do have concerns around these additional reporting requirements.

“However, the ACNC also aims to maintain and increase public trust and confidence in charities, and in order to do that we require transparency and accountability; but that then is intentioned in our legislative object to reduce unnecessary regulatory obligations.”

He recognises the constant challenge of collecting information from the sector while being mindful of the impost imposed on the sector.

“We need to work our way through which areas of the economy are affected, and we then need to work out what the AASB’s proposals mean to those areas.”

The AASB has invited comments on its recommendation for a two-phased approach, whereby it would first apply, as phase 1, the IASB’s Revised Conceptual Framework to publicly accountable for-profit entities and other entities that voluntarily comply with IFRS.

In phase two, it would then withdraw SAC 1 and apply the Revised Conceptual Framework to all entities required by legislation or otherwise to comply with revised Australian Accounting Standards.

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December 2021
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