Over the last few years, the Australian Accounting Standards Board (AASB) has been hard at work reforming the Australian financial reporting landscape, specifically with respect to special purpose reporting by for-profit private sector entities. The implementation period for many affected entities is drawing to a close as 30 June 2022 is just around the corner. Hopefully, entities impacted by the reforms have their GPFS house in order.
The entities that will no longer be permitted to prepare special purpose financial statements (SPFS) for years ending 30 June 2022 and thereafter are those required by:
- legislation (e.g. the Corporations Act) to prepare financial statements that comply with Australian Accounting Standards or ‘accounting standards’; or
- a constituting (e.g. trust deed) or other document (e.g. loan agreement) created or amended on or after 1 July 2021 and includes, or retains, a requirement to prepare financial statements that comply with Australian Accounting Standards.
These entities must prepare general purpose financial statements (GPFS) for years ending 30 June 2022 and beyond. Tier 2 GPFS (as opposed to Tier 1 GPFS) will probably be appropriate as it is unlikely that these entities will have public accountability (as defined in AASB 1053 Application of Tiers of Australian Accounting Standards).
Tier 2 GPFS requires compliance with all the recognition and measurement requirements in Australian Accounting Standards, including those relating to consolidation and equity accounting. In terms of disclosures in the financial statements, Tier 2 entities are required to apply the new Simplified Disclosures that replaced the Reduced Disclosure Requirements (RDR) with effect from 1 July 2021 (that is, for years ending 30 June 2022 and later).
The new Simplified Disclosures are contained in a standalone standard, namely AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.
Entities that prepare Tier 2 RDR financial reports will also be impacted in that they too will have to adopt the new Simplified Disclosures for years ending 30 June 2022 and beyond. Since these entities already prepare GPFS, there is no change to the how the numbers are derived since the recognition and measurement requirements under Tier 2 remain unchanged.
Entities that currently prepare SPFS, especially June reporters, that have not yet evaluated if and how they are impacted by the reforms should do so with some sense of urgency. The extent of impact on entities ranges and will very much depend on the degree to which an entity currently complies with the recognition and measurement provisions in Australian Accounting Standards, as well as the existing level of disclosures it makes in its SPFS. One of the biggest anticipated challenges in transitioning to GPFS for the first time is consolidating subsidiaries where this has not been done in the past.
Entities that currently prepare SPFS should:
1. Evaluate if they are captured by the reforms
This may entail reading governing and other documents such as bank or loan agreements to identify the financial reporting requirements contained therein. A requirement to prepare financial statements in accordance with Australian Accounting Standards may trigger GPFS depending on the date the document was created or amended (before or after 1 July 2021).
2. Understand their current accounting policies
The aim of this exercise is to identify those policies that are not in line with the requirements of Australian Accounting Standards. For example, if operating leases (other than short-term leases or leases of low value assets) are not recognised on the statement of financial position, this does not comply with AASB 16 Leases. Or if the entity does not account for deferred tax, this is not in compliance with AASB 112 Income Taxes. Adjustments to opening retained earnings of the comparative period (i.e. at 1 July 2020 for a 30 June 2022 balance date) will be needed to ‘fix’ the numbers so they reflect all the requirements of Australian Accounting Standards as at date of transition. This includes accounting for subsidiaries that historically have not been consolidated under the requirements of AASB 10 Consolidated Financial Statements.
3. Identify and make disclosures required by AASB 1060
Moving from the minimum disclosures required in SPFS to the new Simplified Disclosures could mean a substantial elevation in the information to be disclosed, depending on the nature of an entity’s business. In particular, common areas such as revenue, tax, related parties, leases and financial assets will require some attention. Comparative numbers must be provided in the first set of GPFS prepared for years ending 30 June 2022 and later (relief from doing so was afforded only to early adopters). Collating the required information for disclosure purposes could involve some effort especially where accounting systems are unsophisticated.
4. Engage early with auditors
As can be seen from the above, there is a lot for entities to think about when transitioning to GPFS for the first time. Engaging with auditors sooner rather than later will mean they can assist in navigating any complexities that arise during the transition process. Furthermore, auditors will be in a better position to then verify any transitional adjustments and review new financial statement disclosures, including those relating to transition.
This article was first published in The Bottom Line Issue 12.