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- AASB Consultation Paper: Differential Financial Reporting – Reducing Disclosure Requirements
AASB Consultation Paper: Differential Financial Reporting – Reducing Disclosure Requirements
- By Rob Mackay
- Published 18/12/2009
- December 2009
- Unrated
Overview
The AASB has now released their proposals for a change to the differential reporting framework in Australia. These proposals are in light of the previous decision not to apply the new IASB standard IFRS for SMEs released in July 2009 (refer to the October 2009 edition of XYZ Financial Reporter).
The proposed framework is a 2 tiered structure and is based on the need to prepare general purpose financial statements (‘GPFSs’). Entities preparing a GPFS and meeting the criteria of tier 2 can avail themselves of a reduced disclosure regime. It is anticipated that the number of entities falling into the full-IFRS tier one requirement would be relatively low.
Revised differential reporting framework
The proposed framework for entities required to prepare a GPFS can be summarised as follows:
Tier 1 – Full IFRS required
Tier 2 – Reduced Disclosure Regime
General Purpose Financial Statements
The principle of GPFSs will now be a driving factor in determining the content of financial statements. This is particularly the case since the notion of the ‘reporting entity’ concept will effectively be disengaged from the scoping provisions of AASBs.
It is accepted that GPFSs are financial statements intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. The AASB has now added to this concept by stating that GPFSs will include financial statements that are publicly available and are required to be prepared in accordance with Accounting Standards.
In this regard, all entities lodging their financial statements with ASIC or another public regulator where there is a requirement to adopt AASB accounting standards will be GPFSs. Once an entity determines that it is required to prepare GPFSs, it will need to ascertain which reporting tier of the framework it falls into.
Publicly Accountable Entities
The AASB has adopted the definition of ‘public accountability’ from the IASBs IFRS for SMEs accounting standard. An entity will have public accountability if:
The reduced disclosure regime
Under the reduced disclosure regime the recognition and measurement requirements required by IFRS will be mandatorily applicable.
This may represent a change for those entities preparing special purpose financial statements (‘SPFSs’) and lodging with ASIC that have not previously adopted full measurement and recognition criteria of IFRS.
The content of reports previously prepared as SPFSs will increase as a result of moving to the new regime. The extent of the extra accounting effort required will largely be dependent upon the size and nature of the operations of the entity.
The disclosures included in GPFSs prepared under the current framework will be reduced as a result of the proposals. Such entities may therefore see time and cost benefits of adopting the proposals.
For the related users of GPFSs now receiving reduced disclosures, it should be considered that the disclosures required under the reduced disclosure regime have been determined after considering the potential information needs of such users. Therefore, it is possible that less relevant financial information will be omitted such that the financial statements become a more efficient and effective means of providing useful financial information.
In determining the appropriate disclosure requirements to be included in the reduced disclosure regime, the AASB’s objective was to ensure the level of disclosure was not reduced to a level which would undermine the objective of general purpose financial reporting of providing information that is useful to a wide range of users in making economic decisions. In this way, the AASB has benchmarked against the disclosures of the IFRS for SMEs standard which is seen as representing the minimum disclosures required to satisfy the objective of general purpose reporting.
Other considerations
The concept of GPFS’s driving financial reporting requirements appears more aligned to that of public policy. That is, those entities lodging their financial reports with ASIC do so on the basis that government has determined that there are users dependent upon the information contained within those accounts, hence they should be prepared as general purpose reports.
Additionally, Treasury has reconsidered the reporting requirements of various entities and provided reporting relief to a great number of not-for-profit entities. The merits of moving to a reduced disclosure regime should therefore be determined after consideration of the Treasury proposals.
The AASB has now released their proposals for a change to the differential reporting framework in Australia. These proposals are in light of the previous decision not to apply the new IASB standard IFRS for SMEs released in July 2009 (refer to the October 2009 edition of XYZ Financial Reporter).
The proposed framework is a 2 tiered structure and is based on the need to prepare general purpose financial statements (‘GPFSs’). Entities preparing a GPFS and meeting the criteria of tier 2 can avail themselves of a reduced disclosure regime. It is anticipated that the number of entities falling into the full-IFRS tier one requirement would be relatively low.
Revised differential reporting framework
The proposed framework for entities required to prepare a GPFS can be summarised as follows:
Tier 1 – Full IFRS required
- all publicly accountable for-profit entities (e.g. listed entities, other disclosing entities, banking and insurance entities)
- not-for-profit private sector entities required by relevant regulator to apply full IFRS
- public sector entities that are federal, state, territory or local government and universities or where required by relevant regulator.
Tier 2 – Reduced Disclosure Regime
- all non-publicly accountable for-profit entities
- not-for-profit private sector entities where there is no regulator requirement to apply full IFRS
- public sector entities not included in tier one.
General Purpose Financial Statements
The principle of GPFSs will now be a driving factor in determining the content of financial statements. This is particularly the case since the notion of the ‘reporting entity’ concept will effectively be disengaged from the scoping provisions of AASBs.
It is accepted that GPFSs are financial statements intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. The AASB has now added to this concept by stating that GPFSs will include financial statements that are publicly available and are required to be prepared in accordance with Accounting Standards.
In this regard, all entities lodging their financial statements with ASIC or another public regulator where there is a requirement to adopt AASB accounting standards will be GPFSs. Once an entity determines that it is required to prepare GPFSs, it will need to ascertain which reporting tier of the framework it falls into.
Publicly Accountable Entities
The AASB has adopted the definition of ‘public accountability’ from the IASBs IFRS for SMEs accounting standard. An entity will have public accountability if:
- its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (e.g. domestic, foreign or over-the-counter market)
- it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (e.g. banks, securities brokers, registered schemes).
The reduced disclosure regime
Under the reduced disclosure regime the recognition and measurement requirements required by IFRS will be mandatorily applicable.
This may represent a change for those entities preparing special purpose financial statements (‘SPFSs’) and lodging with ASIC that have not previously adopted full measurement and recognition criteria of IFRS.
The content of reports previously prepared as SPFSs will increase as a result of moving to the new regime. The extent of the extra accounting effort required will largely be dependent upon the size and nature of the operations of the entity.
The disclosures included in GPFSs prepared under the current framework will be reduced as a result of the proposals. Such entities may therefore see time and cost benefits of adopting the proposals.
For the related users of GPFSs now receiving reduced disclosures, it should be considered that the disclosures required under the reduced disclosure regime have been determined after considering the potential information needs of such users. Therefore, it is possible that less relevant financial information will be omitted such that the financial statements become a more efficient and effective means of providing useful financial information.
In determining the appropriate disclosure requirements to be included in the reduced disclosure regime, the AASB’s objective was to ensure the level of disclosure was not reduced to a level which would undermine the objective of general purpose financial reporting of providing information that is useful to a wide range of users in making economic decisions. In this way, the AASB has benchmarked against the disclosures of the IFRS for SMEs standard which is seen as representing the minimum disclosures required to satisfy the objective of general purpose reporting.
Other considerations
The concept of GPFS’s driving financial reporting requirements appears more aligned to that of public policy. That is, those entities lodging their financial reports with ASIC do so on the basis that government has determined that there are users dependent upon the information contained within those accounts, hence they should be prepared as general purpose reports.
Additionally, Treasury has reconsidered the reporting requirements of various entities and provided reporting relief to a great number of not-for-profit entities. The merits of moving to a reduced disclosure regime should therefore be determined after consideration of the Treasury proposals.
Article Series
This article is part 2 of a 3 part series. Other articles in this series are shown below:
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AASB Consultation Paper: Differential Financial Reporting – Reducing Disclosure Requirements