AASB 1057 Application of Australian Accounting Standards July 2015 (Cth)
| Compiled AASB Standard | AASB 1057 |
Application of Australian Accounting Standards
This compiled Standard applies to annual periods beginning on or after 1 July 2021 but before 1 January 2023. Earlier application is permitted for annual periods beginning before 1 July 2021. It incorporates relevant amendments made up to and including 6 March 2020.
Prepared on 21 July 2021 by the staff of the Australian Accounting Standards Board.
Compilation no. 4
Compilation date: 30 June 2021
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COPYRIGHT
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Contents
ACCOUNTING STANDARD
AASB 1057 APPLICATION OF AUSTRALIAN ACCOUNTING STANDARDS
from paragraph
OBJECTIVE 1
APPLICATION OF THIS STANDARD 2
APPLICATION OF AUSTRALIAN ACCOUNTING STANDARDS 5
APPLICATION OF AUSTRALIAN INTERPRETATIONS 22
COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT
APPENDIX
Defined terms
COMPILATION DETAILS
BASIS FOR CONCLUSIONS
BASIS FOR CONCLUSIONS ON AASB 2019-1
BASIS FOR CONCLUSIONS ON AASB 2020-2
Australian Accounting Standard AASB 1057 Application of Australian Accounting Standards (as amended) is set out in paragraphs 1 – 26 and the Appendix. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in the Appendix are in italics the first time they appear in the Standard. AASB 1057 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.
Accounting Standard AASB 1057
The Australian Accounting Standards Board made Accounting Standard AASB 1057 Application of Australian Accounting Standards under section 334 of the Corporations Act 2001 on 24 July 2015.
This compiled version of AASB 1057 applies to annual periods beginning on or after 1 July 2021 but before 1 January 2023. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 6 March 2020 (see Compilation Details).
Accounting Standard AASB 1057
Application of Australian Accounting Standards
Objective
The objective of this Standard is to specify the types of entities and financial statements to which Australian Accounting Standards (including Interpretations) apply. The term ‘Australian Accounting Standards’ refers to accounting standards (including Interpretations) made by the AASB. Each reference to an Interpretation refers to that Interpretation as identified in AASB 1048 Interpretation of Standards.
AusCF1 AusCF entities are:
(a) not-for-profit entities; and
(b) for-profit entities that are not applying the Conceptual Framework for Financial Reporting (as identified in AASB 1048 Interpretation of Standards).
For AusCF entities, the term ‘reporting entity’ is defined in this Standard and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity also applies. For-profit entities applying the Conceptual Framework for Financial Reporting are set out in paragraph Aus1.1 of the Conceptual Framework.
Application of this Standard
This Standard applies to:
(a)each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;
(b)general purpose financial statements of each not-for-profit reporting entity;
(c)each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;
(d)financial statements of General Government Sectors (GGSs) prepared in accordance with AASB 1049 Whole of Government and General Government Sector Financial Reporting;
(e)for-profit private sector entities that are required by legislation* to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
* References in this Standard to ‘legislation’ mean legislation of a government in Australia.
(f)other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
This Standard applies to annual periods beginning on or after 1 January 2016.
This Standard may be applied to annual periods beginning before 1 January 2016.
Application of Australian Accounting Standards
Unless specified otherwise in paragraphs 6–21, Australian Accounting Standards apply to:
(a)each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial statements of each other not-for-profit entity that is a reporting entity;
(c)each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;
(d)for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
(e)other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
AASB 8 Operating Segments and AASB 120 Accounting for Government Grants and Disclosure of Government Assistance apply as set out in paragraph 5, provided the entity is a for-profit entity.
Except as specified in paragraph 20C, AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, AASB 1048 Interpretation of Standards and AASB 1054 Australian Additional Disclosures apply to:
(a)each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;
(b)general purpose financial statements of each not-for-profit entity that is a reporting entity;
(c)each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;
(d)for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
(e)other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
[Deleted by the AASB]
AASB 133 Earnings per Share applies to:
(a) each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity or discloses earnings per share; and
(b) for-profit private sector entities that are required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act or disclose earnings per share.
AASB 134 Interim Financial Reporting applies to:
(a)each disclosing entity required to prepare half-year financial reports in accordance with Part 2M.3 of the Corporations Act;
(b) interim financial reports that are general purpose financial statements of each not-for-profit entity that is a reporting entity;
(c) each entity that elects to prepare interim financial reports that are, or are held out to be, general purpose financial statements;
(d) interim financial reports of for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
(e) interim financial reports of other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
AASB 1004 Contributions applies to general purpose financial statements of local governments, government departments, other government controlled not-for-profit entities and whole of governments.
AASB 1038 Life Insurance Contracts applies to:
(a)a life insurer; or
(b)the parent in a group that includes a life insurer;
when the entity:
(c)is a reporting entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;
(d)is an other reporting entity and prepares general purpose financial statements; or
(e)prepares financial statements that are, or are held out to be, general purpose financial statements.
AASB 1039 Concise Financial Reports applies to a concise financial report prepared by an entity in accordance with paragraph 314(2)(a) in Part 2M.3 of the Corporations Act.
AASB 1049 applies to each government’s whole of government general purpose financial statements and GGS financial statements.
AASB 1050 Administered Items applies to general purpose financial statements of government departments.
AASB 1051 Land Under Roads applies to general purpose financial statements of local governments, government departments and whole of governments, and financial statements of GGSs.
AASB 1052 Disaggregated Disclosures applies to general purpose financial statements of local governments and government departments.
AASB 1053 Application of Tiers of Australian Accounting Standards applies to:
(a)each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;
(b)general purpose financial statements of each not-for-profit entity that is a reporting entity;
(c)each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;
(d)financial statements of GGSs prepared in accordance with AASB 1049;
(e)for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
(f)other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
AASB 1055 Budgetary Reporting applies to:
(a)whole of government general purpose financial statements of each government;
(b)financial statements of each government’s GGS;
(c)general purpose financial statements of each not-for-profit reporting entity within the GGS; and
(d)financial statements of each not-for-profit entity within the GGS that are, or are held out to be, general purpose financial statements.
AASB 1056 Superannuation Entities applies to:
(a)general purpose financial statements of each not-for-profit superannuation entity that is a reporting entity;
(b)each superannuation entity that elects to prepare financial statements that are held out to be general purpose financial statements;
(c)for-profit private sector superannuation entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
(d)other for-profit private sector superannuation entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
20A AASB 1058 Income of Not-for-Profit Entities applies to:
(a)each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial statements of each other not-for-profit entity that is a reporting entity; and
(c)financial statements of a not-for-profit entity that are, or are held out to be, general purpose financial statements.
20B AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities applies as set out in paragraph 5, provided the entity is eligible to apply Tier 2 reporting requirements, as set out in AASB 1053, paragraph 13.
20C Entities applying AASB 1060 are not required to apply the following Australian Accounting Standards:
(a) AASB 7 Financial Instruments: Disclosures;
(b) AASB 12 Disclosure of Interests in Other Entities;
(c) AASB 101 Presentation of Financial Statements;
(d) AASB 107 Statement of Cash Flows; and
(e) AASB 124 Related Party Disclosures.
AAS 25 Financial Reporting by Superannuation Plans applies to general purpose financial reports of each superannuation plan in the private or public sector that is a reporting entity.
Application of Australian Interpretations
Unless specified otherwise in paragraphs 23–26, Interpretations apply to:
(a)each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial statements of each other not-for-profit entity that is a reporting entity;
(c)each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;
(d)for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards, and
(e)other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
Interpretation 110 Government Assistance – No Specific Relation to Operating Activities applies as set out in paragraph 22, provided the entity is a for-profit entity.
Interpretation 1019 The Superannuation Contributions Surcharge applies to:
(a)each not-for-profit superannuation plan that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial statements of each other not-for-profit superannuation plan that is a reporting entity;
(c)each superannuation plan that elects to prepare financial statements of a superannuation plan that are, or are held out to be, general purpose financial statements;
(d)for-profit superannuation plans that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and
(e)other for-profit superannuation plans that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.
Interpretation 1038 Contributions by Owners Made to Wholly-Owned Public Sector Entities applies to public sector entities as follows:
(a)each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial statements of each other reporting entity; and
(c)financial statements that are, or are held out to be, general purpose financial statements.
Interpretation 1047 Professional Indemnity Claims Liabilities in Medical Defence Organisations applies to entities that are or include medical defence organisations as follows:
(a)each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial statements of each other reporting entity; and
(c)financial statements that are, or are held out to be, general purpose financial statements.
Commencement of the legislative instrument
[Repealed]
Appendix
Defined terms
This appendix is an integral part of AASB 1057.
| general purpose financial statements | Financial statements that are 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. |
| reporting entity | An entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries. This reporting entity definition is not relevant to: (a) for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; (b) other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021; and (c) other for-profit entities (private sector or public sector) that elect to prepare general purpose financial statements. |
Compilation details
Accounting Standard AASB 1057 Application of Australian Accounting Standards (as amended)
Compilation details are not part of AASB 1057.
This compiled Standard applies to annual periods beginning on or after 1 July 2021 but before 1 January 2023. It takes into account amendments up to and including 6 March 2020 and was prepared on 21 July 2021 by the staff of the Australian Accounting Standards Board (AASB).
This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB 1057 (July 2015) as amended by other Accounting Standards, which are listed in the table below.
Table of Standards
| Standard | Date made | FRL identifier | Commence-ment date | Effective date | Application, saving or transitional provisions |
| AASB 1057 | 24 Jul 2015 | F2015L01620 | 31 Dec 2015 | (beginning) 1 Jan 2016 | see (a) below |
| AASB 2015-9 | 11 Nov 2015 | F2015L01832 | 31 Dec 2015 | (beginning) 1 Jan 2016 | see (a) below |
| AASB 1058 | 9 Dec 2016 | F2017L00042 | 31 Dec 2018 | (beginning) 1 Jan 2019 | see (b) below |
| AASB 17 | 19 Jul 2017 | F2017L01184 | 31 Dec 2022 | (beginning) 1 Jan 2023 | not compiled* |
| AASB 2019-1 | 21 May 2019 | F2019L00966 | 31 Dec 2019 | (beginning) 1 Jan 2020 | see (c) below |
| AASB 2020-2 | 6 Mar 2020 | F2020L00271 | 30 Jun 2021 | (beginning) 1 Jul 2021 | see (d) below |
| AASB 1060 | 6 Mar 2020 | F2020L00288 | 30 Jun 2021 | (beginning) 1 Jul 2021 | see (d) below |
*The amendments made by this Standard are not included in this compilation, which presents the principal Standard as applicable to annual periods beginning on or after 1 July 2021 but before 1 January 2023.
(a)Entities may elect to apply this Standard to annual periods beginning before 1 January 2016.
(b)Entities may elect to apply this Standard to annual periods beginning before 1 January 2019, provided that AASB 15 Revenue from Contracts with Customers is also applied to the same period.
(c)Entities may elect to apply this Standard to annual periods beginning before 1 January 2020.
(d)Entities may elect to apply this Standard to annual periods beginning before 1 July 2021.
Table of amendments
| Paragraph affected | How affected | By … [paragraph/page] |
| 1 | amended | AASB 2019-1 [page 30] |
| AusCF1 | added | AASB 2019-1 [page 30] |
| 2 | amended amended | AASB 2019-1 [page 30] AASB 2020-2 [page 12] |
| 5 | amended amended | AASB 2019-1 [page 30] AASB 2020-2 [page 12] |
| 6 | amended amended amended amended | AASB 2015-9 [11] AASB 1058 [page 27] AASB 2019-1 [page 30] AASB 2020-2 [page 13] |
| 7 | amended amended amended | AASB 2019-1 [page 31] AASB 2020-2 [page 13] AASB 1060 [page 68] |
| 8 | amended deleted | AASB 2019-1 [page 31] AASB 2020-2 [page 13] |
| 9 | amended amended amended | AASB 2015-9 [11] AASB 2019-1 [page 31] AASB 2020-2 [page 13] |
| 10 | amended | AASB 2020-2 [page 14] |
| 11 | amended | AASB 1058 [page 27] |
| 12 | amended amended | AASB 2019-1 [page 31] AASB 2020-2 [page 14] |
| 18 | amended amended | AASB 2019-1 [page 31] AASB 2020-2 [page 14] |
| 20 | amended amended | AASB 2019-1 [page 31] AASB 2020-2 [page 14] |
| 20A | added | AASB 1058 [page 27] |
| 20B-20C | added | AASB 1060 [page 68] |
| 22-24 | amended amended | AASB 2019-1 [page 32] AASB 2020-2 [page 15] |
| 26 | amended amended | AASB 2019-1 [page 32] AASB 2020-2 [page 15] |
| 27 | repealed | Legislation Act 2003, s. 48D |
| Appendix | amended amended | AASB 2019-1 [page 32] AASB 2020-2 [page 16] |
Basis for Conclusions
This Basis for Conclusions accompanies, but is not part of, AASB 1057.
BC1This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in AASB 1057 Application of Australian Accounting Standards. Individual Board members gave greater weight to some factors than to others.
BC2In 2005 when Australia transitioned to adopting International Financial Reporting Standards (IFRSs), Australian Accounting Standards (including Interpretations) were issued using IFRSs as a base. Australian-specific paragraphs (labelled as ‘Aus’ paragraphs), including application paragraphs, were added to the IFRS text. These application paragraphs identified, in each Standard, the entities and financial reports to which the Standard applied. For example, most Standards apply explicitly to reporting entities and to general purpose financial statements. Other minor amendments were also made to the IFRS text (eg Australian terminology and punctuation).
BC3At its May 2015 meeting, the Board decided to revise Australian Accounting Standards that incorporate IFRSs to minimise Australian-specific wording even further. Therefore, because IFRSs do not contain such application paragraphs, the application paragraphs that were previously in each Australian Accounting Standard were moved to this Standard. In doing so, the application requirements have not been amended. These application paragraphs also do not affect requirements in other Standards that specify that certain paragraphs apply only to certain types of entities.
BC4For consistency, the application paragraphs of Australian-specific Standards have also been included in this Standard, without amendment. When those Standards are amended for other reasons, their application paragraphs are expected to be removed.
Basis for Conclusions on AASB 2019-1
This Basis for Conclusions accompanies, but is not part of, AASB 1057. The Basis for Conclusions was originally published with AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework.
Introduction
BC1This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in this Standard. It sets out the reasons why the Board developed the Standard, the approach taken to developing the Standard and the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.
Reasons for issuing this Standard
BC2The International Accounting Standards Board (IASB) issued a revised Conceptual Framework titled Conceptual Framework for Financial Reporting (the revised Conceptual Framework) in March 2018.
BC3The Conceptual Framework describes the objective and concepts for general purpose financial reporting under International Financial Reporting Standards (IFRS Standards). Its purpose is to assist standard-setters to develop Standards that are based on consistent concepts, and to help preparers develop consistent accounting policies when no Standard applies to a particular transaction or event, or when a Standard allows a choice of accounting policy. It also assists anyone looking to understand and interpret the Standards.
BC4Making the IASB’s revised Conceptual Framework applicable in Australia is essential. In accordance with the Financial Reporting Council’s strategic direction to the Board and the Board’s strategic objectives, the Board should:
(a) maintain compliance with IFRS Standards for publicly accountable entities; and
(b) use IFRS Standards as a base for determining the reporting requirements for all other entities, modified as appropriate, in accordance with the AASB’s standard-setting frameworks for for-profit and not-for-profit entities.
BC5Implementation of the revised Conceptual Framework in Australia is challenging due to the so-called ‘reporting entity clash’. This reflects the difference between the definition of a ‘reporting entity’ in the IASB’s revised Conceptual Framework and the current definition in Australian Accounting Standards (including Interpretations). The reporting entity definition in the revised Conceptual Framework determines the boundary of what needs to be reported when an entity is required to report, e.g. consolidation. The current reporting entity definition in Australian Accounting Standards determines whether an entity should prepare general purpose financial statements that comply with Australian Accounting Standards.
BC6In applying the Board’s normal practice of transaction neutrality based on IFRS Standards, the Board noted that resolving the reporting entity clash required removing the Australian definition of reporting entity. To do this would also remove the ability of an entity to conclude that it is not a reporting entity as currently defined, and so prevent it from preparing special purpose financial statements if it is required to prepare financial statements in accordance with Australian Accounting Standards.
BC7The Board noted that having two conceptual frameworks in operation at the same time would introduce some complexity to Australian Accounting Standards, and is not desirable for a long period of time. Consequently, to implement the revised Conceptual Framework in the short term, the Board decided to follow a phased approach:
(a) Phase 1 – implement the revised Conceptual Framework for publicly accountable for-profit private sector entities so that they can maintain compliance with IFRS Standards. The Board noted that there may also be for-profit entities in the public sector that wish to maintain compliance with IFRS Standards. Phase 1 would permit these entities to adopt the revised Conceptual Framework on a voluntary basis; and
(b) Phase 2 – implement the revised Conceptual Framework for all other entities, and remove the ability for entities to prepare special purpose financial statements when they are required to prepare financial statements in accordance with Australian Accounting Standards.
BC8The Board expected that implementing the revised Conceptual Framework for publicly accountable for-profit private sector entities would be straightforward as such entities were, in the Board’s view, required by Australian Accounting Standards to prepare Tier 1 general purpose financial statements applying all of the accounting standards. As such the Board did not expect the reporting entity concept to be relevant to them.
BC9The phased approach would also provide the Board with more time to develop additional Australian-specific paragraphs for the revised Conceptual Framework in respect of not-for-profit entities in the private and public sectors and for-profit public sector entities, as part of Phase 2.
Issue of ITC 39 Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems
BC10The Board’s proposals were exposed for public comment in May 2018 as part of Invitation to Comment ITC 39 Consultation Paper – Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems. In developing the proposals in ITC 39, the Board considered the findings of various research projects it had initiated. This included AASB Research Report No. 1 Application of the Reporting Entity Concept and Lodgement of Special Purpose Financial Statements (June 2014) and AASB Research Report No. 6 Financial Reporting Requirements Applicable to Public Sector Entities (May 2018).
BC11ITC 39 considered five alternatives for implementing the revised Conceptual Framework in Australia:
(a) Option 1 – Adopt a two-phased approach to applying the revised Conceptual Framework. This option would implement the revised Conceptual Framework for for-profit publicly accountable entities and other entities voluntarily claiming compliance with IFRS Standards in Phase 1. It would then implement the revised Conceptual Framework for all other entities in Phase 2. Phase 2 would remove the Australian reporting entity concept and remove the ability of an entity to prepare special purpose financial statements as a non-reporting entity where they are required to comply with Australian Accounting Standards.
(b) Option 2 – Operate with two conceptual frameworks. This option would implement the revised Conceptual Framework for publicly accountable for-profit entities and other entities voluntarily reporting compliance with IFRS Standards. It would also retain the Framework for the Preparation and Presentation of Financial Statements (the existing Conceptual Framework) for all other entities.
(c) Option 3 – Implement the revised Conceptual Framework for all entities when it first becomes applicable to maintain compliance with IFRS Standards and IFRS Standards as a base for Australian Accounting Standards. This option would remove the Australian reporting entity concept and the ability of an entity to prepare special purpose financial statements as a non-reporting entity where they are required to comply with Australian Accounting Standards from 1 January 2020.
(d) Option 4 – Retain the existing Conceptual Framework, the Australian reporting entity concept and the ability of an entity to prepare special purpose financial statements as a non-reporting entity where they are required to comply with Australian Accounting Standards. Under this option, compliance with Australian Accounting Standards might not result in compliance with IFRS Standards after 1 January 2020.
(e) Option 5 – Implement the revised Conceptual Framework from 1 January 2020 when it first becomes applicable to maintain compliance with IFRS Standards and IFRS Standards as a base for Australian Accounting Standards. Under Option 5, the Australian reporting entity concept would be retained but the name amended and minimum requirements for special purpose financial statements would be prescribed by the Board.
BC12The Board considered the benefits of and barriers to each of these options, and supported Option 1 as its preferred approach. Option 1 is the Board’s preferred approach because it:
(a) allows for-profit entities with public accountability and entities that voluntarily report compliance with IFRS Standards to continue to do so;
(b) allows all other entities to continue preparing special purpose financial statements in the short term while the Board undertakes consultation and outreach activities and determines the appropriate Tier 2 general purpose financial statements framework to replace special purpose financial statements;
(c) maintains IFRS Standards as a base for all entities in the medium term;
(d) solves the reporting entity problem in the medium term;
(e) solves the special purpose financial statements problem in the medium term;
(f) allows time for the Board to consult and determine any not-for-profit modifications that may be necessary to the revised Conceptual Framework in accordance with The AASB’s Not-for-Profit Entity Standard-Setting Framework; and
(g) facilitates comparability and ensures there are appropriate accounting standards for each type of entity required to comply with Australian Accounting Standards.
BC13ITC 39 noted the importance of maintaining compliance with IFRS Standards for certain entities in Australia. As Australian Accounting Standards incorporate IFRS Standards, compliance with Australian Accounting Standards (Tier 1) results in compliance with IFRS Standards for for-profit entities. Compliance with Australian Accounting Standards is often required by legislation.
BC14When deciding that Phase 1 should be limited to for-profit entities with public accountability, the Board reconfirmed the importance of the definition of public accountability included in International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). Internationally, entities with public accountability must apply the full IFRS Standards, rather than the IFRS for SMEs. Therefore the Board reconfirmed its view that for-profit entities in Australia with public accountability (as defined) should be required to prepare Tier 1 general purpose financial statements. Due to the importance of the IFRS for SMEs definition of public accountability, the Board decided that the IASB’s amendments to the definition of public accountability should be reflected in the definition included in AASB 1053 Application of Tiers of Australian Accounting Standards.
Stakeholder engagement
BC15After issuing ITC 39, the Board held targeted outreach with key stakeholders, including State, Territory and national regulators, audit offices, accounting firms, the Australian Securities Exchange (ASX), the Australian Securities and Investments Commission (ASIC), credit rating agencies and professional bodies. The ITC 39 proposals were also presented at various forums, workshops and discussion groups.
BC16The Board received feedback on its proposals through 24 formal comment letters on ITC 39. The Board also obtained feedback via means such as emails, meetings with constituents and feedback from external presentations. The responses to ITC 39 indicated that:
(a) on balance, the majority of the respondents were supportive of the proposals in Phase 1 and the need to issue the revised Conceptual Framework in Australia prior to 1 January 2020 so that entities with public accountability could continue to maintain compliance with IFRS Standards;
(b) there are a number of entities that may be affected by Phase 1 and the reporting entity clash of which the Board was unaware when developing ITC 39;
(c) maintaining two conceptual frameworks was not without its complexities; and
(d) mandatory application of the revised Conceptual Framework in Phase 1 should be limited to for-profit private sector entities with public accountability that are required by legislation to prepare financial statements that comply with Australian Accounting Standards.
BC17The Board considered these issues as well as a range of other issues identified by constituents in developing this Standard following the ITC 39 exposure process. The significant issues are addressed in the following section.
Public accountability
BC18Respondents to ITC 39 identified a number of types of entities that may be affected by Phase 1 as they may have public accountability but currently are preparing special purpose financial statements. Respondents also indicated that additional guidance would be useful to assist them in determining whether an entity meets the definition of ‘public accountability’.
BC19Due to the importance of the definition of publicly accountability in Australia, the Board decided to amend the definition in AASB 1053 to align with the revised definition per the IFRS for SMEs when the revised Conceptual Framework is issued. The revised definition confirms that an entity has publicly accountability if it has debt or equity instruments that are traded in a public market or it is in the process of issuing such instruments for trading in a public market. An entity also has public accountability if it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
BC20The Board decided that further guidance on these matters, as well as a number of other aspects of the public accountability definition, should be addressed through a public accountability sub-project. This sub-project will consider, in accordance with The AASB’s For-Profit Entity Standard-Setting Framework, whether there should be any changes to the types of entities that are deemed to have public accountability (an Australian decision), whether exemptions from the public accountability definition would be in the Australian public interest and whether additional guidance should be included to assist in interpreting the public accountability definition in an Australian context.
Significant issues
Scope
Entities that may be affected by Phase 1
BC21Entities identified by respondents as potentially being affected by Phase 1 included unlisted entities that may be operating in over-the-counter markets (e.g. securitisation trusts), small internally held registered managed investment schemes, certain public sector trust entities, companies raising crowd-sourced equity funding and corporate collective investment vehicles.
Securitisation trusts
BC22Securitisation trusts are listed, unquoted special purpose vehicles structured through a trust, established to facilitate the issue of asset-backed securities. Securitisation trusts are themselves unlisted, however they issue debt instruments which are listed on the ASX and/or another securities exchange. They have no legislative requirement to prepare financial statements. Their financial reporting obligations are governed by their trust deed and ASX listing rules, and they may be preparing special purpose financial statements if they have determined in accordance with SAC 1 Definition of the Reporting Entity that there are no external users dependent on their general purpose financial statements.
BC23Securitisation trusts undertake over-the-counter (i.e. unquoted) transactions, and while the trustee (a third party) is responsible for maintaining the register of investors, investment is often made via custodian entities, making the ultimate holder of asset-backed securities difficult to identify.
BC24Respondents to ITC 39 sought clarification regarding whether securitisation trusts were considered to have public accountability. For the Board to determine whether or not securitisation trusts are publicly accountable would require an interpretation of facts and circumstances. Further, the matter would need to be assessed against the principles of the Interpretations and Improvements Model. The Interpretations and Improvements Model states that issues relating to the interpretation of IFRS Standards would be referred to the International Financial Reporting Interpretations Committee (IFRIC) for its consideration. However, prior to this, the Board needed to assess the issue against specific criteria, the first of which is whether the issue is widespread and has practical relevance. As there were only 126 securitisation trusts listed on the ASX (in August 2018), the issue was not considered widespread and therefore would not meet the requirements of the Interpretations and Improvements Model. The Board also noted that its decision to limit the scope of Phase 1 to entities required by legislation to prepare financial statements would mean that these trusts would be considered as part of Phase 2.
Small internally held registered managed investment schemes (MIS)
BC25Some internal registered MIS are currently preparing special purpose financial statements to satisfy the reporting requirements of the Corporations Act 2001 as they have determined in accordance with SAC 1 that there are no external users of their financial statements. These internal registered MIS only accept investments from other entities within their group, however they are required to be registered under the Corporations Act 2001. Appendix B of AASB 1053 deems registered MIS to have public accountability.
BC26When the Board developed its approach to differential reporting, registered MIS were deemed to be publicly accountable in the Australian context as a means of clarifying the IASB definition of public accountability. At the time, registered MIS were seen as being the Australian equivalents of mutual funds in other jurisdictions as they were expected to hold assets in a fiduciary capacity for a broad group of outsiders. However, due to the nature of these internal registered MIS, it is possible that they may not have public accountability as defined, as they may not hold assets in a fiduciary capacity for a broad group of outsiders. The question of whether all registered MIS should continue to be deemed to have public accountability will be revisited as part of the public accountability sub-project.
Unlisted trusts maintained by State Governments
BC27Respondents also identified that some State Governments have established unlisted investment trusts under State legislation to hold investments in various types of assets, such as infrastructure. Some investments are held in partnership or joint venture with external parties, such as superannuation funds. These trusts are for-profit public sector entities. They do not have a legislative requirement to prepare financial statements, with their financial reporting obligations directed by their Trust Deed.
BC28These trusts are currently preparing special purpose financial statements on the basis that they are not reporting entities. However, as they are holding assets in a fiduciary capacity, they may be considered to have public accountability under the definition in the IFRS for SMEs. The Board noted that its decision to limit the scope of Phase 1 to entities required by legislation to prepare financial statements would mean that these trusts would be considered as part of Phase 2.
Legislation versus constituting documents
BC29Respondents to ITC 39 identified some entities that may be affected by the amendments proposed in Phase 1, including trusts that are required by their constitutional document (rather than legislation) to prepare financial statements that comply with Australian Accounting Standards. They do not have any legislative requirement to prepare such financial statements and may be preparing special purpose financial statements. This includes securitisation trusts and certain public sector trusts.
BC30The Board noted that while changing constitutional documents is possible, it can be onerous and if not done correctly can have tax consequences. Many trust deeds may have template wording referring to compliance with Australian Accounting Standards without the trustees or the beneficiaries having considered whether this would need to involve the preparation of general purpose financial statements. Based on feedback obtained from targeted outreach activities, these trusts may provide detailed information to their beneficiaries about their financial performance and position on a regular basis.
BC31The AASB’s For-Profit Entity Standard-Setting Framework requires publicly accountable for-profit entities to prepare Tier 1 general purpose financial statements on the basis that these entities would need to state compliance with IFRS Standards. However, entities that do not have any legislative requirement to prepare financial statements and are required only by their constitution or trust deed to comply with Australian Accounting Standards often will not need to confirm compliance with IFRS Standards.
BC32The AASB’s For-Profit Entity Standard-Setting Framework further notes that publicly accountable entities should prepare Tier 1 general purpose financial statements as these types of entities would have a significant impact on the Australian economy and therefore should be subject to the highest level of accountability. However, where entities are required to comply with Australian Accounting Standards only as a result of their constitution or trust deed, and their members have in the past been comfortable with the amount of information provided in the form of special purpose financial statements, the Board did not consider it appropriate to mandate the preparation of Tier 1 general purpose financial statements for such entities as part of Phase 1.
BC33Consequently, Phase 1 is intended to allow entities to maintain compliance with IFRS Standards, not to extend requirements for entities to prepare general purpose financial statements if they are not currently required by legislation to prepare financial statements. To ensure that Phase 1 did not unintentionally require such entities to prepare general purpose financial statements, the Board decided to limit Phase 1 to for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards. This ensures the reporting requirements of entities with public accountability that do not have a legislative requirement to prepare financial statements will not be affected by Phase 1. The appropriateness of this limitation will however be reconsidered as part of Phase 2 after further research and outreach. The Board also confirmed that those for-profit entities wanting to voluntarily comply with Tier 1 and IFRS Standards should be permitted to do so, including for-profit entities in the public sector.
Maintaining two conceptual frameworks
BC34When deciding how to implement Option 1 for Phase 1, the Board considered the following alternatives:
| Option 1 | Option 2 | Option 3 | Option 4 | |
| Two conceptual frameworks: | One conceptual framework: | Two conceptual frameworks: | One conceptual framework: | |
| Entities applying the revised Conceptual Framework: | 1 Revised Conceptual Framework. | 1(a) Revised Conceptual Framework. | 1 Revised Conceptual Framework. | 1(a) Revised Conceptual Framework. |
Other entities: | 2 Existing Conceptual Framework and SAC 1[1]. | 1(b) Revised Conceptual Framework minus Chapter 3[2], which is replaced by SAC 1. | 2 Existing Conceptual Framework and SAC 1. | 1(b) Revised Conceptual Framework minus Chapter 3, which is replaced by SAC 1. |
Consequential amendments: | One set of Australian Accounting Standards that continue to be updated for both for-profit and not-for-profit changes. | One set of Australian Accounting Standards that continue to be updated for both for-profit and not-for-profit changes. | Two sets of Australian Accounting Standards. - One set that continues to be updated for for-profit changes. - One set reflecting the requirements in effect immediately prior to the revised Conceptual Framework being issued which are not updated. | Up to two sets of Australian Accounting Standards. |
The reporting entity clash | Addressed in Phase 1, by inserting paragraph AusCF1 into each Australian Accounting Standard that contains the term reporting entity. Paragraph AusCF1 would direct other entities to AASB 1057[3] (and SAC 1) for the definition of the term reporting entity. | Addressed in Phase 1, by inserting paragraph AusCF1 into each Australian Accounting Standard that contains the term reporting entity. Paragraph AusCF1 would direct other entities to AASB 1057 (and SAC 1) for the definition of the term reporting entity. | Tolerated in Phase 1. That is, unlike in Option 1, it would not be addressed via an AusCF1 paragraph. | Tolerated in Phase 1. That is, unlike in Option 2, it would not be addressed via an AusCF1 paragraph. |
[1] Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity
[2] Chapter 3 Financial Statements and the Reporting Entity
[3] AASB 1057 Application of Australian Accounting Standards
BC35If Option 1 was adopted, it would result in two conceptual frameworks. The revised Conceptual Framework would be applied by for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards. Other for-profit entities could elect to apply the revised Conceptual Framework voluntarily. All other entities would continue to apply the existing Conceptual Framework. To operate two conceptual frameworks with only one set of Australian Accounting Standards (including Interpretations), the basic text of each Australian Accounting Standard would be updated for consistency with the IASB’s consequential amendments. The existing, pre-amendment text would also be retained, with the paragraph or footnote given an ‘AusCF’ prefix. Australian Accounting Standards that do not have an equivalent IFRS Standard and future consequential amendments would be addressed in the same way. To address the reporting entity clash, entities applying the revised Conceptual Framework would no longer apply the reporting entity concept in SAC 1. Instead, these entities would refer to Chapter 3 of the revised Conceptual Framework to determine what the term reporting entity means for them. Entities applying the existing Conceptual Framework would continue referring to the reporting entity definition in AASB 1057 and SAC 1.
BC36If Option 2 was adopted, it would result in the revised Conceptual Framework being applied either in full or in part by all entities. For-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards would adopt the revised Conceptual Framework in full. Other for-profit entities could also elect to do so voluntarily. All other entities would apply the revised Conceptual Framework, except for Chapter 3. Instead, these entities would refer to SAC 1 for the definition of the term reporting entity. This would address the reporting entity clash.
BC37Option 3 is similar to Option 1 as it would result in two conceptual frameworks, however unlike Option 1, Option 3 would result in two sets of Australian Accounting Standards. One set would be amended for entities adopting the revised Conceptual Framework. The second set would be frozen at the date the revised Conceptual Framework was issued, and would be applied by entities continuing to apply the existing Conceptual Framework. Option 3 would not address the reporting entity clash.
BC38Option 4 is similar to Option 2, as it would result in a single conceptual framework, however similarly to Option 3, it would result in up to two sets of Australian Accounting Standards. Option 4, like Option 3, would not address the reporting entity clash.
BC39While Option 1 results in there being two conceptual frameworks in operation for a period of time and does not resolve the reporting entity clash in the immediate term, the Board decided that it was the most appropriate Phase 1 approach for the following reasons:
(a) the application of the two conceptual frameworks is clearly defined and is less likely to cause confusion for constituents;
(b) Option 1 would address the reporting entity clash in the medium term;
(c) Option 1 would be more straightforward to unwind when implementing Phase 2;
(d) the revised Conceptual Framework contains new recognition and measurement requirements for assets, liabilities, income and expenses. Unless an entity is applying the revised Conceptual Framework, it is not required to adopt those revised recognition and measurement requirements until Phase 2 is implemented. That is, for entities applying the existing Conceptual Framework, the existing Conceptual Framework and the related references in Australian Accounting Standards are effectively frozen; and
(e) there is no need to consider whether other aspects of the revised Conceptual Framework need to be amended to accommodate retaining SAC 1, which includes the Australian definition of the term reporting entity.
BC40While Option 2 would result in a single conceptual framework, and would address the reporting entity clash, the Board decided that Option 2 was more likely to create confusion amongst constituents. This is because under Option 2 it is less clear which elements of the revised Conceptual Framework would apply to certain entities and which would not. Also, other entities would be required to apply the new recognition and measurement requirements in the revised Conceptual Framework in circumstances where an Australian Accounting Standard (or Interpretation) did not address an issue. In addition, extensive work would be required to review all aspects of the revised Conceptual Framework to determine what other changes would be necessary to accommodate retaining SAC 1 and the Australian definition of the term reporting entity.
BC41The Board did not consider Option 3 or Option 4 to be viable, as both options would result in two sets of Australian Accounting Standards, which would be complex to manage (for example future compilations) and would present a much greater level of confusion for stakeholders in knowing which set of Australian Accounting Standards they should use. The existence of two sets of Australian Accounting Standards would also be challenging when implementing Phase 2.
Phase 1 approach
BC42Implementation of Option 1 in Phase 1 requires identification of all references to the existing Conceptual Framework in each Australian pronouncement and all references to the term reporting entity.
BC43Implementation of two conceptual frameworks and one set of Australian Accounting Standards requires all references to the existing Conceptual Framework to be updated as references to the revised Conceptual Framework, with limited exceptions, for those entities applying the revised Conceptual Framework. For all entities that are not applying the revised Conceptual Framework, references to the existing Conceptual Framework need to be retained.
BC44The Board determined the most effective way to achieve this required:
(a) updating the basic text of all Australian Accounting Standards to reflect the IASB’s amendments consequential to the revised Conceptual Framework, that is, all references to the existing Conceptual Framework were replaced with a reference to the revised Conceptual Framework, with limited exceptions. The basic text of all Australian Accounting Standards applies to entities applying the revised Conceptual Framework. This ensures that compliance with Australian Accounting Standards (Tier 1) by these entities continues to result in compliance with IFRS Standards;
(b) adding an AusCF paragraph or footnote in each Australian Accounting Standard that was updated per paragraph (a). The AusCF paragraph or footnote retained the same number, but was given an AusCF prefix. AusCF paragraphs retained the references to the existing Conceptual Framework and are applicable only to entities applying the existing Conceptual Framework; and
(c) inserting an AusCF1 paragraph into each Australian Accounting Standard that contained a reference to the existing Conceptual Framework or contained the term ‘reporting entity’. Two versions of paragraph AusCF1 were used:
(i) one version states that the requirements of the AusCF paragraphs and footnotes added to the Standard apply only to those entities that are applying the existing Conceptual Framework. It also directs entities applying the existing Conceptual Framework to AASB 1057 and SAC 1 for the definition of the term ‘reporting entity’; and
(ii) a second version is used where no other AusCF paragraphs or footnotes were added to the Standard but the Standard contains the term ‘reporting entity’. This version merely directs entities applying the existing Conceptual Framework to AASB 1057 and SAC 1 for the definition of the term ‘reporting entity’.
BC45To maintain IFRS compliance, there are some instances where it is not necessary or not appropriate to update a reference to the existing Conceptual Framework to a reference to the revised Conceptual Framework (these references were not updated in the consequential amendments made by the IASB to IFRS Standards). These include:
(a) references to the existing Conceptual Framework in AASB 3 Business Combinations (paragraph 11), AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors (paragraph 54G) in relation to developing accounting policies for regulatory balances, AASB 137 Provisions, Contingent Liabilities and Contingent Assets (paragraph 10) and AASB 138 Intangible Assets (paragraph 8) continue to use the definition of a liability and an asset contained in the existing Conceptual Framework;
(b) an existing Conceptual Framework reference that presents the definition of an asset, liability, income or expense in its requirements, so that updating the reference may potentially change the accounting consequences of the Australian Accounting Standard. In these cases, the Australian Accounting Standard will continue to refer to the existing Conceptual Framework for the relevant definition; and
(c) references to the existing Conceptual Framework in Interpretations, which the IASB amended to refer to the Conceptual Framework in effect when the Interpretation was developed. Consequently, the Board also amended the references to the existing Conceptual Framework in its Australian Interpretations to refer to the Conceptual Framework in effect when the Interpretation was developed.
References to the existing Conceptual Framework that are historical (ie fixed in time) rather than required to update automatically for subsequent versions of the Conceptual Framework do not include the reference to identification in accordance with AASB 1048 Interpretation of Standards. Such a reference to AASB 1048 would automatically update the reference to the Conceptual Framework when a new version of the Conceptual Framework is listed in AASB 1048. Most references to the existing and revised Conceptual Frameworks therefore include the AASB 1048 reference.
BC46Existing Conceptual Framework references contained in requirements specific to not-for-profit entities were also not updated. Although amendments will be made to the revised Conceptual Framework for not-for-profit entities in due course, they have not yet been considered as the adoption of the revised Conceptual Framework in Phase 1 is limited to for-profit entities.
BC47Based on feedback received on ITC 39, the Board noted that AASB 1053 paragraph 11 regarding the application of Tier 1 reporting requirements is not operating as intended to require entities with public accountability to prepare general purpose financial statements. The Board determined that the amended requirement would be limited to those entities scoped into Phase 1 to avoid unintended consequences.
Public sector entities
BC48The definition of public accountability in IFRS for SMEs was developed by the IASB for for-profit private sector entities. When discussing AASB 1053, the Board considered whether the definition of public accountability should also be applied to public sector entities. However, the Board decided against this for the following reasons:
The Board concluded that, consistent with the role of other regulators under the revised differential reporting framework (see paragraphs BC40-BC41), the determination of the Tiers of reporting requirements under which for-profit public sector entities should report would best be left to relevant public sector regulators in each jurisdiction. (AASB 1053, paragraph BC38).
The Board did not consider that there was any reason to revisit this decision.
BC49When discussing the application of Phase 1 of ITC 39 to entities in the public sector, the Board did not intend to force any for-profit public sector entity to adopt the revised Conceptual Framework for periods beginning on or after 1 January 2020. The Phase 1 amendments are intended to allow for-profit public sector entities to apply the revised Conceptual Framework and continue stating compliance with IFRS Standards where they elect to do so.
BC50For these reasons, the Board decided that Phase 1 should also apply to for-profit public sector entities that elect to apply the revised Conceptual Framework, in addition to for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.
BC51The Board decided that it would pursue financial reporting reform in the public sector via consultation based on the AASB Discussion Paper Improving Financial Reporting for Australian Public Sector, which was issued in June 2018.
Further consultation
BC52In December 2017 and February, September and November 2018, the Board considered issues papers and drafts of the Standard which were published as Board agenda papers for the public. This gave stakeholders the opportunity to follow the project and to comment on the issues contemporaneously.
BC53At its meeting in November 2018, the Board decided to finalise its decisions to address the issues raised by stakeholders. Whilst the substance of the Board’s decisions is consistent with the proposals in ITC 39, the Board decided that the new approach to highlighting which entities apply which conceptual framework and to the scope restrictions warranted the issue of a limited-scope consultative document presenting the proposed consequential amendments to Australian Accounting Standards (including Interpretations) and other pronouncements. A fatal-flaw review version of the proposed amending Standard was issued for comment in January 2019.
BC54The Board received four submissions on the fatal-flaw review version. The responses in general supported the issue of the amending Standard to finalise the Phase 1 consequential amendments alongside the issue of the revised Conceptual Framework, although one respondent preferred that two conceptual frameworks were both on issue for only a limited period of time and one preferred only one conceptual framework to be on issue. Some of the submissions raised matters of detail regarding the consequential amendments, which were addressed in finalising the amending Standard.
Basis for Conclusions on AASB 2020-2
This Basis for Conclusions accompanies, but is not part of, AASB 1057. The Basis for Conclusions was originally published with AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities.
Introduction
BC1This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in AASB 2020-2. It sets out the reasons why the Board developed the Standard, the approach taken to developing the Standard, and the bases for key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.
BC2For more than a decade the Board has been undertaking work aimed at addressing the problems that arise from entities being allowed to self-assess whether to prepare special purpose financial statements (SPFS) or general purpose financial statements (GPFS) when they are required to comply with Australian Accounting Standards (AAS) (see paragraphs BC10-BC13 for details). As is evident from empirical research and feedback from stakeholders (see paragraphs BC18-BC41), there is concern that SPFS lack consistency, comparability transparency and enforceability. The Board’s research has identified that there are users of financial statements that are publicly lodged with the Australian Securities and Investments Commission (ASIC), and the Board has been informed by those users that comparability, transparency, comprehensibility and consistency are what is most important to them when reading financial statements. For example comparability of recognition and measurement (R&M) requirements in AAS was rated 88% in importance to primary users[4] and 100% in importance to other users. They also expressed concern that key information is omitted from SPFSs (see paragraphs BC37-BC41).
[4] AASB Staff Paper Enhancing the revised Conceptual Framework and replacing Special Purpose Financial Statements – For-profit User and Preparer Survey Results (December 2018). ‘Primary users’ refers to users that meet the definition of primary users in AASB Practice Statement 2 Making Materiality Judgements (ie investors (and analysts), lenders and other creditors) and all other respondents are referred to as ‘other users’.
BC3Regulatory scrutiny of SPFS has also increased, for example in the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the regulation of auditing, the Senate Economics References Committee Report on Tax Avoidance, and the requirement for all Significant Global Entities (SGEs) to lodge GPFS with the Australian Taxation Office (ATO) (see paragraph BC32(a)).
BC4Within the context of the AASB’s International Financial Reporting Standards (IFRS Standards) adoption policy, the issue of a revised Conceptual Framework for Financial Reporting (March 2018) (referred to throughout this Basis for Conclusions as ‘the RCF’) by the International Accounting Standards Board (IASB) provides a timely opportunity to once again consider how best to improve the quality of financial reporting in Australia by solving the so-called ‘SPFS problem’ via a broader project aimed at removing the ability of certain for-profit private sector entities to prepare SPFS when they are required to prepare financial statements that comply with AAS.[5] The Board is progressing with this project by considering each sector separately, in the first instance for-profit private sector entities required to comply with AAS (being the subject of this Standard – as explained in paragraphs BC68-BC93).
[5] In this Basis for Conclusions, the reference to AAS in this phrase also includes accounting standards as referred to in legislation (this means legislation of a government in Australia).
BC5The Board noted the Australian Government Treasury change in thresholds for large proprietary companies which defined the entities that are required to lodge their financial statements with ASIC (unless exempted by ASIC) in April 2019. Treasury doubled the thresholds used for determining what constitutes a large proprietary company. As set out in the Explanatory Memorandum accompanying the increase, the revised thresholds were set with the expectation of capturing entities with economic significance and noted the larger the entity, the more likely it is that there are GPFS users. These are key criteria in the AASB’s Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity for determining whether or not an entity is a reporting entity.
BC6As noted in paragraph BC4, the solution to the SPFS problem provided by this Standard is to remove the ability of certain for-profit private sector entities to self-assess their financial reporting requirements and prepare SPFS when they are required to prepare financial statements that comply with AAS.[6] This will improve the consistency, comparability, transparency and enforceability of financial statements, thus meeting the needs of users who are accessing these financial statements on a public register or otherwise. The Board acknowledged that these changes could not be implemented in isolation, as merely removing the ability of certain for-profit private sector entities to prepare SPFS with no other mitigating action would result in increased reporting requirements for some entities if they were required to transition from SPFS to some form of Tier 2[7] GPFS framework. Therefore, this Standard is made in conjunction with AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (March 2020), which provides simplified Tier 2 GPFS reporting requirements for those for-profit entities that are prohibited from preparing SPFS as a result of this Standard.
[6] The Australian concept of the reporting entity would be retained for entities outside the scope of this Standard (and AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework). The Board will consider the financial reporting framework for these entities in the future.
[7] Currently, Australian Accounting Standards consist of two Tiers of reporting requirements for preparing general purpose financial statements:
BC7The Board also decided to provide transitional relief in addition to that which is currently available via AASB 1 First-time Adoption of Australian Accounting Standards and AASB 1053 (see paragraphs BC122-BC135), for entities that choose to early adopt the requirements in this Standard.
BC8The remainder of this Basis for Conclusions provides further background and explanation about the reasons for developing this Standard, including:
(a)previous Board decisions in relation to earlier stages of the process (to provide a historical perspective, see for example paragraphs BC10-BC13);
(b)the basis for the key decisions made, including:
(i)the types of entities affected by the Standard and the technical requirements (including, for context, a summary of the basis for the revised Tier 2 GPFS framework (see paragraphs BC95-BC121), which is detailed in AASB 1060);
(ii)transitional provisions (see paragraphs BC122-BC135); and
(iii)the effective date (see paragraphs BC145-BC150);
(c)how the Board applied The AASB’s For-Profit Entity Standard-Setting Framework when developing this Standard (see paragraphs BC154-BC156); and
(d)the amendments necessary to implement the requirements outlined in this Standard (see paragraphs BC157-BC162.
Reasons for developing this Standard
BC9This Standard includes:
(a)amendments to AAS to remove the ability of certain for-profit private sector entities to prepare SPFS by removing the ‘reporting entity’ concept for those entities required by:
(i)legislation to prepare financial statements that comply with either AAS or accounting standards; or
(ii)their constituting document (or another document) to prepare financial statements that comply with AAS, provided the relevant document was created or amended on or after 1 July 2021; and
(b)to provide relief from restating comparative information for entities transitioning to full R&M requirements, if the entity chooses to early adopt the requirements (see paragraphs BC122-BC135).
Board deliberations prior to the AASB’s Invitation to Comment ITC 39
BC10As noted in paragraph BC2, the Board had been aware of the problems with the application of the reporting entity concept and the consequential preparation and public lodgement of SPFS for some time. Indeed, the Board has previously publicly contemplated the removal of the ability of certain entities to self-assess and prepare SPFS when required to comply with AAS. For example:
(a)AASB Invitation to Comment ITC 12 Request for Comment on a Proposed Revised Differential Reporting Regime for Australia and IASB Exposure Draft of A Proposed IFRS for Small and Medium-sized Entities (May 2007) noted the concept of SPFS might have been misunderstood in some cases. To remove the ambiguity concerning the reporting entity concept, ITC 12 sought comment on whether all financial statements available on a public register should be required to be GPFS; and
(b)AASB Consultation Paper (CP) Differential Financial Reporting – Reducing Disclosure Requirements (February 2010) and ED 192 Revised Differential Reporting Framework (February 2010), issued in tandem, followed ITC 12 and reaffirmed the Board’s view that the reporting entity concept which allows the public lodgement of SPFS should be removed. The Board elaborated on the issues surrounding SPFS in the CP, including noting that:
(i) entities are asserted to be ‘abusing’ the reporting entity concept by claiming to be non-reporting entities and preparing SPFS when they should be preparing GPFS. An impetus for this is the desire to avoid the cost and exposure that would come from applying full IFRS Standards as adopted in Australia;
(ii) many of the regulators requiring the preparation and lodgement of financial statements may not have given sufficient consideration to the nature of the information they require and the needs of any external users of that information; and
(iii)preparation of SPFS by entities that are required by law to prepare financial statements in accordance with accounting standards and be lodged on a public register contradicts the legislation’s objective of providing information to a wide range of users who are not in a position to command specific information to satisfy their needs.
BC11However, the Board noted mixed feedback from constituents in response to these due process documents in regard to removing the ability of certain entities to self-assess and prepare SPFS when required to comply with AAS, which suggested that (as noted in paragraphs BC10-BC17 of the Basis for Conclusions to AASB 1053):
(a)on the one hand, the reporting entity concept involves a high degree of subjectivity, is not universally understood and hence does not provide the intended result, nor does it provide a robust criterion for differential reporting purposes; and
(b)on the other hand, the reporting entity concept works well, and there appeared to be no evidence to the contrary, particularly from users.
BC12Consequently, in 2010, the Board decided to issue AASB 1053 and introduce a second tier of GPFS reporting, being Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements (RDR), but delay the phase of the project addressing the reporting entity concept and the removal of SPFS until further research had been undertaken. That research would consider in more detail the impact of removing the ability of certain entities to self-assess and prepare SPFS when required to comply with AAS. The RDR requirements were designed to substantially reduce the disclosure burden when compared to the full disclosure requirements of AAS.
BC13Prompted by the views noted in paragraphs BC10-BC11, the Board initiated research projects, the findings of which are discussed in paragraphs BC18-BC25.
The issues with SPFS
BC14Australia is the only jurisdiction with a reporting entity concept that effectively permits entities to self-assess what type of financial reporting they do, when they are required by legislation or otherwise (such as by a constituting document) to prepare financial statements in accordance with AAS.[8] Therefore, unlike other jurisdictions, in Australia two similar entities might prepare very different sets of financial statements, one preparing GPFS using a robust and consistent framework, and the other preparing SPFS with self-selected requirements. This reduces comparability for entities of similar economic circumstances and undermines the fundamental principles of trust and transparency.
[8] See AASB Research Report No. 7 Financial Reporting Requirements Applicable to For-Profit Private Sector Companies (May 2018) for a comparison of international financial reporting frameworks.
BC15An analysis of the reporting practices of specified for-profit entities lodging financial statements with ASIC estimated that 71% of those entities prepared and publicly lodged SPFS in 2018. [9] This same research estimated that 24% of these entities lodging SPFS either did not comply with the R&M requirements in AAS or did not make clear whether they did (refer to paragraphs BC20-BC22). Therefore, only 76% of the SPFS voluntarily complied with ASIC Regulatory Guide 85 Reporting requirements for non-reporting entities (RG 85) recommended guidance to apply all the R&M requirements in AAS (refer BC28-BC29). This suggested a strong need to improve the consistency, comparability, transparency and enforceability of financial reporting, which would also increase the usefulness and credibility of financial reporting in Australia.
[9] AASB Research Report 12 Financial Reporting Practices of For-Profit Entities Lodging Special Purpose Financial Statements (August 2019). Research Report 12 examines the financial reporting practices of for-profit entities, including large proprietary companies, small foreign-controlled proprietary companies, for-profit unlisted public companies and other small proprietary companies, lodging financial statements with ASIC. The findings of Research Report 12 considered in this Standard are limited to those that relate to entities within the scope of the proposals in this Standard, that is large proprietary companies, small foreign-controlled proprietary companies and for-profit unlisted public companies limited by guarantee. These entities are referred to herein as the ‘specified for-profit entities’.
BC16It is incumbent on the AASB to resolve the SPFS problem as, legislatively, the AASB must ensure there are appropriate accounting standards for each type of entity that must comply with accounting standards (Australian Securities and Investments Commission Act2001 s229(2)(c)) and facilitate comparability (s224). The ability to make the self-assessment that gives rise to the SPFS problem sits within AAS. Prior to issuing this Standard, the only AAS that explicitly apply to SPFS of for-profit private sector entities focussed on presentation and disclosure (and not R&M). As such, it was the directors’ choice of accounting policies that provides the financial reporting framework. As a consequence, other regulators have attempted to fill the gap by providing additional guidance in relation to R&M. Despite this, discussions with users, including lenders and insolvency practitioners, indicated their needs for information about liquidity, solvency, cash flows, commitments and contingencies and related party disclosures were not being met in most SPFS and they were not all aware of the extent of the R&M issues. This indicated a need for minimum R&M requirements to be specified in AAS.
BC17Therefore, as noted in paragraph BC6, the Board decided to play its role in improving the consistency, comparability, transparency and enforceability of financial statements to meet user needs, whilst mitigating, where appropriate, the increased reporting burden for entities that would no longer be able to prepare SPFS and would instead be required to prepare GPFS in accordance with AAS.
Results of research into the reporting practices of specified for-profit entities lodging financial statements with ASIC
BC18The Board initiated academic research that resulted in the publication of AASB Research Report No. 1 Application of the Reporting Entity Concept and Lodgement of Special Purpose Financial Statements (June 2014). Research Report No. 1 analysed the application of the reporting entity concept and the adoption of special purpose financial reporting, particularly by entities lodging financial statements with ASIC and with state-based regulators of Australia’s three most populous states, namely, Consumer Affairs Victoria, NSW Fair Trading and Queensland Office of Fair Trading. Research Report No. 1 showed that, based on lodgements as at 30 July 2011, approximately 66% of specified for-profit entities[10] lodged SPFS with ASIC. The findings of Research Report No. 1 indicated to the Board that:
BC128For the reasons noted in the table in paragraph BC127, the Board decided against providing additional transitional relief in the form of ‘push-down accounting’ or immediate write-off of deemed goodwill against retained earnings. The Board sought specific feedback through ED 297 on whether it should re-consider any of the rejected options noted above but did not receive any further compelling reasons to do so.
Relief from restating and presenting comparative information
BC129As noted in the table in paragraph BC127, the Board concluded that relief from the restatement and presentation of comparative information in accordance with current AAS would be beneficial as it could reduce preparation costs whilst providing a consistent, enforceable and transparent reporting framework (despite a lack of comparability in the year of transition). Thus the Board proposed in ED 297 that an entity would not be required to provide restated comparative information as per current AAS in the year the Standard first becomes effective, on the premise that the Standard would be issued by 30 June 2020, effective for periods beginning on or after 1 July 2020 (see paragraphs BC145-BC148 for further discussion on effective date).
BC130However, the Board noted the particular importance for users:
(a)to understand the effect of an entity’s transition from SPFS to Tier 2 GPFS on its assets, liabilities and equity; and
(b)to have comparative information in the statement of profit or loss and other comprehensive income to facilitate trend analysis.
BC131To balance the needs of users and the costs to preparers, the Board proposed in ED 297 that a pragmatic approach would be to require an entity to:
(a)present two statements of financial position ie as at the reporting date and at the beginning of the reporting period, with a comparative statement of financial position as presented in the entity’s last SPFS disclosed in the notes to the financial statements. This would be supplemented with a description of the main adjustments that were required to make the opening statement of financial position compliant with AAS. To reduce costs, the Board proposed an entity need not quantify those adjustments; and
(b)present its statement of profit or loss and other comprehensive income as presented in its last SPFS as comparative information, but clearly labelled, where applicable, that such comparative information is not AAS compliant. This would be supplemented with disclosure in the notes to the financial statements describing the main adjustments that would have been required to make the comparative information compliant with AAS. Also to reduce costs, the Board proposed an entity need not quantify those adjustments.
BC132Respondents to ED 297 agreed in principle with the transitional relief, however some respondents raised concern that the comparative information in the statement of financial position (being the adjusted opening balances – AAS compliant) would not be comparable to the comparative information in the statement of profit or loss and other comprehensive income (which would not necessarily be AAS compliant). Those respondents argued that this would not be helpful for users of financial statements. Further, some software providers provided feedback that having comparative information presented on different bases could be difficult from both a software development and financial statement user perspective.
BC133In response, the Board decided a pragmatic approach would be to require the statement of financial position as presented in the entity’s last SPFS to be presented on the face of the statement of financial position, and to require the opening statement of financial position (compliant with AAS) to be disclosed in the notes. However, given the comparative information on the face of the financial statements would be less comparable under this approach, the Board decided to require entities to disclose a quantified reconciliation of the entity’s equity in the notes. The Board considered whether to require a reconciliation of the entity’s statement of financial position, however noted that a reconciliation of equity should provide sufficient detail to understand the changes to the statement of financial position, and providing a reconciliation to equity would be more consistent with the general first-time disclosure requirements of AASB 1060. The Board noted this requirement should not be too onerous for preparers, as they would be required to calculate these amounts in any case.
BC134Some respondents to ED 297 questioned whether not restating comparative information would mean that an entity would be required to disclose two sets of accounting policies (ie one set to explain the basis of preparation of the comparative information and one set to explain the information for the reporting period). The Board decided not to provide specific requirements on the basis that the disclosure requirements of AASB 1060 and those contained within the relief required by the Board would provide sufficient information about the previous accounting policies in explaining the effect of the transition from SPFS to GPFS.
BC135Because the purpose of this relief is to facilitate transition from SPFS to Tier 2 GPFS in a timely manner, rather than a general first-time adoption of GPFS, the Board decided to propose in ED 297 that the additional transitional relief from restatement of comparative information should not be available beyond the first year in which the Standard becomes effective. That is, on the assumption that the Board would have issued the Standard by 30 June 2020 with an effective date of 1 July 2020, the Board proposed the transitional relief in respect of comparative information would only be available for annual reporting periods beginning on or after 1 July 2020 but before 1 July 2021.
BC136However, for the reasons set out in paragraph BC145-BC151, the Board decided to defer the effective date of the Standard by 12 months to 1 July 2021. Because the transitional relief from restating comparative information is intended to facilitate a timely transition from SPFS to GPFS, the Board decided that an extended effective date would remove the need for transitional relief. However, the Board decided to retain the transitional relief for entities that choose to adopt the requirements of this Standard and AASB 1060 prior to the effective date (ie that choose to early adopt). That Board decided that retaining this option would incentivise a timely transition to GPFS, helping to solve the SPFS problem sooner.
BC137The Board also decided for pragmatic reasons that the transitional relief from restating comparatives will be available regardless of whether an entity had a legislative or other requirement to comply with AAS in prior periods.
Correction of errors in year of transition
BC138With an objective to facilitate a timely transition to better quality financial reporting, the Board decided to also provide relief to entities from distinguishing errors from changes in accounting policies on transition from SPFS to GPFS-Tier 2. The Board noted this relief could be particularly relevant where an entity had claimed compliance with applicable R&M requirements in error. In such a case, there were diverse views as to whether an entity would be permitted to apply the transitional relief in AASB 1 based on the requirements of AASB 1053. As such, the Board decided to clarify in AASB 1053 that the applicability of AASB 1 (or AASB 108) relies on whether or not the entity complied with applicable R&M requirements, rather than whether the entity stated compliance with applicable R&M requirements. As such, an entity that discovered an error in its previous SPFS would still be permitted to apply the transitional relief in AASB 1 (or elect to apply AASB 108).
BC139The Board also noted that the first-time adoption disclosures in AASB 1060 would generally require an entity to distinguish the correction of errors and changes in accounting policies in the notes. As such, to provide relief for preparers and facilitate a more timely transition to a GPFS framework, the Board decided not to require an entity to distinguish errors and accounting policies in the year of transition, noting that in any case all adjustments would be disclosed in the financial statements regardless of their nature. The Board considered whether such an amendment would affect any other obligations of those charged with governance with respect to prior period errors, however noted that such obligations would not be overridden. In making that decision, the Board noted that not distinguishing prior period errors from accounting policy changes may not meet the Conceptual Framework’s qualitative characteristic of faithful representation, however the Board decided to make a trade-off with faithful representation to meet the Board’s objective in these limited circumstances.
Scope of transitional relief
BC140In developing ED 297, the Board noted that entities already complying with the R&M requirements in AAS would not need transitional relief, given that such entities are required to continue applying the applicable R&M requirements in accordance with AASB 1053. However, many respondents to ED 297 considered that the transitional relief should be available to all entities impacted, regardless of whether the SPFS previously issued complied with all R&M requirements. Respondents noted that providing comparative information for disclosures that had not previously been made in an entity’s most recent SPFS could be difficult, in particular when gathering information and preparing disclosures about related parties (including key management personnel) and income tax. The Board considered this feedback and decided that extending the relief to such disclosures would be reasonable to address stakeholder feedback and facilitate timely transition to GPFS. The Board decided to limit the relief only to instances where the comparative information had not previously been disclosed, on the basis that the entity would have all other comparative information available to them.
BC141The Board also decided that it would be appropriate to amend the requirements in AASB 1053 for the transition from SPFS to Tier 2 GPFS generally, as the Board was aware there were mixed views amongst stakeholders as to whether or not consolidation was to be considered a R&M requirement. The Board decided to make amendments to paragraph 18A to explicitly state that entities would be able to apply either AASB 1 (including the relief for preparing consolidated financial statements in Appendix C) or AASB 108 for first-time adoption of GPFS where a parent entity either:
(a)did not apply the requirements of AASB 10 and hence did not prepare consolidated financial statements; or
(b)did not prepare consolidated financial statements on the basis that neither the entity nor the consolidated entity was not a reporting entity, and hence was not required by paragraph Aus4.2 to prepare consolidated financial statements where the entity was an ultimate Australian parent.
BC142In respect of BC141(b), the Board decided that even though such an entity would have technically complied with the R&M requirements of AASB 10 (because it was not required to consolidate), because the amendments in this Standard mean that the reference to a reporting entity in AASB 10 paragraph Aus4.2 is removed, the Board considered it appropriate to make available the same transitional relief as would be available for entities previously not complying with AASB 10. The Board considered whether to also extend such relief to entities preparing separate GPFS on the same basis (ie applying AASB 10 paragraph Aus4.2), however decided this would not be appropriate at this time as the extent of the entities impacted is currently unknown, but is expected to be limited, and as:
(a)the Board expects that such entities should already have comprehensive IFRS-compliant information available to help produce consolidated financial statements, as the entity would be reporting that information to its parent; and
(b)entities currently preparing SPFS would also be required to provide new additional disclosure as well as potentially changes to R&M, hence it could be argued that not having such other challenges would mean entities already preparing GPFS would have enough resources to retrospectively consolidate.
BC143The Board considered whether to explicitly refer also to the equity method of accounting for investments in associates and joint ventures, and concluded that this was not necessary. As the equity method of accounting affects the measurement of the investments and the presentation in the statement of profit or loss and other comprehensive income, it is clear that the existing references in paragraph 18A to the R&M requirements of AAS cover application of the equity method. In any case, paragraph 9 of AASB 1053 now states that the R&M requirements include both consolidation and the equity method of accounting. The explicit references to consolidated financial statements added to paragraph 18A therefore emphasise their coverage.
BC144The Board noted that paragraph 18A(a) and 18A(b) of AASB 1053 as amended would permit an entity to apply the transition relief available under AASB 1, and thus potentially restate recognised amounts, even if the previous SPFS applied all the applicable R&M requirements of AAS, except for the consolidation requirements in AASB 10.
Effective date
BC145In proposing an effective date in ED 297, the Board considered available policies and precedent, including:
(a)the amendments to the tax law requiring SGEs to lodge GPFS with the ATO were issued in December 2015, and required lodgement to the ATO for ‘income years’ commencing on or after 1 July 2016. However, the ATO provided transitional concessions in the first year, whereby it allowed entities with reporting periods ending on 30 June 2017 additional time to lodge those financial statements, with lodgement due by 31 March 2018. It also permitted foreign-controlled entities to lodge financial statements in accordance with another set of Generally Accepted Accounting Principles (GAAP) other than AAS (eg US GAAP);
(b)the AASB issued the first principal version of AASB 1 in July 2004, prior to the effective date of full adoption of the Australian-equivalents to IFRS Standards of annual periods beginning on or after 1 January 2005. The FRC provided the AASB with the directive to adopt IFRS Standards in 2002. Given that all entities would have applied AASB 1 on Australia’s transition to IFRS Standards, this length of time is arguably indicative of how much time might need to be provided for a transition from SPFS to GPFS; and
(c)the now superseded AASB Policies and Processes outlines in paragraph 32 that “when determining the effective date of Standards the AASB seeks to ensure that constituents have adequate time to prepare for their implementation. In normal circumstances the AASB will issue a Standard a significant time before its effective date, say, during the previous annual reporting period and generally permits entities to apply those requirements early should they wish to do so”.
BC146The Board also noted that a timely effective date would be welcomed by users of financial statements, and may also be preferred by preparers. This is because:
(a)the regulations in relation to the doubling of the thresholds used for determining what constitutes a large proprietary company are applicable to financial years beginning on or after 1 July 2019. The Board noted that the commentary contained in the Explanatory Statement to those regulations may be persuasive in an entity reconsidering its status as a non-reporting entity. As such, if entities were to reassess and determine that they were in fact a reporting entity, it would be preferable for the revised Tier 2 GPFS framework and the RCF to be applicable at the same time as for other publicly accountable for-profit private sector entities (annual periods beginning on or after 1 January 2020); and
(b)a large proportion of affected entities (76% - refer paragraph BC20) are already complying with the R&M requirements in AAS.
BC147As noted in the table in paragraph BC127, the Board also concluded that providing relief from restating comparative information in the year of transition would be particularly beneficial as it could allow for an earlier effective date. As such, with regard to the above considerations, the Board decided to propose an effective date of annual periods beginning on or after 1 July 2020 in ED 297. The Board noted this would effectively align with the effective date of the RCF, given most Australian for-profit private sector entities would have reporting dates of 30 June.
BC148Further, the Board noted the timeliness of completing this project, in order to provide an option for large proprietary companies to early adopt the RCF, applicable transitional relief and Tier 2 GPFS framework for periods beginning on or after 1 July 2019 (ie aligned with the doubling of the thresholds used for determining what constitutes a large proprietary company).
BC149Respondents to ED 297 expressed mixed views on the proposed effective date, with many recommending the Board defer the effective date by 1-2 years. Reasons for deferral suggested by respondents include:
(a)to provide time for education, software and process changes;
(b)challenges caused by first-time consolidation, for example gathering AAS-compliant information from subsidiaries;
(c)deferring the effective date would dismiss the need for transitional relief;
(d)the AASB Due Process Framework for Setting Standards (September 2019) (Due Process Framework) suggests an implementation period of 2 years in typical cases; and
(e)whilst the effective date appeared appropriate for entities that should have been complying with RG 85 (ie entities required to prepare financial statements in accordance with the Corporations Act 2001), it may be too soon for other for-profit entities within the scope that had not previously had RG 85 to guide their financial reporting framework.
BC150In addition, because ED 297 and ED 295 are complementary – that is, the revised Tier 2 framework is an integral piece of the removal of SPFS – the Board also considered the comments to ED 295 addressing the effective date, which included in addition to the responses noted above:
(a)that the revised Tier 2 framework should be delayed until the direction of the IASB’s Subsidiaries that are SMEs project is finalised, due to the multiple framework changes that could occur if the AASB were to adopt the IASB’s solution shortly after implementing its own simplified disclosure standard; and
(b)to give time for the NZASB to decide the direction for its own Tier 2 framework in an attempt to retain trans-Tasman convergence for for-profit entities.
BC151The Board considered a range of options to determine the most appropriate solution to balance the urgency of solving the SPFS problem whilst providing sufficient time for stakeholders to transition:
| Option | Advantages | Disadvantages |
| Option 1 · Effective date of 1 July 2021 · Transitional relief available to all entities (R&M compliant and non-compliant) which elect to early adopt · No transitional relief to entities adopting from 1 July 2021 | · Stakeholders will have more time to prepare for the significant change to the financial reporting framework including education and collation of historical information · Transitional relief may incentivise voluntarily early adoption · The effective date would be consistent with the AASB’s Due Process Framework that suggest an implementation period of 2 years · Retaining transitional relief for those that early adopt provides an incentive to transition in a timely manner · Software providers have expressed concerns about their ability to create templates in a timely manner and also the presentation of ‘mixed’ comparatives | · Effective date would not be aligned with the change in proprietary company thresholds. Large proprietary companies would likely need to prepare GPFS prior to the effective date to be consistent with Treasury’s expectations regarding GPFS financial report by large proprietary companies · There is a strong desire for transparent and high-quality financial statements. The recent parliamentary inquiry highlighted even more the need for change in financial reporting. Delaying the effective date is inconsistent with this |
| Option 2 No change to transitional relief and effective date | · Effective date would be aligned with the change in proprietary company thresholds · The project will be completed more quickly, therefore responding to the strong desire for transparent and high-quality financial statements and recent parliamentary inquiry · There are only a maximum of 7,295 entities expected to be effected, and with the effect for the majority of these entities (5,589) expected to be limited to providing additional disclosures only coupled with the transitional relief an earlier effective date was considered reasonable | · Stakeholders are concerned they do not have sufficient time to prepare for such a significant change to the financial reporting framework including education and collation of historical information. However, research strongly suggests that deferring the effective date of new standards does not necessarily result in entities using the extended lead time to better prepare for the new requirements, instead it is often used to delay starting to prepare.[47] · Software providers have expressed concerns about their ability to create templates in a timely manner and also the presentation of ‘mixed’ comparatives · The effective date is not consistent with the AASB’s Due Process Framework that suggest an implementation period of 2 years |
| Option 3 · Effective date of 1 July 2021 · No transitional relief | · Similar as those for Option 1 above · Transition requirements would be consistent with those applied by SGEs | · Similar as those for Option 1 above · There is no incentive for entities to early adopt |
| Option 4 · Extend the effective date of both standards to 1 July 2021 with the transitional relief applicable only to entities’ first time consolidation | · Similar as those for Option 1 above · Research Report 12 does not address the number of financial reports which were presented on a consolidated or separate basis, it is difficult to quantify the number of affected entities. As such the entities preparing first time consolidation would be given extra time to prepare for any changes that might be required | · Disadvantages of deferred effective date similar as for Option 1 above |
| Option 5 Staggered implementation · Corporations Act entities to apply the requirements in year one · Effective date deferred by a further year for all other entities in scope | · Effective date would be aligned with the change in proprietary company thresholds. All entities regulated by Corporations Act, which are in the scope of this Standard would comply with R&M requirements of AAS in a timely manner · It is expected that entities required to prepare financial reports in accordance with the Corporations Act 2001 should already be complying with the R&M requirements in AAS - as there are only a maximum of 7,295 entities expected to be effected, this option is not expected to be too onerous for Corporations Act entities. As the population of other entities is unknown, and they do not have a RG 85 equivalent, an additional year to prepare would be beneficial | · The resolution of the problems with SPFS reporting would take an additional year for entities not regulated by the Corporations Act |
[47] Davern, M., Gyles, N., Potter, B. and Yang, V. (2019), "Implementing AASB 15 revenue from contracts with customers: the preparer perspective", Accounting Research Journal, Vol. 32 No. 1, pp. 50-67. Board ultimately decided that Option 1 provided the most appropriate solution, for the reasons set out in paragraph BC151 above.
BC153In respect of the issues raised in respect of the revised Tier 2 framework (see paragraph BC150), the Board decided that the need to remove SPFS for the entities within the scope of this Standard in a timely manner would mean that waiting for the IASB and retaining trans-Tasman convergence (in the short term) would not meet the objective of the project (see the Basis for Conclusions to AASB 1060 for the Board’s considerations on these matters).
Application of The AASB’s For-Profit Entity Standard-Setting Framework
BC154In developing the Standard the Board considered the principles in The AASB’s For-Profit Entity Standard-Setting Framework, which outlines the matters the Board must consider when determining whether or not to make amendments to IFRS Standards or develop Australian-specific guidance.
BC155The AASB’s For-Profit Entity Standard-Setting Framework states that, when developing accounting standards for non-publicly accountable for-profit entities, the AASB’s objective is to use IFRS Standards and transaction neutrality as a starting point, with modifications where justified to address:
(a)Australian-specific legislation, user needs, or public interest issues relevant to financial reporting or beyond financial reporting;
(b)issues specific to the (for-profit) public sector of such prevalence and magnitude that users are likely to make inappropriate decisions based on the financial statements;
(c)where the objectives and qualitative characteristics of financial reporting as set out in the existing Conceptual Framework would not be met; and/or
(d)undue cost or effort considerations.
BC156Consistent with this, the Board decided standard-setting activities as reflected in this Standard were necessary after undertaking the following (as already noted throughout this Standard):
(a)extensive public consultation and outreach including ITC 39 and ED 297, research into the needs of financial statement users (eg public surveys and targeted outreach), feedback obtained from stakeholders (including users) who participated in roundtable events, along with other general and targeted outreach with stakeholders;
(b)engaging with Treasury and assessing the impact of regulatory changes to large proprietary companies, including understanding the number of entities expected to be affected by the increase in the large proprietary company thresholds from this Standard;
(c)the preparation and review of various research reports, including Research Report No. 1, AASB Research Report No. 4 Review of Adoption of International Financial Reporting Standards in Australia (March 2017), AASB Research Report No. 7 and Research Report 12 to understand the current application of the reporting entity concept, as well as to understand the degree of non-compliance with the R&M requirements in AAS. The objective of these research activities was to better understand the cost implications of disallowing entities required to prepare financial statements that comply with AAS to prepare SPFS and require them to prepare GPFS instead;
(d)considering whether it was necessary to provide transitional relief in addition to that currently available under AASB 1 and AASB 108 with the objective of minimising any undue costs in relation to both the transition from SPFS to GPFS and the associated disclosure requirements; and
(e)a consideration of matters relevant to Regulation Impact Statement (RIS) requirements.
Amendments required to implement Phase 2
BC157As noted in paragraph BC54, in May 2019 the Board made AASB 2019-1 to implement Phase 1 of the Board’s phased approach to implementing the IASB’s RCF in Australia, limiting the application of the Board’s Conceptual Framework for Financial Reporting (Conceptual Framework) to for-profit private sector entities with public accountability that are required by legislation to prepare financial statements that comply with AAS.
BC158In this Standard, to facilitate the implementation of Phase 2, the following amendments are made:
(a)the applicability of the Conceptual Framework is extended so that it applies to:
(i)for profit-private sector entities that are required by legislation to comply with either Australian Accounting Standards or accounting standards (with the previous limitation to entities with public accountability removed);
(ii)other for-profit private sector entities that are required only by their constituting document or another document to comply with Australian Accounting Standards (and so excluding requirements to comply merely with ‘accounting standards’), provided that the relevant document was created or amended on or after 1 July 2021; and
(iii)other for-profit entities (including for-profit public sector entities) that elect to prepare GPFS; and
(b)the existing Conceptual Framework and SAC 1 are also amended so that they do not apply to all for-profit entities that are applying the Conceptual Framework. Consequential amendments are made to the applicability of the reporting entity definition in AASB 1057, which is not relevant to entities applying the Conceptual Framework.
BC159Therefore, with these amendments, an entity that is required to apply the Conceptual Framework cannot identify as a non-reporting entity under SAC 1 or AASB 1057. As a consequence, the ability of such an entity to prepare SPFS is removed and the entity will be required to prepare GPFS that comply with AAS (or accounting standards under legislative requirements). For the avoidance of doubt, an entity applying the Conceptual Framework cannot apply the definition of reporting entity outlined in SAC 1 or AASB 1057.
BC160The application paragraph of AASB 1057 is extended to state that it will apply to for-profit private sector entities that are required by legislation to comply with either AAS or accounting standards, and other for-profit private sector entities that are required only by their constituting document or another document to comply with AAS (provided that the relevant document was created or amended on or after 1 July 2021). The application paragraphs of the other Standards and Interpretations, as set out in AASB 1057, are extended similarly.
BC161In respect of entities that voluntarily choose to prepare GPFS, the Board proposed in ED 297 to permit such entities to apply either the revised Conceptual Framework or the Framework for the Preparation and Presentation of Financial Statements. However, many respondents disagreed with this proposal, and preferred that voluntary GPFS preparers are restricted to applying only the revised Conceptual Framework. In response, the Board decided to require entities that voluntarily prepare GPFS to apply the revised Conceptual Framework once it becomes applicable. The Board considered that allowing either framework for voluntary GPFS preparation could perpetuate problems that this Standard intended to resolve, such as maintaining two conceptual frameworks (which will anyway occur in the medium term due to other exemptions), creating confusion about what compliance with AAS means, and two entities preparing GPFS may adopt different accounting policies for like transactions. Allowing either framework also means that preparing GPFS would not necessarily lead to IFRS compliance.
BC162The AusCF paragraphs in AAS that were introduced in AASB 2019-1 do not need to be amended in this Standard. The definition of AusCF entities as NFP entities and for-profit entities that are not applying the Conceptual Framework, as introduced in AASB 2019-1, will continue to apply, but with a limited scope such that those paragraphs would only be relevant to FP entities not within the scope of this Standard. The phase 2 amendments reduce the set of for-profit entities that are not applying the Conceptual Framework.
(a) Tier 1: Australian Accounting Standards; and
(b) Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements.
(See paragraph 7 of AASB 1053 Application of Tiers of Australian Accounting Standards.) However, the Board is considering what the most appropriate Tier 2 GPFS framework may be – see paragraph BC95.
(a)a ‘global parent entity’ whose ‘annual global income’ is A$1 billion or more; or
(b)a member of a group of entities consolidated (for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.
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