Accounting Standard AASB 2020-2 Amendments to Australian Accounting Standards â€“ Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (Cth)

AASB Standard

AASB 2020-2

March 2020

Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities

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ISSN 1036-4803

Contents

PREFACE

ACCOUNTING STANDARD

AASB 2020-2 AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS – REMOVAL OF SPECIAL PURPOSE FINANCIAL STATEMENTS FOR CERTAIN FOR-PROFIT PRIVATE SECTOR ENTITIES

from page

OBJECTIVE 5

APPLICATION 5

AMENDMENTS TO THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 6

AMENDMENTS TO THE FRAMEWORK FOR THE PREPARATION AND PRESENTATION
OF FINANCIAL STATEMENTS 6

AMENDMENTS TO STATEMENT OF ACCOUNTING CONCEPTS SAC 1 7

AMENDMENTS TO AASB 1 7

AMENDMENTS TO AASB 10 7

AMENDMENTS TO AASB 1048 8

AMENDMENTS TO AASB 1053 8

AMENDMENTS TO AASB 1057 12

COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT 16

BASIS FOR CONCLUSIONS

Australian Accounting Standard AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities is set out on pages 5 – 16. All the paragraphs have equal authority.

Preface

Standards amended by AASB 2020-2

This Standard makes amendments to the Australian Accounting Standards and other pronouncements listed on page 5 of the Standard.

These amendments explicitly extend the application of the Standards and the AASB Conceptual Framework for Financial Reporting (May 2019) to additional for-profit private sector entities. The amendments build upon the consequential amendments to pronouncements previously made in Accounting Standard AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework (May 2019).

Main features of this Standard

Main requirements

This Standard makes amendments to the Standards (via AASB 1057 Application of Australian Accounting Standards) and the Conceptual Framework for Financial Reporting (Conceptual Framework) so that they apply explicitly 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 (with the previous limitation to entities with public accountability removed); and

(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.

The Conceptual Framework is also amended to apply to other for-profit entities (including for-profit public sector entities) that elect to prepare general purpose financial statements and as a result apply the Conceptual Framework and the consequential amendments to other pronouncements set out in this Standard, as well as in AASB 2019-1.

The applicability of the Framework for the Preparation and Presentation of Financial Statements and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity is amended so that they continue to apply to for-profit entities that do not need to apply the Conceptual Framework (eg for-profit public sector entities and those whose constituting document was created or amended before 1 July 2021), as well as to not-for-profit entities (subject to exceptions stated in the Standards).

Consequential amendments are made to various Standards, including amending the applicability of the ‘reporting entity’ definition in AASB 1057 so that it is not relevant to the entities to which this Standard is applicable (all of which would apply the Conceptual Framework). As a consequence, the ability of such an entity to prepare special purpose financial statements is removed and it will need to prepare general purpose financial statements that comply with Australian Accounting Standards (or accounting standards, under legislative requirements).

This Standard also adds an Appendix to AASB 1053 Application of Tiers of Australian Accounting Standards to provide relief from restating comparative information for entities that elect to early adopt the requirements in this Standard.

Application date

This Standard applies to annual reporting periods beginning on or after 1 July 2021, with earlier application permitted.

Accounting Standard AASB 2020-2

The Australian Accounting Standards Board makes Accounting Standard AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities under section 334 of the Corporations Act 2001.

Kris Peach

Dated 6 March 2020 Chair – AASB

Accounting Standard AASB 2020-2

Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities

Objective

This Standard amends:

(a)the Conceptual Framework for Financial Reporting (May 2019);

(b)the Framework for the Preparation and Presentation of Financial Statements (July 2004);

(d) AASB 1 First-time Adoption of Australian Accounting Standards (July 2015);

(e) AASB 10 Consolidated Financial Statements (July 2015);

(f) AASB 1048 Interpretation of Standards (December 2017);

(g) AASB 1053 Application of Tiers of Australian Accounting Standards (June 2010); and

(h) AASB 1057 Application of Australian Accounting Standards (July 2015);

to update the set of for-profit entities for which the reporting entity concept in SAC 1 is no longer relevant. Such entities are therefore not able to prepare special purpose financial statements when financial statements are required to comply with Australian Accounting Standards or when legislation requires financial statements to comply with accounting standards. This Standard also makes transition and consequential amendments to other Standards and pronouncements.

Application

The amendments set out in this Standard apply to entities and financial statements in accordance with the application of the other Standards set out in AASB 1057 Application of Australian Accounting Standards and the other pronouncements.

This Standard applies to annual reporting periods beginning on or after 1 July 2021.

This Standard may be applied to annual reporting periods beginning before 1 July 2021. When an entity applies this Standard to such an annual period, it shall disclose that fact.

This Standard uses underlining, striking out and other typographical material to identify some of the amendments to a pronouncement, in order to make the amendments more understandable. However, the amendments made by this Standard do not include that underlining, striking out or other typographical material. Amended paragraphs are shown with deleted text struck through and new text underlined. Ellipses (…) are used to help provide the context within which amendments are made and also to indicate text that is not amended.

Amendments to the Conceptual Framework for Financial Reporting

Paragraphs Aus1.1 and Aus1.2 are amended.

APPLICATION

Aus1.1 This Conceptual Framework applies to:

(a) for-profit private sector entities that ~~have public accountability* and~~ are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; ~~and~~

(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 apply the Conceptual Framework and the consequential amendments to other pronouncements set out in Accounting Standard AASB 2019‑1 Amendments to Australian Accounting Standards – References to the Conceptual Framework.

* ~~The term ‘public accountability’ is defined in AASB 1053 Application of Tiers of Australian Accounting Standards.~~

Aus1.2 This Conceptual Framework applies to periods beginning on or after 1 ~~January 2020~~ July 2021. Earlier application is permitted if at the same time an entity also applies the amendments made by AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework and AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities.

Amendments to the Framework for the Preparation and Presentation of Financial Statements

Paragraphs Aus1.2A and Aus1.2B are amended.

Application

…

Aus1.2A This Framework does not apply in relation to reporting periods beginning on or after 1 ~~January~~ July 2021 to:

(a)for-profit private sector entities that ~~have public accountability* and~~ are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; ~~and~~

(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 ~~apply the Conceptual Framework for Financial Reporting and the consequential amendments to other pronouncements set out in~~ ~~AASB 2019‑~~1 Amendments to Australian Accounting Standards – References to the Conceptual Framework;

except as otherwise required by Australian Accounting Standards.

*~~The term ‘public accountability’ is defined in AASB 1053 Application of Tiers of Australian Accounting Standards.~~

Aus1.2B If an entity identified in paragraph Aus1.2A elects to apply the Conceptual Framework for Financial Reporting to an annual reporting period prior to its mandatory application for the entity ~~beginning before 1 January 2020~~, the entity shall not apply this Framework to that period, except as otherwise required by Australian Accounting Standards.

Amendments to Statement of Accounting Concepts SAC 1

Paragraphs 2A and 2B are amended.

Application and Operative Date

…

2A This Statement does not apply in relation to reporting periods beginning on or after 1 ~~January 2020~~ July 2021 to:

(a) for-profit private sector entities that ~~have public accountability* and~~ are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; ~~and~~

(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 ~~apply the consequential amendments to other pronouncements set out in AASB 2019‑~~1 Amendments to Australian Accounting Standards – References to the Conceptual Framework.

* ~~The term ‘public accountability’ is defined in AASB 1053 Application of Tiers of Australian Accounting Standards.~~

2B If an entity identified in paragraph 2A elects to apply the Conceptual Framework for Financial Reporting to an annual reporting period prior to its mandatory application for the entity ~~beginning before 1 January 2020~~, the entity shall not apply this Statement to that period.

Amendments to AASB 1

Paragraph Aus12.1 is added.

Aus12.1 Entities that elect to apply AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to periods beginning before 1 July 2021 (ie early application) may also elect to apply the short-term exemptions from restating comparative information set out in AASB 1053 Application of Tiers of Australian Accounting Standards Appendix E, where applicable. For entities that apply that relief, references to the ‘date of transition to Australian Accounting Standards’ in this Standard shall mean the beginning of the first Australian-Accounting-Standards reporting period.

Amendments to AASB 10

Paragraph Aus4.2 is amended.

Scope

…

Aus4.2 Notwithstanding paragraphs 4(a) and Aus4.1, the ultimate Australian parent shall present consolidated financial statements that consolidate its investments in subsidiaries in accordance with this Standard when the ultimate Australian parent is required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards, except if the ultimate Australian parent is required, in accordance with paragraph 31 of this Standard, to measure all of its subsidiaries at fair value through profit or loss.

Amendments to AASB 1048

Paragraphs 10 and AusCF10 are amended.

Conceptual framework

10 Each reference to the Conceptual Framework for Financial Reporting (or Conceptual Framework) in other Australian Accounting Standards (including Interpretations) is taken to be a reference to the relevant pronouncement listed in Table 3 below. Each row in Table 3 is to be treated as a separate provision of this Standard.

Table 3: Australian conceptual framework pronouncements

Issue Date	Title	Application Date (annual reporting periods)
March 2020 [as amended to]	Conceptual Framework for Financial Reporting (or Conceptual Framework) Note – for-profit entities applying the Conceptual Framework are set out in paragraph Aus1.1 of the Conceptual Framework	(beginning) 1 July 2021
~~[Month~~May 2019]	Conceptual Framework for Financial Reporting (or Conceptual Framework) Note – this pronouncement is applicable only to for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards and other for-profit entities that elect to apply this Framework	(beginning) 1 January 2020

AusCF10 Notwithstanding paragraph 10, in respect of AusCF entities, each reference to the Framework for the Preparation and Presentation of Financial Statements (or Framework) in other Australian Accounting Standards (including Interpretations) is taken to be a reference to the relevant pronouncement listed in Table 3 below. Each row in Table 3 is to be treated as a separate provision of this Standard.

Table 3: Australian conceptual framework pronouncements

Issue Date	Title	Application Date (annual reporting periods)
March 2020 [as amended to]	Framework for the Preparation and Presentation of Financial Statements (or Framework)	(beginning) 1 July 2021
May 2019 [as amended to]	Framework for the Preparation and Presentation of Financial Statements (or Framework)	(beginning) 1 January 2020
June 2014 [as amended to]	Framework for the Preparation and Presentation of Financial Statements (or Framework)	(beginning) 1 July 2014

Amendments to AASB 1053

Paragraph 2 is deleted. Paragraphs 11, 18A and 18B are amended. Paragraph 18D is added.

Application

2[Deleted by the AASB]~~This Standard applies to¹:~~

~~(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 reporting entity;~~

~~(c) 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; and

~~(e) for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.~~

1~~This application paragraph does not amend the application paragraphs of other Standards that are restricted to reporting entities.~~

…

Application of Tier 1 Reporting Requirements

The following types of entities shall prepare general purpose financial statements that comply with Tier 1 reporting requirements:

(a) for-profit private sector entities that have public accountability and are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and

(b) the Australian Government and State, Territory and Local Governments.

…

First-time Adoption of Australian Accounting Standards

…

18A When applying Tier 2 reporting requirements for the first time, an entity that prepared its most recent previous financial statements in the form of special purpose financial statements:

(a) without applying, or only selectively applying, applicable recognition and measurement requirements of Australian Accounting Standards, including, if a parent entity, without presenting consolidated financial statements prepared in accordance with AASB 10 Consolidated Financial Statements (unless exempt), shall apply either:

(i) all the relevant requirements of AASB 1; or

(ii) Tier 2 reporting requirements directly using the requirements in AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors; ~~and~~

(b) without presenting consolidated financial statements, on the basis that neither the parent nor the group was a reporting entity (as defined in AASB 1057), shall apply either:

(i) all the relevant requirements of AASB 1; or

(ii) Tier 2 reporting requirements directly using the requirements in AASB 108; and

(bc) applying all applicable recognition and measurement requirements of Australian Accounting Standards, including, if a parent entity, presenting consolidated financial statements prepared in accordance with AASB 10 (unless exempt), shall not apply AASB 1.

18B An entity applying paragraph 18A(bc) continues applying the applicable recognition and measurement requirements of Australian Accounting Standards, whether it had previously initially applied recognition and measurement requirements consistent with AASB 1 or a predecessor to AASB 108, whichever was applicable at the time.

…

18D Paragraph 18A(a) addresses where an entity has not applied, or only selectively applied, applicable recognition and measurement requirements, rather than whether the entity had made an explicit and unreserved statement of compliance with such requirements. As such, if an entity becomes aware it had claimed compliance with applicable recognition and measurement requirements of Australian Accounting Standards in error in its most recent previous special purpose financial statements, the entity applies paragraph 18A(a).

In Appendix C, Chart 1: First-time Adoption of Tier 1 or Tier 2 Reporting Requirements (paragraphs 18−18B) is replaced with the following.

Chart 1: First-time Adoption of Tier 1 or Tier 2 Reporting Requirements (paragraphs 18−18D)

Appendix E is added.

Appendix E

Short-term exemptions for entities applying Tier 2 – Simplified Disclosures for periods beginning before 1 July 2022

This appendix is an integral part of AASB 1053

E1This appendix sets out optional short-term exemptions for for-profit private sector entities applying AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to periods beginning before 1 July 2022, as follows:

(a)relief from distinguishing the correction of errors and changes in accounting policy, for periods beginning before 1 July 2022 (see paragraph E3);

(b)relief from providing comparative information not previously disclosed in the notes, for periods beginning before 1 July 2021 (see paragraph E4); and

(c)relief from restating comparative information, for periods beginning before 1 July 2021 (see paragraphs E5–E7).

E2If an entity applies one or more of the exemptions set out in this appendix, it shall disclose that fact.

Relief from distinguishing the correction of errors and changes in accounting policy

E3For periods beginning before 1 July 2022, notwithstanding AASB 1060 paragraph 211 (for entities applying AASB 1 First-time Adoption of Australian Accounting Standards to the period) and AASB 1060 paragraph 110 (for entities applying AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors instead of AASB 1), an entity applying paragraph 18A(a) or (b) need not distinguish the correction of errors and changes in accounting policies if the entity becomes aware of errors made in its most recent previous special purpose financial statements.

Relief from presenting comparative information not previously disclosed in the notes

E4Notwithstanding AASB 1060 paragraph 20, entities that elect to apply AASB 1060 to periods beginning before 1 July 2021 (ie early application) need not present comparative information in the notes if the entity did not disclose the comparable information in its most recent previous financial statements.

Relief from restating comparative information for certain for-profit private sector entities

E5Paragraphs E6–E7 apply to a for-profit private sector entity that elects to apply AASB 1060 to periods beginning before 1 July 2021 (ie early application) and also applies AASB 1 in preparing its first Australian-Accounting-Standards financial statements (Tier 2) for the period.

E6Notwithstanding AASB 1 paragraph 7, comparative information need not be restated in the entity’s first Australian-Accounting-Standards financial statements (Tier 2). Under this approach, references to the ‘date of transition to Australian Accounting Standards’ in AASB 1 shall mean the beginning of the first Australian-Accounting-Standards reporting period. Consequently, consistent with AASB 1 paragraph 11, the entity shall recognise adjustments arising from any differences between the carrying amounts in its previous special purpose financial statements and its opening carrying amounts based on the retrospective application of Australian Accounting Standards directly in retained earnings (or, if appropriate, another category of equity) at the beginning of the first Australian-Accounting-Standards reporting period.

E7An entity that elects to not restate comparative information in its first Australian-Accounting-Standards financial statements (Tier 2) in accordance with paragraph E6 need not provide the reconciliations required by AASB 1060 paragraphs 210(b) and (c). The entity shall:

(a) present two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity and related notes, as follows:

(i) the statements and related notes as at the end of the first Australian-Accounting-Standards reporting period, compliant with Australian Accounting Standards; and

(ii) the statements and related notes presented in its most recent previous special purpose financial statements (not necessarily compliant with Australian Accounting Standards);

(b) disclose a reconciliation of its equity presented in its most recent previous special purpose financial statements to its equity determined in accordance with Australian Accounting Standards – Simplified Disclosures at the date of transition to Australian Accounting Standards – Simplified Disclosures;

(c) disclose a description of the main adjustments that would have been required to make the comparative statement of profit or loss and other comprehensive income and separate statement of profit or loss (if presented) compliant with Australian Accounting Standards. The entity need not quantify those adjustments; and

(d) prominently label the comparative information that is not compliant with Australian Accounting Standards as such.

Amendments to AASB 1057

Paragraphs 2, 5, 6–7, 9, 10, 12, 18, 20, 22–24 and 26 and the Appendix are amended. Paragraph 8 is deleted.

Application of this Standard

2 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; ~~and~~

(e) for-profit private sector entities that ~~have public accountability and~~ 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.

*References in this Standard to ‘legislation’ mean legislation of a government in Australia.

…

Application of Australian Accounting Standards

5 Unless specified otherwise in paragraphs 5A–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; ~~and~~

(d) for-profit private sector entities that ~~have public accountability and~~ 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.

…

6 AASB 8 Operating Segments and AASB 120 Accounting for Government Grants and Disclosure of Government Assistance ~~applies to~~ apply as set out in paragraph 5, provided the entity is a for-profit entity.

~~(a) each 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 for-profit reporting entity;~~

~~(c) financial statements of a for-profit entity that are, or are held out to be, general purpose financial statements; and~~

~~(d) for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards~~.

6A AASB 17 Insurance Contracts applies as set out in paragraph 5,

~~(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;~~

except when the entity is:

(da) a superannuation entity applying AASB 1056; or

(eb) a not-for-profit public sector entity.

7 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; ~~and~~

(d) for-profit private sector entities that ~~have public accountability and~~ 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.

8[Deleted by the AASB]~~AASB 120 Accounting for Government Grants and Disclosure of Government Assistance applies to:~~

~~(a) each 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 for-profit reporting entity;~~

~~(c) financial statements of a for-profit entity that are, or are held out to be, general purpose financial statements; and~~

~~(d) for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.~~

9 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 ~~have public accountability and~~ are required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act or disclose earnings per share.

10 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 ~~other~~ not-for-profit entity that is a reporting entity; ~~and~~

(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.

…

12 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 is a not-for-profit public sector entity that:

(c) is a reporting entity and prepares general purpose financial statements; or

(d) prepares financial statements that are, or are held out to be, general purpose financial statements~~; or~~.

~~(f) is a for-profit private sector entity that has public accountability and is required by legislation to comply with Australian Accounting Standards.~~

…

18 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; ~~and~~

(e) for-profit private sector entities that ~~have public accountability and~~ 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.

…

20 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 ~~of a superannuation entity~~ that are held out to be general purpose financial statements; ~~and~~

(c) for-profit private sector superannuation entities that ~~have public accountability and~~ 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.

…

Application of Australian Interpretations

22 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; ~~and~~

(d) for-profit private sector entities that ~~have public accountability and~~ 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.

23 Interpretation 110 Government Assistance – No Specific Relation to Operating Activities applies ~~to:~~ as set out in paragraph 22, provided the entity is a for-profit entity.

~~(a) each 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 for-profit reporting entity;~~

~~(c) financial statements of a for-profit entity that are, or are held out to be, general purpose financial statements; and~~

~~(d) for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.~~

24 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; ~~and~~

(d) for-profit superannuation plans that ~~have public accountability and~~ 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.

…

26 Interpretation 1047 Professional Indemnity Claims Liabilities in Medical Defence Organisations applies to entities that are or include medical defence organisations as follows:

(a) general purpose financial statements of each not-for-profit public sector reporting entity; and

(b) each not-for-profit public sector entity that elects to prepare financial statements ~~of each not-for-profit public sector entity~~ that are, or are held out to be, general purpose financial statements~~; and~~.

~~(d) for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.~~

…

Appendix

Defined terms

…

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 ~~have public accountability and~~ are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; ~~and~~

(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 and apply the Conceptual Framework for Financial Reporting and the consequential amendments to other pronouncements set out in AASB 2019‑1 Amendments to Australian Accounting Standards – References to the Conceptual Framework.

Commencement of the legislative instrument

For legal purposes, this legislative instrument commences on 30 June 2021.

Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, AASB 2020-2.

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[1] and 100% in importance to other users. They also expressed concern that key information is omitted from SPFSs (see paragraphs BC37-BC41).
[1] 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.[2] 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).
[2] 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.[3] 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[4] 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.
[3] 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.
[4] 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 Consultation Paper – Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems

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.[5] 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.
[5] 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. [6] 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.
[6] 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[7] lodged SPFS with ASIC. The findings of Research Report No. 1 indicated to the Board that:
[7] Specified for-profit entities are large proprietary companies, small foreign-controlled companies and unlisted public companies.

(a)in light of the high incidence of SPFS being lodged with ASIC, there is doubt as to whether the reporting entity concept is being applied as intended by SAC 1;

(b)the reporting entity concept appears too subjective for regulators to enforce effectively and accordingly does not create a level playing field; and

(c)63% of SPFS lodged with ASIC stated compliance with the R&M requirements of applicable AAS, suggesting that R&M was not always complied with despite regulatory guidance suggesting this should be the case (see paragraphs BC28-BC29).

BC19The Board also initiated subsequent research[8] to understand how the reporting practices of for-profit entities lodging SPFS with ASIC may have changed since the introduction of the RDR reporting framework in 2010. An analysis of financial reports of the specified for-profit entities lodging financial statements with ASIC in 2018 confirmed that 71% of these entities were still lodging SPFS with ASIC, 13% lodged Tier 2 GPFS and 16% lodged Tier 1 GPFS. The Board also noted that those entities preparing Tier 2 GPFS (RDR) appear to have moved from Tier 1 GPFS to RDR and not from SPFS to RDR.
[8] Research Report No 12

BC20In respect of compliance with the R&M requirements in AAS, the Board noted the more detailed findings of Research Report 12, which estimates that 76% of specified for-profit entities preparing and lodging SPFS with ASIC complied with the R&M requirements in AAS. In particular:

(a)66% explicitly stated that they followed the R&M requirements in AAS (compared with the 63% found in Research Report No.1 – see paragraph BC18(c)); and

(b)10% were assessed to have complied with the R&M requirements in AAS based on a qualitative review of the accounting policies, despite the absence of an explicit statement to that effect.

BC21For the remaining 24%:

(a)10% did not comply with the R&M requirements in AAS (of which only 0.5% clearly stated so); and

(b)the extent of compliance (or otherwise) with the R&M requirements in AAS of the remaining 14% was unclear.

BC22In addition to it being difficult for the researchers to understand the extent of alignment between an entity’s accounting policies and the R&M requirements in AAS, the Board noted the same difficulties faced by financial statement users. This leads to fundamental issues with the transparency of information available to users of publicly lodged SPFS, consistency and the comparability of SPFS with other SPFS and GPFS. As noted in paragraph BC15, only 76% of entities preparing SPFS are voluntarily complying with RG 85 recommendations, suggesting that mandatory requirements were needed to improve the quality of financial reporting.

BC23In response, in July 2019, the Board issued ED 293 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Compliance with Recognition and Measurement Requirements which proposed, as an interim measure, amendments to AAS to require entities preparing SPFS to make an explicit statement as to whether or not the accounting policies applied in the SPFS comply with all the R&M requirements in AAS. The Board acknowledged that disclosure of this information was not sufficient to address the problems with publicly lodged SPFS, however the interim measure was aimed at providing some measure of transparency to users until the resolution of the SPFS problem, in the short to medium term for for-profit private sector entities and in the longer term for not-for-profit entities. After considering feedback from respondents on ED 293, the Board decided to limit the scope of the proposals to only not-for-profit (NFP) entities as respondents “were particularly concerned about the costs of the ED 293 proposals exceeding any benefits for for-profit private sector entities given the ED 293 proposals were intended to be only a short-term measure for these entities. This is because the broader project proposing to remove the ability for certain for-profit private sector entities to prepare special purpose financial statements when they are required to comply with Australian Accounting Standards is expected to be completed by 30 June 2020.”[9]
[9] AASB 2019-4, paragraph BC43 and BC 44. At the time of making that decision, the effective date of this Standard was proposed as 1 July 2020.

BC24In light of the effective date of this Standard being one year later than that proposed in ED 297, and also noting that there is likely to be a number of entities that will continue to be able to prepare SPFS (e.g. due to the exemption provided to entities with a non-legislative requirement to prepare financial statements that comply with AAS (refer paragraphs BC90-BC92)), the Board reconsidered this decision. The Board was concerned about the lack of transparency in the SPFS that continues to refer to AAS and therefore decided that these entities should also be required to disclose a statement of the entity’s compliance, or otherwise, with the R&M requirements in AAS (including requirements set out in AASB 10 Consolidated Financial Statements or AASB 128 Investments in Associates and Joint Ventures). The Board thought this was particularly important for securitisation trusts given they are listed on the ASX and other securities exchanges. The Board intends to communicate with the ASX and industry bodies to ensure they understand the implications of having SPFS on their public registers.

BC25In addition to the research described above, the Board also conducted significant targeted outreach prior to issuing the standard, where over 250 formal meetings were held with key stakeholders, including State, Territory and Commonwealth regulators, audit offices, large and small accounting firms, the Australian Securities Exchange (ASX), ASIC, the Australian Charities and Not-for-profits Commission (ACNC), credit rating agencies, professional bodies and users of financial statements (including analysts, investors and creditors) to help identify how implementing the RCF and 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, would impact Australian entities. The Board considered the feedback received, when developing the Standard.

Regulatory views and developments on SPFS

BC26The Board noted feedback from some stakeholders suggesting that it was the role of other regulators (rather than the AASB) to address any potential issues with SPFS. In particular, some stakeholders argued:

(a)other regulators should specify or determine whether an entity is required to lodge GPFS;[10] and
[10] This is consistent with the view that the AASB’s role and expertise is to determine the appropriate accounting framework and accounting standards that should apply where legislation, regulation or other authority requires the preparation of financial statements that comply with AAS.

(b)if the reporting entity concept is not being applied correctly, this is a matter of enforcement for the appropriate regulator rather than a matter of standard-setting.

BC27Thus, the Board has paid particular regard to the views of other regulators, and noted the increasing regulatory interest in and concern about the use of SPFS to assess what role the Board should play in addressing the issues.

BC28The Board noted ASIC issued RG 85 in July 2005, which states “ASIC believes that non-reporting entities, which are required to prepare financial reports in accordance with Chapter 2M of the Corporations Act 2001 (Act), should comply with the recognition and measurement requirements of accounting standards”[11] “hence, the recognition and measurement requirements of accounting standards must also be applied in order to determine the financial position and profit or loss of any entity preparing financial reports in accordance with the Act”.[12]
[11] Paragraph 2 of RG 85.
[12] Paragraph 2.5 of RG 85.

BC29RG 85 further states that “Directors of non-reporting entities must also consider carefully the need to make disclosures which are not directly prescribed by accounting standards, but which may be necessary in order for the financial statements to give a true and fair view”,[13] and that those standards that must be applied by entities reporting under the Corporations Act 2001 are 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. However, as noted in paragraph BC21, research into the extent of compliance with the R&M requirements in AAS by specified for-profit entities lodging SPFS with ASIC shows that at least 10% and potentially up to 24% of them do not appear to have followed the guidance outlined in RG 85. ASIC has also indicated it finds the judgements required regarding the application of the reporting entity concept in SAC 1 to be unenforceable.
[13] Paragraph 2.9 of RG 85.

BC30The appropriateness of SPFS have also been called into question in a number of other regulatory matters. For example, as part of the Senate Economics References Committee Report on Tax Avoidance, the Board’s Chair was asked to explain to the Committee the reporting entity concept and its role in facilitating the preparation of SPFS. The Board noted the subsequent Report, Corporate tax avoidance Part III, Much heat, little light so far (May 2018), outlined strong concern that multinationals operating within Australia are avoiding public scrutiny through the preparation of SPFS, which are not required to disclose corporate tax and related party transactions, and also noted the Board’s role in facilitating the public lodgement of SPFS through its reporting entity concept. The Report recommended the Government require all companies, trusts and other financial entities with income above a certain amount to lodge GPFS with ASIC. These comments, albeit with a focus on tax, reinforce the view that a problem exists in relation to the way in which the reporting entity concept is applied, as well as the information provided through the public lodgement of SPFS.

BC31The Board also reflected on the recommendations in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (February 2019), particularly the recommendation to remove special rules and exceptions that can create regulatory complexities. The Final Report indicated that exceptions departing from underlying principles have consequences often resulting in exploitation and that exceptions act as barriers to the simplification of regulation. The Board further considered the theme of enforceability within the Final Report, noting in particular that the subjectivity inherent in the current Australian reporting entity concept may not provide regulators with an objective basis on which to enforce financial reporting obligations.

BC32In addition, other regulatory developments indicated an increased need for entities to prepare GPFS instead of SPFS where they are required to prepare financial statements that comply with AAS, for example:

(a)the requirement for SGEs[14] to lodge GPFS with the ATO, which would subsequently be provided to ASIC[15] (December 2015);
[14] An entity is an SGE for a period if it is one of the following (as defined in Subdivision 960-U of the Income Tax Assessment Act 1997):
[15] Introduced by Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015.

(b)questions to the Board’s Chair and the Financial Reporting Council’s (FRC) Chair on the AASB’s and FRC’s approaches to resolving the shortcomings of SPFS by the Parliamentary Joint Committee on Corporations and Financial Services as part of its inquiry into the oversight of ASIC and the Takeovers Panel (February 2018);

(c)the Senate Economics References Committee report Financial and tax practices of for-profit aged care providers (November 2018), which supported the Board’s intent to remove the ability of certain entities to prepare SPFS where they are required to prepare financial statements that comply with AAS; and

(d)further questions to the Board’s Chair on the status of the AASB’s work to remove SPFS from the Parliamentary Joint Committee on Corporations and Financial Services as part of its inquiry into the regulation of auditing in Australia (November 2019). SPFS were criticised both by members of that committee as well as in several submissions from the public in relation to that inquiry.

BC33In light of the regulatory developments and public enquiries noted above, the Board also observed the increasing public interest and media scrutiny of the transparency and accountability of publicly available financial statements, both generally and specifically in relation to the reporting entity concept and its facilitation of publicly lodged SPFS.

BC34In proposing to remove the ability of certain for-profit private sector entities to prepare SPFS when they are required to prepare financial statements that comply with AAS, the Board received support from other regulators, particularly ASIC and the ATO, which conveyed the following views to the Board:

(a)ASIC fully supports the consultation to remove SPFS for entities regulated by ASIC and remove the subjective ‘reporting entity’ test under SAC 1, facilitating a comparable, consistent and transparent framework for the preparation of financial statements in Australia; and

(b)the ATO is supportive of the AASB’s proposed approach to consulting on a series of principles or concepts for enhancing the transparency of entities currently preparing SPFS as part of adopting the RCF issued by the IASB and for inclusion in AAS by 2021. The ATO also noted its further support of the AASB’s recommendations surrounding the timing and application of the new Tier 2 disclosures requirements during the Board’s Exposure Draft process.

BC35The Board provided input to Treasury in considering legislative requirements that specify which types of for-profit entities should be required to prepare and, in most cases, publicly lodge financial statements with ASIC. In April 2019, Treasury announced changes to the Corporations Regulations2001[16] to increase (double) the thresholds used for determining whether an entity is a large proprietary company, with companies falling below the thresholds not being required to prepare or publicly lodge financial reports with ASIC. As part of the changes, the Board suggested Treasury provide objective criteria based on economic significance for determining the thresholds and noted the commentary in Treasury’s Explanatory Statement, which is consistent with the Board’s decision to remove the ability of certain entities to prepare SPFS when they are required to prepare financial statements that comply with AAS. In particular, the Board noted:
[16] Introduced by Corporations Amendment (Proprietary Company Thresholds) Regulations 2019.

(a)the requirement for large proprietary companies to prepare and in some cases lodge financial reports was first introduced to focus regulation of reporting on the financial affairs of proprietary companies that have a significant economic influence; and

(b)the financial reports of companies that have economic significance should be publicly available because of their size and potential to affect the community and the economy. The larger the size, the more likely it is that there will exist users dependent on GPFS as a basis for making economic decisions.

BC36This clearly indicates the new thresholds which apply from 1 July 2019 were set to reflect the ‘economic significance’ of the entities captured, which is another key criterion in SAC 1 for deciding whether or not an entity is a reporting entity.

Evidence from stakeholders, including financial report users

BC37In addition to the above, the Board noted the general agreement amongst stakeholders that there is an SPFS problem in its outreach both prior and subsequent to the issue of ITC 39. In considering submissions received on ITC 39 the Board noted that of the 33 formal respondents (relevant to this phase of the project), 85% agreed there is a problem with SPFS that needs to be solved, with similar feedback received anecdotally through other outreach activities.

BC38As part of the due process, a significant amount of feedback was provided by users of financial statements. Of particular importance is the AASB Staff Paper Enhancing the revised Conceptual Framework and replacing Special Purpose Financial Statements – For-profit User and Preparer Survey Results (December 2018), which indicated that, from the perspective of the 37 users (analysts, investors and creditors) that responded:

(a)there is a problem with SPFS that needs to be addressed – 78% of primary users expressed concern that SPFS do not consistently apply R&M requirements in AAS;

(b)93% of primary users and over 95% of other users said that comparability, transparency, comprehensibility and consistency are all paramount; and

(c)there is dissatisfaction with SPFS that needs to be addressed, particularly around the lack of related party disclosures, lack of comparability and that the extent to which entities comply with the R&M requirements in AAS is unclear to users.

BC39The Board also conducted a range of meetings with users to understand their needs and received six formal submissions on ITC 39 from users of financial statements (out of the 33 responses relevant to this phase of the project). In those formal submissions, the Board noted that all of those respondents:

(a)noted, or referred to, the lack of comparability, consistency and transparency currently caused by SPFS that needs to be resolved; and

(b)supported public lodgement of financial statements that comply with all of the R&M requirements in AAS. Consistency, transparency and comparability were noted as important to users in their responses, with one user also noting the importance of consistent financial reporting to facilitate computer-based analysis and use of financial information.

BC40In addition to the information in paragraph BC38, the Board also noted other evidence that clearly indicates the existence of users who would benefit from having access to GPFS rather than SPFS. For example:

(a)over 98,000 copies of financial statements were purchased during the year ending 30 June 2018 from ASIC. Of those financial statements purchased, 80% were of proprietary companies, 16% were of unlisted public companies and 4% were of small foreign-controlled companies;[17]
[17] Of these 98,000 copies of financial statements, approximately 29,000 were purchased by public users through ASIC connect and not by data aggregators.

(b)anecdotally, data aggregators[18] rely on publicly available information to assist their clients with determining the viability, capacity and credit risk associated with a company; and
[18] Data aggregators purchase and analyse data for the purpose of providing informed credit and risk management advice, industry profiling and other analytic products and services.

(c)as noted in paragraph BC35, Treasury indicated in the Explanatory Statement accompanying the revision of the large proprietary company thresholds its expectation that there are users dependent on the GPFS of large proprietary companies, given their economic significance. Further, that Explanatory Statement noted that average access rates through ASIC of the revised (smaller) population of large proprietary companies was significantly higher (on average 3.6 times per company) than the proprietary companies that would no longer have an obligation to prepare and lodge financial statements with ASIC (on average 1.8 times per company).

BC41Despite the relatively lower access rates for small foreign-controlled companies and unlisted public companies noted in paragraph BC40(a), the Board noted its expectation that users of those financial statements would also benefit from having access to GPFS rather than SPFS given that:

(a)small foreign-controlled companies have been specifically required to lodge financial statements with ASIC[19], and are already provided with significant relief from financial reporting obligations if the company is included in the consolidated financial statements of a registered foreign company that is lodged with ASIC. Additionally, ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 provides further relief to small foreign-controlled entities – even if they are not consolidated by a registered foreign company lodging financial statements with ASIC – by requiring them to lodge financial statements with ASIC only if directed to do so by shareholders or ASIC, or if they are part of a large group in Australia. The requirement for small foreign-controlled companies to lodge financial statements where they are part of a large group is designed to prevent foreign-controlled companies disaggregating their Australian activities into smaller companies to avoid financial reporting obligations.[20] In light of this Australian public interest context, demonstrated also through the requirements for SGEs to lodge GPFS with the ATO and the strong public interest in seeing no avoidance of tax, there appears to be no justification for small foreign-controlled companies to be relieved from the requirement to prepare GPFS; and
[19] The Explanatory Memorandum to the Company Law Review Bill 1997 noted that “financial reporting by small proprietary companies which are foreign-controlled should, as far as possible, equate with the reporting requirements of small proprietary companies which are controlled by Australian companies. Accordingly, a small proprietary company will be required to prepare a financial report if the controlling registered foreign company does not prepare and lodge financial statements with the ASC which consolidate the affairs of the small proprietary company for the period in which it was controlled. … An Australian company which controls a small proprietary company is required to consolidate the small proprietary company in its consolidated financial report if it comes within the scope of AASB 1024: Consolidated Accounts. While it would not be appropriate for the Corporations Law to generally require a registered foreign company to prepare consolidated financial statements, that company may consolidate the small proprietary company in financial statements prepared under the law of its jurisdiction of incorporation. If consolidated accounts of this kind are lodged with the ASC in accordance with the requirements in current section 349, the remainder of Chapter 2M will not apply to the small proprietary company.”

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.[44] · 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

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.[44]

· 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

[44] 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.