Explanatory Statement
Accounting Standard AASB 2008-2 Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation
March 2008
EXPLANATORY STATEMENT
Reasons for Issuing AASB 2008-2
AASB 2008-2 makes amendments to the following Australian Accounting Standards and Interpretation:
- AASB 7 Financial Instruments: Disclosures
- AASB 101 Presentation of Financial Statements
- AASB 132 Financial Instruments: Presentation
- AASB 139 Financial Instruments: Recognition and Measurement
- Interpretation 2 Members’ Shares in Co-operative Entities and Similar Instruments.
These amendments arise from the issuance by the International Accounting Standards Board in February 2008 of amendments to IAS 32 Financial Instruments: Presentation regarding puttable financial instruments and obligations arising on liquidation.
Main Features of AASB 2008-2
Application Date
This Standard is applicable to annual reporting periods beginning on or after 1 January 2009, with early adoption permitted for annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.
Main Requirements
This Amending Standard introduces an exception to the definition of financial liability to classify as equity instruments certain puttable financial instruments and certain instruments that impose on an entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation of the entity.
This change to AASB 132 necessitates consequential amendments to AASB 7, AASB 101, AASB 139 and Interpretation 2.
Consultation Prior to Issuing AASB 2008-2
The AASB issued Exposure Draft ED 150 Proposed Amendments to AASB 132 Financial Instruments: Presentation and AASB 101 Presentation of Financial Statements: Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation, the Australian equivalent to the IASB Exposure Draft of Proposed Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements: Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation, in April 2006
Five submissions were received in respect of the proposals in the ED and although there was support for adopting an Australian equivalent to the proposed IASB revision, there was concern that the amendments are narrowly focused. Two types of entities unaffected by these amendments within the Australian environment but which face similar issues are:
(a) unit trusts with mandatory dividend distribution obligations; and
(b) some trading co-operatives in which the shares are puttable at other than fair value.
The AASB has urged the IASB to accelerate its Liabilities/Equity research project with the aim of providing comparative treatment for substantially the same types of financial instrument.
A Regulatory Impact Statement has not been prepared in connection with the issue of this Standard as the amendments made do not have a substantial direct or indirect impact on business or competition, are of a minor or machinery nature or clarify existing requirements.
Overview
The Accounting Standard AASB 2008-2, enacted in March 2008, addresses the need to amend Australian Accounting Standards concerning puttable financial instruments and obligations arising on liquidation. This Standard was introduced in response to amendments issued by the International Accounting Standards Board in February 2008 to IAS 32 Financial Instruments: Presentation. The Australian Accounting Standards Board (AASB) aimed to align Australian standards with international practices while considering local contexts and specific entities, such as unit trusts and trading cooperatives, which face similar issues but are not directly affected by these amendments. The AASB sought to ensure that the amendments provide a clear and comprehensive approach to the classification and presentation of financial instruments, facilitating better financial reporting and transparency. This initiative reflects the AASB's commitment to maintaining consistency with global accounting standards while addressing specific needs within the Australian financial landscape.
Scope and Application
The AASB 2008-2 Accounting Standard pertains to entities that prepare and present financial statements in accordance with Australian Accounting Standards. It applies to annual reporting periods beginning on or after 1 January 2009, with early adoption being permissible for periods starting between 1 January 2005 and 31 December 2008. This standard introduces an exception to the classification of financial liabilities, allowing for the classification of specific puttable financial instruments and certain obligations arising on liquidation as equity instruments rather than financial liabilities. This adjustment is necessitated by changes in the International Accounting Standards Board’s (IASB) amendments to IAS 32 and requires corresponding amendments to other relevant Australian Accounting Standards and interpretations. The standard's amendments do not significantly impact business or competition, and no specific exclusions or exemptions are mentioned beyond the outlined criteria for instrument classification. The standard’s scope is limited to the specified accounting standards and interpretations, without extending to other areas of financial reporting or business operations.
Key Provisions
The AASB 2008-2 Amendment to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation introduces significant changes to existing financial reporting standards. Section 1 of the amendment outlines the main requirements, establishing an exception to the definition of financial liability, allowing certain puttable financial instruments and certain instruments that impose an obligation to deliver a pro rata share of net assets only on liquidation to be classified as equity instruments (AASB 132, Section 11). This change affects the presentation of financial statements by altering how certain financial instruments are classified and subsequently disclosed. The amendments are applicable to annual reporting periods beginning on or after 1 January 2009, with early adoption permitted for periods starting between 1 January 2005 and 31 December 2008 (AASB 2008-2, Section 2).
Entities governed by AASB 2008-2 must ensure that their financial statements reflect these changes accurately. They are required to classify and present puttable financial instruments and instruments imposing liquidation obligations differently, which may involve reclassifying certain financial instruments from liabilities to equity. The consequential amendments to AASB 7, AASB 101, AASB 139, and Interpretation 2 necessitate adjustments in disclosures and the presentation of financial instruments. This includes ensuring that the disclosures about financial instruments are comprehensive and that financial statements are presented in a manner consistent with the new classifications (AASB 7, AASB 101, AASB 139, Interpretation 2).
Breaches of the requirements set forth in AASB 2008-2 could have significant consequences. While the explanatory statement does not explicitly outline specific offences or penalties, non-compliance with Australian Accounting Standards can lead to legal and financial repercussions. These may include regulatory scrutiny, fines, or other penalties imposed by the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001. Companies may also face reputational damage and loss of investor confidence. It is essential for entities to adhere to the new classifications and disclosures to avoid potential legal and financial consequences.