From 1 July 2021, certain for-profit private sector entities will no longer be allowed to prepare special purpose financial statements (SPFS), when preparing financial statements under Australian Accounting Standards. Entities that fall into the scope of these changes will instead be required to prepare general purpose financial statements (GPFS).
A reporting entity is required to prepare GPFS, by applying the recognition and measurement requirements, and presentation and disclosure requirements of all Australian Accounting Standards (or Australian Accounting Standards – Reduced Disclosure Requirements, for those reporting entities that do not have ‘public accountability’).
In contrast, an entity that is not a reporting entity is permitted to prepare SPFS, by applying recognition and measurement policies, and presentation and disclosure policies, that are appropriate to satisfy the purpose for which the financial statements are prepared (e.g., to satisfy the requirements of a trust deed or private company constitution).
Who does this apply to?
The removal of the ability to prepare SPRS under Australian Accounting Standards applies to the following entities:
For-profit private sector entities that are required by legislation to prepare financial statements that comply with either “Australian Accounting Standards” or “accounting standards”.
This will include entities preparing annual financial statements under the Corporations Act 2001, such as:
- Large proprietary companies
- Unlisted public companies
- Foreign-controlled small proprietary companies
- Financial services licensees
- Small proprietary companies with crowd-sourced funding
Other for-profit private sector entities, whose constituting document or another document requires the preparation of financial statements that comply with “Australian Accounting Standards” if the relevant document was created or amended in any way on or after 1 July 2021.
If you fall into this second category (i.e., you have solely a non-legislative requirement to prepare financial statements), it is important that you seek professional advice to determine if you are impacted or are likely to be impacted in the future.
Some common documents that may refer to the preparation of financial statements that comply with “Australian Accounting Standards” include:
- Trust deeds
- Partnership agreements
- Shareholder agreements
- Joint Venture agreements
- Banking covenants and other lending agreements
Entities that currently prepare SPFS and do not fall into the scope of these changes can continue to prepare SPFS provided. This preparation satisfies the reporting requirements of the document or agreement under which the financial statements are prepared.
What’s the impact?
Entities may be required to prepare GPFS that comply with the recognition and measurement requirements of all Australian Accounting Standards, including those that may not have been applied in the past such as equity accounting, consolidation, business combinations, leases, financial instruments, revenue from contracts with customers and fair value measurement.
What type of GPFS need to be prepared?
Entities will need to prepare either Tier 1 GPFS or Tier 2 GPFS, depending on whether the entity has ‘public accountability’, as follows:
- Tier 1 reporting is required for entities that have public accountability. These adopt the full suite of Australian Accounting Standards.
- Tier 2 reporting is required for entities that do not have public accountability. These adopt the recognition and measurement requirements of Australian Accounting Standards, but with the simplified disclosures specified by AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.
If you determine that you will be required to prepare GPFS under these changes, early adoption is permitted. There are benefits to early adoption, however, it is important that you consider all the impacts of adopting the new requirements before making this decision.
The amendments contain transitional relief only for those entities that choose to early adopt the new requirements (i.e. for periods beginning before 1 July 2021).
This means that:
- where relevant you can present comparatives as they were disclosed in your prior year SPFS and,
- you will not need to include comparative note disclosures that were not previously required for SPFS.
Further information and assistance
Contact your Pitcher Partners representative for further information and assistance on the removal of special purpose financial statements from Australian Accounting Standards.