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What does the change in the reporting entity concept mean for special purpose financial reporting

What does the change in the reporting entity concept mean for special purpose financial reporting

For annual reporting periods beginning on or after 1 July 2021, certain for-profit private sector entities will no longer be permitted to prepare Special Purpose Financial Statements (‘SPFS’), when preparing financial statements under Australian Accounting Standards (‘AAS’).

This change to Australian financial reporting requirements was brought about by the issue of AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities.

What does this mean for businesses?

AAS previously required entities to determine if they met the definition of a ‘reporting entity’. Where an entity met this definition it was required to prepare General Purpose Financial Statements (‘GPFS’). Any entity not required to prepare GPFS was eligible to prepare SPFS.

The amendments to the accounting standards remove the reporting entity concept for certain for-profit private sector entities and therefore the ability to prepare SPFS. Importantly, the changes do not apply to not-for-profit (NFP) entities and accordingly an NFP that does not meet the definition of a reporting entity is permitted to continue preparing SPFS.

The changes also coincide with the introduction of AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060). Previously, AASB 1053 provided two tiers of reporting requirements for entities preparing GPFS. Tier 1 requirements applied to all entities that have public accountability while Tier 2 entities included for-profit private sector entities that did not have public accountability and not-for-profit private sector entities. Entities classified as Tier 2 entities were able to prepare financial statements under the reduced disclosure regime which resulted in significantly less financial statement disclosures when compared to Tier 1 entities.

With the removal of the reporting entity concept, a number of entities will now be required to prepare GPFS as opposed to SPFS. AASB 1060 provides a simplified disclosure regime for Tier 2 entities. There will be no change for the financial reporting requirements of Tier 1 entities.

Who is impacted?

Any for-profit private sector entity that requires its financial statements to be prepared in accordance with AAS must now prepare GPFS. The exception being if the requirement comes from a document created or amended before 1 July 2021 (e.g. a constitution or a banking agreement).

If the business’s financial statements are not required to comply with AAS, the appropriate framework (accounting policies) is determined based on the underlying requirement for preparing the financial statements. This will most likely be SPFS and thus see no change to existing practices.

Examples of entities that will no longer be able to prepare SPFS include:

  • Large proprietary companies;
  • Unlisted public companies (excluding companies limited by guarantee);
  • Small proprietary companies controlled by a foreign company;
  • Financial services licensees (AFSL holders); and
  • Small proprietary companies with crowd-sourced funding.

What is the impact?

For-profit private sector entities in the scope of the new requirements will have to comply with the full recognition and measurement requirements of AAS including those they may not have applied in the past such as equity accounting, consolidation, business combinations, leases, financial instruments, revenue from contracts with customers and fair value measurement.

Entities not in the scope of the new requirements can still prepare SPFS provided there is no other document that requires the preparation of GPFS and there are no users dependent on GPFS to meet their information needs (based on the ‘reporting entity’ concept).

The requirement to prepare GPFS also increases the disclosure requirements of entities including but not limited to the requirement to disclose possibly sensitive information such as key management personnel remuneration and related party transactions.

Why the change?

This shift reflects the AASB’s desire to better align the ‘definition and intent’ of the term ’reporting entity’ with International Financial Reporting Standards (IFRS).

The AASB decision also reflects research findings that indicate the Australian “reporting entity” concept has not been applied as intended. This change reduces risk for directors and auditors that can come with the subjective nature of self-assessing reporting requirements.

The simplified disclosures approach of AASB 1060 aims to reduce the burden on for-profit and NFP entities currently applying the existing Reduced Disclosure Requirements (RDR) framework and to better align Tier 2 disclosure requirements to the international benchmark of IFRS for SMEs.

It also provides a transitional option to adopt simplified disclosures for those entities currently using SPFS.

Key considerations moving forward

With the changes come some key considerations to watch out for as new processes take effect, for example:



Amendment or creation of agreements on or after 1 July 2021 requiring financial statements to be prepared in accordance with ‘Australian Accounting Standards’

  • Banking agreements
  • Constitutions
  • Trust deeds
  • Shareholder agreements
  • Purchase and sale agreements
  • Note holder or bond holder agreements
  • Partnership agreements

If you are amending an agreement that requires the preparation of financial statement in accordance with AAS, consider if GPFS are required to meet the objectives of the agreement. If not, consider using alternative wording from ‘Australian Accounting Standards’ (e.g. ‘Generally Accepted Accounting Practice’).

For example, the purpose of the agreement may have been to ensure compliance with the recognition and measurement requirements of all Australian Accounting Standards (as distinct from disclosure requirements) and this can still be achieved through preparing SPFS.

Companies or Groups transitioning to large or aspiring to be large companies

Consider the future additional disclosure requirements (e.g. related party transactions and KMP remuneration)

Financial statements prepared by AFSL holders

Currently AFSL holders lodge annual FS70 forms requiring a profit and loss statement and balance sheet, with the licence holder typically attaching full financial statements. FS70 previously included the ability for a licensee to lodge SPFS if the entity did not meet the definition of a ‘reporting entity’. This option has now been removed by ASIC and consequently all licensees must lodge GPFS with their FS70.

To assist licensees with the transition from ‘special purpose’ to ‘general purpose’ reporting, ASIC has recently announced that licensees that prepared SPFS last year, and that do not prepare financial reports under Chapter 2M of the Corporations Act 2001, can choose to defer the new disclosure requirements to financial years commencing on or after 1 July 2022 (for entities with a 30 June year-end).

If you are a licensee, consider whether you will apply the transitional provisions for 30 June 2022.

Further information on the transition for AFS licensees can be found here.

Agreements that require the preparation of financial statements but do not use the term AAS may still require application of AAS

Review current agreements to determine whether there is a requirement to prepare financial statements in accordance with AAS.

Example 1 – an agreement requires preparation of financial statements that comply with accounting standards as defined by the Corporations Act 2001.

Example 2 – an agreement requires preparation of financial statements that comply with accounting standards issued by Australian Accounting Standards Board.

These examples don’t use the term ‘Australian Accounting Standards’ directly, but nonetheless it is clear that agreements adopting such expressions would give rise to a requirement to prepare General Purpose Financial if the documents were created or amended on or after 1 July 2021.

What to do next?

If you have any questions or would like to learn more about how the changes could impact your business, please reach out to your Pitcher Partners expert today.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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