Future Focus: The end to Special Purpose Financial Statements
It seems that time is running out for financial entities that are currently choosing to prepare special purpose financial reports with the Australian Accounting Standards Board (AASB) releasing a consultation paper intending to remove this flexibility.
Currently, Australian financial entities that are required to lodge financial statements with regulatory bodies such as ASIC and the ACNC have the option to submit special purpose financial reports where they are not categorised as a reporting entity. Reporting entities on the other hand, are required to submit general purpose financial reports which bring with them a higher level of compliance than their special purpose counterparts.
An entity will generally be categorised as a reporting entity if it is reasonable to expect the existence of users who are dependent on the information contained in the general purpose financial reports to make decisions associated with the entity.
With the increased level of compliance associated with preparation of general purpose financial reports, the push for entities to stay outside of the reporting entity regime is quite common and it is likely that the self-assessment of this status has left more entities in the non-reporting entity category than is appropriate.
With the AASB intending to adopt the revised Conceptual Framework issued by the International Accounting Standards Board in March 2018, the concept of non-reporting entities will eventually be removed. In doing so, there will be a shift away from the preparation of special purpose financial reports with all entities required to comply with accounting standards having to preparing general purpose reports.
AASB intends for the proposed changes to take effect from 1 January 2020.
How will this affect you?
If you are currently required to submit financial reports with a regulatory body for statutory or other purposes but prepare special purpose financial reports, should the proposed changes from the AASB be passed, there will be a need to change the way your reports are prepared.
This change will not just effect the reporting period after 1 January 2020 but it will also apply to the comparative information in the financial statements for that year. For example:
- Financial statement prepared for the year ended 30 June 2021
- Comparative information is required for the year ended 30 June 2020.
- Requiring measurement of assets as at 30 June 2019.
The AASB has stated that entities not required to lodge reports with regulatory bodies for statutory or other purposes are unlikely to be effected by these changes and can continue to prepare special purpose financial reports. This is likely to apply to many small to medium proprietary companies and other entities such as self managed super funds that are not under any obligation to submit financials to a regulatory body.
Which major financial areas may be impacted as a result of this change?
- Revenue – AASB 15 Revenue from Contracts with Customers changes the way that revenue will be brought to account.
Where relevant, memberships is one area that the impact of this standard will need to be assessed
Contracts will also require review to understand the performance obligations and whether they have been fulfilled to ensure they are disclosed correctly in the financials
- Leases – AASB 16 requires entities to bring the majority of operating leases on-balance sheet effectively adding an asset and a liability to the balance sheet.
What should you do?
We would suggest that you remain abreast of changes as they are advised and we will keep you informed as more information comes to hand.
We also recommend:
- Commence planning for the change by assessing the impact of current measurement requirements to what you are doing now.
- Consider making the change to General Purpose Financial Reporting now so that you are ahead of the changes
- Speak with your accountant or one of the team at Davidsons by calling 03 52216399 to find out more