The newly introduced Australian Accounting Standards AASB 2021-2 – Disclosure of Accounting Policies and Definition of Accounting Estimates brings important changes to how companies report their accounting policies.  

This article explains the new standards in plain terms and how they impact your business. 

What’s changing under AASB 2021-2?  

AASB 2021-2 introduces changes to the disclosure requirements for accounting policies, along with a definition of accounting estimates which was previously undefined. 

The changes are intended to increase transparency and make financial statements more specific and relevant by removing generic ‘boilerplate’ information. 

The standard doesn’t impact any of the numbers in a financial report but significantly changes the accounting policies disclosed within it.   

Under AASB 2021-2, companies only need to disclose policies that are considered ‘material’ and relevant to understanding their financial statements rather than listing all significant policies.   

However, the material policies they do disclose will likely need rewording to make sure they’re adequately specific to the company and its operations and that they explain the key judgements, estimates or choices made in applying those policies. Going forward, standard policy wording provided through proforma financial reports is highly unlikely to be specific enough to be compliant.  

The standards also define accounting estimates and clarify when changes in estimates impact the current vs. prior periods. This helps distinguish changes in estimates from changes in accounting policies. 

Who do the changes apply to?  

The new standards apply to all entities that comply with the accounting standards, including those lodging with the Australian Charities and Not-for-profits Commission (ACNC).  

When does AASB 2021-2 take effect? 

The standard is effective for reporting periods that begin on or after January 1, 2023. This means it applies to the financial years that start in 2023 and conclude in 2024 onwards. Companies need to start applying these changes to any financial statements they prepare for periods starting after this date. 

AASB 2021-2 in detail 

Here’s a breakdown of the changes in simpler terms:  

Focus on material accounting policies only  

Previously, companies often included more accounting policies than needed in their financial statements, including many generic and boilerplate policies.     

Now, AASB 2021-2 requires companies to disclose only the material accounting policies – meaning they could influence the decisions of people reading the financial statements. 

Companies no longer need to include generic or boilerplate content that repeats the accounting standards. The policies disclosed should be specific to the company and provide insights into key judgments, estimates or choices made in applying those policies. There’s no need to repeat verbatim information from the accounting standards. Instead, the report can just state that it complys with the standards.  

This change aims to reduce clutter and focus on what’s truly important. 

Rewording of policies  

Since the new standard focuses on material policies, some existing policies may need to be reworded to ensure they’re specific to the company and not just copied from proforma templates. The aim is to add more depth to the financial reports and help users understand the basis on which they were prepared. In some cases, this will increase the time and effort required to prepare an organisation’s financial statements this year, but these reworded policies should only require minor updates in future years. 

A clear definition of accounting estimates  

The new standards also provide a clear definition of accounting estimates. These are the amounts in financial statements that can’t be directly observed but need to be estimated, like how much bad debt a company expects or the useful life of an asset. 

The amendment clarifies that changes in accounting estimates only impact the current period, not prior periods (unless they correct an error). This helps distinguish changes in estimates from changes in accounting policies. 

What do these changes mean for your business?  

It’s crucial to note that these changes don’t alter the figures reported in the financial statements. Instead, they affect how you explain or disclose the figures so they can be better understood. 

How should companies prepare for AASB 2021-2? 

To comply with the new standards, which are effective for reporting periods starting on or after January 1, 2023, your business should: 

  • Review your existing policies: Go through your current accounting policies in detail. Remove any immaterial policies (including anything boilerplate and/or non-specific) and assess whether the remaining ones provide enough detail on how you apply the policy and what choices and calculations you’ve made.  
  • Remove any non-material policies: Any policies that aren’t material based on the new definition should be removed. Focus on quality over quantity – you’ll likely end up with fewer policies overall, but the ones you include will be more detailed. 
  • Enhance material policy disclosures: Provide more company-specific details for the policies you keep. Describe the key judgments, estimates or choices made and explain how they impact your material policies. 

AASB 2021-2 aims to make financial statements more useful by focusing on material, company-specific policy information. While reviewing and enhancing your disclosures will take some effort, the result will be greater transparency and relevance for anyone reading your financial reports. 

Need help understanding what’s required under AASB 2021-2?  

Chat with our experienced accounting team  

If you have questions about these changes and how to ensure compliance, our knowledgeable accountants at Davidsons are here to help. Reach out to us to discuss your specific situation and needs. 

You can contact us by:   

  • calling us on 03 5221 6399  

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This article was written by Audit and Assurance Manager Lucy Partridge

Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.