NFP Financial reporting insights | August

Removal of special purpose financial statements for certain for-profit entities

In March 2020 the AASB approved the issue of AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities and AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities. This means that for periods beginning on or after 1 July 2021 certain for-profit entities will no longer be able to self-assess their reporting requirements and prepare special purpose financial statements (SPFS). These entities will be required to prepare general purpose financial statements (GPFS).

A new disclosure framework, Simplified Disclosures which is based on IFRS for SMEs, is to replace the current Tier 2 RDR framework and is also applicable to periods beginning on or after 1 July 2021.

Does this affect Not-for-Profit entities too?

The continuing ability of Not-for-Profit (NFP) entities to prepare SPFS will be reviewed as part of a forthcoming review of the NFP reporting framework. For now, NFPs will continue to be able to prepare SPFS. For NFPs required to, or choosing to, prepare Tier 2 GPFS the new Simplified Disclosure framework will be applicable for periods beginning on or after 1 July 2021. This is to avoid confusion in having two different Tier 2 frameworks in place at the same time.

For NFP private sector entities preparing SPFS for reporting periods ending on or after 30 June 2020 the following is required to be disclosed in those SPFS:

• The basis on which the decision to prepare SPFS has been made;
• Whether interests in other entities (subsidiaries, investments in associates or joint ventures) have been consolidated or equity accounted and if not, why not;
• For each material accounting policy applied and disclosed in the financial statements that does not comply with all recognition and measurement requirements of Australian Accounting Standards, an indication of how it does not comply, or the fact that an assessment has not been made; and
• Whether or not the financial statements overall comply with all recognition and measurement requirements of Australian Accounting Standards or that such an assessment has not been made.

Why are these changes being made?

Australia is the only jurisdiction which enables preparers of financial statements to select their reporting requirements. With the move to a new conceptual framework, the definition of a reporting entity changes from that currently in SAC 1.

Research performed by the AASB, and supported by various stakeholders, shows that the current SPFS lacks comparability and transparency with many financial statements being unclear as to the accounting policies that have been adopted. In addition, some entities deemed economically significant by their size (i.e. meets the Corporations Act thresholds for being large) are still preparing SPFS.

Who is affected

The AASB expects that approximately 7,300 entities lodging financial statements will be affected.

Entities in scope		Examples
1	Companies lodging financial statements under the Corporations Act 2001*	Large proprietary companies (including grandfathered companies) Unlisted public companies Small foreign-controlled companies Financial services licensees Small proprietary companies with crowd-sourced funding Companies directed to prepare financial reports in accordance with Australian Accounting Standards by ASIC or shareholders
2	Private sector entities required by legislation to prepare financial statements in accordance with Australian Accounting Standards or accounting standards**	Co-operatives Incorporated associations Higher education providers
3	Entities whose constituting document or another document requires to preparation of financial statements that comply with Australian Accounting Standards IF created or amended in any way on or after 1 July 2021***	Private sector trusts Partnerships Self-managed superannuation funds Joint arrangements Small proprietary companies with loan documents that required financial statements to be prepared in accordance with Australian Accounting Standards
4	Entities that elect (i.e. voluntarily) to prepare GPFS

* It is expected that entities in category 1 above, those required to report under the Corporations Act, are the most easily identifiable as these entities would currently be required to lodge financial statements with ASIC.

** Entities required by legislation to prepare financial statements under Australian Accounting Standards or accounting standards. This is based on the view that, in referring to ‘accounting standards’ only, it can be reasonable to expect that legislators intended compliance with standards as issued by the AASB when the term ‘accounting standards’ is used under Australian legislation.

*** Entities potentially falling into category 3 require careful consideration of the wording of any documents that require the preparation of financial statements. These entities are the most likely to be ‘caught out’ by the new requirements. In this case the document requiring the financial statements must specifically start that these are to be in compliance with Australian Accounting Standards. Any document that specifies only ‘accounting standards’ compliant financial statements would not be in scope.

What this means

All recognition and measurement requirements of Australian Accounting Standards will need to be complied with. This includes compliance with the requirements of AASB 10 Consolidated Financial Statements to consolidate any subsidiaries and equity account for any associate or joint ventures.

Transition options

For entities choosing to early adopt the new requirements (i.e. before 1 July 2021) transitional relief is available:

• Relief from restating comparative information in the year of transition;
• Relief for entities that have complied with all recognition and measurement requirements in previous SPFS from presenting comparative information for those disclosures that they had not previously made; and
• Relief from distinguishing the correction of prior period errors from changes in accounting policies in the year of transition (this also applies if adopted in the year it becomes mandatory).

	30 June 2021# year end		31 December 2021# year end		30 June 2022 / 31 December 2022	30 June 2023 onwards
	Current period	Comparative period (SPFS & not restated)	Current period	Comparative period (SPFS & not restated)	The short-term exemption from restating comparatives no longer applies.   However, relief from distinguishing prior period errors from changes in accounting policies remains available.	Transitional relief is no longer available
Statement of financial position (SOFP)	30/06/2021	30/06/2020##	31/12/2021	31/12/2020##
Statement of profit or loss and OCI (P&L)	30/06/2021	30/06/2020##	31/12/2021	31/12/2020##
Notes to the financial statements	Explanation of transition from SPFS to GPFS Reconciliation of equity from latest SPFS to the adjusted opening balances (quantification required) Description of major adjustments that would have been required to make comparative SOFP compliant with AAS (no quantification needed) Comparatives not restated, if new disclosures in current year then no comparatives

^# Also for 30 June 2020 and 31 December 2020 year ends
^## This information is taken from the entity’s most recent SPFS (and therefore may not comply with Australian Accounting Standards)

An exposure draft has been issued, ED 302, to propose minimum disclosure requirements for those entities who continue to prepare SPFS. This comes into effect for reporting periods ending on or after 30 June 2021. This means it may only be a transitory disclosure for those entities who are required to prepare GPFS from 1 July 2021. Disclosures are required are the same as those required for NFP entities above.