The AASB’s phasing out of Special Purpose Financial Statement reports is in motion. How well is your business prepared for the new statutory reporting framework?
Following the AASB’s march announcement, Australia’s financial statement reporting regime found itself in the running for a “transparency” makeover. Joining the Federal Government and local regulators in their mission to align with global financial and tax frameworks, the AASB plans to bring a greater consistency in reporting, access to accurate data and to bring Australia’s compliance reporting system into the digital age with the adoption of the IFRS Reporting Conceptual Framework.
So, is it time for your organisation to re-evaluate the current resources and processes in how you record, prepare and report your financial statements? We look at what the proposed changes mean.
Nothing “special” in the proposed Framework?
The AASB has set in motion the phasing out of Special Purpose Financial Statement (SPFS) reports and replacing these with General Purpose Financial Statement reports for a larger group of businesses.
The reaction to the changes has not been one of unadulterated enthusiasm. Some stakeholders have voiced concerns over the new scope (who will report what), the potential higher compliance costs and a forced adoption of electronic reporting. As part of the changes, the Australian Board of Taxation is reviewing tax disclosure in line with new financial reporting standards. While tax reports and financial statements have different purposes, an alignment will mean it is easier for regulators and tax administrators to cross-review data in each, which will potentially impact companies affected by other anti-avoidance measures, such as the changes to the Thin Capitalisation rules.
Current status of reporting
Under the current standards, entities are required to adopt either a GPFS or SPFS depending on whether they are classified as a “reporting entity” or “non-reporting entity”. But current guidelines for determining which companies are required to prepare general purpose financial reports leave the decision to be a matter of judgment, which means that many companies are only preparing special-purpose financial statements.
As of June 2017, so-called ‘significant global entities’ (SGEs – entities that are members of groups with turnover of AUD 1 billion or more) are required to file an income tax return in Australia and must also lodge general purpose financial statements (GPFS) with the ATO when they lodge their return, unless these entities already lodge GPFS with ASIC. This impacts a number of corporate tax payers, including mid-tier entities, who will now be brought into Australia’s tax reporting system.
The Australian Taxation Office’s current revenue threshold for the public disclosure of company tax information is $100 million for public companies and $200 million for private companies. There is speculation that this benchmark will also be applied to the disclosure of general purpose financial reports.
Small proprietary companies are currently exempt from having to prepare financial reports unless they are required to do so by shareholders or the ASIC. However, this only applies to companies who meet two of the three of the following conditions:
- revenues less than $25 million,
- assets less than $12.5 million,
- less than 50 employees.
Why are the reforms so important?
The issue with the current system is a lack of consistency. Financial statements lodged with regulators are not comparable between entities because they do not apply all the recognition and measurement principles of Australian Accounting Standards.
To start with, “non-reporting” entities have been able to select which standards they apply, often meaning that they don’t present consolidated reports or disclose related party transactions.
Further, accounting firms often adopt different practices when preparing the reports, and this disparity in approach can undermine the regulators and tax authorities from being able to gain an account view on the accounts and to draw comparisons across segments.
So, special purpose financial statements can be of very limited value in capturing the activities of the company, and can’t be compared against other similar entities.
Roll out plans for the new framework
The proposed rollout of the new framework will see a transitional period, with the AASB having both the old and new frameworks in operation.
The old framework will be retained in the short-term so entities that are not publicly accountable can continue to prepare SPFS.
The new framework will apply to all “publicly accountable entities” (e.g. listed and disclosing entities) so that their financial statements remain IFRS compliant from 1 January 2020. The phase-out and new requirements mean that a significantly larger group of entities will be required to adopt GPFS.
Though no date has been set, we will see the eventual removal of the “reporting entity” concept and all financial statements prepared in accordance with Australian Accounting Standards will be GPFS, based on a two-tiered system outlined in AASB 1053.
There are still many questions surrounding the new framework:
- How broadly will it be applied across organisational sizes and types?
- Will Australia, like the UK, require small and micro entities to adopt the GPFS?
- Will mandatory electronic filing of financial statements come into play?
At present, mid-tier and SGEs who haven’t previously been required to report in Australia will possibly feel the effects the most. But when weighing up the pros and cons of compliance, it is worth remembering that by adopting the GPFS, your organisation or clients will achieve parity with the regulators and tax administrators in the consistency and accuracy of reports. By assuming a uniform format and moving to electronic lodgement there will be a reduction in costly errors due to manual input and formatting.
How to prepare?
As with all previous compliance changes, understanding the implications of the changes and preparing accordingly is ideal. This could involve:
- Reviewing the proposed changes to understand how they could apply to your organisation, i.e., how and when these will apply.
- Conducting a gap analysis. Do you have the appropriate technology systems in place to record, manage and report on data? Do you have the right people, processes and skills to meet your obligations?
- Future-proofing your advice. Engage a specialist to help with compliance, including what type of investment in technology will best suit your company.
- Researching options to redesign, upgrade and re-skill.
How the local Framework will evolve remains to be seen. We will be exploring the unfolding of developments here and overseas further in our Statutory Reporting series. Keep an eye on our blog for updates from local industry organisations, such as CAANZ who have been canvassing member feedback on the AASB’s proposed Phase 2.
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