General Purpose or Special Purpose Financial Statements - what you need to know

IFRS news

Recent changes to Australian Accounting Standards will mean that some for-profit entities will have to prepare General Purpose Financial Statements ('GPFS') for the first time, and are no longer able to prepare Special Purpose Financial Statements ('SPFS'). 

In this article we explain who is affected and what the impact will be on family law issues.


General Purpose or Special Purpose – why should I care?Recent changes to Australian Accounting Standards will mean that some for-profit entities have to prepare General Purpose Financial Statements (“GPFS”) for the first time, and are no longer able to prepare Special Purpose Financial Statements (“SPFS”). 

In gathering information about a business, a commonly accepted key document is its financial statements.

These set out the financial position of the business – the assets it owns and the liabilities it owes.

They also set out its revenues, its expenses, its profitability, and its cash flows, which are metrics used to judge the financial performance of a business.

However, not all financial statements are created equal!

General Purpose Financial Statements are prepared in accordance with Australian Accounting Standards. 

This means that the financial position and performance of the business are determined using a globally recognised accounting framework that has strict rules on when and whether revenue and expenses are recognised, and how assets and liabilities are recognised and valued. 

This can give a high degree of confidence over the information contained within them, particularly if they have been independently audited

Special Purpose Financial Statements come in a wide variety of forms.

Some of them may comply with the recognition and measurement requirements of Australian Accounting Standards and therefore may be a reliable starting point for family law determinations.

However, others may adopt their own accounting policies, which should usually be disclosed in a note to the financial statements. 

If the accounting policies do not follow any recognised set of accounting standards, then there is a much greater choice for the preparer in how and when asset liabilities, income, and expenses can be recognised. 

This, of course, means that the preparer may have a greater ability to manipulate the results presented in the financial statements to suit his or her own purposes.


Why can this be relevant to family law situations?However, all of these approaches, to some extent, rely on the information within the financial statements.

Where a family law settlement involves a business, it is usually important to determine the value of that business as part of any settlement. 

It may also be important to determine the ongoing income generated by that business for its owners. 

There are a variety of approaches to valuing a business, including multiples of profit or revenue, or the value of the underlying assets owned by the business. 

However, all of these approaches, to some extent, rely on the information within the financial statements.

Where reliance is placed on special purpose financial statements, particularly where they are not audited and do not comply with Australian Accounting Standards, there are a variety of areas where results can be manipulated by the adoption of particular accounting policies. 

These include:

  • The timing of when revenue is recognised - for example, on an invoice or cash basis as opposed to when the actual goods or services are delivered to a customer
  • The basis on which inventory is valued
  • The recognition of appropriate adjustments of bad debts, or for accruals and prepayments, or deferred tax
  • The treatment of long-term leases
  • The basis on which any buildings or plant and equipment are valued, and how recently these evaluations were performed
  • Any provision made for employee benefits, legal or environmental obligations, or onerous contracts

This list is not exhaustive. Therefore, where financial statements are prepared on a non-statutory basis, or where they are not independently audited, they need to be closely scrutinised to determine whether they accurately and fairly represent the financial position and performance of that business.


What is changing?

From 1 July 2021, for-profit entities preparing financial statements in accordance with the Corporations Act 2001, or who have to prepare financial statements in accordance with Australian Accounting Standards under other legislation, their constituting documents or other agreements will not be permitted to prepare Special Purpose Financial Statements.The change will affect any entity preparing financial statements under the Corporations Act 2001 which currently prepares SPFS. 

At the same time, the existing Tier 2 Reduced Disclosure Regime (“RDR”) will be replaced by a new set of Tier 2 disclosure requirements known as the Simplified Disclosure Standard (“SDS”).


Who will have to prepare General Purpose Financial Statements for the first time?

The change will affect any entity preparing financial statements under the Corporations Act 2001 which currently prepares SPFS

This includes large proprietary companies (including grandfathered or wholly-owned subsidiaries), unlisted public companies, foreign-controlled small proprietary companies, financial services licensees, and small proprietary entities where over 5% of members request the preparation of financial statements. Who will have to prepare General Purpose Financial Statements for the first time?

All the entities listed above are required to prepare financial statements under the Corporations Act 2001

RSM Australia’s previous article provides further detail on who has to prepare financial statements under the Corporations Act, and what exemptions or reliefs are available.

While some of the above listed entities may already prepare GPFS, the majority currently prepare SPFS, and therefore will need to change their financial statements to reflect the new requirements.

However, small companies which currently do not have any legal requirement to prepare or lodge financial statements with ASIC will not be affected by this change.


Who else may be affected?

For-profit private sector entities that are required by their constituting document or another document to prepare financial statements that comply with ‘Australian Accounting Standards’ will also have to prepare GPFS, if that document was created or amended on or after 1 July 2021.

This means that existing entities that amend their constituting documents,  or any new entities that create their constituting document, after 1 July 2021, with For-profit private sector entities that are required by their constituting document or another document to prepare financial statements that comply with ‘Australian Accounting Standards’ will also have to prepare GPFS, if that document was created or amended on or after 1 July 2021.wording compelling them to prepare financial statements in accordance with Australian Accounting Standards, will have to prepare GPFS.

Constituting documents would include any legal settlement, so if there was an agreement between parties in a legal case to prepare financial statements in accordance with Australian Accounting Standards, then in the future that would mean general purpose financial statements must be prepared.

Anyone drafting such documents for potentially affected entities should carefully consider the language used in drafting. 

Persons or entities should review any arrangements entered into on or after 1 July 2021 to ensure that they do not inadvertently create, or fail to create,  a requirement to prepare GPFS.  

Examples of documents that may create such a requirement include superannuation fund trust deeds, other trust deeds, partnership agreements, business acquisition contracts, joint venture agreements, legal settlements, or lending agreements.


What about not-for-profit entities?

At present, not-for-profit entities are not affected by the above changes.  The Australian Accounting Standards Board (“AASB”) and the Australian Charities and Not-for-profits Commission (“ACNC”) are currently undertaking a project to create a new differential reporting framework for not-for-profit entities. 

However, at the time of writing, the final nature and timing of any changes have not yet been determined.At present, not-for-profit entities are not affected by the above changes. 

Not-for-profit entities which already prepare GPFS but do not have public accountability will be free to adopt the new Simplified Disclosure Standard if they wish.


When do these changes take effect?

The amendments issued by the AASB require affected entities to prepare GPFS for annual reporting periods commencing from 1 July 2021. 

This means that 30 June 2022 will be the first year-end for which the preparation of GPFS is mandatory for affected entities.


I need to prepare GPFS for the first time.  What changes will I need to make to my Financial Statements?

The extent of any changes will depend on the extent to which an entity’s previously prepared SPFS were compliant with the recognition and measurement requirements of Australian Accounting Standards. 

Where those requirements were applied in full, any changes are likely to be limited primarily to disclosure. 

However, many preparers of SPFS did not apply the requirements of Australian Accounting Standards in full. 

We have highlighted below some areas where we believe the  greatest impacts are likely to occur in respect of recognition and measurement:


Where can I receive assistance with these changes?

Preparing statutory financial statements has become a challenging and time-consuming exercise.

RSM Australia’s financial reporting technology, along with our technical knowledge and expertise, has enabled us to develop an efficient and timely approach to preparing financial statements that ensure regulatory compliance and meet the needs of users.  

RSM Australia can assist in drafting and preparing all different types of financial reports, or with updating financial reports each year to reflect any changes in accounting standards.

Contact your local RSM office for more information