Removal of Special Purpose Financial Statements - What you need to know

IFRS news

Recent changes to Australian Accounting Standards will mean that many 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 this article, we explain who is affected, and what the impact will be on those entities.

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. 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 Regime (“SDR”).

Who will have to prepare GPFS for the first time?

The change will affect any entity preparing financial statements under the Corporations Act 2001 which currently prepares SPFSThis includes large proprietary companies (including grandfathered or wholly-owned subsidiaries), Changes to Australian Accounting Standardsunlisted public companies, foreign-controlled small proprietary companies and financial services licensees, and small proprietary entities where over 5% of members request the preparation of financial statements.  All the entities listed above are required to prepare financial statements under the Corporations Act 2001RSM 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.

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 wording Companies affected by removal of SPFScompelling them to prepare financial statements in accordance with Australian Accounting Standards, will have to prepare GPFS.

Anyone drafting such documents for potentially affected entities should carefully consider the language used in drafting.  Entities should review any arrangements entered into on or after 1 July 2021 to ensure that they do not inadvertently 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, or lending agreements.

How to avoid a requirement to prepare GPFS

For for-profit entities that do not have to report under the Corporations Act 2001, the requirement to prepare GPFS may be triggered by references to Australian Accounting Standards within constituting documents.  Therefore, references to Australian Accounting Standards should be avoided, unless there is a clear desire to create a requirement to prepare GPFS.  Similarly, references to undefined terms such as ’accounting standards,’ a ‘true and fair view,’ or ‘generally accepted accounting principles’ should be avoided, as they risk creating ambiguity and uncertainty about reporting requirements.

Instead, if an entity wishes to retain flexibility about how any financial report is presented, then this should be clearly stated, through the use of phrases such as ’prepare financial statements in accordance with the directions of the trustee/partners/joint venturers/beneficiaries.’

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 General purpose financial statementsreporting 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.

Not-for-profit entities that 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.

Transition relief is available for entities that choose to early adopt and prepare GPFS under the new SDR before 1 July 2021, for example for 30 June 2021 year-end.  This relief allows an entity not to restate Special purpose financial statementscomparative financial information, which will be presented in accordance with the entity’s previous accounting policies.  Entities that do not early adopt and wait until 1 July 2021 will not receive any special transition relief, so will have to restate comparative financial information in their first year of adoption. This means an entity first applying the new requirements in its 30 June 2022 financial statements will be required to restate its 2021 comparatives. However, if the entity first applies the new requirements in its 30 June 2021 financial statements it will not be required to restate its 2020 comparatives. 

Given the transitional relief available, affected entities may therefore wish to consider adopting the new requirements for the year ended 30 June 2021.

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:

What about Financial Statement disclosures?

The Simplified Disclosures Standard (“SDS”, published as AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities) contains far fewer disclosure requirements than a full IFRS-compliant set Financial statement disclosuresof financial statements, and indeed fewer disclosures than the existing Reduced Disclosure Regime.

However, given that SPFS previously had very few mandatory disclosure requirements, there is likely to be a greater volume of disclosures in entities preparing GPFS – SDS for the first time.  A non-exhaustive list of the key differences is set out below.  A full list of the required disclosures can be found in AASB 1060.

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 statutory financial statements that ensures regulatory compliance.

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. If you require assistance, please contact your local RSM adviser.