On 1 July 2021, new accounting standards have changed the criteria for determining whether a company or a trust needs to prepare General Purpose Financial Statements.
The change represents a major step towards decoupling the Australian Accounting Standards framework from Special Purpose Financial Statements (SPFS). For the many preparers currently benefiting from the relative simplicity of preparing SPFS, this article warns against inadvertently triggering an obligation to prepare significantly more complex financial statements. Let’s begin by explaining the difference between SPFS and General Purpose Financial Statements.
Special Purpose Financial Statements allow the preparer of accounts to choose the extent to which accounting standards will be applied to best suit the intended purpose or expected users. This might include relatively basic compliance with recognition and measurement concepts where financial statements are prepared solely for management purposes or to enable the annual income tax return to be completed. Special Purpose Financial Statements apply only the basic accounting standards and disclosures because as a “non-reporting entity” there are expected to be no users dependent on more detailed financial statements. In contrast to Special Purpose Financial Statements, General Purpose Financial Statements (GPFS) prepared by “reporting entities” are significantly more complex and must be prepared in accordance with all applicable accounting standards.
Effective from 1 July 2021, the new accounting standards (AASB 2020-2 and AASB 1060) dictate that any entity lodging accounts publicly (for example with ASIC), will be considered a “reporting entity” and will therefore be required to prepare General Purpose Financial Statements. Further, for any other preparers, any reference to compliance with Accounting Standards or Generally Accepted Accounting Principles will be deemed to represent full compliance rather than partial application.
For small companies and trusts, these changes will therefore require the preparation of General Purpose Financial Statements if:
- An entity is created after 1 July 2021 and its Constitution or Trust Deed (or other establishment document) specifically requires preparation of financial statements in accordance with Australian Accounting Standards; or
- The establishment documents of entities existing before 1 July 2021 are amended after this date for any purpose and similarly specify preparation of financial statements in accordance with Australian Accounting Standards.
Furthermore, bank loan facilities or other finance arrangements entered into after 1 July 2021 may also trigger the preparation of financial statements in accordance with Australian Accounting Standards and require General Purpose Financial Statements to be prepared.
We can assist you to avoid an inadvertent obligation to prepare more complex financial statements than intended for your entity through proactive review of new entity establishment documents, documents for any new financial arrangements or proposed amendments being contemplated for existing arrangements.
Please contact the author, your usual Mazars advisor or our financial reporting specialists via the details below.
Author: Craig Silvester
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