The removal of Special Purpose Reporting
For many years, directors of for-profit private entities have enjoyed the liberty of determining the type of financial statements that they will prepare for an entity. This discretion to prepare an often much less detailed set of Special Purpose Financial Statements (SPFS) to meet their reporting requirements is soon to be removed.
Under new rules, many of those private sector entities currently preparing SPFS will no longer be able to report under the special purpose framework from 1 July 2021.
Two new accounting standards have been recently issued by the Australian Accounting Standards Board that result in the removal of the special purpose reporting framework for those for-profit private sector entities with reporting requirements. Such requirements might be driven by:
- legislation (eg: the Corporations Act 2001 or the Associations Incorporation Reform Act 2012) to comply with Australian Accounting Standards (AAS); or
- constituting document (such as a trust deed) created or amended after 1 July 2021 that requires compliance with AAS; or
- another document (such as a bank facility document) created or amended after 1 July 2021 that requires preparation of financial statements that comply with AAS.
For those entities, “compliance with accounting standards” will equate to the preparation of General Purpose Financial Statements from 1 July 2021.
The New Standards and challenges
The upcoming changes to reporting requirements are delivered via two new standards. AASB 2020-2 Amendments to Australian Accounting Standards removes the ability of for-profit private sector entities with reporting responsibilities to prepare SPFS, whilst AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities sets out the new Simplified Disclosure Requirements for General Purpose Financial Statements (GPFS Tier 2 - SDR) that will replace the previous GPFS Tier 2 - Reduced Disclosure Requirements.
Both standards will become effective from 1 July 2021 with early adoption encouraged.
The new standards will require entities to apply the recognition and measurement requirements of all Australian Accounting Standards. This will include application of AASB 10 Consolidated Financial Statements Standard which may require groups of entities to apply consolidation accounting principles for the first time. This is expected to be a significant challenge for groups that have previously elected not to consolidate under the special purpose framework.
Another likely challenge will be the requirement to provide more detailed disclosures in respect of related party transactions. Identifying the relevant related parties and detailing transactions and balances with those parties for disclosure in the financial statements may require significant consideration.
Special Transitional Relief
If the standards are adopted from the effective date, that is for annual periods beginning on or after 1 July 2021 (i.e. 30 June 2022 year ends), the new Simplified Disclosure Requirements (SDR) will need to be retrospectively restated in the financial statements, therefore requiring at least one year of comparative information to be prepared and presented.
If entities apply the new standards early, for financial years beginning before 1 July 2021, special transitional relief is available as follows:
- Entities will not need to restate comparative information for any changes as a result of applying full recognition and measurement requirements for the first time. For those who have prepared SPFS and not applied the consolidation standard in the previous year, they can disclose comparatives as they were disclosed in the SPFS. However, a reconciliation of equity from the latest SPFS to the adjusted opening balances will need to be disclosed in the notes.
- Entities will not need to disclose comparatives for those note disclosures that were not previously required for SPFS. For those who have previously prepared SPFS and have not disclosed applicable related party transactions, those disclosures can be made in respect of the current financial year only.
Additionally, when transitioning from SPFS to GPFS there is no requirement to distinguish between errors and changes in accounting policies in the year when the new standards are adopted.
Plan for transitioning to GPFS
The new requirements of AASB 2020-2 and AASB 1060 will lead to significant changes to financial statements that are currently being prepared under the special purpose framework. Those charged with the governance of entities that prepare SPFS should now consider the implications of the new standards. In particular, groups that will require consolidation of controlled entities for the first time may need to plan well in advance to achieve a smooth transition to GPFS.
For more information on assessing the impact on your entity please contact your usual Mazars advisor or alternatively one of our specialists:
Brisbane – Matthew Green
Melbourne – Craig Silvester
Sydney – Rose Megale
+61 7 3218 3900
+61 3 9252 0800
+61 2 9922 1166
Author: Uliana Subbotina
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