Accounting Standard AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities
Options considered: why using the IFRS fOptions considered: why using the IFRS for SMEs Standard as the basis for the new Tier 2 Standard?
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Options considered: why using the IFRS for SMEs Standard as the basis for the new Tier 2 Standard?
In developing AASB 1060, the Board considered the following options:
retain the current Tier 2 disclosure requirements (RDR framework);
adopt the alternative proposed in ITC 39 (SDR framework – see paragraph BC13);
revisit the proposals in ED 277 Reduced Disclosures Requirements for Tier 2 Entities; or
develop a new disclosure Standard based on the IFRS for SMEs Standard.
RDR and SDR frameworks – feedback from ITC 39
In ITC 39, the Board proposed to replace the current RDR framework with a revised disclosure framework and proposed two alternatives for Tier 2 (See Specific Matter for Comment 12 of ITC 39). Alternative 1 was the existing Tier 2 RDR under AASB 1053 Application of Tiers of Australian Accounting Standards which requires compliance with the full R&M requirements of AAS (as amended for NFP specific issues) and with minimum disclosures specified in each Standard.
The second proposed alternative, the Specified Disclosure Requirement (SDR), was a revised disclosure framework. It required full R&M requirements of AAS (as amended for NFP specific issues) and included the disclosure of those Standards that are currently mandatory for entities required to prepare financial statements in accordance with Chapter 2M of the Corporations Act 2001 (Cwth), being AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, AASB 1048 Interpretation of Standards and AASB 1054 Australian Additional Disclosures, and disclosures required by AASB 15 Revenue from Contracts with Customers, AASB 112 Income Taxes, AASB 124 Related Party Disclosures and AASB 136 Impairment of Assets.
After issuing ITC 39, the Board held targeted outreach with key stakeholders, including State, Territory and National regulators, audit offices, accounting firms, the Australian Securities Exchange (ASX), the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC), credit rating agencies and professional bodies. The ITC 39 proposals were also presented at various forums, workshops, roundtables and discussion groups.
The Board received feedback on its proposals in ITC 39 through 33 formal comment letters from professional service firms, regulators, professional bodies, academics, preparers, users of financial statements and other respondents. Furthermore, feedback was sought via targeted user and preparer surveys in quarter 3 of 2018, which received a total of 37 user and 49 preparer responses[48]. The surveys were focussed on the specific matters for comment in ITC 39, and were used to get a better understanding of which of the Tier 2 GPFS frameworks proposed in ITC 39 users preferred (and why), as well as what transitional relief would be helpful to preparers.
Part Options considered: why using the IFRS f - Accounting Standard AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities - Options considered: why using the IFRS for SMEs Standard as the basis for the new Tier 2 Standard? | Zoe
The feedback on the proposed SDR framework was that the SDR had too many disclosures in some ways but fell short in many other ways. For example, the feedback received from roundtables, surveys and submissions on ITC 39 was that whilst the disclosures in SDR are important, requiring full disclosure of those nine Standards (as explained in paragraph BC13) was too much. Most participants further suggested that SDR might not be appropriate for all industry sectors and is missing some critical disclosures to help predict the viability of an entity such as liquidity, contingent liabilities, subsequent events and commitment disclosures.
At the same time, respondents noted that refining the principles used in determining the level of disclosures required for Tier 2 entities to achieve an appropriate balance between the benefits of financial information to users and the costs to preparers of providing that information is crucial. The feedback from the roundtables, surveys and submissions on ITC 39 indicated that RDR has too many disclosure requirements.
Revisiting the proposals in ED 277
The RDR disclosure requirements in Australia and New Zealand are essentially the same and are based on an approach developed by the Board in 2010. That approach draws on the disclosure requirements in the IFRS for SMEs Standard when Tier 2 R&M requirements are the same as those under the IFRS for SMEs Standard; and applies the ‘user needs’ and ‘cost-benefit’ principles applied by the IASB in developing its IFRS for SMEs Standard when full R&M requirements are not the same as those available under the IFRS for SMEs Standard. A top-down approach is used which starts with the full IFRS disclosures and then identifies those that can be removed. The Board noted that there could be a tendency to retain disclosures in circumstances where a direct comparison is not possible.
A post implementation review of the RDR framework was carried out by the Board which identified that the RDR disclosure requirements had not delivered the expected outcome and that take up of the RDR framework by entities was consequently low[49]. In response to the findings of the post implementation review, the Board issued ED 277 in January 2017 as a joint project with the New Zealand Accounting Standards Board (NZASB).
ED 277 proposed adopting an RDR decision-making framework, together with accompanying operational guidance. The framework was based on Key Disclosure Areas (KDAs) which were meant to result in information that meets user needs. Judgement was required when applying this framework, and the overarching principles of user needs and cost-benefit were considered when determining the disclosures that Tier 2 entities should make.
The approach taken in the proposed Tier 2 framework in ED 277 was to include an Australian Appendix in each AAS that identifies the disclosures that Tier 2 entities are required to provide, thereby addressing concerns by those that find the shading used to identify disclosures that can be omitted confusing. However, while ED 277 was based on clear disclosure principles, the cost-benefit analysis was difficult to apply in the context of disclosures and the top-down approach resulted in too many disclosures being retained, as removal was difficult to justify with the KDAs.
Feedback from Australian stakeholders confirmed that ED 277 still resulted in too many disclosures. While the Board had intended to conduct further outreach and consultation on the proposals in ED 277, any further work was put on hold following the issue of the revised Conceptual Framework by the IASB in March 2018 and the decision by the Board to reform the Australian Financial Reporting Framework and propose removing the ability for entities to prepare SPFS when required to comply with AAS by legislation or otherwise.
Issue of ED 295 – New disclosure Standard based on the disclosures in IFRS for SMEs Standard
In weighing up the shortfalls of RDR, the other proposed Tier 2 options and the disclosure principles applied by the IASB while developing the IFRS for SMEs Standard, the Board decided in February 2019 to develop a new Tier 2 Standard based on the disclosures in the IFRS for SMEs Standard which would be available for GPFS that are publicly lodged or are required to comply with AAS, but do not relate to entities that are publicly accountable.
Using the IFRS for SMEs Standard as the base maximises the use of relevant IFRS-based materials. The Board further noted that the IASB had added a research project on Subsidiaries that are SMEs to their agenda in March 2019, which was moved to the standard-setting programme in January 2020. Consistent with the policy of adopting Standards issued by the IASB for application by Australian entities, AASB 1060 may ultimately be replaced with the Standard developed by the IASB. This would not only remove the need for the Board to maintain a separate Tier 2 Standard, but also provide comparability and consistency for subsidiary reporting globally. However, this is a longer-term project and the Board needs to have a revised disclosure framework in place in time for the removal of SPFS from 1 July 2021. While the Board could therefore not wait for the IASB to complete their project, the Board will monitor the progress of the IASB’s project closely.
The disclosures that are relevant to Tier 2 entities are set out in a separate Standard, being AASB 1060, which was exposed for public comment in August 2019 as ED 295, together with ED 297. The comment period for both EDs ended on 30 November 2019.
Extensive outreach was conducted on the proposals, including roundtables in Melbourne, Sydney, Brisbane, Perth and Adelaide, attended by 127 stakeholders, a webinar with 162 participants, as well as separate consultations with the AASB’s User Advisory Committee, credit analysts and private equity investors.
The Board received 25 formal submissions on ED 295 from stakeholders representing professional services firms, regulators, professional bodies, academics, preparers, public sector audit offices, software providers and others.
The following section details the matter considered by the Board in developing the proposals and this Standard, including the Board’s decisions on how to address stakeholders’ feedback as part of the exposure process.