Reasons for issuing this Standard
BC2 Australia is the only jurisdiction with a ‘reporting entity’ concept that effectively permits entities to self-assess what type of financial reporting they do when they are required by legislation or otherwise (such as by a constitutional document) to prepare financial statements in accordance with Australian Accounting Standards (issued by the Australian Accounting Standards Board). Therefore, unlike other jurisdictions, in Australia two similar entities might prepare very different sets of financial statements, one preparing general purpose financial statements using a robust and consistent framework, and the other preparing special purpose financial statements with self-selected requirements. The Board notes that the self-selection is subject to some constraints, imposed by paragraphs 7 and 10 to 12 of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
BC3 Appendix A of AASB 1053 Application of Tiers of Australian Accounting Standards defines what a reporting entity is,[1] and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity also sets out the reporting entity concept. Paragraph 41 of SAC 1 states that “Reporting entities shall prepare general purpose financial reports.” [2] In relation to a group, SAC 1 states in paragraph 17 that “the group, which may be termed an economic entity, will be a reporting entity where there exist users dependent on general purpose financial reports for making and evaluating resource allocation decisions regarding the collective operations of the group of entities”.
BC4 An entity that assesses itself to be a non-reporting entity can therefore prepare special purpose financial statements, which are not necessarily consistent, comparable, transparent or enforceable. In particular, special purpose financial statements do not always comply with the recognition and measurement requirements[3] in Australian Accounting Standards and nor do they always disclose that fact. The Board is aware of the view of some, that this situation is acceptable because, by inference, users of special purpose financial statements can demand any information they need. However, the Board has received feedback that in practice that is often not the case. The Board determined that users should be provided with adequate information to enable them to confidently assess an entity’s level of compliance with the recognition and measurement requirements in Australian Accounting Standards in special purpose financial statements or be alerted to areas where this has not been assessed, and is therefore unclear. Such disclosures are expected to better support users in identifying where additional information is required.
BC5 In developing this Standard, the Board considered the findings of AASB Research Report 11 Review of Special Purpose Financial Statements: Large and Medium Sized Australian Charities and feedback obtained from the not-for-profit private sector regarding the public interest nature of the sector and the needs of financial statement users with regard to the consistency and transparency of special purpose financial statements.
BC6 The research examining the reporting practices of large and medium charities lodging financial statements with the ACNC in 2016 estimates that approximately 36% of those charities declared that they were preparing special purpose financial statements based on data obtained from the 2016 Annual Information Statements lodged with the ACNC. It is estimated that, of those charities preparing and lodging special purpose financial statements, approximately 26% state compliance with recognition and measurement requirements in Australian Accounting Standards. 30% state non-compliance with the recognition and measurements requirements in Australian Accounting Standards. It is not clear for the remaining 44% whether or not they complied with the recognition and measurement requirements in Australian Accounting Standards.[4] Research also indicates that there are issues with the accuracy of charities stating they are preparing general purpose financial statements.[5]
BC7 In addition to it being difficult for the researchers to understand the extent of alignment of an entity’s accounting policies to the recognition and measurement requirements in Australian Accounting Standards, the researchers were also unable to ascertain whether or not an entity had fully consolidated its subsidiaries or equity accounted all its investments in associates and joint ventures.
BC8 The Board discussed the results of the research outlined above and also feedback obtained from respondents to user surveys, along with evidence supporting the existence of users of financial statements, including special purpose financial statements.[6] The Board also noted the importance of consistency, comparability, transparency and enforceability in financial reporting to special purpose financial statement users, and that at times users and other stakeholders were unaware that some special purpose financial statements (where the preparation of financial statements in compliance with Australian Accounting Standards is required by legislation or otherwise) did not comply with all the recognition and measurement requirements in Australian Accounting Standards including consolidation. Adoption of the new disclosures in this Standard helps address these issues.
BC9 The Board was also particularly concerned that the quality of disclosures in a significant number of special purpose financial statements is not adequate to enable a user to determine what additional information they might need. As noted in paragraph BC6 above research indicated that, for 44% of medium and large charities lodging special purpose financial statements with the ACNC, it was unclear to the academics conducting the research whether or not the entities in question complied with the recognition and measurement requirements in Australian Accounting Standards. The Board considers this to be unacceptable given the feedback received from users regarding consistency and transparency of special purpose financial statements including comparability of the recognition and measurement requirements (refer paragraph BC5 above).
BC10 In light of the Board’s current broader project proposing to remove the ability for certain entities to prepare special purpose financial statements when they are required to comply with Australian Accounting Standards,[7] the Board considered whether it was necessary and timely to require an entity preparing special purpose financial statements to disclose whether or not the accounting policies applied in the financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards. These new disclosures are an interim measure aimed at addressing these concerns given the project proposing to remove special purpose financial statements will take some time, particularly for the not-for-profit entities.
BC11 In considering whether such disclosure was necessary, the Board also considered whether any existing disclosure requirements in Australian Accounting Standards or other pronouncements required the disclosure of similar information.
BC12 The Board noted that paragraph 117 of AASB 101 Presentation of Financial Statements, which applies not only to general purpose financial statements but also directly to the special purpose financial statements of entities required to prepare financial reports in accordance with the Corporations Act 2001,[8] requires an entity to disclose its significant accounting policies. The Board also noted that, where it applies, paragraph 6.1 of Accounting Professional and Ethical Standard APES 205 Conformity with Accounting Standards (October 2015) issued by the Accounting Professional and Ethical Standards Board (APESB) also requires that an entity’s special purpose financial statements clearly identify “the significant accounting policies adopted in the preparation of the special purpose financial statements”.[9] The Board however noted that while these disclosures provide information about an entity’s accounting policies, they would not necessarily provide users with sufficient information about an entity’s compliance with all the recognition and measurement requirements in Australian Accounting Standards.
BC13 On the basis of the considerations outlined in paragraphs BC2-BC12 above, the Board decided that an amendment to Australian Accounting Standards to require entities to disclose an explicit statement as to whether or not the accounting policies applied in the financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards was urgently needed to provide greater transparency to users of publicly lodged special purpose financial statements and to improve the comparability of special purpose financial statements. The Board also acknowledged that disclosure of this information is not sufficient to address the problems of special purpose financial reporting, however it provides a practical interim means of improving the quality of information provided to users of special purpose financial statements.
BC14 The Board noted that, when preparing the required disclosure, entities would need to consider how their existing accounting policies compare with all the recognition and measurement requirements in Australian Accounting Standards. While the Board confirmed that the amendment would not require an entity to change its existing accounting policies, understanding how closely the entity’s existing accounting policies are aligned to the recognition and measurement requirements in Australian Accounting Standards would also help entities assess the impact of any future transition from special purpose financial statements to general purpose financial statements.
Issue of Exposure Draft ED 293
BC15 The Board’s proposals with respect to the disclosures in special purpose financial statements finalised in this Standard were exposed for public comment in July 2019 as part of Exposure Draft ED 293 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Compliance with Recognition and Measurement Requirements (ED 293).
BC16 The significant issues considered by the Board in developing ED 293 are addressed in the following section.