Reporting Entity: General purpose vs. Special purpose financial reports

Transcription

1 Reporting Entity: General purpose vs. Special purpose financial reports June 2015 Audit Tax Advisory Financial Advice

2 Contents 1. Introduction Reporting Entity concept... 2 Dependent users... 2 Mandatory compliance General purpose Reduced Disclosure Requirements (RDR)... 4 Disclosures Special purpose... 5 Companies... 6 Charities... 6 Other entities... 7 Transition... 7

3 1. Introduction A form of differential financial reporting has long been incorporated into Australian Accounting Standards (AAS). At its core is the Reporting Entity concept. Put simply, a Reporting Entity should prepare a General Purpose Financial Report (GPFR), which is fully compliant with all AAS. Non-reporting entities can prepare a Special Purpose Financial Report (SPFR), which is less than full compliance with AAS. Determining whether the entity is a Reporting Entity is the responsibility of those charged with governance, for example, the board or governing committee. There is a project at the Australian Accounting Standards Board (AASB) to assess the future relevance of the Reporting Entity concept within AAS. It is possible that the Reporting Entity concept will be removed from the standards in the future, and the AASB will focus their attention only on standards for preparers of GPFRs. To facilitate this transition, a two tier differential reporting framework has been created for GPFRs with the introduction of Reduced Disclosure Requirements (RDR). Diagram 1: Differential reporting Preparers of financial statements and their advisors and auditors must continually evaluate whether their existing financial reporting framework is suitable and, if necessary, take the necessary steps to ensure a smooth transition. 1

4 2. Reporting Entity concept GPFRs are those intended to meet the needs of users that are not in a position to command financial reports tailored so as to satisfy their information needs. Conversely, if users have the ability to demand the information they need, they would ask for financial reports that contain such information, referred to as a SPFR. Clearly, the Reporting Entity concept is not dependent on the sector within which the entity operates, nor the purpose for which it was created (e.g. profit or not-for profit). Likewise, it is not determined based on whether the entity is small or medium. Dependent users It is sometimes easy to determine whether there are dependent users, especially when the actual users are known. Potential users are often overlooked. In a recent essay issued by the AASB 1, it is clear that both actual and potential users are the target audience for GPFRs, or put another way, the expectation of the existence of users is considered rather than merely the existence of users. Therefore, if it is reasonable to expect that users exist that are dependent on the entity s financial reports for making economic decision who cannot command the preparation of a SPFR, then the entity is likely a Reporting Entity and should prepare a GPFR. The following factors from SAC1 2 may provide an indication that an entity is a Reporting Entity: Separation of management from economic interest, Economic or political importance/influence, Financial characteristics. These factors are not the only factors to consider. In practice, the determination of dependent users might be more easily determined through an assessment of the entity s stakeholders. 1 AASB Essay The Critical Role of the Reporting Entity Concept in Australian Financial Reporting, click here to review report. 2 SAC 1 Definition of the Reporting Entity, click here. 2

5 Diagram 2: Stakeholders and the Reporting Entity concept Mandatory compliance An entity might be compelled to prepare a GPFR in accordance with legislation or regulation. Other entities might be required to prepare a GPFR in order to comply with a mandate, such as a trust deed or grant agreement. 3

6 3. General purpose Reduced Disclosure Requirements (RDR) All entities producing a GPFR in accordance with the AAS must comply with the recognition, measurement, presentation and disclosure requirements of the accounting standards, if material. The cost and subjectivity involved has resulted in a number of entities defaulting to special purpose to avoid this effort, even though the entity might be a Reporting Entity. The Reduced Disclosure Requirements (RDR) regime was introduced as a second tier (Tier 2) general purpose alternative to address this anomaly. Tier 2 RDR allows a Reporting Entity to produce a GPFR without the need to fully comply with all the disclosure requirements of the AAS. Unfortunately, this alternative cannot be applied by entities that have public accountability (Tier 1). This includes disclosing entities, co-operatives that issue debentures, registered managed investment schemes, most superannuation plans, authorised deposit-taking institutions, and Australian Government and State, Territory and Local Government entities. An entity may also be compelled to prepare GPFRs in accordance with Tier 1 through other regulation or another mandate. Diagram 3: Differential reporting and the Reporting Entity concept 4

7 Disclosures The disclosure requirements under Tier 2 are the minimum required to achieve the common needs of individual users, if material. In particular, disclosures focus on information about: Short term cash flows, obligations, commitments and contingencies, Liquidity and solvency, Measurement uncertainty, Accounting policy choices, Disaggregation of amounts in the financial statements, and Transactions and other events encountered by such entities. Disclosure items that have generally been omitted under Tier 2 include: Detailed narrative disclosures (e.g. financial instrument risk disclosures), Disclosures related to measurement (e.g. Level 3 disclosures for fair value measurement), Supplementary disclosures (e.g. other disclosures related to associated, joint arrangements and subsidiaries), Australian-specific disclosures (e.g. audit fees). The third statement of financial position required to be presented when there has been a retrospective restatement has also been omitted under Tier 2. Entities may include additional disclosures. Tier 1 entities must include all the relevant disclosures in the AAS, if material. 4. Special purpose The introduction of RDR has not eliminated the use of SPFRs, but it has focused attention on those entities that continue to produce a SPFR in spite of evidence that this may not be appropriate. This concern has been raised at federal, state and territory levels, in particular by the Australian Securities and Investments Commission (ASIC), the Australian Charities and Not-for-Profits Commission (ACNC), and by state and territory registries responsible for not-for-profit associations. Entities that prepare SPFRs must give special attention to the assessment of whether the entity is a Reporting Entity. If an entity is required to lodge its financial reports with a regulator, this will increase the potential for dependent users as part of the Reporting Entity assessment, especially if the financial reports are publically accessible. 5

8 If the decision is made to prepare a SPFR, the rationale for the decision should be recorded for every year that a SPFR is prepared. Companies Companies regulated by ASIC must comply with the true and fair requirement within the Corporations Act, When an entity is required to prepare and lodge financial reports with ASIC in terms of Chapter 2M of the Corporations Act, and the entity prepares SPFR, the company must take into consideration the requirements of Regulatory Guide 85 3 which, at a minimum, requires compliance with: All recognition and measurement requirements in the AAS, All presentation and disclosure requirements of the following standards: AASB 101 Presentation of Financial Statements AASB 107 Statement of Cash Flows AASB 108 Accounting Policies, Changes in Accounting Errors and Estimates AASB 1048 Application and Interpretation of Standards AASB 1054 Australian Additional Disclosures AASB 1031 Materiality Any additional disclosure requirements in order to give a true and fair view and meet the needs of the users. This requirement doesn t extend to financial statements for other purposes (for example, for internal management use) or where there are exemptions (for example, some grandfathered companies). But the company might still find these requirements to be relevant if the financial statements have a fair presentation requirement. Charities All charities that are registered with the ACNC must comply with the ACNC s reporting requirements. Broadly speaking, the Reporting Entity concept is applied by all large and medium charities. For these financial reports, the ACNC also requires all presentation and disclosure requirements of the six accounting standards referred to above. If the registered charity is not preparing a GPFR, the charity must generally still comply with the fair presentation requirement. Entities may include additional disclosures that meet the needs of the users. 3 ASIC Regulatory Guide 85 Reporting requirements for non-reporting entities, click here. 6

9 Other entities Entities other than companies and registered charities might still be required to prepare financial reports that comply with AAS. This is often the case, for example, when entities such as Incorporated Associations are required to lodge their financial report with a regulatory authority. If the entity is not preparing a GPFR, the entity must generally still comply with the fair presentation requirement. Entities may include additional disclosures that meet the needs of the users. Transition AASB contains detailed guidance how an entity would transition from SPFR to GPFR, or move between the tiers. The standard contains decision trees and detailed transitions tables. 4 AASB 1053 Application of Tiers of Australian Accounting Standards, click here. 7

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