The Concept of a Reporting and Non-Reporting Entity
The definition of a reporting entity is an entity where it is reasonable to expect that there are users dependent on a general purpose financial report (GPFR) to gain an understanding of the financial position and performance of the entity, and to make decisions based on this financial information and other information contained in the financial report. These users could be shareholders, members, employees, creditors, lenders or potential investors. A non-reporting entity is where those charged with governance have determined that there are no users dependent on a GPFR. In this situation, a non-reporting entity is permitted to prepare a special purpose financial report and not a GPFR.
Accordingly, it is very important for those charged with governance to document whether an entity has users dependent on GPFRs to enable them to define the entity as either reporting or non-reporting. This will then determine the financial reporting framework to be used. Examples of reporting entities include listed public companies, large private companies with external shareholders who have no access to financial information other than the annual financial report and public interest entities such as educational institutions. Examples of a non-reporting entity include private companies with a small number of shareholders all of whom are employed in the management of the business, not-for-profit associations and very small private companies.
If a particular entity is defined as a reporting entity it is required to prepare a GPFR. This means that all Australian Accounting Standards must be applied in the preparation of the financial report. However, if an entity is defined as a non-reporting entity it only needs to prepare a special purpose financial report, which does not need to apply all of the Australian Accounting Standards. A special purpose financial report only needs to apply the measurement and recognition Australian Accounting Standards with limited disclosure.
There are benefits and risks associated with each reporting framework. Arguably the most important risk to address is whether a particular entity is correctly defined as either a reporting or non-reporting entity. If the definition of the entity is incorrect the Australian Securities and Investments Commission (ASIC) will investigate those charged with governance for preparing an incorrect financial report and therefore breaching the reporting requirements of the Corporations Act 2001 and Australian Accounting Standards. The lesson here is to make sure that the entity is correctly defined as either reporting or non-reporting and match the correct financial reporting framework.
Those charged with governance should also explore the benefits of producing a GPFR even though the entity is non-reporting in nature. There may be opportunities for potential new users to learn more about the entity and its activities and operations. Or there may be stakeholders that value the additional information provided in a GPFR. The downside to this is the cost of preparing a GPFR which would be significantly more than a special purpose financial report.
Some listed companies use a GPFR as a marketing document to promote their activities and demonstrate their social responsibility and standing within the community. Non-reporting activities could also produce a GPFR to promote themselves in a similar way.
Another risk that needs to be explored by those charged with governance is the level of disclosure in a GPFR which may inadvertently provide information to a competitor. It is essential to ensure that if the reader possibly includes a competitor looking for a competitive advantage, then careful attention needs to be made in the preparation of the GPFR to ensure its disclosure is minimised to that required by statutory rules and guidelines.
The concept of a Reporting and Non-Reporting Entity and the significance of the definition is important to the financial report prepared by an entity and the associated benefits and risks. It is necessary that those charged with governance understand the concept and seek outside advice where needed to ensure that their decision is appropriate and correct.