What’s “Special” About The End Of Special Purpose Financial Statements?

By Hayley Keagan

02 May 2019

A lot of companies are hearing things along the lines of “you will all need to prepare general purpose financial statements” and “the end of special purpose financial statements is coming!”.  But it is not necessarily all doom and gloom. PKF can help you clear the clouds on the pending amendments and provide insight into the real changes and how will they affect you. 

  1. Why the change?

In Australia, we adopt the International Financial Reporting Standards (IFRS) basis of financial reporting. This means that every time you refer to an AASB accounting standard, it has come from the international equivalent IFRS standard. By taking this approach, Australian businesses preparing financial statements under AASBs also conform with IFRS financial reporting which is the basis used by a majority of international businesses.

The body who releases the IFRS standards (the International Accounting Standards Board or IASB) recently made changes to the framework for how financial statements are prepared, the so-called conceptual framework. So, if Australia is to maintain its IFRS basis of accounting, our framework also needs to change to align with the international framework.

  1. How does this relate to special purpose financials?

Australia is the only country that allows general purpose and so-called special purpose financial statements to be prepared. While in some other countries – such as the US or the UK – a separate financial reporting framework (non-IFRS) is available, this is not an option in Australia for legislative reasons. For Australia to maintain a single framework based on IFRS there will be only one way to prepare a financial report in accordance with accounting standards and that is by adopting all the applicable IFRS standards.

If we do not revise our own framework to align with the international framework, Australia will not be able to claim its IFRS compliance. Whilst this may not affect all businesses, the impact on those who do business internationally could be detrimental. Comparability and understandability of our financial reports need to be internationally recognised to allow our businesses to remain competitive.

  1. What will it change?

After we revise our framework, there will no longer be a distinction between “reporting” and “non-reporting” entities. This means all financials to be prepared in accordance with accounting standards will, in fact, be “general purpose”. The concept of special purpose financial reports will no longer be able to be applied where a business is required to prepare its financial report in accordance with accounting standards. 

  1. Does this mean we now prepare financials that look like Rio Tinto’s or Macquarie Banks financial reports?

No. Companies that previously prepared only special purpose financial reports will be allowed to prepare financial statements with a reduced amount of disclosure. This will hopefully result in the same amount of disclosures that are currently being prepared. The AASB is currently working towards releasing examples of how this may look and along the way they will work with those companies who are impacted to listen to their needs regarding any transitional issues.

  1. Do we need to prepare consolidated financial reports now?

Most likely, yes. There is still ongoing debate regarding whether consolidation is considered to be a “recognition and measurement” standard or a “presentation and disclosure” standard. This is important as the AASB is able to grant relief for disclosure requirements, however, relief for the way in which transactions and balances are recognised and measured is not possible. Current debates are leaning towards consolidation being considered a recognition and measurement requirement which will, therefore, result in all companies needing to prepare consolidated accounts if they are to comply with accounting standards.

  1. When does it all happen?

As you can now see, the AASB is still busy working on this project to resolve all potential issues (such as consolidation) and create a level of disclosure that will not cause unnecessary burden. Currently, there are no rules drafted for what the change will look like. However, the AASB has indicated that the changes will be made and applicable for reporting periods beginning on or after 1 January 2021. Meaning you may be preparing your first general purpose financial report for the year ended 31 December 2021 or 30 June 2022. 

  1. How can I prepare?

Follow PKF on social media and keep updated through your PKF adviser, alternatively reach out to the PKF technical team for a discussion on your particular situation so that we can alert you as soon as the AASB releases relevant information. If you currently prepare separate financial reports and are not consolidating subsidiary financials, start the discussion early as the impact for these companies is greater.

The AASB is also publishing information on the project to their website here and is performing outreach activities where you can submit your views here.

As the time for change gets nearer, we will be here to support your business through the transition to ensure you remain compliant.

Fun facts:

  • Around 75% of special purpose financial reports currently comply with recognition and measurement requirements of accounting standards (ignoring consolidation).
  • Australia is the only country that has a reporting and non-reporting entity definition – with non-reporting entities being allowed to prepare special purpose financial statements.
  • Current debate is occurring as to whether the process of consolidation under accounting standards is a “recognition and measurement” requirement or simply a “presentation and disclosure” need.