General Purpose and Special Purpose financial reports have been a part of Australia’s financial reporting framework for over 25 years. Changes are now afoot.
New reporting standards to improve transparency, comparability and consistency of financial statements are expected to apply from July 2021. These standards have been adopted to bring Australian financial reporting standards within the framework of the International Financial Reporting Standards (IFRS).
It’s clear that industry is not well prepared for these changes, based on feedback from professionals involved in the financial planning supply chain. For many accounting firms who have provided these reports to clients in the past, the time to seek specialist external support is fast approaching.
What changes are anticipated?
AASB 2020-2 removes the ability of for-profit entities with reporting requirements requiring compliance with Australian Accounting Standards to prepare Special Purpose Financial Statements. These changes will affect:
- Large Proprietary companies* including grandfathered entities
- Unlisted public companies (other than companies limited by guarantees)
- Small foreign-controlled companies
- Australian Financial Services Licensees (AFSL)
- Small proprietary companies with crowd-sourced funding
- Trusts where the trust deed is created on or after 1st July 2021 and there is a requirement to prepare financial statements in accordance with AAS.
AASB 1060 provides simplified disclosures for all for-profit entities who are no longer able to prepare SMSFs because of 2020-2 and for-profit and NFP entities that currently prepare Tier 2 General Purpose Statements using the AASB’s reduced disclosure regime (RDR).
The new standard does not currently apply to for-profit entities whose financial reporting requirements do not make reference to compliance with AAS. However, it is likely that over time, exemptions will be withdrawn.
At this time, private sector NFP’s and public sector entities are not affected. However, the AASB is considering the adoption of a Tier 3 accruals-based reporting system for smaller NFP’s and a cash-based Tier 4 solution for the smallest NFP’s.
How long will entities have to comply with the new regime?
Both AASB 2020-2 and AASB 1060 apply to financial years beginning on or after 1st July 2021.
Entities affected are being encouraged by the AASB to adopt these new guidelines in the current financial year through transactional relief from disclosing comparative information once the new regime commences.
Early adoption is permitted and, to encourage early adoption, the AASB is providing specific transitional relief from disclosing comparative information once the new regime commences. This is only available to entities who choose this option now.
Is the industry prepared for these changes?
In November 2019, CAANZ asked 500 professionals involved in the financial reporting supply for feedback on the proposed changes to special purpose reporting.
- Respondents indicated that their use of special purpose reports was widespread. Over 60% felt that the cost of removing SAC1 would outweigh the benefits while around 30% were convinced that the benefits would outweigh the costs.
- Over 40% of respondents anticipated that, for each set of financial statements prepared, the reform would cost an additional $501 to $5000 in initial transition, ongoing preparation and ongoing audit costs.
- Key transition challenges were identified in the areas of leasing, related parties, financial instruments, consolidation, impairment and revenue.
- Just 33% of respondents believed they had the internal resources to implement these changes. An additional 48% felt they could need external support and 19% said they would definitely need external support.
What do affected businesses and accounting firms need to consider now?
From 1 July 2021, SPFR’s will no longer be able to be applied where a business is required to prepare its financial reports in accordance with accounting standards.
Most affected businesses will require external support with the implementation of new reporting requirements. It’s clear that most clients of accounting firms represent the smaller end of town. However, most accounting firms will certainly have clients who may be affected by the new regime, especially in relation to Trusts (including Property Investment and Self-Managed Superannuation Trusts) and AFSL’s.
Accounting firms who have provided these services to clients to date may well be unable to continue to provide support with transition to the new standards. For these firms, the best option may be to seek external support from specialists.
If you would like further information on how these changes affect you and your clients, contact the team at National Audits Group
Steven Watson | National Audits Group | https://www.audits.com.au/
Future of Special Purpose Reporting Survey. November 2019. CAANZ
The Time Has Come. Changes to Australian Financial Reporting. EY. 2020
CAANZ | CPA Australia Joint Fact Sheet – 30 June 2020
AASB – Amendments to Australian Accounting Standards – Removal of SPFS for certain for-profit private sector entities
- ATO releases SMSF Auditor Independence Guide – What should you do? - 25 March 2021
- The Future of Special Purpose Reporting - 25 February 2021
- Special Purpose Financial Statements – New Financial Reporting Regime - 2 December 2020