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AASB 2019-4 Standards/Accounting & Auditing as made
This instrument amends AASB 1054 Australian Additional Disclosures (May 2011) to require disclosures about the accounting policies applied in special purpose financial statements of not-for-profit private sector entities.
Administered by: Treasury
Exempt from sunsetting by the Legislation (Exemptions and Other Matters) Regulation 2015 s12 item 18
Registered 05 Dec 2019
Tabling HistoryDate
Tabled HR04-Feb-2020
Tabled Senate04-Feb-2020


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ISSN 1036-4803


Contents

PREFACE

ACCOUNTING STANDARD

AASB 2019-4 AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS – DISCLOSURE IN SPECIAL PURPOSE FINANCIAL STATEMENTS OF NOT-FOR-PROFIT PRIVATE SECTOR ENTITIES ON COMPLIANCE WITH RECOGNITION AND MEASUREMENT REQUIREMENTS

 

from paragraph

OBJECTIVE                                                                                                                                                                              1

APPLICATION                                                                                                                                                                         2

AMENDMENTS TO AASB 1054                                                                                                                                          6

COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT                                                                                  8

 

IMPLEMENTATION GUIDANCE AND ILLUSTRATIVE EXAMPLES FOR NOT-FOR-PROFIT PRIVATE SECTOR ENTITIES                                                                                                                                                                                    

BASIS FOR CONCLUSIONS

 

Australian Accounting Standard AASB 2019-4 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements is set out in paragraphs 1 – 8. All the paragraphs have equal authority.

 


Preface

Standards amended by AASB 2019-4

This Standard makes amendments to AASB 1054 Australian Additional Disclosures (May 2011).

Main features of this Standard

Main requirements

This Standard amends AASB 1054 to require not-for-profit private sector entities that are required to apply AASB 1054 (including those required by legislation to do so) and are preparing special purpose financial statements to disclose information about those financial statements, including information that enables users of the financial statements to understand whether or not the material accounting policies applied in the financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards.

In particular, the amendments to AASB 1054 require a not-for-profit private sector entity to:

(a)          disclose the basis on which the decision to prepare special purpose financial statements was made;

(b)          where the entity has interests in other entities – disclose either:

(i)            whether or not its subsidiaries and investments in associates or joint ventures have been consolidated or equity accounted in a manner consistent with the requirements set out in AASB 10 Consolidated Financial Statements or AASB 128 Investments in Associates and Joint Ventures, as appropriate.  If the entity has not consolidated its subsidiaries or equity accounted its investments in associates or joint ventures consistently with those requirements, it shall disclose that fact, and the reasons why; or

(ii)          that the entity has not assessed whether its interests in other entities give rise to interests in subsidiaries, associates or joint ventures, provided it is not required by legislation to make such an assessment for financial reporting purposes and has not made such an assessment;

(c)          for each material accounting policy applied and disclosed in the financial statements that does not comply with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128), disclose an indication of how it does not comply; or if such an assessment has not been made, disclose that fact; and

(d)          disclose whether or not the financial statements overall comply with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) or that such an assessment has not been made.

Application date

This Standard applies to annual reporting periods ending on or after 30 June 2020, with earlier application permitted.

 


Accounting Standard AASB 2019-4

The Australian Accounting Standards Board makes Accounting Standard AASB 2019-4 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements under section 334 of the Corporations Act 2001.

 

Kris Peach

Dated 21 November 2019

Chair – AASB

Accounting Standard AASB 2019-4

Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements

Objective

1              This Standard amends AASB 1054 Australian Additional Disclosures (May 2011) to add requirements for not‑for‑profit private sector entities that are required to apply AASB 1054 and are preparing special purpose financial statements to disclose information about those financial statements, including information that enables users of the financial statements to understand whether or not the accounting policies applied in the financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards.

Application

2              The amendments set out in this Standard apply to entities and financial statements in accordance with the application of AASB 1054 set out in AASB 1057 Application of Australian Accounting Standards.

3              This Standard applies to annual reporting periods ending on or after 30 June 2020.

4              This Standard may be applied to annual reporting periods ending before 30 June 2020.  When an entity applies this Standard to such an annual period, it shall disclose that fact.

5              This Standard uses underlining, striking out and other typographical material to identify some of the amendments to a Standard, in order to make the amendments more understandable.  However, the amendments made by this Standard do not include that underlining, striking out or other typographical material.  Ellipses (…) are used to help provide the context within which amendments are made and also to indicate text that is not amended.

Amendments to AASB 1054

6              Paragraphs 9A and 9B, and a related heading, are added as follows (new text is underlined):

General Purpose or Special Purpose Financial Statements

Information about special purpose financial statements

9A            A not-for-profit private sector entity that prepares special purpose financial statements shall:

(a)                   disclose the basis on which the decision to prepare special purpose financial statements was made;

(b)                   where the entity has interests in other entities – disclose either:

(i)                     whether or not its subsidiaries and investments in associates or joint ventures have been consolidated or equity accounted in a manner consistent with the requirements set out in AASB 10 Consolidated Financial Statements or AASB 128 Investments in Associates and Joint Ventures, as appropriate. If the entity has not consolidated its subsidiaries or equity accounted its investments in associates or joint ventures consistently with those requirements, it shall disclose that fact, and the reasons why; or

(ii)                   that the entity has not determined whether its interests in other entities give rise to interests in subsidiaries, associates or joint ventures, provided it is not required by legislation to make such an assessment for the purpose of assessing its financial reporting requirements and has not made such an assessment;

(c)                   for each material accounting policy applied and disclosed in the financial statements that does not comply with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128), disclose an indication of how it does not comply; or if such an assessment has not been made, disclose that fact; and

(d)                   disclose whether or not the financial statements overall comply with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) or that such an assessment has not been made.

9B            Implementation guidance and illustrative examples for not-for-profit private sector entities accompanies this Standard. It illustrates the application of the requirements in paragraph 9A and their relationship to the requirements in AASB 101 Presentation of Financial Statements for the disclosure of an entity’s significant accounting policies.

7              Implementation guidance and illustrative examples for not-for-profit private sector entities is attached to accompany AASB 1054 as set out on pages 7 to 14.

Commencement of the legislative instrument

8              For legal purposes, this legislative instrument commences on 29 June 2020.


Implementation guidance and illustrative examples for not-for-profit private sector entities

The following implementation guidance and illustrative examples accompany, but are not part of, AASB 1054 Australian Additional Disclosures. They illustrate aspects of AASB 1054 but are not intended to provide interpretative guidance.

IG1                The AASB has prepared this guidance and examples to explain and illustrate the application of the requirements in paragraph 9A of this Standard and their relationship to the requirements in AASB 101 Presentation of Financial Statements for the disclosure of a not-for-profit private sector entity’s significant accounting policies.  These requirements apply to entities applying this Standard, including those required by legislation to comply.  An entity preparing special purpose financial statements that is not specifically required to comply with AASB 1054 may elect not to comply with these requirements, however, is encouraged to do so.

IG2                The table below has been provided for ease of reference to illustrate the types of entities that would be generally within the scope of the requirements in paragraph 9A of this Standard, but some entities may have different specific requirements.

#

Entity  

In scope/out of scope

1

For-profit private and for-profit public sector entities preparing special purpose financial statements

Not in scope

2

Not-for-profit private sector entities

 

 

Charities registered with the Australian Charities and Not-for-profits Commission (ACNC)

 

 

-          that have annual revenue of $250,000 or more (ie medium and large charities), preparing special purpose financial statements and required to comply with the ACNC reporting requirements for such financial statements

In scope, must comply with AASB 1054

 

-          that have annual revenue of less than $250,000 (ie small charities)

Not in scope

 

-          that have annual revenue of $250,000 or more, preparing special purpose financial statements and not required to comply with the ACNC reporting requirements for such financial statements

Not in scope

 

Not-for-profit entities not registered with ACNC

 

 

-          lodging special purpose financial statements with the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001 (eg companies limited by guarantee)

In scope, must comply with AASB 1054

 

-          required by Federal or State/Territory legislation to prepare financial statements in accordance with Australian Accounting Standards or accounting standards (eg incorporated associations, co-operatives and charitable fundraising organisations), that are preparing special purpose financial statements and not specifically required to comply with AASB 1054

Not in scope

3

Other not-for-profit entities, including not-for-profit public sector entities, entities not specified above and entities not required to comply with AASB 1054 by legislation or otherwise

Not in scope

IG3                The following flowchart summarises some of the key decisions in determining how to apply the disclosure requirements in paragraph 9A of this Standard in relation to special purpose financial statements. 

IG4                In disclosing the information required by paragraph 9A of this Standard, entities are not expected to provide quantitative information, or reconciliations, where accounting policies do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

 

 

Chart 1 – Not-for-profit private sector entities preparing special purpose financial statements

Disclosure of accounting policies

IG5                Not-for-profit private sector entities required to apply AASB 1054 in their special purpose financial statements (including those lodged with ASIC or the ACNC), whether consolidated or unconsolidated, are also required to apply AASB 101 and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, including:

(a)                   paragraph 15 of AASB 101, which requires the fair presentation of financial statements;

(b)                   paragraphs 10-12 of AASB 108, which address the selection of accounting policies in the absence of an Australian Accounting Standard that specifically applies to a transaction, other event or condition; and

(c)                   paragraph 117 of AASB 101, which requires disclosure of significant accounting policies comprising the measurement basis (or bases) and the other accounting policies used that are relevant to an understanding of the financial statements.

As a result, sufficient information to enable users of special purpose financial statements to obtain an understanding of the accounting policies adopted is required to be disclosed. This includes where an entity has selected and applied accounting policies that differ from the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 Consolidated Financial statements or AASB 128 Investments in Associates and Joint Ventures).

Accounting policy assessment step 1:  Assessing compliance with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) at the accounting policy level

IG6                Paragraph 9A(c) of this Standard requires an entity, for each material accounting policy applied and disclosed in the financial statements to first assess, based on already known information, whether that policy complies with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128), does not comply, or compliance has not been assessed. An entity is not expected to perform a detailed assessment of recognition and measurement differences if that has not already been performed.

IG7                Using those assessments:

(a)                   an entity discloses for those policies not complying with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) or not assessed for compliance, an indication of how it does not comply or that such an assessment has not been made; or

(b)                   if the material accounting policies applied and disclosed in the financial statements comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) no additional disclosures are required.

IG8                Where an entity’s accounting policies do not comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128), the presentation of the disclosure providing an indication of that non-compliance may differ depending on the extent of non-compliance.  Entities may choose to provide disclosures for non-compliance and non-assessed policies in one place or placed with each accounting policy disclosed in the financial statements as appropriate.  For example:

(a)                   an entity may choose to disclose which Australian Accounting Standards they have not complied with and provide details of the non-compliance in one place for example within the basis of preparation note, where the instance of non-compliance are not extensive (see Example 4 below); or alternatively

(b)                   where the instances of non-compliance are extensive, details of the non-compliance may be provided within the relevant accounting policy note (see Example 5 below).

Accounting policy assessment step 2:  Disclosing whether or not the financial statements comply overall with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) or that compliance has not been assessed

IG9                Based on the assessment in paragraph 9A(c), paragraph 9A(d) then requires an entity to disclose whether or not overall the material accounting policies applied and disclosed in the financial statements comply (that is there are no instances of non-compliance or non-assessment) (see Examples 1, 2 and 3 below) or do not comply (there are one or more instances of non-compliance) with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128)  (see Examples 4, 5 and 6 below), or that an assessment has not been made (there are one or more instances of compliance / non-compliance not having been assessed) (see Examples 6 and 7 below). 

IG10            Based on the AASB’s research, some of the most frequent examples of non-compliance with recognition and measurement requirements in Australian Accounting Standards include:

(a)                   in accounting for income, recognition of grant income for a specified time period, or which has no conditions that need to be met, is deferred until the related expenses are incurred, or all grant income is deferred, without assessing whether a performance obligation exists, which does not comply with AASB 15 Revenue from Contracts with Customers or AASB 1058 Income of Not-for-Profit Entities;

(b)                   in accounting for property, plant and equipment, assets were not depreciated based on their useful lives, which does not comply with AASB 116 Property, Plant and Equipment;

(c)                   in accounting for impairments, the recoverable amount for impairment testing was calculated on an undiscounted basis, which does not comply with AASB 136 Impairment of Assets; and

(d)                   in accounting for employee benefits, the long-term provision for long service leave is not recognised, or not discounted, which does not comply with AASB 119 Employee Benefits.

Application of the consolidation and equity accounting requirements

IG11            In relation to paragraph 9A(b) of this Standard, information about the accounting for subsidiaries and investments in associates and joint ventures is fundamental for a user’s understanding of the scope of the financial statements. Some entities are required to determine their financial reporting requirements based on the application of recognition and measurement requirements in Australian Accounting Standards, including consolidation, for example a proprietary company subject to section 45A of the Corporations Act 2001 is required to determine whether it is a small or large proprietary company on a consolidated basis (ie the parent and the entities it controls (subsidiaries)) in accordance with the accounting standards even if the standards do not otherwise apply to some or all of the companies concerned.  Other entities, typically lodging financial reports with the ACNC, make their assessments based on individual entity circumstances only. In instances where legislation does not require assessment on a consolidated basis, and an entity has not made an assessment of whether its interests in other entities are subsidiaries, associates or joint ventures, an entity shall make a statement that they have not been assessed (see Example 2 below).

IG12            Exemptions from consolidation of subsidiaries are provided in AASB 10, paragraphs 4(a) and Aus4.1 (as modified by paragraph Aus4.2), including when the entity is a wholly-owned subsidiary and its ultimate parent produces consolidated financial statements that are available for public use and comply with accounting standards. Directors preparing special purpose financial statements might have other reasons for non-consolidation of some or all of an entity’s subsidiaries, and paragraph 9A(b) requires these reasons to be disclosed (see Example 3 below).

IG13            The following illustrative examples are provided:

Scenario/Example

1

2

3

4

5

6

7

Reporting Framework

ACNC

ü

ü

ü

ü

ü

Corporations Act 2001

 

 

 

ü

 

ü

 

Subsidiaries

Yes

ü

Not

assessed

ü

 

No

 

ü

ü

ü

ü

Consolidated

Yes

ü

n/a

 

n/a

n/a

n/a

n/a

No

 

Partially

 

ü

Associates / Joint Ventures

Yes

ü

Not assessed

ü

 

 

 

 

No

 

ü

ü

ü

ü

Equity accounted

Yes

ü

 

 

n/a

n/a

n/a

n/a

No

 

ü

 

Partially

 

 

ü

Material accounting policies comply with all recognition and measurement requirements (except for AASB 10 or AASB 128)

Yes

ü

ü

ü

 

 

 

 

No

 

 

 

ü

ü

ü

 

Not assessed

 

 

 

 

 

ü

ü

Financial statements overall comply with all recognition and measurement requirements (except for AASB 10 or AASB 128)

Yes

ü

ü

ü

 

No

 

 

 

ü

ü

ü

 

Not assessed

 

 

 

 

 

 

ü

IG14            The following examples illustrate how an entity might apply the disclosure requirements in paragraph 9A of this Standard within the context of the requirements in AASB 101 and AASB 108 referred to in paragraph IG5 above to the special purpose financial statements they prepare, on the basis of the limited facts presented.  Although some aspects of the examples might be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern need to be evaluated when applying disclosure requirements of this Standard.

#

Example

Illustrative disclosure

1

Compliance with all recognition and measurement requirements in Australian Accounting Standards including AASB 10 and AASB 128

Charity A Inc, a not-for-profit parent, prepares consolidated special purpose financial statements that:

·         consolidate all its subsidiaries in a manner consistent with the requirements set out in AASB 10;

·         equity account all its investments in associates and joint ventures in a manner consistent with the requirements set out in AASB 128; and

·         apply accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards.

Charity A Inc is a not-for-profit entity.  The Members of the Governing / Management Committee are of the opinion that the Association is not a reporting entity as users may obtain the financial information they require upon request. These special purpose financial statements have therefore been prepared in order to meet the requirements of the [Australian Charities and Not-for-profits Commission Act 2012 / insert further details of the not-for-profit reporting framework under which the financial statements are prepared].

Charity A Inc has consolidated all its subsidiaries consistent with the requirements set out in AASB 10 Consolidated Financial Statements and equity accounted for its investments in associates and joint ventures in a manner consistent with the requirements set out in AASB 128 Investments in Associates and Joint Ventures.

These consolidated special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards. 

2

Compliance with all recognition and measurement requirements in Australian Accounting Standards except for AASB 10 and AASB 128 (interests in other entities not assessed)

Charity B Inc, a not-for-profit entity, prepares special purpose financial statements that:

·         do not consolidate or equity account any entities as Charity B Inc did not determine whether its interests in other entities give rise to interests in subsidiaries or investments in associates or joint ventures; and

·         apply accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards.

The legislative framework in which Charity B Inc operates does not require it to identify subsidiaries, associates or joint ventures to determine its financial reporting requirements.

Charity B Inc is a not-for-profit entity.  In the opinion of the Management Committee, Charity B Inc is not a reporting entity as its users may request the financial information they need. These special purpose financial statements have been prepared for distribution to members and for the purposes of fulfilling the reporting requirements under the [Australian Charities and Not-for-profits Commission Act 2012 / insert further details of the not-for-profit reporting framework under which the financial statements are prepared].

Charity B Inc has not assessed whether it has relationships with other entities which, for financial reporting purposes, might be considered subsidiaries, associates or joint ventures as it is not required by the [Australian Charities and Not-for-profits Commission Act 2012] to do so.

These special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards (except for the requirements set out in AASB 10 Consolidated Financial Statements or AASB 128 Investments in Associates and Joint Ventures). 

3

Compliance with all recognition and measurement requirements in Australian Accounting Standards except for AASB 10 and AASB 128 (some subsidiaries not consolidated and some associates and joint ventures not equity accounted)

MNO Ltd, a parent that is a charity, prepares partially consolidated special purpose financial statements that:

·         consolidate some but not all of its subsidiaries (and are therefore inconsistent with the requirements set out in AASB 10);

·         do not equity account all its investments in associates and investments in joint ventures in a manner consistent with the requirements set out in AASB 128; and

·         apply accounting policies to those partially consolidated financial statements that comply with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128).

MNO Ltd, a not-for-profit entity, has prepared special purpose financial statements as, in the opinion of the Directors, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. Accordingly, these financial statements have been prepared to satisfy the Directors’ reporting requirements under the [Australian Charities and Not-for-profits Commission Act 2012 / insert further details of the not-for-profit reporting framework under which the financial statements are prepared].

These financial statements do not consolidate all of MNO Ltd’s subsidiaries or equity account all its investments in associates and investments in joint ventures as the Directors [did not perform a detailed assessment of all of MNO Ltd’s relationships with other entities, and instead elected to only consolidate those entities MNO Ltd has a 100% ownership interest in / insert an explanation of why some subsidiaries, associates and joint ventures are not consolidated / equity accounted.]

MNO Ltd’s partially consolidated special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards (except for the requirements set out in AASB 10 Consolidated Financial Statements or AASB 128 Investments in Associates and Joint Ventures).

4

Known non-compliance with all recognition and measurement requirements in Australian Accounting Standards that is not extensive

XYZ Ltd, a not-for-profit entity that is not a charity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore requirements set out in AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply material accounting policies that do not comply with all the recognition and measurement requirements in Australian Accounting Standards. The differences are not extensive.

XYZ Ltd, a not-for-profit entity, has prepared special purpose financial statements as, in the opinion of the Directors, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. Accordingly, these financial statements have been prepared to satisfy the Directors’ reporting requirements under the Corporations Act 2001.

These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

The recognition and measurement requirements that have not been complied with are those specified in AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities as, in accounting for income, recognition of all grant income has been deferred [[until the related expenses are incurred without assessing whether there are enforceable performance obligations to transfer a good or service to a third party which are sufficiently specific to know when the performance obligation has been satisfied] / [where the grant is for multi-years without assessing whether there is a performance obligation or the grantor retains control of the remainder of the grant at the end of each year] / insert further details including an indication of how material recognition and measurement requirements in Australian Accounting Standards have not been complied with]. 

5

Known non-compliance with all recognition and measurement requirements in Australian Accounting Standards that is extensive

Charity D Inc, a not-for-profit entity, does not have any subsidiaries, associates or joint ventures (and therefore requirements set out in AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply material accounting policies that do not comply with all the recognition and measurement requirements in Australian Accounting Standards. Although the differences have not been quantified, they are extensive and an indication of the differences are presented with the appropriate note disclosing the accounting policy.

Charity D Inc, a not-for-profit entity, has prepared special purpose financial statements as, in the opinion of the Management Committee, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs.  Accordingly, these financial statements have been prepared to satisfy the Management Committee’s reporting requirements under the [Australian Charities and Not-for-profits Commission Act 2012 / insert further details of the not-for-profit reporting framework under which the financial statements are prepared].

These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

[The material accounting policies adopted in the special purpose financial statements are set out in notes X-Y and indicate how the recognition and measurement requirements in Australian Accounting Standards have not been complied with.

Note X: Revenue

All grant income has been deferred upon receipt and not recognised as revenue until the related expenses are incurred, without assessing whether enforceable performance obligations exist. This does not comply with AASB 15 Revenue from Contracts with Customers or AASB 1058 Income of Not-for-Profit Entities.

Note Y: Employee Benefits

Long-term provision recognised for long service leave has been measured on the undiscounted basis which does not comply with AASB 119 Employee Benefits.

…]

6

At least one material accounting policy not assessed for compliance with recognition and measurement requirements in Australian Accounting Standards (combined with known non-compliance with recognition and measurement requirements in Australian Accounting Standards)

MLK Ltd, a not-for-profit entity, does not have any subsidiaries, associates or joint ventures (and therefore requirements set out in AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply some material accounting policies that do not comply with the recognition and measurement requirements in Australian Accounting Standards and some material accounting policies that have not been assessed for compliance with the recognition and measurement requirements in Australian Accounting Standards.

MLK Ltd is a not-for-profit entity.  In the opinion of the Directors Charity E Ltd is not a reporting entity as its users may request the financial information they need.  These special purpose financial statements have been prepared for distribution to members and for the purposes of fulfilling the requirements of the Corporations Act 2001.

These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

The material accounting policies adopted in the special purpose financial statements include:

-       [deferring all grant income upon receipt and not recognising as revenue until the related expenses are incurred, without assessing whether enforceable performance obligations exist, which does not comply with AASB 15 Revenue from Contracts with Customers or AASB 1058 Income of Not-for-Profit Entities;

-       insert further details including an indication of how material recognition and measurement requirements in Australian Accounting Standards have not been complied with].

The material accounting policies disclosed in note X that have not been assessed for compliance with the recognition and measurement requirements of Australian Accounting Standards include:

-       Long-service leave; and

-       Impairment of assets.

7

At least one material accounting policy not assessed for compliance with recognition and measurement requirements in Australian Accounting Standards (all other material accounting policies comply with recognition and measurement requirements in Australian Accounting Standards)

Charity F Inc, a not-for-profit entity, does not have any subsidiaries, associates or joint ventures (and therefore requirements set out in AASB 10 and AASB 128 are not applicable)  and prepares special purpose financial statements that apply some material accounting policies that have not been assessed for compliance with the recognition and measurement requirements in Australian Accounting Standards. All other material accounting policies comply with the recognition and measurement requirements in Australian Accounting Standards.

Charity F Inc, a not-for-profit entity, has prepared special purpose financial statements as, in the opinion of the Management Committee, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs.  Accordingly, these financial statements have been prepared to satisfy the Management Committee’s reporting requirements under [the Australian Charities and Not-for-profits Commission Act 2012 / insert details of the not-for-profit reporting framework under which the financial statements are prepared].

Charity F Inc has not assessed whether these special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards.

[The material accounting policies disclosed in note X that have not been assessed for compliance with Australian Accounting Standards include:

-       Recognition of income; and

-       Long-service leave.]

OR

[The material accounting policies adopted in the special purpose financial statements are set out in notes X-Y and indicate how they have not been assessed for compliance with the recognition and measurement requirements in Australian Accounting Standards.

Note X: Revenue

All grant income has been deferred upon receipt and not recognised as revenue until the related expenses are incurred, and has not been assessed for compliance with the recognition and measurement requirements in Australian Accounting Standards.

Note Y: Employee Benefits

Long-term provision recognised for long service leave has been measured to reflect the directors best estimate of the amounts payable for those employees expected to achieve seven years of service at the reporting date, and has not been assessed for compliance with the recognition and measurement requirements in Australian Accounting Standards.]


Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, AASB 2019-4 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements.

Introduction

BC1              This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in this Standard. It sets out the reasons why the Board developed the Standard, the approach taken to developing the Standard and the bases for the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.

Background

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.

 

Significant issues

Scope

BC17          In deciding who should be required to make the disclosures proposed in ED 293, the Board considered The AASB’s For-Profit Entity Standard-Setting Framework and The AASB’s Not-for-Profit Entity Standard-Setting Framework, and decided the proposals would be consistent with both frameworks and therefore ED 293 proposed that they should apply to for-profit and not-for-profit entities.

BC18          In making this decision, the Board had particular regard to the following factors:

(a)     the uncertainty about whether or not the accounting policies applied in the financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards described in paragraph BC6 above, coupled with the findings of AASB Research Report 12 Financial Reporting Practices of For-Profit Entities Lodging Special Purpose Financial Statements (August 2019)[10] significantly adversely impacts financial statement users in both the for-profit and not-for-profit sectors;

(b)     financial statement users have noted during AASB outreach to date[11] the lack of, and need to improve, comparability, consistency, transparency and enforceability in special purpose financial statements;

(c)     the evidence of diversity in the application of, and compliance with, the recognition and measurement requirements in Australian Accounting Standards in special purpose financial statements noted in Research Report 11 (refer to paragraph BC6 above) and Research Report 12;[12]

(d)     the significant number of charities preparing special purpose financial statements and the low levels of explicit statements of compliance with the recognition and measurement requirements in Australian Accounting Standards therein (refer paragraph BC6 above); and

(e)     the requirements of Australian Auditing Standards as they relate to special purpose financial statements (refer to paragraph BC26 below).

BC19          When deciding which for-profit and not-for-profit entities should be required to make the disclosures proposed in ED 293, the Board considered whether the disclosures should be required by:

(a)     all entities preparing special purpose financial statements (including those preparing financial statements voluntarily); or

(b)     all entities preparing special purpose financial statements that are required by legislation or otherwise to comply with Australian Accounting Standards; or

(c)     only those entities preparing special purpose financial statements that are directly subject to AASB 101 and AASB 1054 Australian Additional Disclosures[13], as set out in paragraph 2 of AASB 1054 and paragraph 7 of AASB 1057 Application of Australian Accounting Standards, (and, indirectly, any entities required through legislation to comply with AASB 101 and AASB 1054, such as entities lodging special purpose financial statements with the ACNC as they are required by legislation to comply with AASB 101 and AASB 1054 (as noted in footnote 8 to paragraph BC12 above)).

BC20          The Board considered that while there was merit in requiring all entities required by legislation or otherwise to comply with Australian Accounting Standards preparing special purpose financial statements to make the disclosure proposed in ED 293 (ie those entities include paragraph BC19(b)), to do so was not warranted.  This is consistent with the current scope of Australian Accounting Standards and the Board’s role and expertise, which is to determine the appropriate accounting framework and accounting standards that should apply where legislation, regulation or other authority requires the preparation of financial statements that comply with Australian Accounting Standards.

BC21          The Board did acknowledge that if the disclosures were required only by entities subject to AASB 101 and AASB 1054, there may be a large number of entities preparing special purpose financial statements when required to comply with Australian Accounting Standards that would not be required to make the disclosures (eg entities outside the scope of the Corporations Act 2001 and entities not required to comply with the ACNC’s reporting requirements applying to special purpose financial statements).  The Board however made the observation that many of these entities are expected to fall within the scope of APES 205, as the intention of APES 205 is to set requirements for members[14] who are involved in the preparation, presentation, audit, review or compilation of financial statements for entities that are outside the scope of the Corporations Act 2001.  Therefore, to possibly mitigate (albeit not eliminate) concerns about entities outside the scope of AASB 101 and AASB 1054 not being required to make the disclosures, the matter was raised with staff of the APESB as to whether the APESB might consider, following its own due process, making any consequential amendments to APES 205 consistent with the amendments to the affected Australian Accounting Standard proposed in ED 293.  Subsequent to the issue of ED 293, the Board noted that the matter was considered by the APESB, and that the APESB were not proposing amendments to APES 205 (of a nature consistent with those proposed in ED 293) at that time, however they did consider it an important issue to seek stakeholder views on.  Accordingly, the Explanatory Memorandum to Exposure Draft 03/19 Proposed revisions to APESB Pronouncements included commentary on this matter and sought specific feedback from their stakeholders.  After considering this feedback, the APESB decided not to amend APES 205.

BC22          For the reasons outlined in paragraph BC20-BC21 above, the Board decided it was not necessary to broaden the application paragraphs of AASB 101 or AASB 1054, and therefore ED 293 proposed the amendment should apply in the manner described in paragraph BC19(c) above.

BC23          The Board then considered whether the disclosure requirement should be effected through AASB 101 or AASB 1054.  They were identified as the only two reasonable candidates as vehicles for housing the requirements because they already have related requirements: AASB 101 includes requirements relating to the disclosure of accounting policies and compliance with Standards, and AASB 1054 includes requirements relating to compliance with Australian Accounting Standards and explicitly refers to special purpose financial statements.  The Board’s preferred approach was to amend AASB 1054 because the amendment is Australian-specific, specifically relates to special purpose financial statements, and is consistent with the objective of AASB 1054 “… to set out Australian-specific disclosure requirements that are in addition to the disclosure requirements of International Financial Reporting Standards”.

Disclosures regarding the basis for the decision to prepare special purpose financial statements

BC24          Paragraph 9 of AASB 1054 requires an entity to disclose whether the financial statements are general purpose or special purpose.  The Board decided that entities should also be required to disclose the reasons why the preparation of special purpose financial statements was considered appropriate. 

BC25          In making this decision, the Board noted that APES 205 contains a requirement for entities to identify “the purpose for which the Special Purpose Financial Statements have been prepared”[15] and therefore entities within the scope of APES 205 should already be including this information in special purpose financial statements, however mandating it in an Australian Accounting Standard would help ensure users are provided with useful information.

BC26          The Board also noted the requirements of Australian Auditing Standards and the existing responsibilities of those charged with governance and auditors with respect to the selection and application of an entity’s financial reporting framework.  In particular, the Board noted the requirements in ASA 800 Special Considerations-Audits of Financial Reports Prepared in Accordance with Special Purpose Frameworks which for example require that “the auditor shall obtain an understanding of the steps undertaken by management to determine that the applicable financial reporting framework is acceptable in the circumstances”[16] and also ASA 700 Forming an Opinion and Reporting on a Financial Report which for example requires that “the auditor shall evaluate whether the financial report adequately refers to or describes the applicable financial reporting framework”.[17]

Disclosures regarding compliance with all the recognition and measurement requirements in Australian Accounting Standards

BC27          When deciding what information about compliance with all the recognition and measurement requirements in Australian Accounting Standards should be disclosed, the Board considered the following alternatives in developing ED 293:

Option

Information to be disclosed

Option 1

Contextual information about the entity, being where the entity has subsidiaries, investments in associates or investments in joint ventures, and whether or not they have been consolidated or equity accounted in a manner consistent with the requirements set out in Australian Accounting Standards. 

If the entity has not consolidated its subsidiaries or equity accounted its investments in associates or joint ventures in a manner consistent with the requirements set out in Australian Accounting Standards, the entity shall disclose that fact and the reasons why.  If the entity is a not-for-profit entity, and it has not determined whether or not its interests in other entities give rise to interests in subsidiaries, associates or joint ventures, the entity shall instead disclose that fact.

Option 2

An explicit statement as to whether or not the financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards and, if not, an indication of where they do not comply.

Option 3

Merely a binary statement regarding compliance or non-compliance with all the recognition and measurement requirements in Australian Accounting Standards, for example either that “the entity has complied with all the recognition and measurement requirements in Australian Accounting Standards” or “the entity has not complied with all the recognition and measurement requirements in Australian Accounting Standards”.

Option 4

Merely a statement of compliance with all the recognition and measurement requirements in Australian Accounting Standards that is, no statement would be required if an entity did not comply with all the recognition and measurement requirements in Australian Accounting Standards.

BC28          The Board decided that Options 1 and 2 together were most appropriate, as they best inform financial statement users about the special purpose financial statements and best address the issues identified in paragraphs BC2-BC12 above.

BC29          In considering the application of Australian Accounting Standards to special purpose financial statements, the Board noted that section 45A of the Corporations Act 2001 requires the assessment of thresholds for small and large proprietary companies to be determined on a consolidated basis (ie the parent and the entities it controls (subsidiaries)) in accordance with the accounting standards even if the standards do not otherwise apply to some or all of the companies concerned.  For the purposes of this section, the question of whether a proprietary company controls another entity is to be decided in accordance with the requirements of Australian Accounting Standards (ie AASB 10 Consolidated Financial Statements) even if the standards do not otherwise apply to the company. 

BC30          The Board considered whether an explicit statement that an entity does not have subsidiaries, or investments in associates or joint ventures was required.  The Board noted that entities preparing either Tier 1 or Tier 2 general purpose financial statements[18] are not required to make these statements and accordingly an explicit statement in these circumstances should not be required. 

BC31          The Board decided that in situations where an entity’s financial statements do not consolidate some or all of its subsidiaries, information about the consolidated financial statements of the entity’s parent is likely to be useful to enable financial statement users to at least be able to know if and where they can access some consolidated information, even if it is incorporated into a wider group.  While this requirement arguably improves transparency in financial reporting, the Board decided not to mandatorily require disclosure of this information as such information is currently not required to be provided by entities preparing Tier 2 general purpose financial statements.  The Board acknowledged that entities preparing Tier 2 general purpose financial statements would already be required to prepare consolidated financial statements and therefore such a disclosure would not be necessary as when preparing general purpose financial statements all subsidiaries must be consolidated (unless the parent entity applies the exemption in AASB 10).  Ultimately this is one of the notable differences between special purpose financial statements and general purpose financial statements, as in contrast, where an entity is preparing special purpose financial statements, users cannot be sure whether an entity did not consolidate its subsidiaries due to the exemption in AASB 10 or whether it was because it was determined that the group was not a reporting entity.

BC32          The Board also considered whether to require these entities to identify those subsidiaries that have not been consolidated.  Whilst the Board acknowledged that this information might be useful to users of the financial statements, the Board noted that for some entities, particularly those in the not-for-profit private sector, this disclosure might be unduly burdensome, such as where entities are not required to determine whether they have subsidiaries in accordance with AASB 10 to assess their financial reporting requirements.  Thus, on balance, the Board decided that ED 293 would not require entities to disclose the identity of subsidiaries that have not been consolidated.

BC33          The Board noted the general requirement in paragraph 117 of AASB 101 to disclose accounting policies provides financial statement users with an explanation of the basis upon which the financial statements have been prepared, but does not provide information regarding how those accounting policies compare with all the recognition and measurement requirements in Australian Accounting Standards.  Accordingly, the transparency of special purpose financial reporting is compromised. The Board therefore decided that it was necessary for an entity to explicitly disclose whether or not it complied with all the recognition and measurement requirements in Australian Accounting Standards and to supplement that disclosure with an indication of where they do not comply.

BC34          In relation to the requirement to provide an indication of where non-compliance exists (for example, where the entity has not provided for employee entitlements in a manner consistent with the requirements set out in AASB 119 Employee Benefits), the Board decided to express a broad principle (ie an indication of where the non-compliance exists) rather than take a more prescriptive approach (eg a description of the extent of non-compliance). This was because, in the Board’s view, the explanation of that disclosure requirement in paragraphs IG6-IG8 of the Implementation guidance and illustrative examples (as proposed in ED 293) and the implementation guidance and illustrative examples themselves attached to AASB 1054 as non-mandatory material (see paragraph BC36 below) provide sufficient guidance for preparers to understand the nature of the information that is to be disclosed.  As illustrated in the Implementation guidance and illustrative examples (as proposed in ED 293), the approach taken by the Board also leaves discretion for entities to determine how best to make the disclosure having regard to their particular circumstances and the needs of their users.

BC35          The Board did however confirm, that in disclosing the required information, the Board did not expect entities to provide quantitative information or reconciliations where their accounting policies do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

BC36          The Board noted the view of some that, if the differences between an entity’s accounting policies and the recognition and measurement requirements in Australian Accounting Standards are extensive, the preparation of the required disclosure could be onerous.  To help address this concern, as referred to in paragraph BC34 above, the Board prepared a number of illustrative examples and flowcharts.  The Implementation guidance and illustrative examples (as proposed in ED 293) is designed to provide examples of how the required information might be disclosed having regard to the existing variation and diversity to compliance with all the recognition and measurement requirements in Australian Accounting Standards in special purpose financial statements currently seen in practice.

BC37          The Board further noted the view that, depending on the current level of expertise, some entities might find it burdensome to determine whether their accounting policies comply with the recognition and measurement requirements in Australian Accounting Standards.  The Board also made the observation that understanding whether or not the entity has complied with all the recognition and measurement requirements in Australian Accounting Standards is a part of good governance and therefore it is reasonable to expect the necessary level of expertise is available, and any costs of acquiring that expertise would be reasonably expected to be outweighed by the benefits.  Furthermore, the Board confirmed that the amendment would not require an entity to change its existing accounting policies and therefore is not onerous. 

BC38          While Options 3 and 4 in the table in paragraph BC27 above were not without their advantages, the Board decided they were not the most appropriate alternatives for a number of reasons including:

(a)     a binary disclosure stating only ‘non-compliance’ as suggested in Option 3 would not be useful as users would not be able to discern an indication of the extent of recognition and measurement compliance or non-compliance; and

(b)     Option 4 was not appropriate as, if an entity did not make the disclosure, users would also not be able discern the reason for non-compliance, that is, whether it was a recognition and measurement non-compliance or the omission of a disclosure requirement for example.

Accordingly, any costs that would be saved by adopting Options 3 or 4 relative to Option 2, including that they would result in less voluminous disclosure, would be clearly outweighed by the benefits to users of Option 2.

Other issues

BC39          Both The AASB’s For-Profit Entity Standard-Setting Framework and The AASB’s Not-for-Profit Entity Standard-Setting Framework state that the Board does not currently set standards for special purpose financial statements, as such financial statements should only be prepared where users can tailor them to their own information needs, and therefore do not need a standard-setter or regulator to require the information on their behalf.  Accordingly, the Board noted the view that those responsible for the preparation of special purpose financial statements should determine the extent to which they conform with Australian Accounting Standards and therefore it was not necessary for the Board to specify the disclosures proposed in ED 293.

BC40          Notwithstanding this, “as part of moving legacy regulations out of legislation and into Australian Accounting Standards …”,[19] and as noted in paragraph BC19(c) above, Australian Accounting Standards AASB 101, AASB 107, AASB 108, AASB 1048 and AASB 1054 apply to special purpose financial statements.  The Board considered that this, especially the requirement in paragraph 9 of AASB 1054,[20] together with the needs of users noted in paragraph BC18 above, provided a sufficient basis for requiring the disclosures in special purpose financial statements proposed in ED 293.  The Board was particularly concerned that a significant number of special purpose financial statements do not provide adequate disclosures to enable a user to determine whether they do need additional information to meet their needs.

Finalisation of ED 293 proposals

BC41          Following the consultation period, and after considering constituent comments received, the Board decided to proceed with issuing this Standard, however in doing so the Board made a number of decisions regarding the final proposals.

Feedback from respondents on ED 293

BC42          The Board received 14 formal comment letters on ED 293, and undertook targeted outreach with key stakeholders including professional bodies and regulators.

BC43          The key feedback received on ED 293 indicated that overall the majority of respondents agreed that the proposals set out in ED 293 would increase the transparency and comparability of special purpose financial statements, however a number of respondents had concerns about the costs that may be incurred by entities in making the disclosures proposed in ED 293 exceeding the benefits of the resulting information.  Respondents were particularly concerned about the costs of the ED 293 proposals exceeding any benefits for for-profit private sector entities given the ED 293 proposals were intended to be only a short-term measure for these entities.  This is because the broader project proposing to remove the ability for certain for-profit private sector entities to prepare special purpose financial statements when they are required to comply with Australian Accounting Standards is expected to be completed by 30 June 2020. 

BC44          The Board considered this feedback and decided that in order to better balance any additional costs with any benefits to financial statement users, it was necessary to limit the scope of this Standard to apply only to not-for-profit private sector entities. This is because the broader project to remove the ability for certain not-for-profit entities to prepare special purpose financial statements when required to comply with Australian Accounting Standards would take some time. The Board also decided to amend the required disclosures related to compliance with Australian Accounting Standards to reduce any costs that may be incurred in complying with the new disclosures.  The significant matters considered by the Board in making these decisions are addressed below.

Scope

BC45          The Board decided that the requirements of this Standard should apply only to not-for-profit private sector entities required by legislation or otherwise to comply with AASB 1054, such as medium and large charities with revenue greater than $250,000, registered with the ACNC and required to comply with the ACNC’s reporting requirements relating to special purpose financial statements and companies limited by guarantee lodging financial reports with ASIC. The Board noted the ACNC expressed support for increased transparency of financial reporting in the charities sector with the additional disclosure requirements being viewed as a positive step towards greater transparency, accountability and good governance. 

BC46          As noted in paragraph BC44 above, the disclosure requirements were amended (refer paragraphs BC48-BC57 below) to not require not-for-profit private sector entities to undertake more effort than they already have in regards to assessing compliance or otherwise with the recognition and measurement requirements in Australian Accounting Standards, as they could state that they have not made an assessment of compliance with the recognition and measurement requirements in Australian Accounting Standards (refer paragraph BC49) if they wish to. The Board acknowledged that there is less clarity regarding compliance with the recognition and measurement requirements in Australian Accounting Standards in the special purpose financial statements of charities and considered that the new disclosures provide appropriate information for users without these entities incurring undue costs.  The Board also confirmed the new disclosures should apply to not-for-profit private sector entities for annual reporting periods ending on or after 30 June 2020.

BC47          When deciding to limit the application of this Standard to not-for-profit private sector entities only, the Board noted feedback from respondents to ED 293 (refer paragraph BC43 above) that if the proposals in ED 297 Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities to remove the ability for certain for-profit private sector entities to prepare special purpose financial statements are finalised as proposed, so that they are effective for annual reporting periods beginning on or after 1 July 2020, the requirements of this Standard would only be relevant for a short period of time for these for-profit private sector entities. The Board therefore considered that the costs to prepare the disclosures in this Standard for these for-profit private sector entities would arguably outweigh the benefits. If however the proposals in ED 297 are not finalised as proposed, the Board will reconsider the application of the requirements in this Standard for for-profit private sector entities.

Disclosure requirements

BC48          In order to simplify the new disclosures and minimise any possible burden associated with preparing the new disclosures, the Board decided to amend the disclosure requirements to adopt a two-step approach to assessing and disclosing compliance with the recognition and measurement requirements in Australian Accounting Standards and also clarified a number of other aspects of the disclosure requirements.

BC49          The Board decided that not-for-profit private sector entities required to apply this Standard should assess, for each material accounting policy applied and disclosed in the special purpose financial statements, whether the policy does not comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128 Investments in Associates and Joint Ventures).  If a material accounting policy does not comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128), that fact shall be disclosed with an indication of how it does not comply.  Alternatively, if a not-for-profit private sector entity has not made this assessment, it should disclose that fact.

BC50          After making the disclosures noted in paragraph BC49, the not-for-profit private sector entity will then disclose, whether the financial statements overall:

(a)     comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) - that is there are no material accounting policies disclosed in the special purpose financial statements that would not comply and have not been assessed in respect of the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128);

(b)     do not comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) - that is there are one or more instances of material accounting policies disclosed in the special purpose financial statements that do not comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128); or

(c)     compliance with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) has not been assessed - that is there are one or more instances where the not-for-profit private sector entity has not assessed whether or not the material accounting policies disclosed in the special purpose financial statements comply with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128).

BC51          The Board decided to include an option for a not-for-profit private sector entity to disclose that they have not assessed whether or not the accounting policies disclosed in the special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128), because allowing an entity to make such a disclosure would require minimal additional effort (as entities would not be required to complete additional assessment of compliance with the recognition and measurement requirements in Australian Accounting Standards but merely make the disclosures based on their existing understanding of the entity’s accounting policies). This disclosure, however, would highlight potential instances of non-compliance with the recognition and measurement requirements in Australian Accounting Standards to users of the special purpose financial statements, as well as potential governance issues, and would also allow users of the special purpose financial statements to seek additional information if required.

BC52          The Board confirmed that it is their expectation that the new disclosures are intended to identify instances of non-compliance with the recognition and measurement requirements in Australian Accounting Standards that are material to the special purpose financial statements.  The Board considered whether an entity that has disclosed non-compliance with the recognition and measurement requirements in Australian Accounting Standards (except for requirements set out in AASB 10 or AASB 128) for an accounting policy that is not material to the entity, could still claim that its financial statements overall complied with the recognition and measurement requirements in Australian Accounting Standards.  The Board confirmed if there is one instance of a material accounting policy applied and disclosed in the special purpose financial statements not complying with the recognition and measurement requirements in Australian Accounting Standards or not being assessed, the entity cannot claim that its financial statements overall comply with all the recognition and measurement requirements in Australian Accounting Standards.

BC53          The Board acknowledged the diversity in views regarding whether or not consolidation and the equity method of accounting are recognition and measurement requirements, presentation and disclosure requirements, neither or both, and the effect this diversity in views may have on the ability of an entity to determine whether or not they have complied with all the recognition and measurement requirements in Australian Accounting Standards. 

BC54          The Board considered whether the recent amendment to paragraph 9 of AASB 1053 made via AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework clarified that consolidation and the equity method of accounting are recognition and measurement requirements, however noted that the intention of this amendment was to provide certainty that an entity not consolidating or equity accounting must apply the transitional provisions in AASB 1 or AASB 108, and the Board had determined to not make a conclusive decision on it.

BC55          For the avoidance of doubt the Board decided to make it clear that for the purposes of the disclosures in paragraphs 9A(c) and 9A(d) of this Standard, recognition and measurement requirements exclude consolidation and the equity method of accounting as the application of consolidation and the equity method of accounting are the subject of separate disclosure requirements in this Standard.

BC56          The Board also reconsidered the proposal in ED 293 to relieve a not-for-profit entity from the requirement to determine whether or not its interests in other entities give rise to interests in subsidiaries, associates or joint ventures. The Board acknowledged that there may be some instances where a not-for-profit private sector entity may be required by legislation to make this determination to assess their financial reporting requirements, and therefore decided that this relief should only be available where there is no legislative requirement for a not-for-profit entity to make this determination.  For example, and as noted in paragraph BC29, section 45A of the Corporations Act 2001 requires the assessment of thresholds for small and large proprietary companies to be determined on a consolidated basis (ie the parent and the entities it controls (subsidiaries)) in accordance with the accounting standards even if the standards do not otherwise apply to some or all of the companies concerned.  While it is not common, it is possible for a not-for-profit entity to be structured using a proprietary company structure and the entity would therefore be subject to section 45A of the Corporations Act 2001

BC57          The Implementation guidance and illustrative examples for not-for-profit private sector entities was updated to reflect these decisions of the Board.

Due process

BC58          In responding to the specific feedback from respondents to ED 293 regarding the costs of the proposed disclosures exceeding any benefits and the short term nature of the proposals, particularly for for-profit private sector entities, the Board considered that as the disclosures required by this Standard apply only to not-for-profit private sector entities and are less burdensome than those proposed in ED 293 (while still providing users with useful information regarding whether or not an entity has complied with the recognition and measurement requirements in Australian Accounting Standards), there was no need to undertake further due process and re-expose the requirements of this Standard.

BC59          The Board also decided that notwithstanding its decision to limit the scope of the requirements in this Standard to not-for-profit private sector entities, issuing a fatal-flaw review version of this Standard for public comment was not required as the Board did not make any other major changes to the proposals in ED 293. 

BC60          The Board also informed other regulators of the outcome of ED 293, to help them identify whether there are any regulatory consequences of the proposed disclosure requirements.

Effective date

BC61          The Board confirmed that the narrow scope amendment in this Standard is an interim measure, until the broader project proposing to remove the ability for certain entities to prepare special purpose financial statements is completed (which would take some time for not-for-profit entities), and confirmed, as outlined in this Basis for Conclusions, that the amendment is urgently needed to provide more transparency to the users of publicly lodged special purpose financial statements of not-for-profit private sector entities and to increase the comparability of special purpose financial statements with other special purpose financial statements and general purpose financial statements.

BC62          As noted in paragraph BC37 above, the amendments do not require entities to change their existing accounting policies or perform additional assessment of compliance with the recognition and measurement requirements in Australian Accounting Standards, and therefore the information required to be disclosed is based on an entity’s existing financial reporting policies and practices.  Accordingly, it is not necessary to provide an extended operative date.

BC63          Based on the above, the Board decided this Standard should be effective for annual periods ending on or after 30 June 2020, with early voluntary disclosure allowed.



[1]      “Reporting entity means an entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources.  A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries.”  AASB 1053, Appendix A.

[2]      A “ ‘general purpose financial report’ means a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs”.  SAC 1, paragraph 6.

[3]      For those entities that are required to prepare and lodge financial statements with the Australian Securities and Investments Commission (ASIC) by Part 2M.3 of the Corporations Act 2001, and who are preparing special purpose financial statements, paragraph 2 of ASIC Regulatory Guide 85 Reporting requirements for non-reporting entities states “… ASIC believes that non-reporting entities, which are required to prepare financial reports in accordance with Chapter 2M of the Corporations Act 2001 (Act), should comply with the recognition and measurement requirements of accounting standards”.  For those entities that are required to prepare and lodge financial statements with the Australian Charities and Not-for-profits Commission (ACNC), “section 60.10(3) of ACNC Regulations requires financial statements and notes give a ‘true and fair view’, and the determination is required by the charity as well as the auditors in their audit report. 

[4]      Research Report 11.

[5]      Appendix 2, Research Report 11.

[6]      Financial statements lodged with the ACNC are available from the ACNC’s website for no cost, therefore it is reasonable to expect that financial statements are being accessed by public users.  Research Report 11 noted that of the approximately 16,000 charities lodging financial statements with the ACNC in 2016, approximately one third declared that they were preparing special purpose financial statements.

[7]      This project proposes to remove ability for certain entities to prepare special purpose financial statements when they are required to comply with Australian Accounting Standards via a phased approach, firstly in relation to for-profit entities and, in due course, in relation to not-for-profit entities.

[8]      And indirectly through other legislation that imposes the application of AASB 101 in the preparation of special purpose financial statements.  For example, the Australian Charities and Not-for-profits Commission Act 2012, through section 60.30 of the Australian Charities and Not‑for‑profits Commission Regulation 2013, requires charities lodging special purpose financial statements with the ACNC to comply with AASB 101, despite the fact that the application paragraph of that Standard does not directly encompass them.

[9]      Paragraph 6.1(c) of APES 205.

[10]    Research Report 12 examined the financial reporting practices of for-profit entities, including large proprietary companies, small foreign-controlled proprietary companies, for-profit unlisted public companies and other small proprietary companies, lodging financial statements with ASIC.  Research Report 12 noted that when performing their initial assessment as to whether or not the accounting policies applied in the special purpose financial statements complied with the recognition and measurement requirements in Australian Accounting Standards, it was initially unclear to the researchers whether or not 34% of the entities in question complied with the recognition and measurement requirements in Australian Accounting Standards.

[11]    Such outreach included responses received on ITC 39, user surveys, participation of stakeholders at ITC 39 roundtable events and targeted outreach with not-for-profit private sector stakeholders.

[12]    Research Report 12 estimated that of those for-profit non-disclosing entities preparing and lodging special purpose financial statements 66% explicitly stated that they followed the recognition and measurement requirements in Australian Accounting Standards, 10% were assessed to have complied with the recognition and measurement requirements in Australian Accounting Standards based on a qualitative review of the accounting policies, despite the absence of an explicit statement to that effect, 10% did not comply with the recognition and measurement requirements in Australian Accounting Standards (of which only 0.5% clearly stated so), and the extent of compliance (or otherwise) with the recognition and measurement requirements in Australian Accounting Standards of the remaining 14% was unclear.

[13]    And AASB 107 Statement of Cash Flows, AASB 108 and AASB 1048 Interpretation of Standards, although they were not considered appropriate candidates to give effect to the amendments proposed in ED 293, as noted in paragraph BC23 below.

[14]    APES 205 defines a member as “a member of a professional body that has adopted this Standard as applicable to their membership as defined by that professional body”.  APES 205 is therefore applicable, to and mandatory for, accounting professionals who are members of CPA Australia, Chartered Accountants Australia and New Zealand or the Institute of Public Accountants.  This includes accountants working in accounting firms (of all sizes), the corporate sector and in government.  Therefore, although its reach is limited, it is broader than that of AASB 1054.

[15]    Paragraph 6.1(c) of APES 205.

[16]    Paragraph 8 of ASA 800.

[17]    Paragraph 15 of ASA 700.

[18]    “Australian Accounting Standards consist of two Tiers of reporting requirements for preparing general purpose financial statements:

(a)    Tier 1: Australian Accounting Standards; and

(b)    Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements.”  Paragraph 7 of AASB 1053.

[19]    Paragraph 14 of both The AASB’s For-Profit Entity Standard-Setting Framework and The AASB’s Not-for-Profit Entity Standard-Setting Framework.

[20]    Paragraph 9 of AASB 1054 requires an entity to disclose whether the financial statements are general purpose financial statements or special purpose financial statements.