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AASB 2022-4 Standards/Accounting & Auditing as made
This instrument amends AASB 1054 Australian Additional Disclosures (May 2011) and AASB 1057 Application of Australian Accounting Standards (July 2015).
Administered by: Treasury
Exempt from sunsetting by the Legislation (Exemptions and Other Matters) Regulation 2015 s12 item 18
Registered 05 Aug 2022


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ISSN 1036-4803


Contents

Preface

Accounting Standard

AASB 2022-4 Amendments to Australian Accounting Standards – Disclosures in Special Purpose Financial Statements of Certain For-Profit Private Sector Entities

 

from paragraph

Objective                                                                                                                                                                              1

Application                                                                                                                                                                         2

Amendments to AASB 1054                                                                                                                                          5

Amendments to AASB 1057                                                                                                                                          7

COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT                                                                                  8

 

bASIS FOR CONCLUSIONS

 

Australian Accounting Standard AASB 2022-4 Amendments to Australian Accounting Standards – Disclosures in Special Purpose Financial Statements of Certain For-Profit Private Sector Entities is set out in paragraphs 1 – 8. All the paragraphs have equal authority.

 


Preface

Standards amended by AASB 2022-4

This Standard makes amendments to AASB 1054 Australian Additional Disclosures (May 2011) and AASB 1057 Application of Australian Accounting Standards (July 2015).

Main features of this Standard

Main requirements

This Standard amends AASB 1054 and AASB 1057 in relation to for-profit private sector entities that are required only by their constituting document or another document (being a document created before 1 July 2021 and not amended on or after that date) to prepare financial statements that comply with Australian Accounting Standards. The amendments require that when such entities prepare special purpose financial statements that refer to Australian Accounting Standards, the financial statements include disclosures that inform users of the basis upon which those financial statements were prepared.

In particular, the amendments made to AASB 1054 by this Standard require the special purpose financial statements to:

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

(b)                   disclose information about the material accounting policies applied in the special purpose financial statements, including information about changes in those policies;

(c)                   where the entity has interests in other entities – disclose 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, also disclose the reasons why;

(d)                   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 AASB 10 and AASB 128) – disclose an indication of how it does not comply;

(e)                   disclose whether or not the financial statements overall comply with all the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128); and

(f)                    comply with the disclosure requirements in paragraphs 8 and 9 of AASB 1054 regarding the reporting framework and the type of financial statements.

The amendments to AASB 1057 ensure that the for-profit private sector entities addressed in this Standard are made subject to Australian Accounting Standards – explicitly only AASB 1054 (in addition to AASB 1057) – so that the relevant disclosure requirements in AASB 1054 are applicable to their special purpose financial statements that are required to comply with the Standards.

Application date

This Standard applies to annual periods ending on or after 30 June 2022.  Earlier application is permitted.

 


Accounting Standard AASB 2022-4

The Australian Accounting Standards Board makes Accounting Standard AASB 2022-4 Amendments to Australian Accounting Standards – Disclosures in Special Purpose Financial Statements of Certain For-Profit Private Sector Entities under section 334 of the Corporations Act 2001.

 

Keith Kendall

 Dated 23 June 2022

Chair – AASB

Accounting Standard AASB 2022-4

Amendments to Australian Accounting Standards – Disclosures in Special Purpose Financial Statements of Certain For-Profit Private Sector Entities

Objective

1                       This Standard amends AASB 1054 Australian Additional Disclosures (May 2011) and AASB 1057 Application of Australian Accounting Standards (July 2015) in relation to certain for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards. Where those entities prepare special purpose financial statements, the amendments require disclosure of specified information. In particular, this Standard amends:

(a)                   AASB 1054, to require disclosure of particular information about the special purpose financial statements, including information that enables users of the financial statements to understand the material accounting policies applied in the financial statements, changes in those policies and whether or not the policies comply with all the recognition and measurement requirements in Australian Accounting Standards; and

(b)                   AASB 1057, to extend the set of entities to which AASB 1057 and AASB 1054 apply. This is necessary in order to give effect to the amendments described in paragraph (a).

Application

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

3                       This Standard applies to annual periods ending on or after 30 June 2022. This Standard may be applied to annual periods ending before 30 June 2022.

4                       This Standard uses underlining, striking out and other typographical material to identify some of the amendments to AASB 1057, 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. Amended paragraphs are shown with deleted text struck through and new text underlined. 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

5              Paragraphs 2, 9C and 9D are added as follows:

2               The following table identifies the disclosure requirements that, in accordance with this Standard, apply to each type of entity to which this Standard applies:

 

Type of entity to which the paragraph is applicable

Subject of paragraphs

Paragraph numbers

Entities preparing general purpose financial statements

For-profit entities and not-for-profit entities, whether in the private sector or the public sector

Compliance with Australian Accounting Standards

7

Reporting framework

8

General purpose or special purpose financial statements

9

Audit fees

10, 11

Imputation credits

12-15

Operating cash flow reconciliation

16

IFRS Standard not yet issued in Australia

17

Entities preparing special purpose financial statements

For-profit private sector entities required only by their constituting document or another document (created before 1 July 2021 and not amended on or after that date) to prepare financial statements that comply with Australian Accounting Standards

Reporting framework

8

General purpose or special purpose financial statements

9

Information about special purpose financial statements

9C, 9D

Not-for-profit private sector entities required to comply with this Standard

Compliance with Australian Accounting Standards

7

Reporting framework

8

General purpose or special purpose financial statements

9

Information about special purpose financial statements

9A, 9B

Audit fees

10, 11

Imputation credits

12-15

Operating cash flow reconciliation

16

IFRS Standard not yet issued in Australia

17

General Purpose or Special Purpose Financial Statements

          Information about special purpose financial statements

9C            The special purpose financial statements of a for-profit private sector entity that is required only by its constituting document or another document (created before 1 July 2021 and not amended on or after that date) to prepare financial statements that comply with Australian Accounting Standards shall:

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

(b)            disclose the following about the material accounting policies applied in the special purpose financial statements, if not already required by another Australian Accounting Standard:

(i)              the measurement basis (or bases) applied in preparing the special purpose financial statements; and

(ii)             the other accounting policies applied that are relevant to an understanding of the special purpose financial statements;

(c)             when a change in a material accounting policy has an effect on the current period or any prior period, disclose the following, if not already required by another Australian Accounting Standard:

(i)              the nature of the change in accounting policy;

(ii)             the reasons why applying the new accounting policy provides reliable and more relevant information;

(iii)            to the extent practicable, the amount of the adjustment for each financial statement line item affected, shown separately:

(A)            for the current period;

(B)            for each prior period presented; and

(C)            in the aggregate for periods before those presented; and

(iv)           an explanation if it is impracticable to determine the amounts to be disclosed under paragraph (iii).

Financial statements of subsequent periods need not repeat these disclosures;

(d)            where the entity has interests in other entities – disclose 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 also disclose the reasons why that is the case;

(e)             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 AASB 10 and AASB 128), disclose an indication of how it does not comply; and

(f)             disclose whether or not the financial statements overall comply with all the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128).

9D            Implementation guidance and illustrative examples for certain for-profit private sector entities accompanies this Standard. It illustrates the application of the requirements in paragraph 9C.

6              Implementation guidance and illustrative examples for certain for-profit private sector entities is attached to accompany AASB 1054 as set out on pages 9 to 14.

Amendments to AASB 1057

7              Paragraphs 2 and 7 are amended (new text is underlined, deleted text is struck through) and paragraph 18A is added as follows:

2               This Standard applies to:

(a)            each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;

(b)            general purpose financial statements of each not-for-profit reporting entity;

(c)             each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;

(d)            financial statements of General Government Sectors (GGSs) prepared in accordance with AASB 1049 Whole of Government and General Government Sector Financial Reporting;

(e)             for-profit private sector entities that are required by legislation* to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and

(f)             other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.

*       References in this Standard to ‘legislation’ mean legislation of a government in Australia.

7               Except as specified in paragraph 20C, AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, and AASB 1048 Interpretation of Standards and AASB 1054 Australian Additional Disclosures apply to:

(a)            each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;

(b)            general purpose financial statements of each not-for-profit entity that is a reporting entity;

(c)             each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;

(d)            for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and

(e)             other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.

18A          AASB 1054 Australian Additional Disclosures applies to:

(a)            each not-for-profit entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act;

(b)            general purpose financial statements of each not-for-profit entity that is a reporting entity;

(c)             each entity that elects to prepare financial statements that are, or are held out to be, general purpose financial statements;

(d)            for-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards; and

(e)             other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards.

Commencement of the legislative instrument

8              For legal purposes, this legislative instrument commences on 29 June 2022.

 


Implementation guidance and illustrative examples for certain 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.

IG15            The AASB has prepared this guidance and examples to explain and illustrate the application of the requirements in paragraph 9C of this Standard.

IG16            The table below has been provided for ease of reference to illustrate the types of entities that would generally be within or outside the scope of the requirements in paragraph 9C of this Standard.

#

Type of entity

In scope/out of scope

1

For-profit private sector entities preparing special purpose financial statements

 

 

For-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards – provided that the relevant document was created before 1 July 2021 and not amended on or after that date

In scope

 

For-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards – but the relevant document was created or amended on or after 1 July 2021

Not in scope – compliance with the Standards requires general purpose financial statements

 

For-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with accounting standards or generally accepted accounting principles or practices

Not in scope

 

For-profit private sector entities that are required by legislation to prepare financial statements that comply with either Australian Accounting Standards or accounting standards

Not in scope – compliance with the Standards requires general purpose financial statements

 

For-profit private sector entities that are required by legislation to prepare financial statements, where there is no legislative reference requiring compliance with Australian Accounting Standards or accounting standards

Not in scope

2

For-profit and not-for-profit public sector entities preparing special purpose financial statements

Not in scope

3

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

Not in scope – see paragraph 9A for similar requirements

IG17            The following flowchart summarises some of the key decisions in determining how to apply the disclosure requirements in paragraphs 9C(d)-(f) of this Standard in relation to special purpose financial statements.

IG18            In disclosing the information required by paragraphs 9C(d)-(f) 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 2 – For-profit private sector entities preparing special purpose financial statements (paragraphs 9C(d)-(f))

Chart 2 - for-profit entities preparing SPFS

 

Disclose the basis on which the decision to prepare special purpose financial statements was made

IG19            Paragraph 9C(a) requires an entity to disclose the reasons why the preparation of special purpose financial statements was considered appropriate. It is not sufficient for the entity to merely disclose that it is ‘not a reporting entity’; the entity must articulate the reasons why it concluded general purpose financial statements were not required. For example, the reason could be that in the opinion of the directors of the entity all financial statement users are in a position to require the entity to prepare reports tailored to their particular information needs.

Disclosure of accounting policies

IG20            For-profit private sector entities within the scope of this Standard that are preparing special purpose financial statements are required to include sufficient information to enable users of those special purpose financial statements to obtain an understanding of the material accounting policies applied in the preparation of the special purpose financial statements, including changes in those policies.

IG21            The disclosure of this information may be required by another Australian Accounting Standard, such as AASB 101 Presentation of Financial Statements or AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. Where this is the case, the entity also complies with the requirements of the other Standard.

IG22            Paragraph 9C(e) of this Standard requires an entity, for each material accounting policy applied and disclosed in the financial statements, to first assess whether that policy complies or does not comply with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128).

IG23            Using those assessments:

(a)                   an entity discloses for those policies not complying with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128), an indication of how it does not comply; 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 AASB 10 and AASB 128), no additional disclosures are required.

IG24            Where an entity’s accounting policies do not comply with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and 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-compliant 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 are not complied with and provide details of the non-compliance in one place – for example, within the basis of preparation note – where the instances of non-compliance are not extensive (see Example 3); or

(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 4).

Accounting policy assessment step 2:  Overall compliance

IG25            Based on the assessment required by paragraph 9C(e), paragraph 9C(f) 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) (see Examples 1 and 2) or do not comply (there are one or more instances of non-compliance) (see Examples 3 and 4) with all the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128).

IG26            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 taxes, deferred tax was not recognised, which does not comply with AASB 112 Income Taxes;

(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 of assets for impairment testing was calculated on an undiscounted basis, which does not comply with AASB 136 Impairment of Assets;

(d)                   in accounting for leases, certain leases that would previously have been considered operating leases in accordance with AASB 117 Leases[1] have not been recognised in the statement of financial position, which does not comply with AASB 16 Leases; and

(e)                   in accounting for revenue, revenue was recognised based on the transfer of risks and rewards or the percentage of completion method in accordance with AASB 118 Revenue,[2] which does not comply with AASB 15 Revenue from Contracts with Customers.

Application of the consolidation and equity accounting requirements

IG27            In relation to paragraph 9C(d) 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.

IG28            Exemptions from consolidation of subsidiaries are provided in AASB 10, paragraphs 4(a)-Aus4.2, including when the entity is a wholly-owned subsidiary, its debt or equity instruments are not traded in or to be issued in a public market and its ultimate parent produces consolidated financial statements that are available for public use and comply with accounting standards. Those charged with governance preparing special purpose financial statements might have other reasons for non-consolidation of some or all of an entity’s subsidiaries, and paragraph 9C(d) requires these reasons to be disclosed (see Example 2).

Illustrative examples

IG29            The following illustrative examples are provided:

Scenario/Example

1

2

3

4

Reporting Framework

Trust deed

 

 

ü

ü

Other document

ü

ü

 

 

Subsidiaries

Yes

ü

ü

No

 

ü

ü

Consolidated

Yes

ü

 

n/a

n/a

No

ü

Associates / Joint Ventures

Yes

ü

 

 

 

No

ü

ü

ü

Equity accounted

Yes

ü

n/a

n/a

n/a

No

 

Material accounting policies comply with all recognition and measurement requirements (excluding AASB 10 and AASB 128)

Yes

ü

ü

 

 

No

 

 

ü

ü

Financial statements overall comply with all recognition and measurement requirements (excluding AASB 10 and AASB 128)

Yes

ü

ü

No

 

ü

ü

IG30            There are additional illustrative examples in paragraphs IG13 and IG14 of this Standard that may be useful, notwithstanding that they have been prepared for not-for-profit private sector entities.

IG31            The following examples illustrate how an entity might apply some of the disclosure requirements in paragraph 9C of this Standard, 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 the Standard.

#

Example

Illustrative disclosure

1

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

CMA Pty Ltd, a small for-profit parent company, has prepared special purpose financial statements to satisfy requirements of the major supplier of its raw materials. The special purpose financial statements:

·         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.

CMA Pty Ltd is a small for-profit entity that prepares special purpose financial statements under its raw material supply agreement with Company X. These special purpose financial statements have therefore been prepared in accordance with the reporting framework agreed with Company X, which specifies limited note disclosures to accompany the financial statements. The Directors note that Company X may obtain further financial information upon request.

CMA Pty Ltd 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 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, excluding AASB 10 and AASB 128

KC Pty Ltd, a small for-profit parent company, prepares separate special purpose financial statements in order to meet the requirements of its financing agreement. The separate special purpose financial statements apply material accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards. The separate financial statements do not consolidate KC Pty Ltd’s subsidiaries.

These special purpose financial statements have been prepared to satisfy the company’s reporting requirements under its financing agreement with Bank X, which requires the financial statements to comply with Australian Accounting Standards. 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. KC Pty Ltd is a for-profit entity.

Consolidated financial statements have not been prepared for KC Pty Ltd and its subsidiaries as the Directors have decided not to comply with AASB 10 Consolidated Financial Statements – the Directors would provide consolidated information to financial statement users upon request.

KC Pty Ltd’s special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards for separate financial statements.

3

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

ABC Trading Trust, a for-profit entity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore 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.

ABC Trading Trust, a for-profit entity, has prepared special purpose financial statements as, in the opinion of the Trustees, 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 Trustee’s reporting requirements under the Trust Deed, which requires the financial statements to comply with Australian Accounting Standards.

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 116 Property, Plant and Equipment. In accounting for property, plant and equipment, ABC Trading Trust has [calculated depreciation on the basis of the useful lives determined by the Australian Taxation Office for income tax purposes / insert further details, including an indication of how material recognition and measurement requirements in Australian Accounting Standards have not been complied with].

4

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

HIJ Public Trading Trust, a for-profit entity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore 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.

HIJ Public Trading Trust, a for-profit entity, has prepared special purpose financial statements as, in the opinion of the Trustees, 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 Trustee’s reporting requirements under the Trust Deed, which requires the financial statements to comply with Australian Accounting Standards.

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 Q-Z and indicate how the recognition and measurement requirements in Australian Accounting Standards have not been complied with.

Note X: Impairment

Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is determined on an undiscounted basis as the higher of an asset’s fair value less costs of disposal and value in use. This does not comply with AASB 136 Impairment of Assets.

 

Note Y: Income Tax

The income tax expense or credit for the period is based on the tax payable on the current period’s taxable income based on the applicable income tax rate. This amount is not adjusted for changes in deferred tax assets and liabilities as HIJ Public Trading Trust does not recognise deferred tax balances. This does not comply with AASB 112 Income Taxes.

…]


Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, AASB 2022-4 Amendments to Australian Accounting Standards – Disclosures in Special Purpose Financial Statements of Certain For-Profit Private Sector Entities.

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.

BC2              In setting out the Board’s reasons for issuing this Standard, the following section includes the historical context and the relationship of the project that gave rise to this Standard to similar Board projects pertaining to different types of entities. Later sections then:

(a)                   summarise the rationale for the pertinent proposals that were exposed for public comment in Exposure Draft ED 302 Amendments to Australian Accounting Standards – Disclosures in Special Purpose Financial Statements of Certain For-Profit Private Sector Entities, which led to the development of this Standard; and

(b)                   explain why some ED 302 proposals and some views expressed by respondents to ED 302 (particularly those not adequately addressed in the Basis for Conclusions on ED 302) were not adopted in the Standard.

Reasons for issuing this Standard

BC3              In 2018 the Board initiated a broad project to address the issues associated with special purpose financial statements (SPFS) reporting in the for-profit private sector.[3] As part of that project, the Board proposed, through Exposure Draft ED 297 Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (August 2019), to remove the option for some types of for-profit private sector entities to prepare SPFS when they are required to comply with Australian Accounting Standards (AAS). ED 297 proposed an operative date of annual reporting periods beginning on or after 1 July 2020 and led to the issue of AASB 2020‑2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (March 2020). AASB 2020‑2, operative instead for reporting periods beginning on or after 1 July 2021, made amendments to AAS to disallow the preparation of SPFS by the following entities (and, consistent with that, to also remove the ‘reporting entity’ concept for them):

(a)           entities required by legislation to prepare financial statements that comply with either AAS or accounting standards;  and

(b)           entities required by their constituting document or another document to prepare financial statements that comply with AAS, provided the relevant document was created or amended on or after 1 July 2021 (to coincide with AASB 2020-2’s operative date).

The Basis for Conclusions accompanying AASB 2020-2 explains the Board’s reasons for the decisions it made in that Standard and provides more information about the issues with SPFS reporting. (The Basis for Conclusions is also published with AASB 1057 Application of Australian Accounting Standards.)

BC4              Given the limited scope of AASB 2020-2, the problems associated with SPFS prepared by for-profit private sector entities that are required to prepare financial statements that comply with AAS were not entirely resolved. This is because AASB 2020-2:

(a)                   did not become immediately operative (AASB 2020-2 was issued in March 2020); and

(b)                   contains an exemption that allows for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with AAS to continue preparing SPFS if the relevant document was created before 1 July 2021 and not amended on or after that date.

BC5              The continued preparation of SPFS that state compliance with AAS without further explanation, whether temporarily (until an entity transitioned to general purpose financial statements (GPFS) in accordance with AASB 2020-2) or for the foreseeable future (in relation to entities referred to in paragraph BC4(b)), remained a concern to the Board. Consistent with the AASB Evidence-Informed Standard-Setting Framework, the Board decided to address its concern by considering whether to issue a Standard having regard to the evidence it gathered through outreach to stakeholders and other forms of research. That research evinced users’ clearly stated views on the importance of understanding the recognition and measurement (R&M) basis of preparation of financial statements. The Board also noted the findings of AASB Research Report 12 Financial Reporting Practices of For-Profit Entities Lodging Special Purpose Financial Statements (August 2019), which indicated the current deficiencies in clearly reporting the basis of preparation in SPFS (see also paragraphs BC20-BC22 of the Basis for Conclusions on AASB 2020-2).

BC6              The Board noted some stakeholders were concerned about a lack of research-based evidence that demonstrates disclosure requirements would assist users’ understanding of SPFS prepared by entities within the scope of this Standard. This concern arose because AASB Research Report 12 is based on data relating to entities within the scope of AASB 2020-2, rather than the types of entities referred to in paragraph BC4(b), and in any event it predates the change in proprietary company reporting thresholds under the Corporations Act 2001 and therefore does not provide any current analysis. However, the Board came to the view that the Research Report provides evidence by analogy as there is no basis to expect that SPFS of the types of entities referred to in paragraph BC4(b) would have adopted better disclosure practices than the SPFS of the types of entities that were the focus of the Research Report (see paragraph BC7). Furthermore, the evidence provided by the Research Report was supplemented by the findings of outreach undertaken in December 2018 to understand users’ views as part of improving the Australian Financial Reporting Framework, which was considered by the Board at its April 2020 meeting (see paragraph BC8).

BC7              AASB Research Report 12 indicated that for 34% of examined entities preparing and lodging SPFS with the Australian Securities and Investments Commission (ASIC) in 2018, the extent of compliance with R&M requirements in AAS was not clear. After a detailed, qualitative assessment of the accounting policies of these unclear SPFS by the researchers, Research Report 12 concluded:

(a)                   10% of the total population of SPFS did not appear to be following all R&M requirements in AAS, despite only 0.5% of the total clearly stating so;

(b)                   76% appeared to follow all R&M requirements in AAS; and

(c)                   the extent of compliance (or otherwise) with the R&M requirements in AAS of the remaining 14% of SPFS was unclear.

BC8              The December 2018 research conducted via a survey of users of financial statements prepared by for-profit private sector entities found:

(a)                   on average, 93% of primary users and more than 95% of other users said comparability, transparency, comprehensibility and consistency are what they need most in financial statements; and

(b)                   only 43% of primary users and 56% of other users said they are satisfied with the information presented in SPFS.

Respondents to this survey were generally involved with entities within the scope of AASB 2020-2, although there were a number involved with the types of entities referred to in paragraph BC4(b), such as limited partnerships, incorporated associations and trusts. On that basis, the Board concluded the findings of the research are relevant in supporting the Board’s view that users of SPFS prepared by entities within the scope of this Standard would benefit from specific SPFS disclosure requirements.

BC9              In light of ED 297’s limited scope and anticipating the proposals in ED 297 would not be reflected in a Standard for some time after ED 297 was published for comment, the Board had also issued Exposure Draft ED 293 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Compliance with Recognition and Measurement Requirements (July 2019). ED 293 proposed requiring for-profit and not-for-profit private sector entities lodging SPFS with either the ASIC or the Australian Charities and Not-for-profits Commission (ACNC) to disclose information in their SPFS that would allow users to understand the extent of compliance or otherwise of the entity’s accounting policies with the R&M requirements in AAS.[4]

BC10          The feedback received on ED 293 indicated the majority of respondents agreed the proposals would increase the transparency and comparability of SPFS. However, due to the short time within which the proposed requirements would become mandatory in light of the expected timing of the release of a Standard based on ED 297’s proposals, respondents were particularly concerned about the costs of the proposals exceeding any benefits for for-profit private sector entities. This is because the proposal in ED 297 to remove the ability for certain for-profit private sector entities to prepare SPFS when they are required to comply with AAS was expected to be completed and, as noted in paragraph BC3, operative for annual reporting periods beginning on or after 1 July 2020.

BC11          After considering this feedback, the Board decided at that time the proposals in ED 293 should apply only to not-for-profit private sector entities. The Board decided it would revisit the application of the proposals in ED 293 for for-profit private sector entities if the proposals in ED 297 were not finalised as proposed. Consequently, the Board issued 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 (November 2019), operative for annual reporting periods ending on or after 30 June 2020.

BC12          As indicated in paragraph BC3, the Board decided the effective date of AASB 2020-2 should be one year later than what was proposed in ED 297. It arrived at this decision after considering feedback from respondents to ED 297 that entities needed more time to prepare for the implementation of the proposals – see also the reasons noted in paragraph BC149 of the Basis for Conclusions on AASB 2020-2. As a consequence of the deferral of the effective date, the Board decided it was necessary to revisit the proposals in ED 293 in relation to for-profit private sector entities that were not yet required to apply AASB 2020-2, as well as for the types of entities referred to in paragraph BC4(b). Consequently, ED 302 was issued in June 2020, which as noted in paragraph BC2 led to the development of this Standard.

Issue of Exposure Draft ED 302

BC13          The significant issues considered by the Board in developing ED 302 that are pertinent to this Standard are addressed in this section.

Scope

BC14          When considering which for-profit private sector entities should be required to make the ED 302 proposed disclosures,[5] the Board considered whether the disclosures should be required by:

(a)                   only those entities preparing SPFS that are directly subject to AASB 1054 Australian Additional Disclosures (for example, an entity with a direct reference to application of AASB 1054 in its trust deed); or

(b)                   those for-profit private sector entities that are required by legislation (eg Part 2M.3 of the Corporations Act 2001 or other legislation) to prepare financial statements that comply with either AAS or accounting standards, and other for-profit private sector entities that are required only by their constituting document or another document to prepare financial statements that comply with AAS provided the relevant document was created before 1 July 2021 and not amended on or after that date; or

(c)                   those entities referred to in option (b), with a threshold to limit the requirements to those entities that would meet the requirements to be considered a large proprietary company under the Corporations Act; or

(d)                   those entities referred to in option (b), but only where their SPFS state they have been prepared in compliance with AAS.

BC15          For the purposes of ED 302, the Board decided to propose option (b), noting:

(a)                   option (a) would not achieve the objective of the proposed amendments as it would not include all entities with a non-legislative requirement to prepare financial statements that comply with AAS;

(b)                   option (c) was not the most appropriate alternative as it would be relatively complex to apply. It would also add to the overall complexity of AAS because it would result in exemptions for certain entities that are already subject to exemptions (in particular, the scope exemptions from the removal of SPFS for for-profit private sector entities made in AASB 2020-2);

(c)                   option (d) was not the most appropriate alternative for similar reasons to option (c). In addition, the Board was concerned this option might allow any resulting disclosure requirements to be readily circumvented simply through non-disclosure of compliance with AAS, despite an entity’s constituting document requiring compliance with AAS without explicitly requiring disclosure of compliance with AAS; and

(d)                   in adopting option (b), the Board did not expect the proposed disclosures in ED 302 to be onerous. However, it acknowledged that implementing option (b) in paragraph BC14 by making amendments to the application of AASB 1054 (via AASB 1057) would result in a number of entities becoming subject to AASB 1054 for the first time. Furthermore, the Board noted AASB 1054 specifies disclosures that are potentially beyond the scope of the project that gave rise to this Standard. For this reason, ED 302 proposed limiting the application of the existing disclosure requirements in AASB 1054 for those entities preparing SPFS. Consequently, ED 302 proposed that such entities should only be required to comply with proposed paragraph 9C (and paragraph 9D referring to implementation guidance is also relevant) in applying AASB 1054. That approach would leave it to the entities to decide with which other disclosure requirements in AAS to comply, based on their assessment of the needs of the users of their SPFS.

BC16          ED 302 also proposed specific amendments to paragraph 2 of AASB 1057 to extend the set of entities to which AASB 1057 applies. This was necessary in order to extend the set of entities to which AASB 1054 applies and give effect to option (b) in paragraph BC14. The amendments to AASB 1057 proposed in ED 302 would not extend the application of any other AAS to the for-profit private sector entities covered by the proposals (see also paragraphs BC19-BC21).

Disclosure of the basis on which the decision to prepare SPFS was made

BC17          ED 302 proposed that an entity be required to disclose an explanation for why SPFS had been prepared, for the same reasons articulated in paragraph BC24-BC26 of the Basis for Conclusions on AASB 2019-4 (which is published with AASB 1054) and consistent with the existing responsibilities of those charged with governance with respect to the selection and application of an entity’s financial reporting framework. In drafting the proposed illustrative examples to accompany ED 302, the Board did not use the phrase ‘not a reporting entity’ to explain why the entity had prepared SPFS. Consistent with AASB 2020-2 limiting the application of the reporting entity concept by for-profit private sector entities, the Board considered entities need to more clearly articulate the reasons why they prepare SPFS.  Reasons why SPFS have been prepared may include users of the financial statements being in a position to command the information they require.

Disclosure of accounting policies

BC18          The Board noted many entities within the scope of the proposed amendments in ED 302 were not required by AAS to disclose information about the accounting policies applied in their SPFS. Without this, information about the extent of the entity’s compliance or otherwise with the R&M requirements in AAS might be incomplete. Therefore, the Board decided to include in ED 302 a proposal to require entities to disclose information about the material accounting policies applied, including the measurement basis (or bases) used and information about changes in those accounting policies, such as the nature of the change and the reasons why the change was made.

BC19          The Board noted that entities required by legislation to prepare financial reports in accordance with AAS or accounting standards are generally required to comply with AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, AASB 1048 Interpretation of Standards and AASB 1054, even in preparing SPFS. For example, this is specified in paragraph 7 of AASB 1057 for entities within the scope of Part 2M.3 of the Corporations Act. Entities registered with the ACNC are also specifically required to comply with those Standards by the Australian Charities and Not-for-profits Commission Act 2012. However, such requirements do not apply to entities within the scope of this Standard, which simply have a reference to AAS in their constituting or other documents, rather than in legislation.

BC20          In that regard, the Board considered proposing to expand the scope of AASB 101, AASB 107, AASB 108 and AASB 1048 consistent with the proposed expanded scope of AASB 1054, but decided not to do so. This was because, while the Board saw merit in this approach, requiring all entities within the scope of the proposed amendments to AASB 1054 to comply with all the requirements contained in those Standards was considered too onerous.

BC21          The Board also noted that if the approach considered in paragraph BC20 were to be adopted, as the Standards referred to in that paragraph contain certain R&M requirements (such as accrual accounting and applying the going concern basis of preparation), this would then impose a requirement on all entities within the scope of the proposed amendments to adopt minimum R&M requirements. The Board concluded setting minimum R&M requirements in SPFS was beyond the objective of ED 302 (and beyond the objective of this Standard).

Disclosures regarding compliance with all the R&M requirements in AAS

BC22          Both The AASB’s For-Profit Entity Standard-Setting Framework (May 2018) and The AASB’s Not-for-Profit Entity Standard-Setting Framework (May 2018) are predicated on transaction neutrality, that is, like transactions and events should be accounted for in a like manner by all types of entities, unless there is a justifiable reason not to do so.

BC23          The Board considered whether it was appropriate to propose for-profit private sector entities within the scope of ED 302 should make the same disclosures regarding their material accounting policies as those required by not-for-profit private sector entities through AASB 2019‑4, or whether for-profit private sector entities should be required to make different disclosures. Most significantly, the Board noted AASB 2019-4 contains options for a not-for-profit private sector entity to disclose in its SPFS that it has not assessed certain aspects that would otherwise be required to be assessed and disclosed. Those aspects are:

(a)                   whether or not the entity’s interests in other entities give rise to interests in subsidiaries, associates or joint ventures for financial reporting purposes; and

(b)                   whether or not the entity’s material accounting policies comply with the R&M requirements in AAS.

BC24          These options were included in AASB 2019-4 because:

(a)                   for entities in the not-for-profit private sector, disclosure of compliance might be unduly burdensome, such as where entities are not required to determine whether they have subsidiaries in accordance with AASB 10 Consolidated Financial Statements to assess their financial reporting requirements (paragraph BC32 of the Basis for Conclusions on AASB 2019-4); and

(b)                   allowing an entity to make a no-assessment disclosure would require minimal additional effort, but would highlight potential instances of non-compliance with the R&M requirements in AAS to users of the SPFS, as well as potential governance issues, and would also allow users of the SPFS to seek additional information if required (paragraph BC51 of the Basis for Conclusions on AASB 2019‑4).

BC25          The Board acknowledged those for-profit private sector entities with a non-legislative requirement to prepare financial statements that comply with AAS might benefit from being able to disclose they have not assessed compliance with certain AAS requirements, for reasons consistent with those noted in paragraph BC24. However, the Board took the view for-profit private sector entities typically would be expected to have access to the resources necessary to make the required assessments and should therefore have an understanding of the R&M requirements in AAS under a good-governance approach to financial reporting. The Board also considered that while many of these entities might be small in size, they typically would not have overly complex accounting requirements or transactions in this case, and this assessment would therefore be relatively straightforward.

BC26          The Board considered that the reasons outlined in paragraphs BC24 and BC25 meet the requirements of the standard-setting frameworks as justifiable reasons why for-profit and not-for-profit private sector entities should have different disclosure requirements.

BC27          The Board also noted that although it did not expect these disclosures to be onerous for for-profit private sector entities, those entities would still have the option of changing their constituting or other documents to avoid reference to AAS should they wish to do so, which would scope them out of this Standard.

Operative date

BC28          ED 302 proposed an operative date of annual reporting periods ending on or after 30 June 2021. The Board considered this date would result in those entities with a legislative requirement to comply with AAS or accounting standards being required to include the disclosures in their SPFS for one year before they would be required to transition to GPFS under AASB 2020-2. Other entities, with a non-legislative requirement to comply with AAS, would also be required to comply promptly, thereby meeting the needs of users of SPFS in a timely way. The Board was of the view that compliance with R&M requirements is part of good governance and a number of these entities should already be complying with R&M requirements, and therefore the proposals would not be onerous.

BC29          The Board also noted that, when deciding the effective date of AASB 2019-4 for not-for-profit private sector entities, it was not necessary to provide an extended operative date as the amendments did not require entities to change their existing accounting policies. At the time of issuing ED 302, the Board’s view was that the rationale adopted for the operative date of AASB 2019-4 would also apply in the for-profit private sector context. On considering the comments from respondents to ED 302 on this matter and taking into account other factors, the Board decided to defer the proposed operative date of this Standard, as explained in paragraphs BC33 and BC34.

Outcome of ED 302

BC30          Following the consultation period, and after considering stakeholder comments, the Board decided to proceed with the proposals in ED 302, but with some significant changes. The Board’s bases for the proposals it decided to retain are articulated in the Basis for Conclusions accompanying ED 302, and are summarised here in paragraphs BC3-BC27. Accordingly, as noted in paragraph BC2(b), after providing an overview of the feedback received on ED 302, the remainder of this Basis for Conclusions focuses primarily on the significant proposals in ED 302 that the Board decided to change, and the rationale for doing so. It also addresses some issues raised by respondents to ED 302 that, although they did not give rise to changes to the proposals, warrant further explanation.

Feedback from respondents on ED 302

BC31          The Board received 13 formal comment letters on ED 302, with a mix of views from respondents.

BC32          A number of respondents expressed concern that the cost of implementing the ED 302 proposals would exceed any benefits. This was particularly the case for those for-profit private sector entities with a legislative requirement to comply with AAS, given the proposals for these entities were proposed to be effective from 1 July 2020 and therefore would apply for only one year. This was because, as noted above, the amendments in AASB 2020-2 removed the ability of these entities to prepare SPFS for annual reporting periods beginning on or after 1 July 2021.

BC33          A number of respondents also expressed concern that the proposed effective date of 1 July 2020 would provide insufficient time for entities to prepare for the new requirements. Furthermore, some respondents suggested delaying the proposed effective date to align with the operative date of AASB 2020-2. This would effectively exclude entities with a legislative requirement to comply with AAS from the scope of the proposals as well.

BC34          The Board considered this feedback and decided, for the reasons noted in paragraphs BC38 and BC39, it was appropriate to delay the effective date of the final amendments and in doing so exclude those entities with a legislative requirement to comply with AAS or accounting standards from the scope of the Standard.

BC35          Other significant matters considered by the Board in making this and other decisions are addressed below.

Scope

BC36          The Board decided this Standard should apply only to those for-profit private sector entities required only by their constituting document or another document to prepare financial statements that comply with AAS, provided the relevant document was created before 1 July 2021 and not amended on or after that date. In paragraph BC85 of the Basis for Conclusions on AASB 2020-2, the Board explained that these entities were excluded from the scope of AASB 2020-2 and therefore permitted to continue preparing SPFS because they prepare financial statements for specific users, have no external regulator and the financial statements are not lodged on the public record. However, the Board remained concerned about the lack of transparency of SPFS that continue to refer to AAS. As a result, to help ensure users are adequately informed, it came to the view the SPFS of these entities should be required to disclose information about the extent of their compliance or otherwise with the R&M requirements in AAS. In addition, the Board noted anecdotally there would be some types of entities, such as securitised trading trusts, outside the scope of AASB 2020-2 (and therefore permitted to continue preparing SPFS) but lodging SPFS on the public record that are required only by their constituting document or another document to comply with AAS. Accordingly, in the absence of this Standard, there would be publicly available SPFS that do not necessarily specify whether or not they comply with R&M requirements of AAS, despite being required by a constituting or other document to comply with AAS. The Board was concerned this would not satisfy the needs of users.

BC37          The Board also considered whether to broaden the scope of the requirements in this Standard to other entities that are not currently within the application paragraphs of AAS set out in AASB 1057, such as entities voluntarily preparing SPFS or entities preparing SPFS due to a requirement in their constituting document or another document to present a ‘true and fair view’ or to comply with ‘GAAP’ (whether generally accepted accounting principles or generally accepted accounting practices), without those terms being explicitly defined or specified as AAS. However, the Board decided the scope of this Standard should not include such entities for the same reasons it did not include them in the application paragraphs of AAS (see paragraph BC79 of the Basis for Conclusions on AASB 2020-2).

BC38          As noted in paragraph BC34, the Board decided to exclude from the scope of this Standard for-profit private sector entities required by legislation to prepare financial statements that comply with either AAS or accounting standards (ie entities within the scope of AASB 2020-2). This acknowledges what would otherwise be a short-term effect of the proposals in ED 302 for these entities, caused by delays in the issue of this Standard due to the COVID-19 pandemic’s impact on the Board’s work program. The Board noted that, at the time of issuing ED 302, the implications of COVID-19 could not have been predicted. The basis for this decision is consistent with the reason for the earlier decision to exclude for-profit private sector entities from the scope of AASB 2019-4 (see paragraph BC47 of the Basis for Conclusions on AASB 2019-4).

BC39          The Board concluded that excluding these entities from this Standard would allow them to use the extra time to prepare for transitioning to GPFS in accordance with AASB 2020-2 and it would be a reasonable and pragmatic way of providing some resource relief during the pandemic. The Board also concluded excluding these entities would have a limited adverse effect on users and, on that basis, the Board accepted the practical arguments expressed by some stakeholders that the introduction of new disclosure requirements for these entities would add unreasonable incremental time to prepare and audit SPFS for years ending on or after 30 June 2021.

Disclosure regarding the reporting framework and whether the financial statements are general purpose or special purpose

BC40          In addition to the proposed disclosure requirements in ED 302 that the Board decided to incorporate into this Standard, as noted in paragraph BC15(d), the Board considered whether selected pre-existing disclosure requirements in AASB 1054 should be required of entities within the scope of this Standard. In particular, the Board considered whether paragraphs 8 and 9 of AASB 1054 (relating to disclosure of the reporting framework under which the financial statements are prepared and whether the financial statements are SPFS or GPFS) should be required. As part of its consideration, the Board noted similar disclosures required by AASB 2019-4 apply only to not-for-profit private sector entities that were already within the scope of AASB 1054, whereas the scope of this Standard includes entities not previously within the scope of AASB 1054. Despite this, the Board concluded paragraphs 8 and 9 of AASB 1054 are consistent with the objective of this Standard and help describe the basis of accounting. Accordingly, the Board decided paragraphs 8 and 9 of AASB 1054 would provide useful information at minimal cost as this information is expected to be readily available to an entity. The Board further noted that in order to make the disclosure required by paragraph 9C(a) of AASB 1054 (ie “to disclose the basis on which the decision to prepare SPFS was made”), the information that is the subject of paragraphs 8 and 9 of AASB 1054 would need to be considered by the entity anyway.

Disclosure regarding accounting policies for joint operations

BC41          Some respondents to ED 302 expressed a view that joint operations within the scope of AASB 11 Joint Arrangements should be excluded from the requirement to disclose overall compliance with R&M requirements. They argued this by analogy with how ED 302 proposed dealing with disclosures about an entity’s accounting policies relating to subsidiaries, associates and joint ventures. The Board concluded that an exclusion for joint operations (in addition to the exclusion for subsidiaries, associates and joint ventures) is not required and would not be appropriate. This is because paragraph 20 of AASB 11 requires a joint operator, being the entity preparing the financial statements (whether consolidated or unconsolidated), to recognise its share of the assets, liabilities, revenue and expenses in a joint operation – and therefore it is clearly an R&M requirement. The Board also noted paragraph 21 of AASB 11 clarifies that the requirements relating to the entity’s share of those amounts are accounted for in accordance with the requirements (including R&M) of other relevant AAS. The definition of a joint operation also confirms this, on the basis that it refers to the entity’s rights and obligations to the assets and liabilities. Therefore, non-compliance with AASB 11 as it applies to joint operations would be a clear non-compliance with R&M requirements in AAS.

BC42          Given the nature of joint operations, their accounting treatment is fundamentally different from that of subsidiaries, associates and joint ventures. As such, it would be inappropriate to also exclude them from the overall R&M disclosure required by this Standard, potentially implying they are not R&M requirements. The Board also noted that paragraphs 9C(e) and 9C(f) of this Standard are consistent with paragraph 9C(d), which also does not refer to AASB 11.

Disclosure regarding subsidiaries, investments in associates or investments in joint ventures

BC43          The Board considered whether an entity that has no subsidiaries, investments in associates or investments in joint ventures should be required to make an explicit statement to this effect. The Board had considered the same issue in the context of not-for-profit private sector entities in the development of AASB 2019-4. At that time the Board noted entities preparing either Tier 1 or Tier 2 GPFS are not required to make such a statement. Consistent with that, the Board decided an explicit statement would not be required in SPFS of not-for-profit private sector entities, as noted in paragraph BC30 of the Basis for Conclusions on AASB 2019-4. The Board also noted that, in any event, users of financial statements could reasonably be expected to be able to discern from the absence of the other disclosures (eg paragraph 9C(d) of AASB 1054, which results in disclosures only when the entity has interests in other entities) that the entity has no subsidiaries or interests in associates or joint ventures. Therefore, the Board concluded that an explicit statement for entities within the scope of this Standard should not be required.

Disclosures regarding compliance with all the R&M requirements in AAS

BC44          The Board noted the view that the disclosure requirement in paragraph 9C(f) of this Standard – overall compliance with R&M requirements in AAS – is redundant given the disclosure requirement in paragraph 9C(e) about each material accounting policy that does not comply with AAS R&M requirements. In response, the Board noted that, like AASB 2019-4, this Standard follows a two-step approach (first paragraph 9C(e) and then paragraph 9C(f)) to assessing and disclosing compliance or otherwise with the R&M requirements in AAS (other than AASB 10 and AASB 128). This approach is designed to minimise the burden associated with preparing the disclosures by having entities assess first whether or not their material accounting policies comply with AAS R&M requirements, and then whether the financial statements overall comply with AAS R&M requirements. If all material accounting policies comply with AAS R&M requirements, there is no disclosure to be made under paragraph 9C(e), which is why paragraph 9C(f) is useful as a way to make clear to users the financial statements do in fact comply with all R&M requirements. Although the Board noted AAS usually only require an entity to disclose where they have not complied with AAS requirements, in this case requiring an entity to disclose it has complied is useful for users and is not an onerous requirement. Furthermore, without paragraph 9C(f), if an entity has one or more instances of material non-compliance with R&M requirements, without disclosing overall non-compliance it may not be readily evident to users that this is the case.

BC45          The Board reaffirmed its decision to not provide entities within the scope of this Standard an option to state they have not assessed compliance with certain AAS requirements. The Board noted the contrary view that allowing a ‘not assessed’ option might be a means of responding to cost/benefit concerns expressed by respondents to ED 302, whilst still providing useful information that would put users on notice that the financial statements might not comply with all the R&M requirements in AAS. However, consistent with the reasons in paragraph BC25 and the fact the Board had not identified any new arguments in the responses to ED 302, the Board did not accept that contrary view. The Board also noted deferral of the effective date as mentioned in paragraph BC51 would provide entities with sufficient time to consider any possible complexities or challenges in making the disclosures, and therefore the ‘not assessed’ option was not warranted.

Disclosures regarding omitted AAS disclosures

BC46          Some respondents to ED 302 expressed a view the disclosure requirements in this Standard should be expanded to require an entity’s SPFS to identify AAS where it has elected to omit material disclosures that would otherwise be included in GPFS in accordance with those AAS. For example, where the entity elects to not disclose related party transactions, it should be required to disclose its election not to make any disclosures under AASB 124 Related Party Disclosures. The Board considered that while disclosures regarding omitted AAS disclosures might be useful for users of SPFS, the scope of this Standard and the related amendments are aimed at increasing the transparency and comparability of SPFS in relation to compliance with the R&M requirements in AAS rather than AAS disclosure requirements. The Board also noted this matter was previously considered as part of the feedback received on ED 293 and the Board decided against requiring additional AAS disclosures as it was beyond the scope of the project that resulted in AASB 2019-4. Consistent with AASB 2019-4, the Board considered matters relating to omitted disclosures are beyond the scope of the project that resulted in this Standard.

Other issues

Consistency with the Standard-Setting Framework

BC47          Some respondents to ED 302 expressed a view that a Standard based on the proposals would contradict The AASB’s For-Profit Entity Standard-Setting Framework (the Framework), and therefore this Standard should not be issued. This was on the basis that the Framework states “the AASB currently does not set recognition and measurement requirements for SPFS. This is because SPFS should only be prepared where users can tailor the SPFS to their own information needs and therefore do not need a standard-setter or regulator to specify the accounting policies or require disclosure of the information for them.”

BC48          The Board considered this view in light of its decision relating to disclosures in SPFS of not-for-profit private sector entities as reflected in AASB 2019-4. The Board acknowledged that the appropriateness of the justifications noted in the Basis for Conclusions on AASB 2019-4 (in particular paragraph BC40) for rejecting these respondents’ views are less apparent for entities within the scope of this Standard, but nonetheless concluded this Standard is justifiable under the Framework. The Framework notes the Board does not set R&M requirements for SPFS. In this Standard, the Board is adding limited disclosure requirements for SPFS, in the same way as it did for not-for-profit private sector entities under AASB 2019-4. This Standard does not set R&M requirements for SPFS.

Overall justification for this Standard

BC49          In deciding to issue this Standard, the Board noted the anecdotal feedback it had received that this Standard is unreasonable because many references to AAS historically were included in the constituting documents of entities without those entities having a full appreciation of the implications of the reference being ambulatory rather than static. However, the Board concluded this Standard is justified for the reasons indicated in paragraphs BC3-BC12 and on the basis the Board’s acknowledgement of the history of AAS references in constituting documents is the main reason the Board decided on only contextual disclosures for SPFS rather than requiring a more onerous transition to GPFS by entities within the scope of the Standard. Furthermore, overall, the Board concluded the requirements in this Standard are commensurate with the evidence from the research outlined in paragraphs BC5-BC8. Additional research would unduly delay the project and would only be justified if the requirements were to be more onerous, such as mandating R&M requirements.

BC50          Paragraph 18 of the AASB For-Profit Entity Standard-Setting Framework (July 2021) states: “Enforcement of the preparation of financial statements and compliance with Accounting Standards is the responsibility of other regulators ... It is not the responsibility of the AASB.” Consistent with that, the Board noted its role and expertise in relation to this Standard is to determine the appropriate accounting framework and accounting standards that should apply where financial statements are required by constituting or other documents to comply with AAS. Requiring additional disclosures in SPFS to provide greater transparency and comparability regarding compliance with the R&M requirements in AAS is consistent with this role.

Effective date

BC51          The Board initially decided this Standard should be effective for annual reporting periods beginning on or after 1 July 2021, with earlier application permitted. This effectively deferred the proposed operative date by 12 months. In making this decision the Board acknowledged anecdotal feedback that some issues faced by small entities within the scope of this Standard might be more complex than originally thought. After the issuance of ED 302, the Board became aware that in some instances, for example when applying AASB 15 Revenue from Contracts with Customers or AASB 119 Employee Benefits, it may be difficult for smaller entities to determine whether they are complying with the R&M requirements in AAS, such as an entity calculating employee benefits (eg long service leave) when they have staff with long tenure.

BC52          Consistent with the Board’s view in paragraph BC34, the Board concluded deferring the proposed operative date by 12 months (with early adoption allowed) would give entities within the scope of this Standard enough time to prepare for the implementation of the disclosures. It would also be a way for the Board to address the fact that the economic impact of COVID-19 has been significant, is ongoing, and could not have been predicted when issuing ED 302 and proposing an operative date.

BC53          Given subsequent delays in finalising this Standard, the Board revised the operative date to periods ending on or after 30 June 2022, which in substance covers the same periods as periods beginning on or after 1 July 2021. Short periods beginning on or after 1 July 2021 and ending before 30 June 2022 would not be covered, but these would be very unusual and therefore of limited significance in aggregate. Earlier application is permitted.

 



[1]    AASB 117 was superseded by AASB 16 for periods beginning on or after 1 January 2019.

[2]    AASB 118 was superseded by AASB 15 for for-profit entities for periods beginning on or after 1 January 2018.

[3]    Public sector entities were excluded from the scope of this broad project because the Board had a separate project addressing the public sector financial reporting framework.

[4]    In relation to for-profit private sector entities, the proposals were developed as an interim measure while the Board continued with its ED 297 proposals.

[5]    With limited exceptions, consistent with transaction neutrality the proposed disclosures in ED 302 for for-profit entities were based on the disclosures specified in AASB 2019-4 for not-for-profit entities.