Application of Tiers of Australian Accounting Standards

This compiled Standard applies to annual periods beginning on or after 1 July 2021 that end on or after 30 June 2022.  Earlier application is permitted for annual periods beginning on or after 1 January 2014 that end before 30 June 2022.  It incorporates relevant amendments made up to and including 2 May 2022.

Prepared on 15 September 2022 by the staff of the Australian Accounting Standards Board.

Compilation no. 6

Compilation date:  29 June 2022

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Contents

Comparison with ifrs for smes

Accounting Standard

AASB 1053 Application of Tiers of Australian Accounting Standards

from paragraph

Objective 1

Application 3

Tiers of Reporting Requirements 7

Application of Australian Accounting Standards under thE Differential Reporting Framework

Application of Tier 1 Reporting Requirements 11

Application of Tier 2 Reporting Requirements 13

Application of AASB 1 17

First-time Adoption of Australian Accounting Standards 18

Reapplication of Australian Accounting Standards other than Transitioning between Tiers 19

Reapplication of Tier 2 Reporting Requirements in Initial Consolidated Financial Statements 20A

Transition between Tiers 21

APPENDICES

A  Defined Terms

B  Public Accountability

C  Transition

D  Transition Scenarios

E  Short-term exemptions for entities applying Tier 2 – Simplified Disclosures for periods beginning before 1 July 2022

COMPILATION DETAILS

Basis for Conclusions

BASIS FOR CONCLUSIONS ON AASB 2014-2

BASIS FOR CONCLUSIONS ON AASB 2022-2

Australian Accounting Standard AASB 1053 Application of Tiers of Australian Accounting Standards (as amended) is set out in paragraphs 1 – 23 and Appendices A, B and E.  All the paragraphs have equal authority.  Paragraphs in bold type state the main principles.  Terms defined in Appendix A are in italics the first time they appear in the Standard.  AASB 1053 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations, and AASB 1057 Application of Australian Accounting Standards.  In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.

Comparison with IFRS for SMEs

The disclosures required by Tier 2 and the disclosures required by the IASB’s International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) are highly similar.  However, Tier 2 requirements and the IFRS for SMEs are not directly comparable as a consequence of Tier 2 including recognition and measurement requirements corresponding to those in IFRS Standards, whereas the IFRS for SMEs includes limited modifications to those requirements.

In addition, the recognition, measurement and disclosure requirements that apply in accordance with Tier 2 are revised as Australian Accounting Standards are revised, whereas the IFRS for SMEs is expected to be revised only periodically for revisions of IFRS Standards.

Accounting Standard AASB 1053

Application of Tiers of Australian Accounting Standards

Objective

1                        The objective of this Standard is to set out the application of Tiers of Australian Accounting Standards to different categories of entities preparing general purpose financial statements.

AusCF1 AusCF entities are:

(a) not-for-profit entities; and

(b) for-profit entities that are not applying the Conceptual Framework for Financial Reporting (as identified in AASB 1048 Interpretation of Standards).

For AusCF entities, the term ‘reporting entity’ is defined in AASB 1057 Application of Australian Accounting Standards and Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity also applies.  For-profit entities applying the Conceptual Framework for Financial Reporting are set out in paragraph Aus1.1 of the Conceptual Framework.

Application

2 [Deleted by the AASB]

3 This Standard applies to annual reporting periods beginning on or after 1 July 2013.

[Note:  For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]

4 This Standard may be applied to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013.  When an entity applies this Standard to such an annual reporting period it shall disclose that fact.

5 When an entity elects to early adopt this Standard for an annual reporting period beginning on or after 1 July 2009 but before 1 July 2013 and prepares Tier 2 general purpose financial statements, it shall also adopt the relevant Standards that specify Tier 2 reporting requirements.

6 [Deleted by the AASB]

Tiers of Reporting Requirements

7 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 – Simplified Disclosures.

8 Tier 1 incorporates International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and include requirements that are specific to Australian entities.

9 Tier 2 comprises the recognition and measurement requirements of Tier 1 (including consolidation and the equity method of accounting) but substantially reduced disclosure requirements.  Except for the presentation of a third statement of financial position under Tier 1[1] and the option of not presenting a statement of changes in equity[2], the presentation requirements under Tier 1 and Tier 2 are the same.  Tier 2 disclosure requirements are set out in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

10 Each Australian Accounting Standard specifies the entities to which it applies and, where necessary, sets out disclosure requirements from which Tier 2 entities are exempt.

Application of Australian Accounting Standards under the Differential Reporting Framework

Application of Tier 1 Reporting Requirements

11 The following types of entities shall prepare general purpose financial statements that comply with Tier 1 reporting requirements:

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

(b) the Australian Government and State, Territory and Local Governments.

12 Subject to AASB 1049, GGSs of the Australian Government and State and Territory Governments shall apply Tier 1 reporting requirements.

Application of Tier 2 Reporting Requirements

13 Tier 2 reporting requirements shall, as a minimum, apply to the general purpose financial statements of the following types of entities:

(a) for-profit private sector entities that do not have public accountability;

(b) not-for-profit private sector entities; and

(c) public sector entities, whether for-profit or not-for-profit, other than the Australian Government and State, Territory and Local Governments.

These types of entities may elect to apply Tier 1 reporting requirements in preparing general purpose financial statements.

14 Entities applying Tier 2 reporting requirements would not be able to state compliance with IFRSs.

15 Whilst Tier 2 reporting requirements are available under this Standard for general purpose financial statements of non-publicly accountable for-profit private sector entities, not-for-profit private sector entities and public sector entities (both for-profit or not-for-profit) other than those required to apply Tier 1 reporting requirements, regulators might exercise a power to require the application of Tier 1 reporting requirements.

16 Disclosures under Tier 2 reporting requirements are the minimum disclosures required to be included in general purpose financial statements.  Entities may include additional disclosures using Tier 1 reporting requirements as a guide if, in their judgement, such additional disclosures are consistent with the objective of general purpose financial statements.

Application of AASB 1

17 Entities adopting Tier 2 reporting requirements for the first time that apply AASB 1 shall comply with the simplified disclosures under AASB 1060 paragraphs 206–213, including for the purposes of paragraphs 18A(a) and 18A(b).

First-time Adoption of Australian Accounting Standards

18 When applying Tier 1 reporting requirements for the first time, an entity that prepared its most recent previous financial statements in the form of special purpose financial statements shall apply all the relevant requirements of AASB 1.

18A When applying Tier 2 reporting requirements for the first time, an entity that prepared its most recent previous financial statements in the form of special purpose financial statements:

(a) without applying, or only selectively applying, applicable recognition and measurement requirements of Australian Accounting Standards, including, if a parent entity, without presenting consolidated financial statements prepared in accordance with AASB 10 Consolidated Financial Statements (unless exempt), shall apply either:

(i) all the relevant requirements of AASB 1; or

(ii) Tier 2 reporting requirements directly using the requirements in AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors;

(b) without presenting consolidated financial statements, on the basis that neither the parent nor the group was a reporting entity (as defined in AASB 1057), shall apply either:

(i) all the relevant requirements of AASB 1; or

(ii) Tier 2 reporting requirements directly using the requirements in AASB 108; and

(c) applying all applicable recognition and measurement requirements of Australian Accounting Standards, including, if a parent entity, presenting consolidated financial statements prepared in accordance with AASB 10 (unless exempt), shall not apply AASB 1.

18B An entity applying paragraph 18A(c) continues applying the applicable recognition and measurement requirements of Australian Accounting Standards, whether it had previously initially applied recognition and measurement requirements consistent with AASB 1 or a predecessor to AASB 108, whichever was applicable at the time.

18C Entities that are applying AASB 1060 shall provide the disclosures required under AASB 1060 paragraphs 206–213 if they are applying paragraph 18A(a)(i) or 18A(b)(i), or the disclosures required under AASB 1060 paragraphs 106–110 if they are applying paragraphs 18A(a)(ii) or 18A(b)(ii), instead of the disclosures required under AASB 1 or AASB 108.

18D Paragraph 18A(a) addresses where an entity has not applied, or only selectively applied, applicable recognition and measurement requirements, rather than whether the entity had made an explicit and unreserved statement of compliance with such requirements. As such, if an entity becomes aware it had claimed compliance with applicable recognition and measurement requirements of Australian Accounting Standards in error in its most recent previous special purpose financial statements, the entity applies paragraph 18A(a)

Reapplication of Australian Accounting Standards other than Transitioning between Tiers

19 Subject to paragraphs 19A and 21, an entity that:

(a) has applied Tier 1 reporting requirements or IFRSs in a previous reporting period; but

(b) whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with Tier 1 reporting requirements[3] or IFRSs; and

(c) is resuming or commencing the application of Tier 1 reporting requirements;

shall apply all the relevant requirements of AASB 1, or the AASB 1 option for retrospective application of Australian Accounting Standards in accordance with AASB 108 as if the entity had never stopped applying Australian Accounting Standards or IFRSs.

19A An entity that is to claim IFRS compliance on resuming Tier 1 reporting requirements under paragraph 19, shall not use the AASB 1 option for retrospective application of Australian Accounting Standards in accordance with AASB 108 if it was not previously IFRS compliant.

19B Subject to paragraph 23, an entity that:

(a) has applied Tier 2 reporting requirements[4] in a previous reporting period; but

(b) whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with Tier 2 reporting requirements[5]; and

(c) is resuming the application of Tier 2 reporting requirements;

shall:

(d) apply all the relevant requirements of AASB 1, or the AASB 1 option for retrospective application of Australian Accounting Standards in accordance with AASB 108 as if the entity had never stopped applying Tier 2 reporting requirements, if the entity did not apply all applicable recognition and measurement requirements of Australian Accounting Standards; or

(e) not apply AASB 1, or the AASB 1 option for retrospective application of Australian Accounting Standards in accordance with AASB 108, if the entity applied all applicable recognition and measurement requirements of Australian Accounting Standards.

20 Entities described in paragraph 19B(a)-(c) resume the application of Tier 2 reporting requirements effectively using the same approach as an entity would for first transitioning from special purpose financial statements to Tier 2 reporting requirements set out in paragraph 18A.  Accordingly, an entity that did not comply with Tier 2 reporting requirements due solely to omitting some disclosures, but otherwise continued to apply all applicable recognition and measurement requirements, is prohibited from applying AASB 1 on returning to Tier 2 requirements.  Instead, it continues applying applicable recognition and measurement requirements, whether it had previously initially applied AASB 1 or a predecessor to AASB 108, whichever was applicable at the time.  However, if such an entity did not continue to apply all applicable recognition and measurement requirements of Australian Accounting Standards in its most recent previous annual financial statements, that entity is required to apply AASB 1, or the AASB 1 option for retrospective application of Australian Accounting Standards in accordance with AASB 108, on resuming the application of Tier 2 reporting requirements.

Reapplication of Tier 2 Reporting Requirements in Initial Consolidated Financial Statements

20A A for-profit private sector entity that:

(a) prepared its most recent previous annual financial statements in compliance with Tier 2 reporting requirements, including an explicit and unreserved statement of compliance with Tier 2 reporting requirements;

(b) did not present consolidated financial statements, on the basis that neither the parent nor the group was a reporting entity (as defined in AASB 1057); and

(c) is preparing consolidated financial statements for the first time in compliance with Tier 2 – Simplified Disclosures;

shall apply either:

(d) all the relevant requirements of AASB 1; or

(e) Tier 2 reporting requirements directly using the requirements in AASB 108.

Transition between Tiers

21 An entity transitioning from Tier 2 to Tier 1 shall:

(a) apply AASB 1[6], if it is claiming compliance with IFRSs; and

(b) not apply AASB 1, if it is a not-for-profit entity not claiming compliance with IFRSs.

22 In relation to paragraph 21(a), entities claiming compliance with IFRSs (which would include for-profit entities applying Tier 1 reporting requirements) need to apply the relevant requirements of AASB 1.  This is because, in previously applying Tier 2 reporting requirements, these entities have applied only some of the disclosure requirements of AASB 1 or were prohibited or exempted from applying AASB 1.

23 An entity transitioning from Tier 1 to Tier 2 shall not apply AASB 1.

24 [Deleted by the AASB]

Appendix A
Defined Terms

This appendix is an integral part of AASB 1053.

The following terms have the meanings specified:

General purpose financial statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.

Public accountability – an entity has public accountability if:

(a) its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or

(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.

Appendix B
Public Accountability

This appendix is an integral part of AASB 1053.

B1 Public accountability is defined in Appendix A.  The notion of public accountability is consistent with the notion adopted by the IASB in its International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).  It is different from the notion of public accountability in the general sense of the term that is often employed in relation to not-for-profit, including public sector, entities. 

B2 The following for-profit entities are deemed to have public accountability:

(a) disclosing entities, even if their debt or equity instruments are not traded in a public market or are not in the process of being issued for trading in a public market;

(b) co-operatives that issue debentures;

(c) registered managed investment schemes;

(d) superannuation plans regulated by the Australian Prudential Regulation Authority (APRA) other than Small APRA Funds as defined by APRA Superannuation Circular No. III.E.1 Regulation of Small APRA Funds, December 2000; and

(e) authorised deposit-taking institutions.

B3 Some entities may also hold assets in a fiduciary capacity for a broad group of outsiders because they hold and manage financial resources entrusted to them by clients, customers or members not involved in the management of the entity.  However, if they do so for reasons incidental to a primary business (as, for example, may be the case for travel or real estate agents, schools, charitable organisations, co-operative enterprises requiring a nominal membership deposit and sellers that receive payment in advance of delivery of the goods or services such as utility companies), that does not make them publicly accountable.

B4 Examples of entities that hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses are most likely to include banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.

Appendix C
Transition

This appendix accompanies, but is not part of, AASB 1053.

This Appendix is intended to facilitate the application of the requirements in paragraphs 17–23 of the Standard for the application of Tiers, and the transition between Tiers, of Australian Accounting Standards.

Chart 1:  First-time Adoption of Tier 1 or Tier 2 Reporting Requirements (paragraphs 18–18D)

* AASB 1060, paragraph B1, provides optional relief from presenting comparative information for new disclosures for not-for-profit entities transitioning early from either Tier 1 or Tier 2 – Reduced Disclosure Requirements to Tier 2 – Simplified Disclosures.

Chart 2: Re-application of Tier 1 Reporting Requirements (paragraphs 19 and 19A)

Chart 3: Re-application of Tier 2 Reporting Requirements (paragraph 19B)

Chart 4: Moving between Tiers (paragraphs 21 and 23)

Appendix D
Transition Scenarios[7]

This appendix accompanies, but is not part of AASB 1053.  It is intended to summarise which paragraphs of AASB 1053 (as revised by AASB 2014-2 Amendments to AASB 1053 – Transition to and between Tiers, and related Tier 2 Disclosure Requirements) would apply in particular common scenarios, and their consequences.

Appendix E
Short-term exemptions for entities applying Tier 2 – Simplified Disclosures for periods beginning before 1 July 2022

This appendix is an integral part of AASB 1053

Short-term exemptions for for-profit private sector entities

E1                    This appendix sets out optional short-term exemptions for for-profit private sector entities applying AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to periods beginning before 1 July 2022, as follows:

(a)                    relief from distinguishing the correction of errors and changes in accounting policy, for periods beginning before 1 July 2022 (see paragraph E3);

(b)                   relief from providing comparative information not previously disclosed in the notes, for periods beginning before 1 July 2021 (see paragraph E4); and

(c)                    relief from restating comparative information, for periods beginning before 1 July 2021 (see paragraphs E5–E7).

E2                    If an entity applies one or more of the exemptions set out in this appendix, it shall disclose that fact.

Relief from distinguishing the correction of errors and changes in accounting policy

E3                    For periods beginning before 1 July 2022, notwithstanding AASB 1060 paragraph 211 (for entities applying AASB 1 First-time Adoption of Australian Accounting Standards to the period) and AASB 1060 paragraph 110 (for entities applying AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors instead of AASB 1), an entity applying paragraph 18A(a) or (b) need not distinguish the correction of errors and changes in accounting policies if the entity becomes aware of errors made in its most recent previous special purpose financial statements.

Relief from presenting comparative information not previously disclosed in the notes

E4                    Notwithstanding AASB 1060 paragraph 20, entities that elect to apply AASB 1060 to periods beginning before 1 July 2021 (ie early application) need not present comparative information in the notes if the entity did not disclose the comparable information in its most recent previous financial statements.

Relief from restating comparative information for certain for-profit private sector entities

E5                    Paragraphs E6–E7 apply to a for-profit private sector entity that elects to apply AASB 1060 to periods beginning before 1 July 2021 (ie early application) and also applies AASB 1 in preparing its first Australian-Accounting-Standards financial statements (Tier 2) for the period.

E6                    Notwithstanding AASB 1 paragraph 7, comparative information need not be restated in the entity’s first Australian-Accounting-Standards financial statements (Tier 2). Under this approach, references to the ‘date of transition to Australian Accounting Standards’ in AASB 1 shall mean the beginning of the first Australian-Accounting-Standards reporting period. Consequently, consistent with AASB 1 paragraph 11, the entity shall recognise adjustments arising from any differences between the carrying amounts in its previous special purpose financial statements and its opening carrying amounts based on the retrospective application of Australian Accounting Standards directly in retained earnings (or, if appropriate, another category of equity) at the beginning of the first Australian-Accounting-Standards reporting period.

E7                    An entity that elects to not restate comparative information in its first Australian-Accounting-Standards financial statements (Tier 2) in accordance with paragraph E6 need not provide the reconciliations required by AASB 1060 paragraphs 210(b) and (c). The entity shall:

(a) present two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows and two statements of changes in equity and related notes, as follows:

(i) the statements and related notes as at the end of the first Australian-Accounting-Standards reporting period, compliant with Australian Accounting Standards; and

(ii) the statements and related notes presented in its most recent previous special purpose financial statements (not necessarily compliant with Australian Accounting Standards);

(b) disclose a reconciliation of its equity presented in its most recent previous special purpose financial statements to its equity determined in accordance with Australian Accounting Standards – Simplified Disclosures at the date of transition to Australian Accounting Standards – Simplified Disclosures;

(c) disclose a description of the main adjustments that would have been required to make the comparative statement of profit or loss and other comprehensive income and separate statement of profit or loss (if presented) compliant with Australian Accounting Standards. The entity need not quantify those adjustments; and

(d) prominently label the comparative information that is not compliant with Australian Accounting Standards as such.

Compilation details
Accounting Standard AASB 1053 Application of Tiers of Australian Accounting Standards (as amended)

Compilation details are not part of AASB 1053.

This compiled Standard applies to annual reporting periods beginning on or after 1 July 2021 that end on or after 30 June 2022.  It takes into account amendments up to and including 2 May 2022 and was prepared on 15 September 2022 by the staff of the Australian Accounting Standards Board (AASB).

This compilation is not a separate Accounting Standard made by the AASB.  Instead, it is a representation of AASB 1053 (June 2010) as amended by other Accounting Standards, which are listed in the table below.

Table of Standards

(a) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013.

(b) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2014.

(c) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2018, provided that AASB 15 Revenue from Contracts with Customers is also applied to such periods.  AASB 2015-8 updated the application date of the amendments in this Standard (and of AASB 15) to 1 January 2018.

(d) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2014 but before 1 July 2015.

(e) The amendments made by AASB 2014-5 are no longer required to apply to annual reporting periods beginning on or after 1 January 2017 but before 1 January 2018, as a consequence of AASB 2015-8 deferring the effective date of AASB 15 (and its consequential amendments in AASB 2014-5) from 1 January 2017 to 1 January 2018.

(f) AASB 2016-7 deferred the effective date of AASB 15 (and its consequential amendments in AASB 2014-5) for not-for-profit entities to annual reporting periods beginning on or after 1 January 2019, instead of 1 January 2018.  However, earlier application of AASB 1053 (2010) incorporating the text that relates to AASB 15 is permitted, provided that AASB 15 is also applied.

(g) Entities may elect to apply this Standard to annual periods beginning before 1 January 2020.

(h) Entities may elect to apply this Standard to annual periods beginning before 1 July 2021.

(i) Entities may elect to apply this Standard to annual periods beginning before 1 July 2021 provided that AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities is also applied to the same period.

(j) Entities may elect to apply this Standard to annual periods ending before 30 June 2022.

Table of amendments to Standard

Table of amendments to Guidance

Basis for Conclusions

The Basis for Conclusions accompanies, but is not part of, AASB 1053.

BC1               This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in AASB 1053 Application of Tiers of Australian Accounting Standards.  It also provides a context for the Board’s decisions about disclosures from which ‘Tier 2’ entities are exempt, which are reflected in AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements.  It focuses on the issues that the Board considers to be of greatest significance.  Individual Board members gave greater weight to some factors than to others. 

Background to Differential Reporting in Australia

BC2               A form of differential reporting has been incorporated in Accounting Standards in Australia since the early 1990s.  The concept of ‘reporting entity’ is at the core of this differential reporting regime.  Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity deals with the reporting entity concept.  The AASB Glossary of Defined Terms includes the definition of a reporting entity[9] as:

An entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statement 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.

BC3               Most Australian Accounting Standards include the requirements of corresponding International Financial Reporting Standards (IFRSs) and have the following application paragraph:

This Standard applies to:

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

(b)                   general purpose financial statements of each other reporting entity; and

(c)                    financial statements that are, or are held out to be, general purpose financial statements.

Prior to AASB 1053, for-profit and not-for-profit (NFP) entities falling within the scope of this application paragraph were subject to all the recognition, measurement, presentation and disclosure requirements of those Standards.  These entities included entities incorporated under the Corporations Act 2001 that are reporting entities.

BC4               Under the Corporations Act, disclosing entities, public companies (including companies limited by guarantee), large proprietary companies and registered schemes must prepare and lodge financial statements that comply with accounting standards.  Large proprietary companies are those companies that meet at least two of the three size thresholds set out in the Corporations Act relating to:

(a)                    the consolidated revenue for the financial year of the company and the entities it controls (if any);

(b)                   the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any); and

(c)                    the number of employees of the company and the entities it controls (if any) at the end of the financial year.

These Corporations Act size thresholds effectively remove the external reporting obligations for small proprietary companies.[10]

BC5               Accordingly, prior to AASB 1053, a reporting burden that is less than compliance with full Australian Accounting Standards was only available to non-reporting entities in the preparation of financial statements that are not general purpose financial statements.  The financial statements of non-reporting entities are classified as special purpose financial statements and, like general purpose financial statements, are subject to true and fair view requirements of the Corporations Act where they fall within the scope of that Act.

BC6               Entities eligible for this reduced reporting burden included those incorporated under the Corporations Act that are not reporting entities but are required to prepare financial statements.  Only AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, AASB 1031 Materiality and AASB 1048 Interpretation of Standards apply to such entities, by virtue of the application paragraphs in those Standards.

BC7               The Australian Securities and Investment Commission (ASIC) has expressed the view[11] that non-reporting entities required to prepare financial statements in accordance with Chapter 2M of the Corporations Act should comply with the recognition and measurement requirements of all accounting standards.  Under ASIC’s view, the only ‘relief’ for these entities is not having to apply the disclosure requirements contained in Standards other than AASB 101, AASB 107 and AASB 108.

BC8               In addition to AASB pronouncements that incorporate IFRSs, there are Australian Accounting Standards (including Interpretations) that apply specifically to some or all NFP entities, including:

(a)                    AASB 1004 Contributions;

(b)                   AASB 1049 Whole of Government and General Government Sector Financial Reporting;

(c)                    AASB 1050 Administered Items;

(d)                   AASB 1051 Land Under Roads;

(e)                    AASB 1052 Disaggregated Disclosures; and

(f)                    AASB Interpretation 1038 Contributions by Owners Made to Wholly-owned Public Sector Entities.

BC9               Prior to AASB 1053, entities not incorporated under the Corporations Act, (which include many NFP entities and most public sector entities), were required to apply, where applicable, the recognition, measurement, presentation and disclosure requirements of these and other Australian Accounting Standards if they were reporting entities or holding out financial statements to be general purpose financial statements.

The Need to Review the Differential Reporting Framework

BC10            The Board identified a number of concerns with the differential reporting framework that existed prior to AASB 1053.  These concerns included that:

(a)                    costs of preparing general purpose financial statements for some entities were greater than benefits for the users of those general purpose financial statements, because the framework resulted in requirements for general purpose financial statements that were overly burdensome for many entities; and

(b)                   user needs were not being satisfied for other entities, because the framework was being applied in a way that some entities (which should prepare general purpose financial statements) were being treated as non-reporting entities and preparing only special purpose financial statements.

BC11            When it was initially considering these concerns, the Board noted that the International Accounting Standards Board (IASB) was developing an IFRS for SMEs that would result in general purpose financial statements that would not be compliant with IFRSs.  Accordingly, the Board decided that, in revising its differential reporting framework, it was appropriate for the Board to also consider requirements for general purpose financial statements that differ from (full) Australian Accounting Standards.  The Financial Reporting Council has been kept apprised of these developments.

BC12            The Board issued a number of consultative documents containing its proposals for addressing the concerns noted in paragraph BC10.  These documents were, in sequence:

(a)                    Invitation to Comment ITC 12 Request for Comment on a Proposed Revised Differential Reporting Regime for Australia and IASB Exposure Draft of A Proposed IFRS for Small and Medium-sized Entities – issued in May 2007;

(b)                   Consultation Paper Differential Financial Reporting – Reducing Disclosure Requirements (A Proposed Reduced Disclosure Regime for Non-publicly Accountable For-profit Private Sector Entities and Certain Entities in the Not-for-profit Private Sector and Public Sector) – issued in February 2010; and

(c)                    Exposure Draft ED 192 Differential Reporting Framework – also issued in February 2010.

BC13            These consultative documents contained proposals relating to both of the concerns (a) and (b) noted in paragraph BC10 above.  The Board refined its ITC 12 proposals in the light of comments it received on the ITC, and reflected its revised proposals in the Consultation Paper and accompanying ED 192.  After considering constituent comments on ED 192, the Board decided to issue AASB 1053 in response to concern (a), and to undertake further research prior to deciding how it would deal with concern (b). 

BC14            In relation to concern (b), many constituents agreed with the manner in which the Board proposed to address the concern, which was to change the focus from reporting entity to general purpose financial statements and clarify the meaning of general purpose financial statements in an Australian context.  This was on the grounds that:

(a)                    the application of reporting entity involves a high degree of subjectivity and the term is open to differing interpretations; and

(b)                   the use of reporting entity for differential reporting is not universally understood. 

This group was of the view that the use of the reporting entity concept does not provide the intended result, and the uncertainty surrounding its application reduces its usefulness as a robust criterion for differential reporting purposes. 

BC15            In contrast, other constituents expressed the view that the concept of reporting entity works well and should be retained as one aspect of differential reporting.  They commented that they have not seen evidence of major problems with its application.  This group, therefore, considered that those entities that currently claim to be non-reporting entities and prepare special purpose financial statements do not have dependent users and the evidence does not support a view that there is a systemic problem with reporting entities claiming a non-reporting entity status to evade their reporting responsibilities under Australian Accounting Standards.

BC16            The Board concluded that, in the light of these contrasting claims, further research should be carried out on the impact of the ED 192 proposals on those entities currently preparing special purpose financial statements.  This is primarily with a view to ensuring that those entities currently appropriately preparing special purpose financial statements are not disadvantaged by the proposals.  Consistent with this, the Board decided that, under the first stage of revisions to the differential reporting framework, concern (a) should be addressed.  The Board’s approach to dealing with concern (a) leaves the current differential reporting framework based on the reporting entity concept and general purpose financial statements intact, including the requirement for entities required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act to apply AASB 101, AASB 107, AASB 108, AASB 1031 and AASB 1048, by virtue of the application paragraphs in those Standards.

BC17            The remainder of this Basis for Conclusions focuses on the basis for the Board’s conclusions relating to concern (a).

Different Tiers of Requirements for General Purpose Financial Statements

BC18            The Board decided to retain full IFRSs as adopted in Australia as the first Tier (Tier 1) of reporting requirements, and make it mandatory for a relatively small number of entities in the private and public sectors in their preparation of general purpose financial statements.  These entities are limited to publicly accountable entities in the for-profit private sector and Governments in the public sector (see paragraphs BC25 and BC52).  Accordingly, AASB 1053 does not reduce the reporting burden of those entities.  Retention of full IFRSs as adopted in Australia requirements for these entities is consistent with the approach adopted by the IASB to require certain entities to continue to comply with full IFRSs in order to claim IFRS compliance.

BC19            The Board decided to introduce a second Tier (Tier 2) of requirements to substantially reduce the burden of financial reporting for other entities in both the private and public sectors in their preparation of general purpose financial statements.  Tier 2 retains the recognition, measurement and presentation requirements[12] of full IFRSs as adopted in Australia, but requires disclosures that are substantially reduced when compared with those required under full IFRSs as adopted in Australia.

BC20            The Board regards AASB 1053 as a pragmatic and substantive response to the need to reduce the burden of disclosure requirements on Australian reporting entities.  However, the Board does not regard it as a complete or final answer to that need.  In addition to the further research referred to in paragraph BC16 above, the Board intends continuing its deliberations on revising the differential reporting framework with a view to ongoing improvements (including having regard to decisions made by the IASB in relation to its IFRS for SMEs – see paragraph BC98).  The Board concluded that the reforms in AASB 1053 should not be delayed while consideration of other possible areas of reform continues.  The Board notes that important reforms are also being considered to reduce the complexity of full IFRSs, including in the area of financial instruments, which would help reduce reporting complexities when adopted in Australia, including for entities that would be subject to Tier 1 requirements.  The IASB is expected to move beyond financial instruments in its efforts to simplify requirements and the AASB will continue to encourage and support those efforts.

BC21            The new Tier 2 requirements do not change the current AASB policy of the same transactions and other events being subject to the same accounting requirements to the extent feasible (that is, transaction neutrality), for all entities preparing general purpose financial statements (whether for-profit or NFP).

BC22            The Board considered whether a third tier of reporting requirements for general purpose financial statements should be introduced to provide simpler financial reporting requirements for smaller NFP entities since those entities might find the adoption of Tier 2 requirements overly burdensome on cost-benefit grounds.  The Board noted that many NFP entities in the private sector are established as companies limited by guarantee under the Corporations Act or as associations under relevant Incorporated Associations Acts in each State and Territory.  Moreover, many non-trading cooperatives are regulated by State or Territory Acts.  Having regard to this legislation, the Board noted that a reason for contemplating the need for a third tier was that there is generally no NFP equivalent to the outright exemption from reporting that exists for small proprietary companies (see paragraph BC4 above).

BC23            The Board noted that while there is some support from constituents for creating a third tier, there are different views about the requirements of such a tier and the way entities applying those requirements should be identified.  The Board also considered the proposals for reporting relief in the Discussion Paper published by the Australian Government in June 2007 titled Financial Reporting by Unlisted Public Companies in relation to the creation of a third tier of reporting requirements for companies limited by guarantee[13].

BC24            The Board decided not to introduce a third tier of reporting requirements on the basis that:

(a)                    the Government intended to alleviate the reporting burden of small companies limited by guarantee through amendments to the Corporations Act; and

(b)                   Tier 2 requirements for preparing general purpose financial statements would help reduce the disclosure burden of NFP entities significantly.

Applicability of the Different Tiers to For-Profit Entities

Public Accountability

BC25            The Board concluded that for-profit entities that are publicly accountable (as defined in International Financial Reporting Standard for Small and Medium-sized Entities [IFRS for SMEs]) should be required to apply full IFRSs as adopted in Australia.  This is on the basis of consistency with international reporting requirements in the for-profit private sector.  The Board noted that, since Australia has adopted full IFRSs, it would be logical to use the public accountability notion used by the IASB in determining which entities in the for-profit sector should apply Australian Accounting Standards in full.

BC26            The Board acknowledged constituents’ comments about some aspects of the definition of public accountability that the application of the definition in some cases may involve interpretation or judgement.  Some respondents to ED 192 noted it would be helpful for the Board to clarify certain terms used in the definition.  These include the term ‘public market’ referred to in the first leg of the definition and the terms ‘fiduciary’, ‘broad’, ‘outsiders’ and ‘primary business’ referred to in the second leg of the definition.  However, the Board noted it is not a policy of the Board to further interpret the IASB’s terms and definitions.  Accordingly, the Board decided that, instead of interpreting the terms in the definition, AASB 1053 should identify entities that the Board deems to be publicly accountable in the Australian context, to supplement the IASB’s definition of public accountability (see Appendix B of AASB 1053). 

BC27            In relation to identifying entities that should be deemed to be publicly accountable in the Australian context, some respondents to ED 192 questioned whether captive insurers should be classified as publicly accountable since, in their view, there is unlikely to be a broad group of outsiders involved.  The Board noted that the nature of captive insurers varies.  Some only provide insurance to subsidiaries within their group while others also insure joint venture businesses.  Some captive insurers, such as association captive insurers, can insure a wide range of members.  Those that provide insurance to subsidiaries within groups may also deal with outsiders.  For example, they may offer products that have public beneficiaries (such as public or product liability, or professional indemnity).

BC28            The Board concluded that, whilst it expects that most insurance companies will be publicly accountable, there may be certain general insurers, such as some captive insurers, that may not be publicly accountable.  Accordingly, the Board did not deem all regulated insurance entities as publicly accountable.

BC29            Some respondents to ED 192 also questioned whether Small Australian Prudential Regulation Authority (APRA) Funds (SAFs) should be deemed to be publicly accountable, given the small number of members and the limited users of their financial statements.

BC30            The Board noted that SAFs are usually similar in size to self-managed super funds (SMSFs) but, unlike SMSFs (which are regulated by the Australian Taxation Office [ATO]), are regulated by APRA because they do not meet all conditions to be a SMSF.  The Board noted there may be users (such as regulators and trustees) of the financial statements of SAFs who can command information they need and the outsiders for whom the SAF holds assets in a fiduciary capacity.  Accordingly, those users do not seem to constitute a broad group and the Board decided not to deem SAFs as publicly accountable.

BC31            Furthermore, some respondents questioned whether all entities holding an Australian Financial Services Licence (AFSL) would meet the definition of publicly accountable. 

BC32            The Board noted that AFSL holders undertake a range of activities and are a diverse group of entities.  The Board concluded that whether an AFSL holder is publicly accountable depends on the circumstances, including the nature of the services they provide.  Therefore, it would not be appropriate for the Board to deem AFSL holders as publicly accountable or not publicly accountable.

Size Thresholds

BC33            The Board proposed in ITC 12 that for-profit entities that do not satisfy the definition of a publicly accountable entity, nevertheless may be viewed as being ‘important’ from a public interest perspective because of their large size, and should be subject to Tier 1 requirements.  The size thresholds proposed were:

• Consolidated revenue for the financial year of the entity and the entities it controls (if any) of $500m.
• Consolidated assets at financial year end of the entity and the entities it controls (if any) of $250m.

BC34            The Board considered constituents’ comments on the issue and decided not to require entities that are ‘important’ because of their large size to adopt Tier 1 requirements on the grounds that:

(a)                    size thresholds are arbitrary;

(b)                   using public accountability (as defined by the IASB) for the for-profit sector in Australia would be consistent with international requirements;

(c)                    large non-publicly accountable entities would still be required to prepare high-quality general purpose financial statements under the requirements of Tier 2; and

(d)                   keeping size thresholds that identify ‘important’ entities up-to-date would entail additional maintenance and monitoring costs.

For-Profit Entities in the Public Sector

BC35            The Board noted that the definition of public accountability it has adopted has a for-profit private sector orientation as it is based on the definition included in the IFRS for SMEs.  The Board noted that the nature of for-profit entities in the public sector may differ from that in the private sector in that many Government Business Enterprises (GBEs) also undertake social policy obligations.  Moreover, the ownership group in many for-profit public sector entities is not a broad group.  The Board noted that, although these entities are typically seen as publicly accountable in the general sense of the term, they do not typically fall under the definition of public accountability used for the private sector.

BC36            Some respondents to ED 192 expressed the view that GBEs should be included in Tier 1 because of their commercial significance and their participation in markets in competition with private sector for-profit entities.  Others noted that, while it is acknowledged there is a relatively high level of public interest in relation to GBEs, it is also important that those public sector entities that compete with private sector entities in Tier 2 are not disadvantaged through the application of more onerous financial reporting requirements.

BC37            Some respondents supported an approach where GBEs would by default be classified as Tier 2 entities, with the caveat that the public sector entity that ‘regulates’ the respective entities would determine whether individual entities should apply the disclosure requirements of Tier 1.  This approach, it was noted, could result in GBEs achieving the same level of financial reporting as for-profit private sector entities of similar nature and size.

BC38            The Board concluded that, consistent with the role of other regulators under the revised differential reporting framework (see paragraphs BC40-BC41), the determination of the Tiers of reporting requirements under which for-profit public sector entities should report would best be left to relevant public sector regulators in each jurisdiction.

Entities Eligible for Tier 2 Requirements can Elect to Adopt Tier 1 Requirements

BC39            The Board concluded that an entity that is eligible to adopt Tier 2 requirements should be permitted to adopt Tier 1 requirements.  This is on the basis that:

(a)                    a relevant regulator may decide that in certain circumstances it is more beneficial to the users of financial statements, including the public at large, to include more comprehensive information in the general purpose financial statements;

(b)                   a subsidiary may be required to apply Tier 1 requirements by its parent; and

(c)                    some entities may find it more convenient or beneficial to continue to apply Tier 1 requirements in their circumstances.  Examples include entities:

(i)                     contemplating future listing on the stock exchange;

(ii)                   planning to engage in activities as their primary business that would classify them as holders of assets in a fiduciary capacity for a broad group of outsiders; and

(iii)                 preferring to state compliance with full IFRSs because they are primarily engaged in international business. 

The Role of Other Regulators

BC40            The Board noted that other regulators, legislators and stakeholders play an important role in the application of Standards, including providing exemptions in certain circumstances.  For example, as noted in paragraph BC4, small proprietary companies are exempted from financial reporting under the Corporations Act.

BC41            The Board noted that some respondents to ITC 12 expressed concern about possible inconsistencies in practice that may arise if the Board were to specify rules rather than principles for determining which Tier of reporting is applicable to which entities.  This is due to complexities involved in determining the application of different Tiers of reporting requirements to entities of different sizes and with varying levels of economic, social and political significance across different economic sectors.  To help avoid these inconsistencies and to facilitate the application of different Tiers of reporting requirements in an effective and efficient manner, the Board decided that other regulators, legislators or stakeholders should have a role in determining the application of Standards under the revised framework.  Accordingly, the Board decided that, except for the cases where a clear-cut and timeless application criterion can be used by the Board or a clear-cut judgement can be made based on relevant factors, the application issue would best be dealt with by other regulators, legislators and stakeholders (see, for example, paragraphs BC39(a) and (b)).

Applicability of the Different Tiers to NFP Entities

Public Accountability

BC42            The Board considered whether the notion of public accountability as defined by the IASB could usefully be applied to the NFP sector.  It noted that, although there are some who argue that the IASB definition of public accountability may cover some NFP entities on the grounds that they hold funds in a fiduciary capacity for a broad group of outsiders, the IASB definition has a for-profit context that makes it unsuitable for the NFP sector.

BC43            The Board also considered using a modified definition of public accountability in the NFP sector context.  The Board noted the disparate views among constituents about whether such a notion can effectively be modified and used to identify entities falling under different reporting Tiers in the NFP sector.

BC44            The Board noted that some constituents believe that the level of public accountability, for example, for each charity, depends on a number of entity-specific factors, which reduce the usefulness of ‘public accountability’ as a stand-alone criterion for differential reporting purposes in the NFP sector.  Some constituents argued that the degree of public accountability of a charity has a direct relationship to the following.

(a)                    Sources of funds:  for example, if the sources of funds are public donations (particularly those that are tax deductible by the donor) or government grants, then a high degree of public accountability is expected.  Voluntary labour may be regarded as a form of donation and, therefore, a high degree of public accountability might be expected when significant voluntary labour is involved.  Generally the level of public accountability is high where public funds are involved, such as when community or social activities are carried out on behalf of government.  However, when the source of funds is an individual or a corporation, a much lower degree of public accountability is expected on the basis that the individual or corporation involved can probably access the financial information they need.  A moderate level of public accountability may be envisaged when the sources of funds are grants from foundations or sponsors.

(b)                   Number of stakeholders in the entity:  the wider the spectrum of stakeholders, the higher the expected level of public accountability.

(c)                    Scale of operations and geographical coverage:  generally charities active at the national or international level are seen as being publicly accountable at a high level.

BC45            The Board concluded that a modified definition of public accountability in the NFP private sector context would not provide a robust basis for identifying entities falling under different reporting Tiers since NFP private sector entities, (with the likely exception of smaller member-based entities), are typically seen as having differing degrees of public accountability in the general sense of the term.

BC46            The Board reached a similar conclusion about whether a definition of public accountability could provide a robust basis for identifying NFP public sector entities falling under different reporting Tiers.  This is on the basis that these entities are regarded as publicly accountable in the general sense of the term.

Size Thresholds

BC47            The Board proposed in ITC 12 that NFP entities that prepare general purpose financial statements that exceed nominated size thresholds should be required to apply Tier 1 requirements.  The size thresholds proposed were:

• Consolidated revenue for the financial year of the entity and the entities it controls (if any) of $25m.
• Consolidated assets at the end of the financial year of the entity and the entities it controls (if any) of $12.5m.

BC48            Some respondents to ITC 12 preferred the use of size thresholds in comparison to the use of a modified notion of public accountability as the basis for identifying reporting Tiers on the grounds that it is relatively objective and would provide consistency in identifying entities that fall under different Tiers.  However, other respondents were concerned about using size thresholds, citing the following reasons:

(a)                    size thresholds are arbitrary;

(b)                   size thresholds will become outdated over time; and

(c)                    particularly in the public sector, unless jurisdiction-specific thresholds are prescribed, it would lead to similar entities applying different requirements across different State and Territory jurisdictions.

BC49            There were also differences of view between respondents as to the amounts of the appropriate thresholds.  Some thought the thresholds noted in paragraph BC47 are too low and should be raised to be comparable to ‘important’ entity thresholds contemplated for the for-profit sector noted in paragraph BC33.  Others thought the thresholds being contemplated are too high, which would mean that too few NFP entities would apply full IFRSs as adopted in Australia.  Yet others thought that the ratio of thresholds (revenue twice the assets) is not appropriate for many asset-rich entities in the NFP sector.

BC50            Respondents’ comments on the comparability of thresholds between private and public sector NFP entities and their difference from those contemplated for ‘important’ entities in the for-profit sector did not reflect any convergence of views.  Some respondents thought that public sector NFP entities are inherently of greater public interest than private sector NFP entities.  Others thought that the thresholds should take account of the fact that the resources at the disposal of public sector NFP entities are generally significantly greater than those at the disposal of private sector NFP entities.  Some expressed the view that public interest would not differ between the for-profit and NFP sectors.  Others expressed the view that entities within the public sector are all of public interest and expressed concern that size thresholds would give a misleading perception of an increase in public interest proportional to an increase in an entity’s size.

BC51            Consistent with the Board’s conclusions in relation to size thresholds for for-profit entities, the Board concluded that size thresholds do not provide a robust basis for differential reporting purposes in a NFP context because of the complexities involved and that the disadvantages of using size thresholds would exceed any advantages that may arise from their use.  The Board also noted that keeping size thresholds up-to-date would entail additional maintenance and monitoring costs.

Governments

BC52            The Board concluded that the Australian Government and State, Territory and Local Governments should be subject to Tier 1 requirements.  This is on the basis that these entities clearly satisfy the criteria cited in paragraph BC63 as a whole, including in particular their coercive power to tax, rate or levy.  Consistent with this conclusion, the Board also decided that General Government Sectors of the Australian Government and State and Territory Governments should continue to apply AASB 1049 Whole of Government and General Government Sector Financial Reporting, without the reduction in disclosures provided by Tier 2.

Public Sector NFP Universities

BC53            ED 192 proposed that universities in the public sector should be subject to Tier 1 requirements.  Some respondents concurred with the proposal on the grounds that universities in the public sector are government funded.  However, others had reservations, which included the following:

(a)                    since universities are statutory bodies (in some jurisdictions), then they should be subject to the same reporting requirements that apply to other statutory bodies in the relevant jurisdiction – that is, the decision as to whether universities should be subject to Tier 1 or Tier 2 requirements should be left to the local regulator;

(b)                   while it is acknowledged they are large entities, there would appear to be no conceptual reason mandating the classification of universities under Tier 1 – for example, they have no coercive power to tax, rate or levy;

(c)                    funding by government or receipt of voluntary donations, by itself, does not suffice to classify universities as Tier 1 entities since many other public sector entities fall in the same category; and

(d)                   the proposal would not be consistent with transaction-neutrality principles, because it would result in public sector NFP universities being treated differently from private sector universities.

BC54            The Board noted that because universities differ from jurisdiction to jurisdiction, it may not enable regulators in those jurisdictions to apply criteria that they regard as appropriate in their circumstances, if the Board were to make a universal decision on the reporting Tier under which they fall.  Accordingly the Board decided that universities should be allowed to apply Tier 2 requirements in preparing their general purpose financial statements unless a relevant public sector regulator requires the application of Tier 1 requirements.

Private Sector NFP Entities

BC55            The Board considered the issue of possible subclassifications of different types of NFP entities within the NFP sector for differential reporting purposes.  The Board noted commentators’ views on ITC 14 Proposed Definition and Guidance for Not-for-Profit Entities that NFP entities can generally be identified as being in one of three categories based on the nature of their operations and sources of funding:

(a)                    charities;

(b)                   member-based entities; and

(c)                    public sector entities;

and that there may be a need for a fourth ‘other’ category to cater for entities such as schools and religious organisations.  The Board noted the significant disparities in the size of entities within each of the above categories.

BC56            Some constituents argued that the disclosures required by full IFRSs (or the IFRS for SMEs) would not satisfy the information needs of users of financial statements of, for example, charities.  These Standards, it was noted, have a for-profit focus while the nature of charities’ activities is such that not all disclosures in these Standards are pertinent to the needs of users of the financial statements of charities.  Moreover, there are disclosures that relate to the nature of operations of charities and specific issues of public interest that are not required by these Standards and that may be within the scope of financial reporting.  It was argued that the stakeholders of a charity are interested in the accountability of the entity in achieving objectives stated in the entity’s mission statement using funds provided by those stakeholders.  They noted that donors, grantors and other contributors who provide resources in the form of money or voluntary services and the public at large (which includes the beneficiaries of charitable activity) are all interested in the accountability of charities.

BC57            The Board noted that a similar view exists in regard to all NFP entities.  This view links accountability to the objective of each NFP entity and advocates disclosure of particular performance-related information to help inform a wide range of stakeholders about the way a NFP entity is utilising its resources in achieving its purpose.

BC58            The Board decided that there should not be subclassifications of different types of entities in the NFP sector other than between private and public sector entities, for differential reporting purposes.  In arriving at this decision, the Board noted that:

(a)                    in a transaction-neutral reporting environment, subclassifications should not make a reporting difference as far as the recognition and measurement of transactions are concerned; and

(b)                   a choice between Tier 1 and Tier 2 requirements would provide different levels of disclosures appropriate for entities with different levels of activities.

BC59            The Board noted that its conclusion on this matter does not rule out specific projects directed at particular types of NFP entities and decided that its separate project on Disclosures by Private Sector Not-for-Profit Entities should be the vehicle through which it determines whether disclosures in addition to those required by full IFRSs as adopted in Australia should be required of Tier 1 or Tier 2 NFP entities.  The Board also noted that much of the information relating to the extent to which a NFP entity has achieved its purpose set out in its mission statement may not be of a financial nature.

Entities Eligible for Tier 2 Requirements can Elect to Adopt Tier 1 Requirements

BC60            The Board concluded that a NFP entity that is eligible to adopt Tier 2 requirements should be permitted to adopt Tier 1 requirements.  This is on the basis that, as noted in relation to the for-profit sector in paragraph BC39, in some jurisdictions, a relevant regulator may decide that in certain circumstances it is more beneficial to the users of financial statements, including the public at large, to include more comprehensive information in the general purpose financial statements.  A NFP entity may also find it beneficial to choose to apply Tier 1 requirements in order to claim compliance with full IFRSs as adopted in Australia with a view to enhancing its credibility internationally, in particular in relation to major users of financial statements such as donors and governments.

The Role of Other Regulators

BC61            The Board acknowledges that, although AASB 1053 allows the vast majority of entities in the NFP sector to adopt Tier 2 requirements, other regulators may decide that some of those entities should adopt Tier 1 requirements.

BC62            Some respondents to ED 192 particularly commented that, while they welcome the choice that the Board has provided to public sector regulators in determining which of the Tiers should be followed by entities other than those required by the Board to apply Tier 1 requirements, the Board should develop non-mandatory guidance, in the form of qualitative criteria, to help public sector regulators consistently identify entities falling under each of the two Tiers of reporting requirements.

BC63            The Board explored the possibility of providing guidance, noting there are a range of qualitative factors that could be considered, including the following:

(a)                    the entity’s coercive power to obtain public funds: the Board noted this notion of coercive power is a narrow criterion and on its own would be helpful only in a limited number of cases for jurisdictions in identifying entities falling under each Tier;

(b)                   level of public funds used by the entity: entities in the public sector vary in the degree to which they are publicly funded, the discretion over the distribution or expenditure of public funds, and the nature of that spending (for example, operational compared with income redistribution);

(c)                    risk profile: generally, risk in the public sector is a reference to uncertainty in achieving an organisation’s objectives and more comprehensive disclosures may be warranted where an entity is seen as having a high risk profile;

(d)                   level of complexity: the level of complexity of public sector entities varies with the nature, diversity and range of their activities, which may also point to the existence of a wide range of stakeholders; and

(e)                    financial profile: the financial profile of a public sector entity may point to its economic significance and ability in providing services, which would in turn have an impact on the level of public interest. 

BC64            The Board noted that, while each of the above factors may be a useful indicator to help regulators in identifying entities that should disclose more comprehensive information in their general purpose financial statements, no single criterion, by itself, would be likely to provide a conclusive basis for a jurisdiction to distinguish between Tier 1 and Tier 2 entities in the public sector.

BC65            The Board noted these factors as a whole were taken into account in its decision to classify the Australian Government and State, Territory and Local Governments as Tier 1 entities (see paragraph BC52).  Accordingly, the Board concluded that these factors as a whole would be likely to benefit regulators across public sector jurisdictions in identifying the population of entities that could be of greater interest to users of general purpose financial statements, including the public at large.  The Board noted regulators may develop their own size thresholds to identify those entities about which there would be sufficient interest to justify applying Tier 1 requirements.  To arrive at consistent results, the Board noted it might be appropriate to use a number of different size indicators such as total assets, revenue, and number of employees as the basis for thresholds.

Tier 2 Requirements

BC66            The Board decided to adopt the Reduced Disclosure Requirements (RDR) reflected in AASB 1053, rather than the IFRS for SMEs, as Tier 2 requirements.  The Board noted that the two approaches are fundamentally different because the RDR involve applying the same recognition and measurement requirements as Tier 1, whereas the IFRS for SMEs modifies the recognition and measurement requirements of full IFRSs.  In deciding between the RDR and the IFRS for SMEs, the Board also considered whether entities subject to Tier 2 requirements should be provided with an option of adopting the RDR or the IFRS for SMEs.

Reasons for Not Adopting IFRS for SMEs

BC67            Constituents’ comments on the IFRS for SMEs were mixed.  While many supported its reduction in disclosure requirements, they expressed concern about introducing recognition and measurement requirements that are different from those included in full IFRSs.

BC68            There was also concern expressed about the differences in the hierarchies for determining accounting policies under the IFRS for SMEs and full IFRSs in the absence of a specific requirement.  It was noted that the hierarchy adopted in the IFRS for SMEs would lead to disparities in the choice of accounting policies by different entities as it gives precedence to the Conceptual Framework over full IFRSs as the source of guidance for determining accounting policies in the absence of a specific requirement.

BC69            Other respondents noted the additional initial and ongoing costs of training and education for two sets of standards both for the profession and at the tertiary level.

BC70            In its submission to the IASB on the proposed IFRS for SMEs, the AASB noted that the IFRS for SMEs in its proposed form would not be a stand-alone document and that to meet its stand-alone objective more topics and more treatment options would need to be included from full IFRSs.

BC71            Based on comments received from constituents, the AASB commented in its submission to the IASB that:

Some subsidiaries of publicly accountable entities would find it burdensome to apply the proposed IFRS for SMEs in preparing their general purpose financial statements.  They would need to prepare financial information based on the recognition and measurement requirements of full IFRSs for the purposes of the parent entity consolidation.  If such subsidiaries are not themselves publicly accountable but apply full IFRSs (as they are already applying full IFRS recognition and measurement for consolidation purposes), they are required to disclose information that is onerous to prepare and is often of no benefit to users.  If they were to adopt the IFRS for SMEs as proposed, they could choose to refer to a full IFRS for an option that is not included in the IFRS for SMEs.  However, they are then required to follow the disclosure requirements of that full IFRS.  A stand-alone IFRS for SMEs that includes only the absolute minimum necessary disclosures, more topics and more of the treatment options from full IFRSs may alleviate the problem.  However, it seems likely that subsidiaries within large groups would be involved in a wider range of activities and transactions than an equivalent SME that is not part of a group.  Accordingly, it may be necessary for the IASB to consider permitting subsidiaries of publicly accountable entities to prepare general purpose financial statements by applying all the recognition and measurement requirements of full IFRSs, but permitting reduced disclosures similar to those required by the IFRS for SMEs.

BC72            However, the IFRS for SMEs, published in July 2009, did not address many of the Australian constituents’ concerns.  The IFRS for SMEs changes some of the full IFRS recognition and measurement accounting policy options by mandating or eliminating a particular option or introducing ‘new’ options.  That means some of the full IFRS recognition and measurement accounting policy options are not available to SMEs and there are some that differ from comparable full IFRS recognition and measurement requirements.

BC73            The AASB discussed the IFRS for SMEs with a view to assessing its suitability as Tier 2 requirements.  The AASB noted that there are concerns about adopting the IFRS for SMEs in Australia for the following reasons:

(a)                    some of the accounting policy options that have been removed would be the favoured accounting policies for many Australian entities;

(b)                   changes to full IFRS recognition and measurement requirements under the IFRS for SMEs and the absence of some accounting policy options from the IFRS for SMEs would force subsidiaries to adjust accounting policies for consolidation purposes when parents apply full IFRSs;

(c)                    entities applying the IFRS for SMEs would be deprived of improvements and simplifications as they become available at the full IFRS level because the IASB has stated that it will only update the IFRS for SMEs once there have been two years of broad adoption and, thereafter, every three years;

(d)                   possible benefits that might result from comparability with overseas entities applying the IFRS for SMEs would:

(i)                     depend on how widely adopted it becomes;

(ii)                   be limited because entities seeking to access international capital markets would generally apply full IFRSs; and

(iii)                 be mitigated due to a loss of comparability across all types of entities’ general purpose financial statements within Australia;

(e)                    having different streams of recognition and measurement requirements involves different streams of knowledge, such that education and training at the tertiary level and within the accounting profession would become more costly;

(f)                    there would be start up costs because entities preparing general purpose financial statements have already made the effort to apply full IFRSs;

(g)                   adoption of the IFRS for SMEs may be seen as a retrograde step in a country that has already adopted full IFRS recognition and measurement accounting policy options;

(h)                   the actual changes in recognition and measurement requirements in the IFRS for SMEs would not produce any real economies for Australian SMEs; and

(i)                     in the event that an entity moves to, or from, full IFRSs, there would be costs involved in migrating from the recognition and measurement requirements of one Tier of reporting to another.

BC74            The Board concluded that the IFRS for SMEs is not presently a suitable set of requirements for Tier 2 in Australia.  However, the Board decided it will continue to monitor and contribute to further changes in the IFRS for SMEs and that it is open to the possibility of adopting the IFRS for SMEs in future should the changes in that Standard make it practicable in an integrated for-profit/NFP sector reporting environment.

BC75            The Board noted that the introduction of the RDR as Tier 2 is supported by a majority of respondents to ED 192 who have also provided reasons for not supporting the adoption of the IFRS for SMEs as Tier 2 in place of the RDR or as an alternative alongside it.

Approach to Determining Disclosure Requirements under the RDR

BC76            In determining the RDR, the Board sought to balance the need to reduce disclosures with the need to satisfy the objective of general purpose financial statements.  From amongst a number of possible approaches to determining disclosure requirements under the RDR, the Board decided to adopt an approach that:

(a)                    draws on the IFRS for SMEs to identify disclosures in cases where the recognition and measurement accounting policy options available or requirements under the RDR align with those under the IFRS for SMEs; and

(b)                   applies ‘user need’ and ‘cost-benefit’ principles (that is, the same basic principles used by the IASB in determining disclosures under the IFRS for SMEs) to arrive at reduced disclosure requirements in cases where the recognition and measurement accounting policy options or requirements under the RDR differ from those under the IFRS for SMEs.

In applying this approach, the Board concluded that satisfying the objective of general purpose financial statements should be the overriding basis for determining the disclosures under the RDR whether or not the recognition and measurement accounting policy options available or required under that regime align with those provided under the IFRS for SMEs.  The Board applied this approach to each disclosure requirement in each Australian Accounting Standard.  The results are reflected in AASB 2010-2.

BC77            The Board noted that its approach would help minimise the cost of determining and maintaining disclosures under the RDR. 

BC78            Consistent with the IASB’s approach in the IFRS for SMEs, the AASB concluded that users of general purpose financial statements of non-publicly accountable for-profit entities are particularly interested in information about:

(a)                    short-term cash flows and about obligations, commitments or contingencies, whether or not recognised as liabilities;

(b)                   liquidity and solvency;

(c)                    measurement uncertainties;

(d)                   the entity’s accounting policy choices;

(e)                    disaggregations of amounts presented in the financial statements; and

(f)                    transactions and other events and conditions encountered by such entities.

BC79            The Board also concluded that, in addition to the particular information needs of users of non-publicly accountable for-profit entities noted in paragraph BC78, the information needs of the users of general purpose financial statements of NFP entities in both the private and public sectors would be satisfied by adopting a similar approach, having regard to the specific needs of users of NFP, including public sector, entity financial statements.  The AASB uses its Process for Modifying IFRSs for PBE/NFP in assessing the need for specific requirements relating to NFP entities.

BC80            The Board noted that, although the IFRS for SMEs has been developed to apply to for-profit private sector entities, broadly it is considered reasonable to rely on the judgements made in developing the IFRS for SMEs in respect of both for-profit and NFP (including public sector) entities in Australia given that IFRSs are generally applied to all types of Australian entities.

Application of Standards

BC81            AASB 2010-2 specifies the disclosures in each Australian Accounting Standard from which Tier 2 entities are exempted.  However, some Standards are equally applicable to both Tier 1 and Tier 2 entities.  Accordingly, such Standards do not provide reduced disclosures for Tier 2 entities.  Examples are AASB 4 Insurance Contracts and AASB 1004 Contributions.

BC82            Some Standards apply only to Tier 1 entities, but Tier 2 entities may elect to use them.  Examples are AASB 8 Operating Segments and AASB 133 Earnings per Share, which generally apply only to entities that access public capital markets, as stated in their application paragraphs.

BC83            AASB 134 Interim Financial Reporting applies to disclosing entities’ half-year financial statements.  Consistent with the Board’s approach to other Standards in respect of annual general purpose financial statements, other Tier 1 entities and Tier 2 entities that elect to prepare interim general purpose financial statements would be required to apply AASB 134 (which specifies reduced disclosure requirements under Tier 2), by virtue of the application paragraph in that Standard.

BC84            Entities applying AASB 134 may prepare condensed interim financial statements or present a complete set of financial statements as interim financial statements.  Tier 2 entities are exempted from some disclosures when preparing condensed financial statements and would apply Tier 2 requirements in AASB 101 when preparing a complete set of financial statements as their interim financial statements.

BC85            There are also Standards that are only applicable to Tier 1 entities, and Tier 2 entities cannot elect to apply them in preparing financial statements.  These Standards are identified by virtue of their application paragraphs.  Currently the only example is AASB 1049 Whole of Government and General Government Sector Financial Reporting.

BC86            In considering possible reductions in disclosure requirements of:

(a)                    AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts for insurers that might not be publicly accountable, such as potentially some captive insurers (see paragraphs BC27-BC28); and

(b)                   AAS 25 Financial Reporting by Superannuation Plans for superannuation plans that might not be publicly accountable, such as SAFs (see paragraphs BC29-BC30);

the Board noted that such decisions should be made after applying further due process, including public exposure of proposed reductions.  This is because ED 192 did not include proposed reduced disclosures for AASB 4, AASB 1023, AASB 1038 and AAS 25.  In particular, the Board considered it would need to consult widely about whether some life insurers could be given relief from disclosures under AASB 1038 because the Board’s initial view is that life insurance is of high public interest and comprehensive information on life insurance is needed by users of general purpose financial statements.

BC87            The Board noted that, until the above due process is completed, all insurers and superannuation plans preparing general purpose financial statements would continue to apply these Standards in full.  Accordingly, if there are any Tier 2 insurers or superannuation plans preparing general purpose financial statements, the only benefits of reduced disclosure requirements available to them would be through the reduced disclosures in other Standards.

Transition

BC88            The Board considered the transitional requirements for entities adopting Tier 2 requirements for the first time and moving between Tiers.  The Board identified three main scenarios for transition that should be dealt with in AASB 1053:

(a)                    transition by an entity that prepared its most recent previous financial statements in the form of special purpose financial statements to Tier 1 or Tier 2;

(b)                   transition by an entity applying Tier 1 to Tier 2; and

(c)                    transition by an entity applying Tier 2 to Tier 1.

BC89            The Board noted that, for transitioning from special purpose financial statements to general purpose financial statements, an assessment of whether the preparer has applied recognition and measurement requirements in its most recent previous financial statements is of paramount importance.  Accordingly, an entity that has applied recognition and measurement requirements of Australian Accounting Standards selectively or not at all in its special purpose financial statements should be treated differently from one that has applied the recognition and measurement requirements of applicable Australian Accounting Standards, including those of AASB 1 First-time Adoption of Australian Accounting Standards.

BC90            AASB 1 includes disclosure requirements.  Entities transitioning from special purpose financial statements to Tier 2 are exempted from some of the disclosure requirements in that Standard, using the principles applied in determining disclosures under Tier 2 (see paragraph BC78).

BC91            Entities transitioning from Tier 1 to Tier 2 would not apply AASB 1.  However, entities transitioning from Tier 2 to Tier 1 would need to apply AASB 1 in full to claim compliance with IFRSs, as under Tier 2 they would only have applied some of the disclosure requirements of AASB 1.  This is consistent with the Board’s policy that for-profit entities complying with Australian Accounting Standards simultaneously comply with IFRSs.

BC92            Entities that transition to Tier 1 need to apply AASB 1 in full in order to be able to claim compliance with IFRSs, in accordance with AASB 101, including making an unreserved statement of compliance as required by AASB 101.

BC93            The Board considered whether entities transitioning between Tiers for which compliance with IFRSs is not pertinent, in particular NFP entities that are subject to Aus paragraphs, should be subject to AASB 1 on transition.  The Board concluded that AASB 1 is not applicable in those circumstances because, at the time of transition between Tiers, Australian Accounting Standards or Australian Accounting Standards – Reduced Disclosure Requirements, which have common recognition and measurement requirements, have previously been complied with.  Accordingly, it would not be appropriate to imply, through application of AASB 1, that the basis of accounting has changed.

Operative Date

BC94            The Board concluded that mandatory application of Tier 2 requirements should be annual reporting periods beginning on or after 1 July 2013.  The Board noted a long transitional period is particularly required to allow entities that prepare special purpose financial statements to make necessary preparations for transitioning to Tier 2 requirements should they choose to prepare general purpose financial statements under Tier 2.  The Board considered it would be beneficial to have a relatively long transition period to allow these entities to prepare their internal reporting systems for transition.

BC95            However, the Board decided to allow early adoption of Tier 2 requirements for those entities that want to avail themselves of the reduced disclosure requirements under that Tier before the mandatory application date of 1 July 2013.  Early adoption is permitted for annual reporting periods that begin on or after 1 July 2009 but before 1 July 2013.  The Board decided not to permit early adoption for annual reporting periods that begin before 1 July 2009 due to the difficulty of identifying relevant Standards applying to those earlier periods and making consistent judgments as to which disclosures in those Standards would be applicable under Tier 2.

BC96            The Board also noted that a long transition period would potentially enable any outcome of the second stage of the project to be made operative from the same date as the first stage, to facilitate minimal disruption on transition.  The Board will not decide whether the second stage should be progressed until the results of the research project it has commissioned are known.

BC97            The transition period is also consistent with the Board’s normal policy regarding transition periods for its Standards.  The Board concluded that making Tier 2 requirements mandatory from the date of issue of relevant Standards may inappropriately require entities that currently apply Tier 1 to select that Tier and make disclosures related to that selection rather than continue their current accounting disclosures that comply with current GAAP.

Maintenance of Tier 2 Requirements

BC98            The Board decided that Tier 2 requirements should be maintained on a continuous basis, rather than waiting for the IASB to update its IFRS for SMEs, which the IASB plans to undertake only every few years, by which time there would be an accumulation of possible changes.  The AASB intends that each future Exposure Draft or Invitation to Comment involving changes to Tier 1 that includes disclosure proposals would seek comment about which disclosures should be included in Tier 2, and may include the AASB’s proposed reduced disclosures.

Post-implementation Review

BC99            The Board decided that Tier 2 requirements should be subject to review and revision taking account of implementation experience and international developments.

BC100        The Board plans to monitor implementation experience with Tier 2 requirements and use it as a basis for providing feedback to the IASB to assist with its further deliberations on differential reporting matters and to help shape future amendments to the IFRS for SMEs.

Trans-Tasman Convergence

BC101        AASB 1053 was developed in the context of the Prime Ministers of Australia and New Zealand having signed on 20 August 2009 a Joint Statement of Intent that agreed on a framework of Outcome Proposals for developing cross-border economic initiatives.  A range of shared Outcome Proposals have been identified across a wide range of business law areas, including in relation to financial reporting.  The outcomes are expected to accelerate and deepen trans-Tasman regulatory integration as part of a broader single economic market initiative.  Outcome Proposals relating to financial reporting include:

For-profit entities

(a)                    “Profit entities are able to use a single set of accounting standards and prepare only one set of financial statements (timeframe: short term – within two years)”

(b)                   “Trans-Tasman companies have to prepare only one set of financial statements to one set of standards (timeframe: short term – within two years)”

Not-for-profit entities

“Not-for-profit entities are able to use a single set of accounting standards and prepare only one set of financial statements (timeframe: medium term – within five years)”.

BC102        These Outcome Proposals are intended to reduce compliance costs for entities operating across the Tasman and support trans-Tasman investment through the consistency of financial statements.  The use of full IFRSs as the foundation standards in both countries provides a sound basis for achieving the above Outcome Proposals.  However, further harmonisation in regard to financial reporting by entities other than those that are required to apply full IFRSs as adopted in Australia would be necessary to achieve the Outcome Proposals.  This would be achieved by convergence of the differential reporting frameworks in the two countries.

BC103        New Zealand already adopts a differential reporting regime (that is different from the regime in Australia both before and after AASB 1053), which is expected to undergo restructuring in the light of the New Zealand Ministry of Economic Development review of standard setting arrangements.  Close monitoring of these developments by the two countries would help identify an appropriate approach to converge the differential reporting frameworks in the two countries in due course.

BC104        The convergence of differential reporting frameworks is likely to be conducted in stages, with the first stage relating to for-profit private sector entities.  New Zealand is expected to employ a notion of public accountability that is close to the IASB’s definition to distinguish between for-profit entities that apply NZ IFRSs and those that can avail themselves of concessions under the differential reporting framework.  The AASB noted that the use of the IASB’s notion of public accountability under Tier 2 requirements in Australia provides common ground to discuss the harmonisation of the two countries’ differential reporting frameworks in regard to for-profit private sector entities.

Basis for Conclusions on AASB 2014-2

This Basis for Conclusions accompanies, but is not part of, AASB 1053.  The Basis for Conclusions was originally published with AASB 2014-2 Amendments to AASB 1053 – Transition to and between Tiers, and related Tier 2 Disclosure Requirements.

Background

BC1               This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in the Standard.  Individual Board members gave greater weight to some factors than to others.

BC2               In June 2012 the Board issued AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009–2011 Cycle incorporating the IASB Standard Annual Improvements to IFRSs 2009–2011 Cycle.  The amendments AASB 2012-5 made to AASB 1 First-time Adoption of Australian Accounting Standards relate to an entity returning to Australian Accounting Standards that previously applied Australian Accounting Standards or IFRSs, but in its most recent previous annual financial statements did not include an explicit and unreserved statement of compliance with Australian Accounting Standards or IFRSs.  Irrespective of whether AASB 1 has previously been applied, the amendments permit such an entity to apply AASB 1, or the option under AASB 1 to apply Australian Accounting Standards retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors as if the entity had never stopped applying Australian Accounting Standards or IFRSs. Additional disclosure requirements were also specified in the amendments.

BC3               At its May 2013 meeting the Board noted that these AASB 1 amendments have implications for AASB 1053 Application of Tiers of Australian Accounting Standards (June 2010).  Accordingly, the Board decided to clarify some of the existing requirements in, and propose introducing new requirements into, AASB 1053 (June 2010).

BC4               Subsequently, the Board issued Exposure Draft (ED) 248 Amendments to AASB 1053 – Transition to and between Tiers, and related Tier 2 Disclosure Requirements in March 2014 for comment by 19 May 2014.  Two written submissions were received.  One submission expressed concern about the loss of reconciliation information that would result from the proposals (see paragraph BC20 below).  The other submission expressed concern about the complexity of the proposals (see paragraph BC5 below).

BC5               In relation to the latter concern, the respondent did not support certain aspects of the proposals in ED 248 and recommended simplifying the transition rules such that AASB 1 is always required to be applied when an entity transitions from special purpose financial statements (SPFSs) to Tier 2 general purpose financial statements (GPFSs), even if the entity previously applied applicable recognition and measurement requirements.  Moreover, the respondent suggested simplifying the transition rules such that AASB 1 is always required to be applied when an entity transitions to Tier 1 GPFSs, even if the entity does not intend to comply with IFRSs.

BC6               The Board considered that while the respondent’s suggestions might simplify requirements by increasing the number of scenarios where AASB 1 would be required to be applied, the consideration and application of AASB 1 would not necessarily be a simplification for particular entities. 

BC7               Accordingly, the Board decided not to make any substantive changes to the proposals in ED 248 when progressing to the final Standard AASB 2014-2, the basis for which is explained in paragraphs BC8-BC25 below.

Clarification of the Application of AASB 1053

BC8               The Board noted that paragraphs 13 and 15 of AASB 1053 (June 2010) might be read by some as implying that SPFSs of non-reporting entities must be prepared in accordance with Tier 2 reporting requirements.

BC9               The Board decided to amend paragraphs 13 and 15 of AASB 1053 to clarify that Tier 2 reporting requirements only relate to GPFSs.

Reapplication of Tier 1 Reporting Requirements that does not entail Transition from Tier 2

BC10            The Board noted that amendments made to AASB 1 in June 2012 by AASB 2012-5, referred to in paragraph BC2 above, introduced an option for entities returning to Australian Accounting Standards or IFRSs.  An entity can either:

(a)                    apply AASB 1 (including all of its disclosure requirements); or

(b)                   apply Australian Accounting Standards[14] retrospectively in accordance with AASB 108 (as if the entity had never stopped applying Australian Accounting Standards or IFRSs), with some associated disclosures.

BC11            The Board noted that AASB 1 provides exceptions from applying some of the normal Tier 1 reporting requirements retrospectively on the basis that the cost of retrospectively applying some Tier 1 requirements would be likely to exceed the benefits to users of financial statements.  However, the amendments made through AASB 2012-5 acknowledge that the costs of applying AASB 1 without recourse to the AASB 108 option in AASB 1 might exceed the benefits of doing so for an entity that had previously applied Tier 1 requirements.  In particular, the AASB 2012-5 amendments allow an entity resuming the application of Tier 1 reporting requirements to do so using the more cost-beneficial approach.  In applying the AASB 108 option in AASB 1, an entity would apply Tier 1 requirements retrospectively in accordance with AASB 108 as if the entity had never stopped applying Tier 1 requirements.

BC12            However, the Board decided there should be a restriction in relation to the use of the AASB 1 option for retrospective application in accordance with AASB 108 in the Australian financial reporting environment.  This arises because compliance with Tier 1 reporting requirements does not translate into compliance with IFRSs in all cases.  For example, a not-for-profit entity applying AASB 1004 Contributions would apply recognition and measurement requirements that are different from those under IFRSs.  Accordingly, the Board decided that an entity that is to claim IFRS compliance on resuming Tier 1 reporting requirements, but which was not previously IFRS compliant (i.e. it is effectively becoming IFRS compliant for the first time), would not be able to avail itself of the option in AASB 1 for retrospective application in accordance with AASB 108.  Such an entity would apply AASB 1, without recourse to the AASB 108 option in AASB 1, on resuming Tier 1 reporting requirements.

BC13            The Board observed that the effect of the AASB 2012-5 amendments might be regarded as not having been fully reflected in AASB 1053 at the time of making AASB 2012-5.  In particular, some considered that AASB 1053 needed to be amended to make it clear that entities could apply Australian Accounting Standards retrospectively in accordance with AASB 108 in the circumstances described in paragraphs BC11-BC12 above.  Accordingly, the Board concluded it should make the clarification by replacing paragraph 19 of AASB 1053 (June 2010) with paragraphs 19 and 19A.

Reapplication of Tier 2 Reporting Requirements that does not entail Transition from Tier 1

BC14            The Board noted the previous prohibition in paragraph 19(a) of AASB 1053 for entities that had previously applied all applicable recognition and measurement requirements of Australian Accounting Standards from applying AASB 1 on first transition to Tier 2 reporting requirements.  Consistent with this prohibition, the Board decided to clarify in paragraphs 19B and 20[15] of AASB 1053 that an entity that has applied Tier 2 reporting requirements in a previous reporting period, but whose most recent previous annual financial statements did not contain an explicit and unreserved statement of compliance with those requirements, and the entity continued to apply all applicable recognition and measurement requirements, should also be prohibited from applying AASB 1 (and the AASB 108 option in AASB 1), on resuming Tier 2 reporting requirements.  This is consistent with the view that it would not be appropriate to imply, through application of AASB 1, that the basis of accounting has changed.

BC15            The Board also decided to require entities returning to Tier 2 reporting requirements meet the disclosure requirements equivalent to those in paragraph 23A (and, where relevant, paragraph 23B) of AASB 1, which would require an entity to disclose the reason it stopped applying Tier 2 requirements and the reason it is resuming reporting in accordance with those requirements (and the reasons it elected to use the AASB 108 option in AASB 1, where that election is available and adopted).[16]  The Board is of the view that these disclosure requirements provide users with useful information and the disclosures in paragraph 23A would discourage the intentional omission of the statement of compliance with Tier 2 reporting requirements solely to allow an entity to take advantage of the exemptions in AASB 1.

BC16            The Board noted, however, that entities returning to Tier 2 reporting requirements in circumstances noted in paragraph BC14 above are prohibited from applying AASB 1 and, by extension, they would be exempted from the disclosures of paragraph 23A (and the disclosures in paragraph 23B would not be applicable).  Accordingly, to provide relevant information to users, the Board concluded it should amend AASB 1053 to require the same disclosures as those in paragraph 23A of AASB 1 for entities resuming Tier 2 reporting requirements that are prohibited from applying AASB 1 and the AASB 108 option in AASB 1.

First-time Application of Tier 2 Reporting Requirements that does not entail Transition from Tier 1

BC17            The Board is of the view that entities transitioning to Tier 2 reporting requirements from SPFSs for the first time should not be bound by AASB 1 for first-time application.  In some cases it is envisaged that such entities might find application of Tier 2 reporting requirements retrospectively in accordance with AASB 108 more appropriate on cost-benefit grounds and should, therefore, be able to avail themselves of such a treatment.  Accordingly, consistent with first-time adoption requirements that existed before AASB 1 was issued, the Board decided to amend AASB 1053 to permit entities transitioning from SPFSs to Tier 2 requirements for the first time to apply those requirements retrospectively in accordance with AASB 108 without going through AASB 1, when and only when an entity had not applied, or only selectively applied, applicable recognition and measurement requirements in its most recent SPFSs (see paragraph BC19 below).  [In contrast, the Board decided that transition from SPFSs to Tier 1 reporting requirements for the first time should only be carried out using AASB 1, irrespective of whether an entity intends claiming IFRS compliance, consistent with the Board’s IFRS adoption approach for Tier 1 entities.]

BC18            The Board noted the rationale for the prohibition in paragraph 19(a) of  the June 2010 version of AASB 1053 (see paragraph BC93 of AASB 1053 (June 2010)) for entities that had previously applied all applicable recognition and measurement requirements of Australian Accounting Standards from applying AASB 1 on first transition to Tier 2 reporting requirements.  Consistent with this rationale, the Board decided to amend AASB 1053 to prohibit the same entities from applying Tier 2 reporting requirements through AASB 1, or retrospectively in accordance with AASB 108 on first transition to Tier 2 requirements.  Those entities would continue to apply the applicable recognition and measurement requirements, whether they had previously initially applied recognition and measurement requirements consistent with AASB 1 or a predecessor to AASB 108, whichever was applicable at the time.

BC19            The Board noted that in some cases entities would not have applied, or only selectively applied, applicable recognition and measurement requirements in preparing their most recent previous annual financial statements.  Consistent with the rationale in paragraph BC89 of AASB 1053 (June 2010), the Board concluded that such entities should be treated differently from those that had applied all applicable recognition and measurement requirements in those financial statements.  Accordingly, the Board decided that such entities would need to apply AASB 1, or, as explained in paragraph BC17 above, Tier 2 reporting requirements retrospectively in accordance with AASB 108, on first transition to Tier 2 reporting requirements.

BC20            The Board noted the concern expressed by one respondent to ED 248 (see paragraph BC4 above) that allowing an entity to apply AASB 108 rather than AASB 1 in the circumstances proposed would mean that an entity making such an election would not be required to include the type of reconciliation of financial statements that would be required if AASB 1 were to be required to be adopted.  The respondent regards the reconciliations as useful for in-depth understanding of an entity’s financial statements and obtaining comparative information.

BC21            The Board decided that the disclosure requirements in AASB 108 in relation to change of accounting policies provide adequate information to users to understand the nature and effect of changes arising from an entity applying Tier 2 requirements for the first time.

Transition between Tiers

BC22            The Board considered whether the requirements in AASB 1053 (June 2010) relating to transition between Tiers warranted clarification and concluded that paragraphs 21 and 23 of AASB 1053 are adequate.  However, it decided to add a footnote to paragraph 21(a) to acknowledge that the AASB 108 option in AASB 1 would not be relevant if the transition from Tier 2 to Tier 1 is first-time adoption, rather than resumption, of Tier 1.  For consistency, the Board also decided to amend paragraph 22, which provides guidance on paragraph 21(a).

Analysis of Disclosure Requirements for Tier 2 entities

BC23            Consistent with paragraphs BC15 and BC16 above, the Board concurred with the view that applying paragraphs 23A and 23B of AASB 1 (which specify disclosures about the reasons for stopping and resuming or commencing the application of Australian Accounting Standards and the reasons for the accounting policies adopted to effect that resumption or commencement) would not entail material additional costs for Tier 2 entities.  These paragraphs were introduced into AASB 1 by AASB 2012-5.

BC24            Accordingly, the Board decided an entity that resumes the application of Tier 2 reporting requirements using the AASB 108 option in AASB 1 should not be exempt from complying with paragraphs 23A and 23B of AASB 1.

BC25            The Board noted that paragraphs 23A and 23B of AASB 1 are not applicable to entities applying Tier 2 reporting requirements for the first time as these paragraphs are only relevant to reapplication of AASB 1.

Basis for Conclusions on AASB 2022-2

This Basis for Conclusions accompanies, but is not part of, AASB 1053.  The Basis for Conclusions was originally published with AASB 2022-2 Amendments to Australian Accounting Standards – Extending Transition Relief under AASB 1.

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.

Reasons for issuing this Standard

BC2               For periods beginning on or after 1 July 2021, certain for-profit-private sector entities can no longer apply the reporting entity concept or prepare special purpose financial statements (SPFS) when the financial statements are required (by legislation or an entity’s constituting or other document) to comply with Australian Accounting Standards or when legislation requires the financial statements to comply with accounting standards. This follows the issue of AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities. Instead, entities within the scope of AASB 2020-2 will be required to prepare general purpose financial statements (GPFS). In addition, some of these entities may also be required to prepare consolidated financial statements for the first time if they historically applied the exemption in AASB 10 Consolidated Financial Statements that did not require the presentation of consolidated financial statements when neither the parent entity nor the group was a reporting entity.

Issue of Exposure Draft ED 315

BC3               The Board’s proposals with respect to the amendments finalised in this Standard were exposed for public comment in November 2021 through Exposure Draft ED 315 Extending Transition Relief under AASB 1.

BC4               The significant issues considered by the Board in developing ED 315 are addressed in the following sections.

Optional exemption relating to the measurement of the assets and liabilities of subsidiaries, associates and joint ventures

BC5               One subset of entities affected by the removal of SPFS is foreign-controlled proprietary companies. Historically, many of these entities have prepared SPFS. However, they are required to prepare GPFS for the first time for periods beginning on or after 1 July 2021.

BC6               When preparing their SPFS, these entities may or may not have complied with the recognition and measurement requirements in Australian Accounting Standards and may or may not have presented consolidated financial statements.

BC7               AASB 1053 Application of Tiers of Australian Accounting Standards provides transition relief for entities transitioning from SPFS to Tier 2 GPFS. The transition relief allows entities to apply either AASB 1 First-time Adoption of Australian Accounting Standards or AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors to the transition.

BC8               In principle, AASB 1 requires the retrospective application of all Australian Accounting Standards on transition to Australian Accounting Standards. However, AASB 1 establishes two categories of exceptions to this principle:

(a)                    mandatory exceptions that prohibit the retrospective application of some aspects of other Australian Accounting Standards; and

(b)                   optional exemptions from some requirements of other Australian Accounting Standards.

BC9               AASB 1 paragraph D16(a) contains an optional exemption that permits a subsidiary that becomes a first-time adopter later than its parent to measure its assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements. However, the exemption in paragraph D16(a) could only be applied where a parent entity has adopted Australian Accounting Standards and not where a parent entity has adopted International Financial Reporting Standards (IFRS Standards or IFRSs). This is the case even where compliance with IFRSs by the parent entity would result in the same outcome as compliance with Australian Accounting Standards.

BC10            In many cases, affected foreign-controlled proprietary entities are subsidiaries of an overseas parent that prepares consolidated financial statements that include information about the entity and comply with IFRSs.

BC11            The Board received feedback from stakeholders that being able to use the information included in their overseas parent’s IFRS-compliant consolidated financial statements when preparing GPFS for the first time would provide a less costly approach to the transition of such subsidiaries to GPFS. For example:

(a)                    the entity would not need to remeasure its assets and liabilities at its date of transition to Australian Accounting Standards;

(b)                   the entity would not need to apply AASB 1 to any historical business combinations; and

(c)                    the entity would not need to apply Australian Accounting Standards retrospectively where required by certain Australian Accounting Standards (e.g. AASB 16 Leases, if a modified retrospective approach to transition is adopted).

Instead, the entity would use the information already included in the overseas parent’s consolidated financial statements.

BC12            Further, in many cases, it is expected that IFRS-compliant information for the entity is already being prepared and possibly audited to assist the overseas parent in preparing its consolidated financial statements. If prepared, this information would be based on the parent’s date of transition to IFRSs. Using this information would mean the entity would not be required to keep two sets of records – one based on the parent entity’s date of transition to IFRSs for consolidation purposes and another based on the entity’s date of transition to Australian Accounting Standards for its own reporting purposes.

BC13            The Board observed that when the International Accounting Standards Board (IASB) included the optional exemption in IFRS 1 First-time Adoption of International Financial Reporting Standards, the objective of the exemption was to eliminate the need for subsidiaries to keep two parallel sets of records, which would be burdensome and not beneficial to users. The exemption was also expected to ease some practical problems associated with the transition to IFRSs. The IASB was also of the view that the exemption would not diminish the relevance and reliability of the subsidiary’s financial statements because it permits a measurement that is already accepted in accordance with IFRSs in the consolidated financial statements of the parent.[17]

BC14            The Board considered that the objective of the exemption would still be met if the application of AASB 1 paragraph D16(a) was extended to include circumstances where an overseas parent has adopted IFRSs. Therefore, ED 315 proposed an amendment to AASB 1 to allow Australian entities to apply the exemption in AASB 1 paragraph D16(a) where their parent has adopted either Australian Accounting Standards or IFRSs.

Scope

BC15            Although the Board’s initial consideration of when the optional exemption could be applied (ie whether the exemption could be applied where a parent had adopted IFRSs, instead of Australian Accounting Standards) was in the context of entities transitioning from SPFS following the issue of AASB 2020-2, ED 315 did not propose limiting the scope of the proposed amendment to for-profit private sector entities. This was because the exemption in paragraph D16(a) could be applied by any for-profit entity or not-for-profit (NFP) entity that becomes a first-time adopter of Australian Accounting Standards later than its parent (subject to meeting the conditions of the exemption). The objective of the optional exemption as outlined in paragraph BC13 applies equally to all types of entities.

Entities transitioning to consolidated Tier 2 Simplified Disclosures financial statements

BC16            Another subset of entities affected by the removal of the reporting entity concept is entities that were preparing unconsolidated GPFS (Tier 2 – Reduced Disclosure Requirements). That is, the GPFS complied with all the recognition and measurement requirements in Australian Accounting Standards without presenting consolidated financial statements, in accordance with an exemption in AASB 10. This includes some entities that are classified under Australian taxation legislation as “country-by-country reporting entities” (CBC entities).

BC17            CBC entities are required to prepare GPFS to comply with their CBC reporting obligations to the Australian Taxation Office (ATO). However, some CBC entities that are parent entities maintained they were not reporting entities as defined in Australian Accounting Standards and continued to apply the exemption in AASB 10 that did not require the presentation of consolidated financial statements if neither the parent entity nor the group was such a reporting entity. The Board understands that this approach was acknowledged as an available option in ATO guidance.

BC18            However, as the ‘reporting entity’ definition in Australian Accounting Standards no longer applies to certain for-profit private sector entities, including CBC entities, for periods beginning on or after 1 July 2021, these entities can no longer apply the consolidation exemption in AASB 10. Instead, they will be required to prepare consolidated financial statements under AASB 10 for the first time.

BC19            The Board noted that such entities were not required to present consolidated financial statements in prior periods as outlined in paragraph BC17. Further, their most recent Tier 2 GPFS complied with all relevant recognition and measurement requirements in Australian Accounting Standards. The Board acknowledged an absence of specific guidance in Australian Accounting Standards for these entities.

BC20            However, the Board noted that specific guidance was included in AASB 1053 (paragraph 18A(b)) to explicitly allow entities that were preparing SPFS on the same basis – that is, their SPFS complied with all the recognition and measurement requirements without presenting consolidated financial statements, on the basis that neither the parent nor the group was a reporting entity – to apply AASB 1, including the relief for the first-time preparation of consolidated financial statements set out in Appendix C, to their transition to Tier 2 GPFS.

BC21            The Board previously considered whether the transitional relief in paragraph 18A(b) should also be extended to entities transitioning from unconsolidated Tier 2 – Reduced Disclosure Requirements GPFS to consolidated Tier 2 – Simplified Disclosures GPFS. However, when finalising AASB 2020‑2, the Board decided that it would not be appropriate to extend the transition relief at that time as the extent to which entities would be affected was unknown, although it was expected to be limited. Furthermore:

(a)                    the Board expected that such entities should already have comprehensive IFRS-compliant information available to help produce consolidated financial statements, as the entity would be reporting that information to its parent; and

(b)                   entities that previously were preparing SPFS instead would be required to provide new additional disclosures as well as potential changes to recognition and measurement requirements, and hence it could be argued that not having such other challenges would mean entities already preparing GPFS would have enough resources to consolidate retrospectively.[18]

BC22            Following the issue of AASB 2020-2, the Board received feedback from stakeholders expressing concern that it was unclear whether entities transitioning from unconsolidated Tier 2 – Reduced Disclosure Requirements GPFS to consolidated Tier 2 – Simplified Disclosures GPFS were able to apply AASB 1, as there was no specific guidance in Australian Accounting Standards to explain the basis on which their first consolidated financial statements should be prepared. Therefore, Australian Accounting Standards could be read to require such entities to apply the consolidation requirements fully retrospectively. Stakeholders were concerned about this, based on their view that many of these entities do not have sufficient information to retrospectively consolidate as information might be prepared at a higher group level that is not relevant at the level of the ultimate Australian parent entity. Further, stakeholders were also concerned about the ability for comparative information to be audited retrospectively.

BC23            Although the Board previously considered this matter as noted in paragraph BC21, as the subsequent feedback was inconsistent with the Board’s expectations, ED 315 proposed providing explicit relief to also allow entities transitioning from unconsolidated Tier 2 – Reduced Disclosure Requirements GPFS to consolidated Tier 2 – Simplified Disclosures GPFS to apply AASB 1 when preparing consolidated financial statements for the first time.

BC24            The Board acknowledged that proposing this transition relief would allow entities to potentially restate previously recognised amounts in accordance with AASB 1, even though the previous Tier 2 – Reduced Disclosure Requirements GPFS complied with all recognition and measurement requirements without presenting consolidated financial statements. However, the Board noted that this outcome is consistent with the application of the relief available in AASB 1053 paragraph 18A(b) for entities that were preparing SPFS on the same basis (ie their SPFS complied with all the recognition and measurement requirements, without presenting consolidated financial statements, on the basis that neither the parent nor the group was a reporting entity).

Scope

BC25            Although both for-profit and NFP entities are affected by the replacement of Tier 2 – Reduced Disclosure Requirements with Tier 2 – Simplified Disclosures, NFP entities are not affected by the removal of SPFS and the reporting entity definition in Australian Accounting Standards at this stage. Therefore, NFP entities can continue to consider themselves to be non-reporting entities and prepare single-entity Tier 2 – Simplified Disclosures GPFS, applying the exemption in AASB 10 if relevant.

BC26            For this reason, the Board decided the Tier 2 transition relief proposed in ED 315 should be consistent with the scope of AASB 2020-2 and should therefore be limited to certain for-profit private sector entities.

Finalisation of ED 315 proposals

BC27            Following the consultation period, and after considering the comments received, the Board decided to proceed with issuing this Standard, with minimal changes from the proposals in ED 315.

BC28            The Board received seven formal comment letters on ED 315. The feedback received indicated that, in general, most respondents supported the proposals. However, some respondents provided additional feedback, which is considered in the following paragraphs.

Amendments to AASB 1

Application of the optional exemption by NFP entities

BC29            As the optional exemption in AASB 1 paragraph D16(a) can be applied by both for-profit and NFP entities, in the absence of a specific limitation to for-profit entities, one stakeholder questioned how a NFP entity might apply the optional exemption (including the proposed amendment) given the recognition and measurement differences between IFRSs and Australian Accounting Standards as they apply to NFP entities.

BC30            The Board considered this feedback but decided that no changes to the proposed amendment were necessary. The Board acknowledged that compliance with IFRSs might not result in compliance with Australian Accounting Standards as they apply to NFP entities, where NFP-specific recognition and measurement requirements in Australian Accounting Standards are relevant to an entity. The Board noted that a NFP entity would be unable to apply the optional exemption when transitioning to Australian Accounting Standards in relation to amounts included in a parent’s IFRS-compliant consolidated financial statements that do not comply with Australian Accounting Standards as they apply to NFP entities. NFP entities are required to comply with the applicable NFP requirements in Australian Accounting Standards when transitioning to those Standards, subject to any specific exceptions and exemptions in AASB 1.

BC31            The Board noted that this outcome is consistent with how the optional exemption is currently being applied in some circumstances. For example, a NFP entity is unable to apply the optional exemption to assets and liabilities where the amounts included in the parent’s consolidated financial statements do not comply with Australian Accounting Standards as they apply to NFP entities. This could occur where a NFP entity has a for-profit parent that prepares consolidated financial statements for the mixed group (ie a group that includes both for-profit and NFP entities) using accounting policies appropriate to for-profit entities.

Compliance with IFRSs

BC32            One stakeholder provided feedback that, in their view, the proposed amendment to AASB 1 paragraph D16(a) was too narrow because the optional exemption could only be applied where a parent entity prepares financial statements that comply with IFRSs, and not where a parent entity prepares financial statements that comply with IFRS-equivalent Standards but do not include a statement of compliance with IFRSs.

BC33            Although the Board considered there could be merit in permitting the proposed amendment to be applied in circumstances where a parent’s financial statements comply with IFRS-equivalent Standards rather than IFRSs, the Board decided not to make such a change. The Board noted that referring only to IFRSs as proposed in ED 315 is consistent with the approach to first-time adoption in AASB 1. The Board was also concerned about potential unintended consequences if the proposed amendment could be applied where a parent entity prepared financial statements that complied with IFRS-equivalent Standards, including possible difficulties in determining which standards are considered IFRS-equivalent Standards.

Other amendments

BC34            Following feedback from stakeholders, the Board also decided to amend:

(a)                    AASB 1 paragraph D13A, for consistency with the amended paragraph D16(a); and

(a)                    AASB 1 paragraph D17, to allow an entity that becomes a first-time adopter of Australian Accounting Standards in its consolidated financial statements later than its subsidiary (or associate or joint venture) to use the amounts included in the subsidiary’s (or associate’s or joint venture’s) separate financial statements where the subsidiary (or associate or joint venture) has already adopted either Australian Accounting Standards or IFRSs, subject to consolidation, equity accounting and business combination adjustments.

Amendment to AASB 1053

BC35            As noted in paragraph BC28, most respondents to ED 315 supported the proposed amendment to AASB 1053. However, two respondents suggested that the proposed amendment was unnecessary. In summary, these respondents suggested that because the unconsolidated GPFS are separate financial statements, the entity would be applying Tier 2 requirements in the consolidated financial statements for the first time (if they have not prepared consolidated financial statements in the past). Therefore, the entity could use AASB 1 without the proposed amendment, as they would be a first-time adopter of Australian Accounting Standards in the consolidated financial statements. This is because an entity can be a first-time adopter in relation to a set of financial statements – for example, its separate financial statements or consolidated financial statements – rather than in relation to the entity as such.

BC36            The Board noted that AASB 1 paragraph D17, although written in the context of a parent becoming a first-time adopter later than its subsidiary, appears to support the view that distinct ‘first-time adoptions’ are possible for an entity’s separate financial statements and for its consolidated financial statements. Paragraph D17 states that “… if a parent becomes a first-time adopter for its separate financial statements earlier or later than for its consolidated financial statements, it shall measure its assets and liabilities at the same amounts in both financial statements, except for consolidation adjustments.”

BC37            The Board considered this feedback and decided to proceed with the proposed amendment to AASB 1053. Although the Board acknowledged that the proposed amendment might not be strictly necessary due to the requirements in AASB 1 paragraph D17, the Board considered that the amendment:

(a)                    is helpful to stakeholders because it clarifies that an entity can apply AASB 1 on transition from unconsolidated Tier 2 – Reduced Disclosure Requirements GPFS to consolidated Tier 2 – Simplified Disclosures GPFS;

(b)                   is consistent with the approach adopted by the Board in AASB 2020-2 for entities transitioning from SPFS to Tier 2 GPFS; and

(c)                    provides entities with an accounting policy choice that would otherwise be unavailable; that is, they can choose whether to apply AASB 1 or AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors to their transition.

BC38            Two stakeholders also provided feedback suggesting that the proposed paragraph 20A of AASB 1053 should also be available to NFP entities. The stakeholders suggested that broadening the scope of the amendment would avoid any unforeseen effects on NFP entities that are currently preparing unconsolidated Tier 2 – Reduced Disclosure Requirements GPFS and that might decide to transition to consolidated Tier 2 – Simplified Disclosures GPFS.

BC39            The Board acknowledged this feedback but reconfirmed its view that as NFP entities are not affected by the removal of SPFS and the ‘reporting entity’ definition in Australian Accounting Standards at this stage, they can continue to consider themselves to be non-reporting entities and prepare single-entity Tier 2 – Simplified Disclosures GPFS, applying the exemption in AASB 10, if appropriate. For this reason, the Board decided no changes to the proposed AASB 1053 amendment were necessary.

Effective date

BC40            The Board confirmed that, consistent with the effective date of AASB 2020-2 for most entities, the amendments would be effective for annual periods ending on or after 30 June 2022, with earlier application permitted, as proposed in ED 315.

[1]  Under AASB 101 Presentation of Financial Statements, a complete set of financial statements includes a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

[2]  AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities, paragraph 26, permits the presentation of a single statement of income and retained earnings in place of the statement of changes in equity if the only changes to equity during the periods for which financial statements are presented arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policies.

[3]  Compliance with Tier 1 reporting requirements is a reference to compliance with Australian Accounting Standards (Tier 1).

[4]  In this context, Tier 2 reporting requirements refers to either Australian Accounting Standards – Reduced Disclosure Requirements or Australian Accounting Standards – Simplified Disclosures, as appropriate.

[5]  Compliance with Tier 2 reporting requirements is a reference to compliance with Australian Accounting Standards – Simplified Disclosures.

[6]  The AASB 1 option for the retrospective application of Australian Accounting Standards in accordance with AASB 108 might not be relevant here as it is available only in relation to the resumption, not first-time application, of Tier 1 reporting requirements.

[7]  Legend:

SPFSs: special purpose financial statements;

R&M: recognition and measurement in Australian Accounting Standards;

T1: Tier 1;

T2: Tier 2; and

BC: Basis for Conclusions.

[8]  AASB 1053 Application of Tiers of Australian Accounting Standards (June 2010).

[9] This definition is included in paragraph Aus7.2 of AASB 101 Presentation of Financial Statements.

[10] Under Sections 292(2), 293 and 294 of the Corporations Act, small proprietary companies must prepare and lodge financial reports in certain circumstances such as when the Australian Securities and Investments Commission (ASIC) directs them, or they are controlled by a foreign company, or 5% of shareholders vote to have a financial report.

[11] ASIC Regulatory Guide 85 Reporting requirements for non-reporting entities.

[12] Except for presentation of a third balance sheet required under Tier 1.

[13] The outcome of the proposals in the Discussion Paper are included in the Corporations Amendment (Corporate Reporting Reform) Act 2010.

[14]  It is relevant to note that the term ‘Australian Accounting Standards’ encompasses both Tier 1 and Tier 2 requirements.

[15]  Paragraph 20 of AASB 1053 (June 2010) clarified that first-time transitioning to Tier 1 reporting requirements from SPFSs that applied applicable recognition and measurement requirements of Australian Accounting Standards (including those of AASB 1, where relevant) would entail application of the full disclosure requirements of AASB 1.  This clarification is no longer needed because paragraph 18 of AASB 1 is clear that Tier 1 reporting requirements would apply on first transition, irrespective of the degree of application of recognition and measurement requirements prior to transition.

[16]  These disclosures would be in addition to any other disclosures required by other Standards (including comparative information in accordance with AASB 101 Presentation of Financial Statements).

[17]  IFRS 1 Basis for Conclusions, paragraphs BC59–BC62.

[18]  AASB 2020-2 Basis for Conclusions, paragraph BC142.