The upcoming modifications in financial statement presentation are set to impact small to medium-sized entities significantly. It is crucial for accountants in Sydney to proactively prepare for these changes, as they will take effect next year. The following outlines the specific individuals and organisations affected by the new rules.
Are you required to prepare financial statements “per Australian Accounting Standards?”
If the answer is yes, and if you are not a listed company or a large corporation already with reporting obligations, you may have been preparing “special purpose” financial statements (SPFS) to meet these requirements.
In March 2020, the Australian Accounting Standards Board (AASB) approved removing the SPFS reporting framework. It approved a new simplified disclosure standard for entities that are deemed to be “Tier 2” entities – which will capture most Small to mediums sized entities (SMEs) as long as they do not have public accountability (e.g. a listed company). The simplified disclosure standard will, however, mean the production of general-purpose rather than special-purpose financial reports.
Why has this happened?
The removal of SPFSs has been contemplated for quite some time because the framework, unique to Australia, does not align well with the international benchmarks set by the International Financial Reporting Standards for SMEs. The move to the new simplified GPFS framework will facilitate this better.
Who does this impact?
This will impact several companies, not just those lodging financial statements with the ASIC.
It is important to note that several companies produce SPFSs to meet bank or other compliance-related requirements. Critically, suppose the terms of such requirements refer to producing financial statements per “Australian Accounting Standards” or “Accounting Standards”. In that case, you will no longer be able to prepare SPFSs and will now be required to produce simplified general-purpose financial statements as a minimum.
Entering into any form of an agreement requiring the preparation of statements that comply with Accounting Standards will elevate the reporting format to that of Tier 2 general purpose financial statements (GPFS) as a minimum.
What does changing from special purpose to general purpose mean?
The effects of the change will depend on the extent of your existing reporting.
For most SMEs, the extent and level of reporting will require careful preparation and consideration of the accounting policies so that they are fully aligned with the Accounting Standards.
For several entities, the change could mean applying the complete requirements of the measurement and recognition criteria of the Accounting Standards for the first time.
This would include, for example, preparing consolidated financial statements when you were only required to prepare standalone financial statements in the past.
When does this change become effective?
The new disclosure standards will be practical for financial years commencing on or after 1 July 2021 (e.g. for years ending 30 June 2022 and 31 December 2022).
However, early adoption is permitted – and strongly recommended. This is because there is a critical transition relief available under the new standards. This would mean that should you early adopt the requirements (e.g. for the year ending 30 June 2021), you will not be required to restate comparatives for changes arising, for example, on applying the measurement and recognition criteria for the first time or having to complete and prepare disclosures for the comparative year which you did not need to do previously (e.g. related party or tax disclosures).
In addition, the AASB will not require additional notes to identify errors or policy changes when transitioning from SPFS to GPFS.
This relief will not be available if you wait until the mandatory date to adopt the new standards, 1 July 2021.
To learn more about the changes and better prepare for the transition, contact your KrestonSW manager to discuss.
Kreston Stanley Williamson Team
Correct as of 16 December 2020
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
