There are some major changes being made to the way financial statements are to be presented, which will have a big effect on small to medium sized entities. You need to prepare now for the changes that come into effect next year. Below you will see who the new rules effect.
Are you required to prepare financial statements “in accordance with Australian Accounting Standards?”
If the answer is yes, and if you are not a listed company or a large corporate already with reporting obligations, chances are you have been preparing “special purpose” financial statements (SPFS) to meet these requirements.
In March 2020, the Australian Accounting Standards Board (AASB) approved the removal of the SPFS reporting framework and 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 (eg 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 simply because the framework, which is very 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 and not just those lodging financial statements with the ASIC.
It is important to note that a number of companies produce SPFSs to meet bank or other compliance related requirements. Critically, if the terms of such requirements refer to the need to produce financial statements in accordance with “Australian Accounting Standards” or “Accounting Standards”, you will no longer be able to prepare SPFSs and you will now be required to produce simplified general purpose financial statements as a minimum.
Entering into any form of 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 in the accounting policies so that are fully aligned with the Accounting Standards.
For several entities, the change could mean applying the full 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 in the past you were only required to prepare standalone financial statements.
When does this change become effective?
The new disclosure standards will be effective for financial years commencing on or after 1 July 2021 (eg for years ending 30 June 2022 and 31 December 2022).
However, early adoption is permitted – and strongly recommended. This is because there is an important transition relief available under the new standards. This would mean that, should you early adopt the requirements (eg 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 (eg related party or tax disclosures).
In addition, the AASB will not require additional notes to identify errors or change in policies when transitioning from SPFS to GPFS.
This relief will not be available if you wait until the mandatory date for adoption of the new standards, being 1 July 2021.
To learn more about the changes and better prepare for the transition, get in touch with your KrestonSW manager to discuss.
Kreston Stanley Williamson Team