Simplified disclosures to replace RDR for Tier 2 entities preparing general purpose financial statements

On 1 August 2019, the Australian Accounting Standards Board (AASB) issued proposals to replace the current Reduced Disclosure Requirements (RDR) framework for Tier 2 entities preparing general purpose financial statements (GPFS) with a Simplified Disclosure framework.

‘Tier 2’ entities comprise:

For-profit private sector entities that do not have public accountability (e.g. large proprietary companies)
Not-for-profit private sector entities (e.g. charities reporting to the Australian Charities and Not-for-Profits Commission, sporting clubs, etc.)
Public sector entities (for-profit and not-for-profit) other than the Australian Government, State, Territory and Local Governments.

Tier 2 entities are required to comply with all recognition and measurement requirements of Australian Accounting Standards, but are permitted to provide a reduced level of disclosures.

These proposals go hand in hand with another exposure draft, expected to be issued in August 2019 by the AASB (ED 297 Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities), which will remove the ability for certain for-profit entities to prepare special purpose financial statements (SPFS) when they are required to comply with Australian Accounting Standards (e.g. required to lodged audited financial statements with ASIC and the ACNC).

Where can I find these proposals?

ED 295 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities is the exposure draft that contains these proposals.

What is the AASB proposing?

The new Simplified Disclosure Regime (SDR) is based on disclosures contained in the IASB’s IFRS for SMEs standard, and is intended to maximise the use of relevant IFRS-based materials.

It is very important to note that there will be no change to recognition and measurement requirements, which will still apply to all ‘Tier 2’ entities. In addition to that, Tier 2 entities still need to prepare consolidated financial statements when required by AASB 10.

Rather than being ‘greyed’ out of existing standards as is the case for RDR disclosures, all SDR disclosures will be included in a separate disclosure standard for Tier 2 entities. This would make it easier in practice to identify all the applicable disclosure requirements for Tier 2 entities, but it would remove the ability to compare easily with the disclosure requirements for Tier 1 entities.

The rationale for reducing the RDR requirements is to find a balance between the benefits of financial information to users of ‘Tier 2’ entities and the costs to preparers to provide that information, as well as ensuring users are not overburdened with unnecessary information that clutters the financial statements.

Is there a significant reduction in the proposed SDR compared to RDR?

The question that springs to mind when reading ED 295 is whether the proposals actually result in a significant decrease in the overall number of disclosures required for SDR compared to RDR.

The AASB’s Staff Analysis – Comparison of RDR disclosures with proposed AASB 10XX Simplified Disclosures for Tier 2 Entities (page 1) provides a high level summary of where disclosure reductions, compared to RDR, have been made when drafting SDR disclosures from the IFRS for SMEs standard. However, when analysing the detailed differences, in practice, often these will not result in a major reduction in disclosure because the differences sometimes relate to more obscure scenarios that may not be frequently encountered by Tier 2 entities.

Change in level of disclosures	Reasons	BDO Comments
Significant reduction compared to RDR ↓	AASB 7 Financial Instrument: Disclosures	Reduced disclosures relate to less common scenarios such as: Designation of financial assets & liabilities at FVTPL Reclassification Hedging Transfers of financial assets
	AASB 12 Disclosure of Interests in Other Entities	Reduced disclosures relate to less common scenarios such as: Where judgement is required for control, joint control decisions, and type of joint arrangement Investment entities Consolidated structured entities Unconsolidated subsidiaries Unconsolidated structured entities
	AASB 16 Leases	Reduced disclosures relate to: Depreciation charge on ROU assets Interest expense on lease liabilities Income from sub-leasing Cash outflows for leases Additions to ROU assets Gains/losses from sale & leaseback transactions Details of leasing arrangements Variable lease payments Extension options Residual value guarantees
Reduced to some extent ↓	AASB 3 Business Combinations	Reduced disclosures relate to: Contingent arrangements & indemnification assets Business combinations achieved in stages
	AASB 12 Disclosure of Interests in Other Entities (parts covering interests in associates & joint ventures)	Reduced disclosures relate to: Interests in associates Interests in joint ventures
	AASB 13 Fair Value Measurement	Reduced disclosures relate to recurring & non-recurring fair value measurements for assets and liabilities
	AASB 15 Revenue from Contracts with Customers	Reduced disclosures relate to: Revenue from contracts with customers Impairment losses on receivables & contract assets Significant judgements – timing of satisfaction of performance conditions, transaction price allocation, & point in time control transfer Costs to obtain or fulfil a contract Practical expedients
	AASB 101 Presentation of Financial Statements	Reduced disclosures relate to: Disclosing total assets & liabilities held for sale in one line on the balance sheet Reconciliation of share capital movements not required for the comparative period Reclassification of financial assets Material items of income and expense
	AASB 127 Separate Financial Statements	Reduced disclosures relate to where the parent entity is an investment entity (and therefore not preparing consolidated financial statements)
	AASB 136 Impairment of Assets	Reduced disclosures relate to: Impairment losses & reversals recognised in profit or loss / OCI Recoverable amount of asset or CGU when there has been an impairment loss

For the following standards, ED 295 proposes disclosures that are essentially the same as RDR:

AASB 2 Share-based Payment
AASB 102 Inventories
AASB 107 Statement of Cash Flows
AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
AASB 112 Income Taxes
AASB 116 Property, Plant and Equipment
AASB 120 Accounting for Government Grants and Disclosure of Government Assistance
AASB 121 The Effects of Changes in Foreign Exchange Rates
AASB 123 Borrowing Costs
AASB 129 Financial Reporting in Hyperinflationary Economies
AASB 137 Provisions, Contingent Liabilities and Contingent Assets
AASB 138 Intangible Assets
AASB 140 Investment Property
AASB 141 Agriculture.

More disclosures in some areas

It should be noted for the following standards that the number of SDR disclosures are somewhat more than the current RDR disclosure requirements:

AASB 1 First-time Adoption of Australian Accounting Standards
AASB 110 Events after the Reporting Period
AASB 119 Employee Benefits
AASB 124 Related Party Disclosures (e.g. disclosures relating to government-related entities).

What is the effective date for these changes?

ED 295 proposes that the new Simplified Disclosures will apply to ‘Tier 2’ entities for annual periods beginning on or after 1 July 2020, i.e. 30 June 2021 year-ends, and can be adopted early once approved as a new standard.

Benefits of the proposals

Entities currently preparing GPFS – RDR may need to present fewer disclosures in future.

In addition, removing the ability of certain for-profit entities to self-assess as ‘non-reporting entities’, and thus prepare SPFS, will improve comparability of financial statements filed on the public record.