For-profit private sector entities

For-profit private sector entities - Why you should consider transitioning from special purpose to Tier 2 general purpose financial statements one year early (i.e. for 30 June 2021 year-ends)

In March 2020, the Australian Accounting Standards Board (AASB) finalised its project to scrap special purpose financial statements (SPFS) for certain types of for-profit private sector entities.

SPFS will no longer be an option for reporting periods beginning on or after 1 July 2021 (i.e. 30 June 2022 year-ends and beyond) by for-profit private sector entities that are required by:
  • Legislation to prepare financial statements that comply with either Australian Accounting Standards or ‘accounting standards’ (e.g. if lodging with ASIC), or
  • Their constitutions or other documents such as trust deeds (created or amended on or after 1 July 2021) to prepare financial statements that comply with Australian Accounting Standards.

What general purpose financial statements (GPFS) will replace the SPFS?

Currently there is a two-tiered general purpose reporting framework in Australia:

TierAccounting requirements
1Applies all Australian Accounting Standards and is compliant with International Financial Reporting Standards
2Applies all recognition and measurement requirements of Australian Accounting Standards, but Reduced Disclosures (RDR)

The following entities must prepare Tier 1 GPFS:5

  • For-profit private sector entities that have public accountability and are required to prepare financial statements complying with Australian Accounting Standards or ‘accounting standards’, and
  • Australian Government and State, Territory and Local Government entities.

Entities that are not Tier 1 entities can prepare Tier 2 GPFS. However, going forward, for periods beginning on or after 1 July 2021, RDR will be replaced by the Simplified Disclosures as a Tier 2 general purpose reporting option. Simplified Disclosures also requires application of all recognition and measurement requirements from Australian Accounting Standards, but the disclosure requirements are different to RDR. Whereas RDR are effectively a subset of the bigger disclosure pool in Australian Accounting Standards (some disclosures in each standard are ‘greyed out’ or ignored for RDR), Simplified Disclosures are all contained in a separate, stand-alone standard called AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

RDR will therefore be removed as an option for any Tier 2 general purpose financial reporting, including both for-profit and not-for-profit entities. So all these entities will need to move to Simplified Disclosures for periods beginning on or after 1 July 2021. Some tinkering will be required in the first year to ensure that all Simplified Disclosures (which are based on IFRS for SMEs disclosure), including for comparative information, are included because these are similar, but not identical to RDR.

Why move to GPFS one year early?

In order to encourage entities to move from SPFS to Tier 2 GPFS (Simplified Disclosures) as quickly as possible, the AASB have provided a number of transition exemptions which could considerably reduce the amount of transition work required to produce GPFS in the first year. Preparers may therefore wish to take advantage of some, or all, of these attractive transition options.

What are the transition options?

There are three short-term transition options that have been added to AASB 1053 Application of Tiers of Australian Accounting Standards for entities adopting AASB 1060 early. These provide relief as follows:

Relief from…For periods beginning before…BDO comments
Providing comparative information not previously disclosed in the notes1 July 2021Will save time for all entities currently preparing SPFS as there will be many additional disclosures, and adopting Simplified Disclosures one year early means you do not need to go back and add disclosures for the prior period.
Restating comparative information1 July 2021Will save time if you do not currently apply all recognition and measurement requirements in SPFS, including consolidation.
Distinguishing correction of errors from changes in accounting policies1 July 2022Will save time if you do not currently apply all recognition and measurement requirements in SPFS, including consolidation.

In future editions of Accounting News we will provide more details on when and how each of these transition options can be used.