Reminder – For-profit private sector entities - Changes to constitution and banking agreements from 1 July 2021 may trigger GPFS

This article was originally published in June 2022. It has been updated to remind preparers that determining whether general purpose financial statements (GPFS) or special purpose financial statements (SPFS) are required is not a case of ‘set and forget’.

Which for-profit private sector entities must prepare GPFS?

For annual reporting periods beginning on or after 1 July 2021, for-profit private sector entities must prepare GPFS if they are required by:

  • Legislation to prepare financial statements in accordance with Australian Accounting Standards or ‘accounting standards’, or
  • Their constitutions or other documents (e.g. lending agreements) to prepare financial statements in accordance with Australian Accounting Standards, provided that the relevant document was created or amended on or after 1 July 2021.

LEGISLATION 

(e.g. Part 2M of Corporations Act 2001)		 OR

CONSTITUTIONS / OTHER DOCUMENTS (e.g. trust deeds) CREATED OR AMENDED ON OR AFTER 1 JULY 2021 

This article focuses on the type of financial statements required where a for-profit private sector entity has a constitution or other document that requires financial statements in accordance with Australian Accounting Standards.

Constitutions and documents created and amended before 1 July 2021 are ‘grandfathered’

For-profit entities not required to prepare financial statements in accordance with Part 2M.3 of the Corporations Act 2001 can continue to prepare SPFS if the constitution or document was created and amended before 1 July 2021. This ‘grandfathering’ principle applies, irrespective of whether the document(s) referred to Australian Accounting Standards.

Constitutions and documents amended on or after 1 July 2021

Although ‘grandfathered’ entities may choose to continue preparing SPFS where their constitutions and other documents (created or amended before 1 July 2021) require financial statements in accordance with Australian Accounting Standards, there is a catch.

If any changes are made to these constitutions or other documents from 1 July 2021 onwards, for any reason, SPFS are no longer permitted. The entity must switch to GPFS (Tier 2 Simplified Disclosures) unless references to ‘Australian Accounting Standards’ are removed when the constitution or other document is amended. For example, if amendments are made to the repayment terms in a banking agreement, with no change made to the financial statement clauses, GPFS will be required. The same applies if very minor amendments are made to the entity’s constitution for reasons unrelated to the financial statements.

Therefore, previously ‘grandfathered’ entities must reassess whether their reporting obligations have changed at the end of each reporting period.

Preparing Tier 2 Simplified Disclosures GPFS for the first time after 1 July 2021 means that there is no transitional relief. Entities will have to restate comparatives, provide comparative information not previously disclosed in the notes, and distinguish correction of errors from changes in accounting policies on the transition date.

Constitutions and documents created from 1 July 2021

Careful consideration is required where a constitution or document was created on or after 1 July 2021.

Reference to Australian Accounting Standards

If these documents refer to financial statements prepared in accordance with Australian Accounting Standards, then GPFS must be prepared. These can generally comply with Tier 2 Simplified Disclosures. It should be noted that a reference to ‘financial statements issued by the Australian Accounting Standards Board (AASB)’ is the same as a reference to Australian Accounting Standards.

No reference to Australian Accounting Standards

If there is no other legislative requirement for financial statements (e.g. Part 2M.3 of the Corporations Act 2001), you may continue to prepare SPFS if your constitution or other documents make no reference to Australian Accounting Standards.

What if the constitution or document requires compliance with GAAP?

In the Basis for Conclusions to AASB 2020-2, paragraph BC79, the AASB notes that it considers the term ‘generally accepted accounting principles (GAAP)’ or ‘accounting principles’ to be more broad. Therefore, it would not be reasonable to assume that these terms intend compliance with Australian Accounting Standards. Entities required by constitutions or other documents to prepare financial statements in accordance with GAAP or ‘accounting principles’ can, therefore, continue to prepare SPFS.

Need assistance?

Please contact our IFRS & Corporate Reporting team if you require assistance with deciphering your financial reporting requirements and preparing your first GPFS.