Everything you wanted to know about accounting position papers but were too afraid to ask

In October 2024, the Australian Securities and Investments Commission (ASIC) published ASIC’s oversight of financial reporting and audit 2023-24 (Report 799), in which the corporate regulator noted the following:

ASIC’s Report 799 also noted that:

From this, we take it that ASIC regards accounting position papers as the essential link between the financial information reported in entities’ financial statements and the relevant accounting standards. But why is this link necessary?

In pursuit of perfect accounting standards

There are at least two reasons why we don’t have a comprehensive suite of accounting standards that deal unambiguously with the accounting treatment of all feasible accounting transactions and events.

Limited resources and competing priorities

Like all group decision-making processes, accounting standard-setting is not always quick. It is often initiated in response to an immediate external need and conducted with limited resources. Consequently, standard setters are constantly playing ‘catch up’, resulting in ‘gaps in GAAP’.

The International Accounting Standards Board (IASB) and the Australian Accounting Standards Board (AASB) have seemingly been developing accounting standards for decades. It might be reasonable, therefore, to assume all the big accounting questions have been resolved. The reality, however, is that there are many transactions and events that lack definitive accounting requirements. Moreover, the number seems to be growing, despite the best efforts of the standard setters. Some of the business transactions and arrangements that currently don’t have corresponding requirements in accounting standards include:

• Digital (crypto) currencies and digital tokens
• Carbon credits and carbon pollution reduction schemes
• Internal group restructurings.

Principles-based standards are a dual-edged sword

Standard setters issue accounting standards despite having imperfect information, particularly about the future. In an attempt to ‘future-proof’ accounting standards, many standard setters issue ‘principles-based’ accounting standards. A direct consequence of this, however, is that auditors and preparers are often required to exercise significant judgement and/or make critical assumptions in interpreting if and how particular accounting standards apply to specific accounting transactions and events. This can pose some not insignificant intellectual challenges (ignoring the economic consequences of different accounting outcomes) in the following circumstances where the particular transaction is complex (e.g., comprises multiple components with different features):

• An accounting standard identifies a number of criteria a transaction or event must exhibit in order for a particular accounting treatment to apply (or not apply, as the case may be), but the standard fails to provide any guidance as to whether any of the criteria are more or less important to the assessment. Such circumstances arise in relation to, for instance, assessing whether an entity is acting as a principal or an agent with respect to revenue recognition, and
• Markets and/or products have evolved since the applicable accounting standard had been issued and in ways unanticipated by the standard setters. In such circumstances, preparers and auditors have to interpret and apply accounting standards that weren’t necessarily written with the entity’s particular circumstances in mind. Consequently, while there is an applicable accounting standard, the definitions, criteria and/or reporting requirements it contains don’t entirely match up with the key features of the transaction or event. A good example of this was the recent discussion around, and subsequent resolution of, accounting for contracts referencing nature-dependent electricity.

What is an accounting position paper and what does it do?

Accounting position papers are variously described as:

• Documents of key management decisions in relation to the application of accounting standards to complex and/or judgemental accounting matters
• Documentary support for management’s accounting policy choices, significant judgements, estimates or transition to new accounting standards, and/or
• Key decision tools for management and auditors to better understand accounting decisions made and the application of accounting standards.

From these descriptions a couple of key characteristics of accounting position papers are evident:

• They are documents, so should exist in either a physical form or electronic form that can be converted into a physical document, and
• They reflect management’s assumptions, analysis, judgements, estimates, conclusions, decisions, etc. regarding complex and/or judgemental accounting matters.

While ASIC’s comments in Report 799 stopped short of stating outright that accounting policy papers are part of the ‘accounting records’ companies, registered schemes and disclosing entities are required to keep under section 286 of the Corporations Act 2001, we note the Financial Markets Authority in New Zealand has very clearly and publicly stated its expectations that to keep ‘proper accounting records’, entities would be expected to prepare and retain accounting position papers in circumstances involving:

• Complex technical accounting issues, or
• Complex or new accounting standards and requirements, including accounting standards that have been issued but are not yet effective.

The importance that accounting position papers reflect management’s views also can’t be understated.

Management and, ultimately, those charged with governance (typically directors), are responsible for the preparation and fair presentation of the entity’s financial report in accordance with the applicable financial reporting framework. These responsibilities include determining accounting policies and accounting treatments in accordance with these policies. In contrast, auditors are responsible for forming an opinion on the financial report, which involves a number of different assessments, including whether the accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate (Auditing Standard ASA 700 Forming an Opinion and Reporting on a Financial Report).

The distinction between management and auditors’ responsibilities is critical to ongoing audit quality. When an auditor also provides non-assurance services to an audit client that affect the accounting records or the financial report, there is a real risk that the auditor will audit their own work, thereby giving rise to a self-review threat (APES 110 Code of Ethics for Professional Accountants (including Independence Standards)). Self-review threats have the potential to undermine both the perceived and actual quality of audit findings.

Need assistance?

BDO offers comprehensive support to entities seeking to become audit-ready or needing assistance with preparing accounting position papers.

For assistance, please contact BDO’s IFRS & Corporate Reporting team.