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Reporting Entities, Non-Reporting Entities and the Reduced Disclosure Regime

Authors:

Abstract

Most entities would rather be non-reporting entities when it comes to preparing their accounts as the preparation of the accounts is much simpler and easier to do. Simpler and easier accounts preparation was the reason that the Australian Accounting Standards Board's (AASB) Reduced Disclosure Requirements (RDR) regime was introduced in 2010. This Paper reviews the current Australian financial reporting regime and discusses the circumstances in which entities will or will not be reporting entities
Reporting Entities, Non-Reporting Entities and the Reduced Disclosure Regime
Updated 27 November 2015
Keith Reilly
wally2088@hotmail.com
Member SME Implementation Group- International Accounting Standards Board
Note: An earlier edited version of this Paper was produced by Keith Reilly, for Television Education
Network Pty Ltd in August 2013
Background
Most entities would rather be non-reporting entities when it comes to preparing their accounts as the
preparation of the accounts is much simpler and easier to do. Simpler and easier accounts preparation
was the reason that the Australian Accounting Standards Board's (AASB) Reduced Disclosure
Requirements (RDR) regime was introduced in 2010. This Paper reviews the current Australian
financial reporting regime and discusses the circumstances in which entities will or will not be reporting
entities, including:
The definition of reporting entity and the differences in preparing accounts for reporting and non-
reporting entities general purpose vs. special purpose accounts
Determining whether entities are reporting entities
o Large proprietaries
o Other unlisted entities
o Not for profits and charities
The role of the auditor in auditing non-reporting entity status
The reduced disclosure requirements (RDR)
To which entities does RDR apply to
The nature of the reduced disclosures a detailed review
Auditing reduced disclosures
1. Introduction
The Australian Accounting Standards Board's (AASB) attempt to provide relief from reporting
requirements for the non-listed company market is Accounting Standard AASB 1053 'Application of
Tiers of Australian Accounting Standards’ and is better known as the RDR (Reduced Disclosure
Requirements). AASB 1053 was issued in June 2010 and could be applied when first issued. However
given that the RDR standard is just an option for reporting entities that are not publicly accountable (i.e.
essentially other than listed companies) the actual application date is irrelevant.
In this Paper we will look at the financial reporting requirements that can be applied by various
organizations and proposals to further reform the financial reporting landscape.
For 30 June 2015 financial reporting periods, there are no changes from what
could be
applied in
2010, as an option to reduce the ‘clutter’ in financial statements by adopting the RDR, or for non-
reporting entities to just adopt the 4 AASB disclosure accounting standards (AASBs 101 Presentation,
107 Cash Flow, 108 Accounting Policies and 1054 Additional Disclosures AASB 1031 Materiality
has been abolished by the AASB and AASB 1048 Interpretations to date has only applied to
reporting entities).
At this time there is no requirement to follow the ASIC thinking of applying all the recognition and
measurement (R&M) requirements of the AASBs as there has been no change in the application
paragraphs of the AASB accounting standards. In particular the Australian Charities and Not-for-
Profits Commission (ACNC) clearly states that non-reporting Charities can just adopt the AASB
disclosure accounting standards i.e. no need to apply recognition and measurement requirements of
all the AASB accounting standards.
http://www.acnc.gov.au/ACNC/Manage/Reporting/Financial/ACNC/Report/Financial.aspx
The on-going research into Differential Reporting, or as some commentators have stated how to get
rid of non-reporting simplified accounting, rolls on with the AASB forming the view that the reporting
entity concept is being applied inconsistently and funding academic research to support this argument.
The AASB Research Report No.1 Application of the Reporting Entity Concept and Lodgement of
Special Purpose Financial Statements (6/2014) found that 34% of Large Pty Companies that lodge
financial statements with ASIC do not adopt AASB recognition and measurement rules from the
reporting entity AASB accounting standards.
http://www.aasb.gov.au/admin/file/content102/c3/AASB_RR-1_06-
14_Reporting_Entities_and_SPFSs.pdf
Some argue that the AASB, ASIC and the academic research has fundamentally misinterpreted the
Reporting Entity concept and tried to apply guidance based on economic indicators,
instead of
considering just what the definition is all about are there users who demand high quality financial
statements? To date there has been little criticism from the users, so is there an issue?
The AASB is also conscious that forcing non- reporting entity companies to adopt AASB accounting
standards, even in RDR guise,
will significantly add to costs of preparation and audit, and given the
debate about
reducing red tape compliance costs, major reform is likely to be some years away,
given
that both major political parties are embracing reducing un-necessary compliance costs by cutting red
tape and simplifying business costs which is a mantra for non-reporting entity accounting.
The AASB is continuing to research differential reporting with even IFRS for SMEs being an option
down the track. However it is likely to be some 5 years away before any change in the reporting entity
concept can be operational, given the AASB’s current (January 2015 update) Work Program.
http://www.aasb.gov.au/admin/file/content102/c3/Differential_Reporting_Project_Update_12_01_2015.
pdf
2. Reporting Entity
A reporting entity is defined as an entity where it is reasonable to expect the existence of users
dependent on general purpose financial reports (which adopt most of the requirements of AASB
accounting standards) for information which will be useful to them for making and evaluating
decisions about the allocation of scarce resources (refer to AASB 1053 Appendix A Defined Terms).
http://www.aasb.gov.au/admin/file/content105/c9/AASB1053_06-10.pdf
(a) Publicly accountable entities
A publicly accountable entity is defined as an entity whose equity or debt is or is due to be listed on a
stock exchange or it holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses. This is typically the case for banks, credit
unions, insurance companies,
securities brokers/dealers, mutual funds and investment banks. So essentially listed entities or major
financial
institutions.
http://www.aasb.gov.au/Pronouncements/Statements-of-accounting-concepts.aspx
(b) Non-publicly accountable entity
A non-publicly accountable entity that is a reporting entity is by definition other than a publicly
accountable reporting entity. It has the option of either adopting all the AASB accounting standards
(excluding the non-applicable governmental standards AASB 1049-1052) and listed specific
standards AASB 133 earnings per share and AASB 134 interim financial statements) or it can at its
option choose the RDR accounting standards that have significantly reduced disclosures but still full
recognition and measurement AASB standards requirements.
The RDR is based on the International Accounting Standards Board’s (IASB) IFRS
for SMEs
accounting standard but without the recognition and measurement
simplifications, and with some
additional disclosures given that the AASB still requires full recognition and measurement. It is
estimated (BDO March 2010 survey) that compared to the full AASB standards which have around
1550 disclosures, the RDR has around 625 disclosures so a 60% reduction. However the IFRS for
SMEs accounting standard has only 325 disclosures (80% reduction), and the AASB disclosure only
accounting standards that non-reporting entities can use have only 185 (88% reduction) disclosures.
http://www.bdo.com.au/resources/newsletters/accounting-news/accounting-news%2c-
september-2014/no-more-special-purpose-financial-statements
(c) Public Sector
Whilst in theory the RDR could be followed, the Commonwealth, State and Local Governments have
yet to embrace the RDR so it is all the AASB accounting standards that need to be followed, plus the
specific government accounting standards (AASB 1049-1052 & AASB 1055).
3. Non-Reporting Entities
(a) Companies that are Charities
The ACNC is the Regulator and the former financial reporting requirements of the Corporations Act
generally apply, so no change, although an ACNC registered Charity is required to lodge a simple
Annual Information Statement.
http://www.acnc.gov.au/ACNC/Manage/Reporting/SubmitAIS/ACNC/Report/2014AIS_Landing.aspx?
Noleft=1
For financial periods commencing as from 1 July 2013 (i.e. 30 June 2014 balancers) ACNC Charities
are covered by the new ACNC financial Reporting Regulations,
however they effectively grandfather
the current AASB accounting standards framework. As noted earlier an important distinction though is
that the ACNC has stated that the recognition and measurement provisions of the AASB accounting
standards, do not
have to be applied by non-reporting entities. This is contrary to what the Australian
Securities and Investments Commission (ASIC) has argued, and simply reflects the reality that
ASIC's view on recognition and measurement is often not applied in practice. This also has
implications for any future reform of Not-for-profit (NFP) financial reporting requirements, as the AASB
has stated that it is not interested in financial reporting for non- reporting entities.
http://www.acnc.gov.au/ACNC/Manage/Reporting/Financial/ACNC/Report/Financial.aspx
(b) Other Companies
(i) Small Proprietary Companies
The Corporations Act does not have any financial reporting requirements and whilst
the Australian
Professional & Ethical Standards Board (APESB) has APES 205 Conformity with Accounting
Standards which members of the accounting bodies are required to follow it is an un-regulated
market. In theory APES 205 requires non- reporting entities to adopt the AASB disclosure accounting
standards being AASB 101 Presentation, AASB 107 Cash Flow, AASB 108 Accounting Policies, and
AASB 1054 Additional Disclosures i.e. general or special purpose, audit fees and dividend
imputation details).
(ii) Large Proprietary Companies and Public Companies
Provided that these companies are non-reporting entities, the only specific AASB applicable
accounting standards are: AASB 101, 107, 108 and 1054.
ASIC argues that all the recognition and measurement requirement of the AASB need to be followed
in order for a 'true and fair view' to be given, but as the AASB academic research has confirmed, such
a view is not followed by many non- reporting entities in practice. ASIC has not tried to enforce its
view, most probably because it is not legally enforceable, given that it is the AASB accounting
standards that set out the enforceability, and the recognition and measurement AASBs are clearly
identified in each of the accounting standards as only being applicable to reporting entities. Again the
ACNC has adopted this approach by specifically stating that the recognition and measurement
provisions of AASB accounting standards do not apply to non-reporting Charities.
(iii) Grandfathered Large Pty Companies
These are former Exempt Pty Companies that were audited and when the Large and Small Pty test
replaced the Exempt and Non-Exempt shareholding tests in 1995. Their exemption from lodging
financial reports with ASIC was grandfathered. There were 1.498 Companies in 2011 according to
ASIC records.
(c) Non-corporate entities
As with small proprietary companies, unless there are specific governing rules in their constitution or
specific legislative requirements, then there is a free choice as to what financial reporting model is
followed.
4. Should the RDR be adopted for Reporting entities that are non-publicly accountable?
Unless there is a need for the entity to stay with all the AASB disclosures and that
would generally
only be if the entity is considering a stock exchange listing in the next year and hence needs
comparatives, there is good reason to adopt the RDR and get rid of a lot of the clutter that is
contained in the AASBs (up to 60% according to a BDO Survey).
However it is estimated that less than 5% of eligible entities, have made the decision to adopt the
RDR option. Why, well that illustrates the reality that the significant
savings in financial reporting is not
so much the disclosures but more the complicated recognition and measurement rules contained in
the AABSs The reason that the IASB brought in the IFRS for SMEs accounting standard, is that the
full IFRS framework (AASBs) are only relevant for capital markets and hence publicly accountable
listed entities. IFRS for SMEs is or has been adopted by some 85 countries, it applies in the UK from
2015, and even the US is considering simplified recognition and measurement rules when it starts to
issue accounting standards for non-SEC listed entities. Why hasn't Australia allowed significantly
reduced financial reporting requirements, is a good question!
5. The RDR accounting standards
As stated earlier, the RDR disclosures are broadly the IFRS for SMEs disclosures but with some
additional Australian requirements that the AASB has added as it still requires recognition and
measurement. The AASB's website contains the text of
each of the RDR accounting standards and
has a shaded section that highlights disclosures that are not required by RDR.
6. The role of the auditor in a differential reporting environment
Essentially the auditor needs to be satisfied with the directors’ view that an entity is a reporting or non-
reporting entity and therefore the financial statements comply with the applicable AASB accounting
standards. There are no particular issues that an auditor faces in auditing RDR financial statements,
as the disclosures are just less than what the auditor has dealt with in a full AASB accounting
standards environment.
For non-reporting entities that are preparing special purpose financial reports,
Statement of Australian
Auditing Standards ASA 800 Special Considerations Audits of Financial Reports prepared in
accordance with Special Purpose Frameworks requires the auditor to include an Emphasis of Matter
paragraph alerting users of the auditor’s report that the financial report is prepared in accordance with
a special purpose framework and that, as a result, the financial report may not be suitable for another
purpose.
7. References
Shading added for ease of reference!
1. AASB
AASB’s Glossary of Defined Terms
Note that it is being updated (August 2015) so refer to SAC 1 which has the same defined terms
http://www.aasb.gov.au/Pronouncements/Statements-of-accounting-concepts.aspx
http://www.aasb.gov.au/admin/file/content102/c3/AASB_Glossary_30_September_2 012.pdf
general purpose financial report/statements
A financial report/statement intended to meet the information needs common to users who are
unable to command the preparation of reports tailored so as to satisfy, specifically, all of their
information needs. AAS 25.10, SAC 1.6, SAC 2.5
special purpose financial statements (referred to as ‘financial statements’) Financial statements
other than general purpose financial statements. AASB 101.Aus7.1, AASB 1054.6
reporting entity
An entity (including an economic entity) in respect of which it is reasonable to expect
the existence of
users dependent on general purpose financial reports for information which will be useful to them for
making and evaluating decisions about
the allocation of scarce resources. AAS 25.10, SAC 2.5,
AASB 101.Aus7.2, AASB1053.A
public accountability
Public accountability means accountability to those existing and potential resource providers and
others external to the entity that makes economic decisions but is not
in a position to demand reports
tailored to meet their particular information needs.
A for-profit private sector entity has public accountability if:
(a) its debt or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-
counter market, including local and regional markets); or
(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses. This is typically the case for banks, credit unions, insurance companies, securities
brokers/dealers, mutual funds and investment banks. AASB 1053.A
Accounting Standard AASB 102 Inventories Reporting Entities
http://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-04_COMPdec12_01- 13.pdf
Application
Aus1.1 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part
2M.3 of the
Corporations Act and that is a reporting entity;
(b) general purpose financial statements of each other reporting entity; and
(c) financial statements that are, or are held out to be, general purpose financial statements.
Accounting Standard AASB 108 Accounting Policies, Changes in
Accounting Estimates and
Errors Corporations Act Part 2M.3 preparing entities both reporting & non-reporting entities
http://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPdec12_01- 13.pdf
Application
Aus2.1 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part
2M.3 of the
Corporations Act;
(b) general purpose financial statements of each reporting entity; and
(c) financial statements that are, or are held out to be, general purpose financial statements.
Accounting Standard AASB 1053 Application of Tiers of Australian
Accounting Standards
Corporations Act Part 2M.3 preparing
entities both reporting & non-reporting entities
http://www.aasb.gov.au/admin/file/content105/c9/AASB1053_06-10.pdf
COMPARISON WITH IFRS FOR SMES
The disclosures required by Tier 2 and the disclosures required by the IASB’s International Financial
Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) are highly similar. However,
Tier 2 requirements and the IFRS for SMEs are not directly comparable as a consequence of Tier 2
including recognition and measurement requirements corresponding to those in IFRSs, whereas the
IFRS
for SMEs includes limited modifications to those requirements.
In addition, the recognition, measurement and disclosure requirements that apply in accordance with
Tier 2 are to be revised as Australian Accounting Standards are revised, whereas the IFRS for SMEs
is expected to be revised only periodically for revisions of IFRSs.
Objective
1 The objective of this Standard is to set out the application of Tiers of Australian Accounting
Standards to different categories of entities preparing general purpose financial statements.
Application
2 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part
2M.3 of the
Corporations Act;
(b) general purpose financial statements of each reporting entity;
(c) Financial statements that are, or are held out to be, general purpose financial statements;
and
(d) Financial statements of General Government Sectors (GGSs) prepared in accordance with AASB
1049 Whole of Government and General Government Sector Financial Reporting.
Footnote 1 This application paragraph does not amend the application paragraphs of
other Standards
that are restricted to reporting entities.
Statement of Accounting Concepts
SAC 1 Definition of the Reporting Entity 8/1990
http://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf
INTRODUCTION
3 The purpose of this Statement is to define and explain the concept of a reporting entity and to
establish a benchmark for the minimum required quality of financial reporting for such an entity. This
Statement outlines the circumstances in which an entity or economic entity should be identified as a
reporting entity. It also outlines the criterion for determining, for financial reporting purposes, the
boundaries of a reporting entity.
DISCUSSION
The Reporting Entity Concept
12 This Statement adopts a concept of the reporting entity which is tied to the information needs of
users and the nature of general purpose financial reports. The concept requires that individual
reporting entities be identified by reference to the existence of users who are dependent on general
purpose financial reports for information for making and evaluating resource allocation decisions. This
means that
a class of entity defined under another concept, such as the legal or fund concepts (for
example, proprietary companies or special and general purpose funds), may include some entities
which should be identified as reporting entities, by virtue of the existence of users dependent on
general purpose financial reports prepared by the entity, and other entities which should not be so
identified.
15 However, the concept of the reporting entity established by this Statement is one linked to the
information needs of users of general purpose financial reports in making and evaluating resource
allocation decisions. The provision of information for these purposes is the criterion used to determine
the boundaries of a particular reporting entity.
Identification of Whether Dependent Users Exist
19 For the purposes of this Statement, the identification of an entity as a reporting entity is linked to
the information needs of users of general purpose financial reports.
In many instances, it will be
readily apparent whether, in relation to an entity, there exist users who are dependent on general
purpose financial reports as a basis for making and evaluating resource allocation decisions. For
those entities in respect of
which it is not readily apparent whether such dependent users exist, the
factors outlined in paragraphs 20 to 22 are identified as the primary factors to be considered in
determining whether a reporting entity exists. These factors are indicative only,
and are not the only
factors that will be relevant in determining whether, in a particular circumstance, an entity is a
reporting entity.
Separation of management from economic interest
20 The greater the spread of ownership/membership and the greater the extent of
the separation
between management and owners/members or others with an economic interest in the entity, the
more likely it is that there will exist users dependent on general purpose financial reports as a basis
for making and evaluating resource allocation decisions.
Economic or political importance/influence
21 Economic or political importance/influence refers to the ability of an entity to make a significant
impact on the welfare of external parties. The greater the economic or political importance of an entity,
the more likely it is that there will exist users dependent on general purpose financial reports as a
basis for making and evaluating resource allocation decisions. Reporting entities identified on the
basis of this factor are likely to include organizations which enjoy dominant positions in markets and
those which are concerned with balancing the interests of significant groups, for example,
employer/employee associations and public sector entities which have regulatory powers.
Financial characteristics
22 Financial characteristics that should be considered include the size (for example,
value of sales or
assets, or number of employees or customers) or indebtedness of
an entity. In the case of non-
business entities in particular, the amount of resources provided or allocated by governments or other
parties to the activities conducted by the entities should be considered. The larger the size or the
greater the indebtedness or resources allocated, the more likely it is that there will exist users
dependent on general purpose financial reports as a basis for making and evaluating resource
allocation decisions.
Implications of Application of the Reporting Entity Concept
Implications of the criterion for identification of a reporting entity
23 As the concept of the reporting entity reflected in this Statement is related to the information
needs of users, it is evident that the creation of a company, statutory authority or other organizational
structure does not of itself mean that the entity or organization will qualify as a reporting entity.
Judgement will be required in determining whether an entity satisfies the criterion for being so
classified.
24 For entities which operate in the public sector, the implications of the factors listed in paragraphs
20 to 22 are that most government departments and statutory authorities will be reporting entities.
This arises by virtue of the separation between the parties with an economic interest in the activities
undertaken in the sector and the parties responsible for the management of those activities. In such
circumstances, information about the medical centres controlled by the hospital would be incorporated
into the general purpose financial report of the hospital. This does not mean that the hospital will not
require financial information from each of the centres for making resource allocation decisions. Rather,
the implication is that
financial reports prepared for this purpose by the centres would not be in the
nature of general purpose financial reports, but instead would be in the nature of special purpose
financial report.
25 An implication of applying the reporting entity concept in the public sector is that a government as
a whole, whether at the Federal, State, Territorial or local government
level, would be identified as a
reporting entity because it is reasonable to expect that
users will require general purpose financial
reports to facilitate their decision making in relation to the resource allocations made by, and the
accountability of, those governments. At a lower level of reporting, a number of individual statutory
authorities and departments (and the entities they control) may also be defined as individual reporting
entities because of their economic or political significance and/or their financial characteristics (for
example, resources controlled and level of
indebtedness). In some cases, these factors may also
identify a ministerial portfolio as a reporting entity
26 In the private sector, the factors listed in paragraphs 20 to 22 will identify as reporting entities all
entities in which there is significant separation of
ownership/membership and management, for
example public companies and listed trusts. In contrast, entities in which the members and
management are an identical group, as would be the case for most sole traders, partnerships and
exempt
proprietary companies, would usually not be identified as reporting entities on the basis of this
factor. However, there will exist circumstances in which entities such as these ought to be regarded as
reporting entities. For example, an entity which undertakes the raising of debt or equity funds from the
public will become a reporting entity because there will exist potential resource providers who require
general purpose financial reports as a basis for making resource allocation decisions. For similar
reasons, undertaking to sell an entity may result in the identification of the entity as a reporting entity.
Also, the size and/or economic significance of some entities to their suppliers, clients or employees or
to the public may dictate that those entities are reporting entities even though the members manage
the entity. Examples of this would be professional partnerships which service a very large number of
customers or clients and which enjoy a special status in the community, and exempt
proprietary
companies which attract a special public interest because of their financial characteristics.
27 There will exist some entities which will not be regarded as reporting entities, but
which form part
of an economic entity which is a reporting entity. This would be the case, for example, where a
company is a wholly-owned subsidiary of another entity in the economic entity, and the size and
other economic characteristics of the company are such that there do not exist users dependent on
general purpose financial reports as a source of information for making and evaluating resource
allocation decisions about the wholly-owned company.
Implications of the reporting entity concept for current practice
33 …In this regard, however, it should be noted that the fact that this Statement may not require a
particular entity to prepare general purpose financial reports does not
preclude other parties, for
example, regulatory authorities and financial institutions,
from imposing a requirement on that entity to
prepare general purpose financial reports.
Implications of the Reporting Entity Concept for Differential Reporting
Concepts and Accounting Standards, or differential reporting.
35 Bases that have been proposed for identifying the entities which should be permitted to
depart from these Statements and Standards are:
(a) the size of the entity - that is, entities classed as small in relation to certain size benchmarks,
based on any combination of turnover, assets and number of
employees, would be permitted to
depart;
(b) ownership characteristics - for example, privately-owned entities would be permitted to
depart, whereas publicly owned entities would not be permitted to depart; and
(c) a combination of size and ownership characteristics for example, privately- owned entities
which are classed as small would be permitted to depart from the Statements and Standards.
36 In this Statement the need to prepare general purpose financial reports is linked to the existence
of users dependent on those reports as a basis for making and evaluating resource allocation
decisions. The existence of users dependent on general purpose financial reports is not determined
by either the size or the ownership characteristics of an entity. Accordingly, the bases outlined in
paragraph 35 are not supported by this Statement. However, the reporting entity concept
enunciated
herein embodies a concept of differential reporting in that certain entities will not be identified as
reporting entities and thus would not be required to prepare general purpose financial reports or
comply with Statements of Accounting Concepts and Accounting Standards in the preparation of other
financial reports. The entities which need not prepare general purpose financial reports are those in
respect of
which it is reasonable to expect that users dependent upon information contained in general
purpose financial reports for making and evaluating resource allocation decisions do not exist.
37 As paragraphs 24 to 28 outline, it is likely that some types of entities will be identified as reporting
entities by this Statement, while others will not. Accordingly, in most instances the following private
sector entities are unlikely to be required by this Statement to prepare general purpose financial
reports: sole traders, partnerships,
privately-owned companies and trusts other than those where
funds are subscribed by the public. There may be some instances when it is considered necessary or
desirable that a general purpose financial report about an entity in these categories is prepared, for
example when a privately-owned company intends to raise funds from the public. In these
circumstances the report is required to comply with all Statements of Accounting Concepts and
Accounting Standards. In the public sector,
although most government departments and statutory
authorities are likely to be required to prepare general purpose financial reports, the financial
characteristics of
some authorities and government agencies will mean that they will not be required
by this Statement to prepare such reports. Types of entities which always would be identified as
reporting entities and types of entities that are or are not likely to be identified as reporting entities are
indicated in Professional Statement APS 1 "Conformity with Statements of Accounting Concepts and
Accounting Standards"…
Reduced Disclosure Requirements
http://www.aasb.gov.au/Work-In-Progress/Reduced-Disclosure-Requirements.aspx
The AASB is continuing its efforts to rationalize financial reporting in Australia through its Differential
Reporting project.
In June 2010, the AASB issued Standards establishing a differential reporting framework consisting
of two tiers of reporting requirements for preparing general purpose financial statements (GPFSs):
(a) Tier 1: Australian Accounting Standards; and
(b) Tier 2: Australian Accounting Standards Reduced Disclosure Requirements (RDR).
Compared with Tier 1, Tier 2 significantly reduces the disclosure burden and the costs of preparing
and auditing GPFSs for most entities, whether for-profit or not-for-profit in the private and public
sectors.
The AASB is now undertaking research to assess the implications of earlier proposals relating to
clarifying the meaning of GPFSs and changing the application focus of Standards from reporting
entity to GPFSs. The AASB is considering the potential impact of these proposals on entities that
currently prepare special purpose financial statements.
In this section of the website, you will find links to information regarding all aspects of the Differential
Reporting project, including:
Project updates on the progress of the Differential Reporting Project
Tier 2 work program setting out the estimated times for the release of Tier 2 Supplements to
Tier1 Exposure Drafts/ Standards
Tier 2 requirements including Standards establishing Tier 2 and compiled RDR versions of
Australian
Accounting Standards for early adopters
An explanation of the principles used to determine Tier 2 disclosure requirements
An archive of consultative documents, submissions, media releases and other material
relating to the Differential
Reporting project
2. ACNC
For Charities the Australian Charities & Not-for-profits Commission (ACNC) is the regulator, although
for Charities that are companies limited by guarantee, the financial reporting requirements for the
30/6/2013 and 31/12/2013 financial year are still governed by the Corporations Act. However for
financial years commencing as from 1/7/2013 the ACNC’s Financial Reporting Regulations whilst
generally mirroring the current Corporations Act requirements, specifically state that a non-reporting
entity need not follow the recognition & measurement requirements of the AASB accounting
standards. This whilst consistent with what most non-reporting entities have done to date, is at odds
with the Australian Securities & Investments Commission’s (ASIC) view that for a true and fair view,
the recognition & measurement requirements should be followed. So it is interesting that the ACNC is
at odds with the view of ASIC and also the AASB that intends to abolish the non- reporting entity
concept.
http://www.acnc.gov.au/ACNC/FAQs/FAQ_CLG.aspx
What does my company need to do now about annual financial
reporting?
For the 2013 reporting period (that is, for reporting periods starting on or after 1 July 2012), your
company must submit the 2013 AIS (which does not request any financial information apart
from categorization based on revenues of: Small Revenue less than $250,000, Medium
Revenue between $250,000 and
$999,999, and Large Revenue of $1,000,000 or more) to the ACNC. It must
also still submit
financial statements to ASIC for one more year (i.e. 2013) so there is no gap in the
information collected by ASIC and the ACNC.
http://www.acnc.gov.au/ACNC/Manage/AIS/ACNC/Report/2013AISsample.aspx
For the 2014 reporting period onwards (that is, for reporting periods starting on or after 1 July 2013),
medium and large charities must submit financial reports to the ACNC, instead of
ASIC. That is, Parts
2M.1 (overview of financial reports and audits), 2M.2 (financial records) and 2M.3 (financial reports,
including annual financial, directors’ and audit reports) of the Corporations Act will no longer apply.
(Note: These Parts still apply to charities that issue debentures.)
These Corporations Act requirements are replaced by the financial reporting requirements under the
ACNC Act. The ACNC requirements include keeping, as well as for medium or large charities,
providing financial reports to the ACNC. The size of your company is decided in the same way as
under the Corporations Act, except that deductible gift recipient (DGR) status is no longer relevant.
This means more companies will be ‘small’ for ACNC purposes.
3. ICAA Guidance on Reporting Entities
Business Practice
Guide 12/2006
1. Purpose and Scope of Business Practice Guide (BPG)
1.1 Requirements for the preparation of Financial Statements are contained in the Corporation Act,
Accounting Standards and Urgent Issues Group (UIG) Interpretations for companies and various
other legislation for some non-corporations (e.g. various Commonwealth and State Legislation for
public sector entities, various State Legislation for clubs and associations) and the Institute’s APS 1
“Conformity with Australian Accounting Standards”.
a) The BPG is guidance developed by the Institute of Chartered Accountants in Australia (ICAA) that
is designed to provide some assistance for small to medium entities that are non-reporting
entities when they are preparing Financial Statements given the absence of
specific reporting
requirements. The BPG is not mandatory, and as such can be tailored or not utilized at all,
depending on the circumstances of the particular non-reporting entity. The Guide will be regularly
updated as a result of feedback from Members and Constituents and any comments should be
emailed to best_practice@icaa.org
Note that this Guide has not been updated and is no longer available on the ICAA’s(nowCAANZZ)
website however it is available on request wally2088@hotmail.com
b) ASIC has expressed the view in their Guide “Reporting Requirements for Non-reporting Entities”
that companies required to prepare financial reports under Chapter 2M of the Corporations Act
should comply with the recognition and measurement requirements of
accounting standards. As such
in ASIC’s view this Guide should not be applied by entities that are required to prepare financial
reports under Chapter 2M of the Corporations Act
2001. For further details see Appendix H of
the BPG. This view is not held by the ICAA,
since the standards themselves (with the exception of
AASBs 101, 107, 108 and AASB 1048) are drafted as applying to reporting entities. Consequently
this Guide contains some simplifications of measurement principles to ease the compliance burden on
small business.
However for Chapter 2M Companies, Members will need to determine the
applicability of this Guide. Appendices G and H set out the background to the Reporting Entity
Concept and a Summary of ASIC’s Guide.
Case Study Questions
1. How do I determine whether I am a non-reporting entity?
2. I am currently preparing general purpose financial reports as a non- listed reporting entity. Is it
worth considering whether I should adopt the RDR accounting standard?
3. Given the AASBs view that companies should be producing general purpose financial reports
that comply with all the AASB accounting standards, what should I
do as a current non- reporting
entity that is producing specific purpose financial reports?
4. I am a non-reporting company and only adopt the AASB disclosure accounting standards and do
not follow the recognition and measurement requirements of the other accounting standards. Do I
need to do anything given that ASIC has stated that
all companies should be adopting the recognition
and measurement requirements of
the accounting standards?
5. As a charity I am producing non-reporting entity financial statements. Given that
the ACNC is
the regulator, do I need to think about general purpose financial statements?
6. I am a non-reporting entity and I have never had any concern raised about the financial report. Is
there anything I should do to confirm that I am still a non-reporting entity?
Case Study Answers
1. How do I determine whether I am a non-reporting entity?
Suggestion: If there are no users’ of the financial report that are only relying
upon the
financial report to make their own economic decisions, then the entity is a non-reporting
entity. It is the opposite of what is a reporting entity being an entity where it is reasonable to
expect the existence of users dependent on general purpose financial reports (which adopt
most of the requirements of AASB accounting standards) for information which will be useful
to them for making and evaluating decisions about the allocation of scarce resources (SAC 1
and the AASB’s Glossary). SAC 1 paragraph 37 states that most private companies would not
be reporting entities.
2. I am currently preparing general purpose financial reports as a non- listed reporting entity. Is it
worth considering whether I should adopt the RDR accounting standard?
Suggestion: Absolutely unless you are likely to list on the ASX in the next year or so as then
you may wish to keep the comparatives that the full AASB’s require for publicly accountable
entities (i.e. mostly listeds). The BDO March
2010 Survey indicated that the RDR disclosures
result in up to a 60% reduction
of the disclosures required by the full AASB accounting
standards. However the take-up for RDR has been low (around 5% of those that could adopt
the RDR) and the reason is that the major savings are in the IFRS for SMEs simplified
recognition and measurement requirements, instead of complex full
IFRS/AASBs.
3. Given the AASB’s view that companies should be producing general purpose financial reports
that comply with all the AASB accounting standards, what should I
do as a current non- reporting
entity that is producing specific purpose financial reports?
Suggestion: No need to do anything for the moment, as the AASB’s proposal
has yet to be
publicly debated and even if the AASB does move to abolishing
the reporting entity concept
for companies (and that’s debatable!), it will be at least 3 or more years away (2018).
4. I am a non-reporting company and only adopt the AASB disclosure accounting standards and do
not follow the recognition and measurement requirements of the other accounting standards. Do I
need to do anything given that ASIC has stated that
all companies should be adopting the recognition
and measurement requirements of the accounting standards?
Suggestion: There is some debate on this. In the author’s opinion, the ASIC view is not legally
enforceable as the AASB standards are clear and the recognition and measurement
requirements only apply to reporting entities.
The AASB has stated that it is reviewing this
issue, so on that basis, the author believes that you need not do anything. ASIC has taken
minimal
enforcement on this issue, and given the current policy of the Government and
Opposition to reduce un-necessary business compliance costs, one could
expect political
pressure being brought on this issue if ASIC ramped up its inspection program. Additionally
the ACNC has provided support on this issue (see Question 5 below). The author (Keith Reilly
wally2088@hotmail.com is happy to further advise on this issue!
5. As a charity I am producing non-reporting entity financial statements. Given that
the ACNC is
the regulator, do I need to think about general purpose financial statements?
Suggestion: No. The ACNC’s Financial Reporting Regulations make it quite clear that non-
reporting entities can continue to prepare and lodge with the ACNC from 2014, specific
purpose financial reports that are not required to
adopt the recognition and measurement
requirements of the full AASB accounting standards that apply to reporting entities.
6. I am a non-reporting entity and I have never had any concern raised about the financial report. Is
there anything I should do to confirm that I am still a non-reporting entity?
Suggestion: Probably not, although it does no harm to periodically test that the identified users
of the financial statements being the shareholders are still
satisfied with special purpose
financial reports and that can be easily done as a Note to the financial statements.
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