An Update on the Differential Reporting Project
(as at 10 July 2009) _________________________________________________________________________________
The AASB published Invitation to Comment (ITC) 12 in May 2007 containing the IASB's ED of A Proposed IFRS for Small and Medium-sized Entities (SMEs) and the AASB's proposals for a revised differential reporting regime in Australia. The Board received considerable feedback on its proposals in response to ITC 12 and via Roundtable discussions conducted during the exposure period. The Board began redeliberating ITC 12 proposals in the light of comments received in November 2007. The following reflects a summary of the Board’s tentative decisions to date.
Change of application focus
1. Initial proposals ITC 12 proposed that the application of AASB Standards should no longer depend on whether entities are reporting entities, rather the focus of application would be general purpose financial statements. Accordingly, it was proposed that all entities that prepare general purpose financial statements (GPFSs) would apply either full IFRSs (as adopted in Australia) or an IFRS for SMEs (as adopted in Australia), based on criteria that establish which set of these Standards would apply.
2. Board decisions on redeliberation The Board has tentatively decided that there needs to be a shift of application focus from the reporting entity to GPFSs on the grounds that: (a) Australia has adopted IFRSs, which apply to GPFSs, rather than reporting entities; (b) the reporting entity concept is not used internationally for the purpose of determining the application of accounting standards but it is applied in determining the boundaries of the entity being reported on; and (c) under the current differential reporting regime, various interpretations have been developed around the reporting entity concept that give rise to inconsistent outcomes. One interpretation is that non-reporting entities lodging financial statements with a regulator should apply the recognition and measurement requirements in the Standards, but need only apply some of the presentation and disclosure requirements. Another interpretation is that entities can selectively apply recognition, measurement and disclosure requirements in the Standards.
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General purpose financial statements
1. Initial proposals ITC 12 proposed that, under a revised differential reporting regime, all financial statements that are on a public register, such as those prepared and lodged with the Australian Securities and Investments Commission (ASIC) under the Corporations Act 2001, or otherwise made available to the public at large, such as those tabled in a Parliament, would be regarded as GPFSs. In addition, ITC 12 proposed that, notwithstanding a company being exempt from lodging under the Corporations Act, if it is required under that Act to prepare financial statements in accordance with Australian Accounting Standards, its financial statements are regarded as GPFSs. An example of entities that would have been affected by this proposal would be large proprietary companies that are exempted from lodging their financial statements with the ASIC under the grandfathering provision in section 1408(6) of the Corporations Act. If a grandfathered large proprietary company prepares financial statements in accordance with Australian Accounting Standards under the requirements of the Corporations Act, then its financial statements would be regarded as GPFSs.
2. Board decisions on redeliberation The Board tentatively decided that financial statements made available to the public at large should be prepared in accordance with applicable accounting standards: (a) when a regulator or regulation requires those financial statements to be: (i) (ii) (b) GPFSs; or prepared in accordance with Accounting Standards; or
when a regulator or regulation requires those financial statements and an entity elects to explicitly claim them to be: (i) (ii) GPFSs; or prepared in accordance with Accounting Standards; or
(c)
when an entity voluntarily makes those financial statements available and elects to explicitly claim them to be: (i) (ii) GPFSs; or prepared in accordance with Accounting Standards.
The Board also tentatively decided that: (a) while Accounting Standards apply to GPFSs, not all financial statements prepared in accordance with Accounting Standards under the Corporations Act, other legislation, or otherwise are GPFSs. The existence of dependent users is the key to the general purpose nature of financial statements and not the mere preparation in accordance with Accounting Standards; 2
(b) (c)
‘preparation in accordance with Accounting Standards’ means the application of all Accounting Standards and not a subset of them; and the phrase ‘Accounting Standards’ is taken to be a reference to full IFRSs (as adopted in Australia), a future IFRS for SMEs (as adopted in Australia) and any other reporting requirements that are devised by the AASB for the preparation of GPFSs.
Adoption of the IFRS for SMEs in Australia
The Board noted that the IFRS for SMEs is expected to be adopted by some overseas jurisdictions and it would be inappropriate to deprive Australian entities from using the IFRS for SMEs (as adopted in Australia) for the following reasons: (a) (b) (c) consistency with the IASB approach in regard to for-profit entities; consistency with the Board’s transaction neutrality policy; an Australian subsidiary of a foreign company should have the choice of applying the IFRS for SMEs because the parent or other subsidiaries of the company operating in other jurisdictions might apply the IFRS for SMEs; and the reporting requirements of the IFRS for SMEs are less onerous compared with those of full IFRSs, providing a potentially suitable choice in cases where other regulators, legislators and stakeholders regard a less onerous regime as being more appropriate for some entities that are currently applying full IFRSs.
(d)
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Differential reporting
For-profit entities 1. Initial proposals ITC 12 proposed the following in respect of for-profit entities that prepare GPFSs: (a) (b) publicly accountable for-profit entities as defined by the IASB would apply full IFRSs (as adopted in Australia); for-profit entities that do not satisfy the definition of a publicly accountable entity, but are viewed as being ‘important’ from a public interest perspective because of their large size, also would apply full IFRSs. ‘Important’, entities are those that exceed either of the nominated size thresholds (Revenue $500m, Assets $250m); and other for-profit entities that are not publicly accountable or not otherwise included in (b) above, would apply the IFRS for SMEs (as adopted in Australia). Such entities could choose to apply full IFRSs (as adopted in Australia).
(c)
2. Board decisions on redeliberation So far the Board has considered differential reporting in respect of for-profit Corporations Act entities and has tentatively decided that a two-tier differential reporting regime is appropriate. (a) (b) The first tier, which is applicable to the GPFSs of publicly accountable entities, would consist of full IFRSs. The second tier, which is applicable to the GPFSs of non-publicly accountable entities, would include a choice to apply: (i) (ii) either the IFRS for SMEs (as adopted in Australia), or an alternative regime involving full IFRSs recognition and measurement requirements plus limited specified disclosures to be determined by the Board.
Non-publicly accountable entities could also choose to apply full IFRSs (as adopted in Australia). Public accountability would have the same definition as that in the IASB’s IFRS for SMEs. The Glossary to the Standard defines public accountability as: ‘Accountability to those existing and potential resource providers and others external to the entity who make economic decisions but are not in a position to demand reports tailored to meet their particular information needs. An entity has public accountability if:
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(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 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.’
(b)
The Board also tentatively decided that: (a) the condition in part (b) of the above definition, that is ‘holding assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses’ should be applied in the Australian context; and the IASB’s examples of publicly accountable entities should be supplemented by further examples of the types of entities that would be deemed as publicly accountable under part (b) of the definition in an Australian context.
(b)
Some constituents had argued that in relation to wholly-owned subsidiaries a lower level of disclosures compared to full IFRSs or the proposed IFRS for SMEs would be justified since, in the case of wholly-owned subsidiaries, they argue that users are largely internal. The second alternative in tier 2 is expected to help this group of entities, among others, by providing a less onerous disclosure regime. The Board has tentatively decided not to identify an ‘important’ entity category that would apply full IFRSs. Accordingly, entities that should follow full IFRSs (as adopted in Australia) will be confined to publicly accountable entities as defined by the IASB. This will help avoid the additional maintenance and monitoring costs involved in keeping the size thresholds up-to-date.
Not-for-profit entities 1. Initial proposals ITC 12 proposed the following in respect of not-for-profit (NFP) private and public sector entities that prepare GPFSs: (a) (b) NFP entities exceeding either of the nominated size thresholds (Revenue $25m Assets $12.5m) apply full IFRSs (as adopted in Australia); and NFP entities that fall under the nominated size thresholds would apply the IFRS for SMEs (as adopted in Australia). Such entities could also choose to apply the full set of IFRSs (as adopted in Australia).
ITC 12 sought constituents’ views about the need for a third tier of simpler reporting requirements for smaller NFP entities because they might find the adoption of the forthcoming IFRS for SMEs burdensome on cost-benefit grounds.
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2. Board decisions on redeliberation NFP private sector The Board has tentatively decided that NFP private sector entities should all have the choice of applying any of the following alternatives (that is, a one-tier approach): (i) (ii) (iii) full IFRSs (as adopted in Australia); or the IFRS for SMEs (as adopted in Australia); or a regime of full IFRS recognition and measurement requirements with limited specified disclosures to be determined by the Board.
NFP public sector The Board has tentatively decided that NFP public sector entities would follow a twotier reporting system as follows: Tier 1: financial reporting at federal, state and territory levels would apply full IFRSs (as adopted in Australia). Tier 2: all other NFP public sector entities would have the choice of applying one of the following: (i) (ii) (iii) full IFRSs (as adopted in Australia); or the IFRS for SMEs (as adopted in Australia); or a regime of full IFRS recognition and measurement requirements with limited specified disclosures to be determined by the Board.
Future deliberations The Board will continue its deliberations of the ITC 12 proposals. Among the issues still to be discussed are: (a) (b) the differential reporting regime for for-profit non-Corporations Act entities, and whether the alternative regime to the IFRS for SMEs is needed.
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Other pertinent issues
1. Public accountability The Board noted that the notion of public accountability as defined by the IASB has a for-profit context and is not applicable to the NFP sector where entities are involved in pursuing a wide variety of objectives. The Board also considered the option of using a modified definition of public accountability in the NFP sector context. The Board noted that such a definition would not provide a robust basis for identifying entities falling under different reporting tiers since NFP private sector entities, with the likely exception of smaller member-based entities, are generally seen as being publicly accountable in the general sense of the term. A similar argument is made in relation to NFP public sector entities noting that these entities are levying or using public funds and are all generally regarded as publicly accountable. Moreover, a modified notion of public accountability to cater for the NFP sector would probably give rise to the same level of subjectivity as the concept of reporting entity currently being used for differential reporting purposes and there are disparate views among commentators about whether such a notion can effectively be used to identify entities falling under different reporting tiers in the NFP sector. The Board also noted that some commentators believe the level of public accountability for each entity within the charitable sector depends on a number of entity-specific factors, which reduce its usefulness as a stand-alone criterion for differential reporting purposes in the NFP sector. Accordingly, the Board decided that the notion of public accountability, whether as defined by the IASB or in a modified form, would not provide a robust basis for identifying entities falling under different tiers of reporting requirements in the NFP sector.
2. Use of size thresholds The Board decided that size thresholds do not provide a robust basis for differential reporting purposes on the grounds that it involves complexities and that the disadvantages of using size thresholds would exceed any advantages that may arise from their use. The Board noted that: keeping size thresholds up-to-date would entail additional maintenance and monitoring costs; there is no consensus of views among respondents about the use of size thresholds as a basis for identifying entities falling under different tiers of reporting requirements in the NFP sector. There were also differences of view between commentators as to the amounts of the appropriate thresholds; particularly in the public sector, unless jurisdiction specific thresholds are prescribed, it would lead to similar entities applying different requirements across different State and Territory jurisdictions because of the size differences between these jurisdictions; and 7
problems may arise at the whole of government level if public sector entities were to apply different reporting requirements, possibly resulting in different accounting outcomes that would need to be adjusted on consolidation.
3. The need for a third tier The Board tentatively decided that there is no need for a third tier of reporting requirements considering that: (a) (b) the federal government is considering whether to alleviate the reporting burden of small companies limited by guarantee; there was no convergence of views amongst respondents about the requirements of a third tier and the way entities applying those requirements should be identified; and there would be the choice of a regime involving full IFRS recognition and measurement requirements but limited specified disclosures.
(c)
The Board noted that many NFP entities in the private sector are established as companies limited by guarantee under the Corporations Act or as associations under relevant Associations Acts in each State. Moreover, many non-trading cooperatives are regulated by State or Territory Acts. It is expected that, in cases where the proposed alternative reporting requirements are regarded as burdensome for small entities, regulators may step in and fill the gap either by exempting certain small entities from reporting or devising the minimum requirements they regard as appropriate for such entities.
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Special treatment of charities
Some respondents to ITC 12 argued that the disclosures required by full IFRSs or included in the proposed IFRS for SMEs do not satisfy the information needs of users of financial statements of charities on the grounds that these Standards have a for-profit focus. The Board decided that, as a general policy, there should not be sub-classification of different types of entities in the NFP sector other than between private and public sector entities for differential reporting purposes (in line with ITC 12). The Board noted that: (a) in a transaction-neutral reporting environment, a sub-classification should not be relevant as far as the recognition and measurement of transactions are concerned; and a choice of reporting requirements would provide different levels of disclosures appropriate for entities with different levels of activities.
(b)
The Board noted that this does not rule out specific projects directed at specific aspects of reporting by particular types of NFP entities and decided that a project proposal on disclosures in addition to those required by IASB Standards (as adopted in Australia) should be prepared in respect of charities.
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Characteristics of the revised reporting framework
The revised framework would rely on other regulators, legislators or stakeholders in: (a) (b) determining entities that are required by law to report or otherwise are exempted from financial reporting; and identifying the reporting requirements to be applied by the entity in preparing GPFSs where a choice is allowed by the AASB.
Compared with the current reporting framework, other regulators, legislators or stakeholders could be regarded as having a more extensive role in determining the application of Standards under the revised framework. 1. The AASB’s role Under the revised framework, the Board would define and clarify the concept of GPFSs and promulgate different tiers/choices of reporting requirements for use by entities in preparing their GPFSs. The revised framework would define the AASB’s role in a manner similar to the role the IASB plays internationally. In the for-profit sector, except for identifying publicly accountable entities (as defined by the IFRS for SMEs) as entities that apply the full suite of Standards, the AASB role would be limited to the provision of different choices of reporting requirements and the onus would be on other regulators or legislators and stakeholders to identify those entities in their jurisdictions that should apply one or other set of reporting requirements. Similarly, in the not-for-profit sector, except for identifying whole-of-government entities and government departments at the Federal, State and Territory levels as entities that apply the full suite of Standards, the AASB’s role would be limited to the provision of different choices of reporting requirements and the onus would be on other regulators or legislators and stakeholders to identify those entities in their jurisdictions that should apply one or other set of reporting requirements. 2. The alternative to the IFRS for SMEs Based on the Board’s tentative decisions, the revised differential reporting regime may involve the introduction of an alternative set of reporting requirements to the IFRS for SMEs as a choice. The final decision on this alternative, which could involve full IFRS recognition and measurement requirements with limited specified disclosures, depends on the extent of disclosures that will be required in IASB’s forthcoming IFRS for SMES
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