Australian Financial Reporting Framework
We outline the current status on the progressive finalisation of the overhaul to the Australian financial reporting framework.
Current status of the overhaul to the Australian financial reporting framework.
The Australian financial reporting framework is undergoing its most significant overhaul in three-plus decades. Understand how the different pieces fit together, the respective entities affected and related application dates as finalisation progresses. Relevant updates will be incorporated on an ongoing basis.
The International Accounting Standards Board issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. In accordance with the Australian Financial Reporting Council strategic direction, the Australian Accounting Standards Board (AASB) is required to adopt the RCF in Australia. In adopting the RCF a number of issues have been identified. It is the AASB’s view that collectively these issues require the existing Australian financial reporting framework to be examined.
This has resulted in the AASB undertaking a number of projects which are detailed below. The sum of these projects will result in the ‘resetting’ of the Australian financial reporting framework – last done some 30 years ago. The new framework will impact most entities who are required to prepare financial statements.
The IASB® Board issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. The AASB proposed and has implemented a two-phased approach to adopt the RCF in Australia. As part of the AASB’s financial reporting framework project it is considering an entity’s ability to prepare financial statements in accordance with Australian Accounting Standards.
To implement the RCF in Australia the AASB has had to work through a number of issues including addressing:
- the reporting entity concept clash between the RCF and current Australian requirements
- Australia’s unique special purpose financial statements (SPFS) accounting requirements that allow entities to self-assess as ‘non-reporting entities’ and prepare free form SPFS.
In May 2019 the AASB issued the RCF which effectively implements the first of the two-phased approach. The RCF incorporates the IASB Board’s meaning of ‘reporting entity’, which differs significantly from the reporting entity concept (PDF 157KB) in current Australian pronouncements.
In March 2020 the AASB implemented the second phase – removing the ability of certain for-profit private sector entities to prepare SPFS. These entities will be required to prepare a form of general purpose financial statements (GPFS). The amendments (set out in AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities) will work in conjunction with the new GPFS-Tier 2 SD standard, AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities. Both AASB 2020-2 and AASB 1060 will apply for financial reporting periods beginning on or after 1 July 2021, with early adoption permitted.
Who is impacted?All entities will be impacted by the RCF. Refer to For-profit and Not-for-profit for further information.
Having the RCF in place is important so that entities that currently claim compliance with IFRS® Standards can continue to do so.
The RCF applies to annual reporting periods beginning on or after 1 January 2020.
What is the RCF?The RCF contributes to the stated mission of the AASB, including developing standards that bring transparency, accountability and efficiency to financial markets in Australia. The AASB’s work serves the public interest by fostering trust, growth and long-term financial stability in the Australian economy.
The RCF describes the objective of, and the concepts for, general purpose financial reporting. The purpose is to assist:
- the AASB to develop Australian Accounting Standards that are based on consistent concepts
- preparers to develop consistent accounting policies when no Australian Accounting Standard applies to a particular transaction or other event, or when an Australian Accounting Standard allows a choice of accounting policy
- all parties to understand and interpret the Australian Accounting Standards.
The RCF is not a Standard. Nothing in the RCF overrides any Australian Accounting Standard or any requirement in an Australian Accounting Standard. This is consistent with s227(1) of the Australian Securities and Investments Commission Act 2001.
The RCF also assists companies in developing accounting policies when no Australian Accounting Standard applies to a particular transaction. In addition it helps stakeholders more broadly to understand the standards better. We expect it to be rare for companies to use the RCF to select their accounting policies in the absence of specific requirements in the Australian Accounting Standards. Where this is the case the RCF may require a change in accounting policy. Companies will need to apply any changes in accounting policies retrospectively.
When applicable, this RCF supersedes:
- the Framework for the Preparation and Presentation of Financial Statements (July 2004)
- Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (August 1990)
except as otherwise required by Australian Accounting Standards.
Additional resourcesThe IASB® Board issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. The AASB Board proposed a two-phased approach to adopt the RCF in Australia. As part of the AASB’s financial reporting framework project it is considering an entity’s ability to prepare financial statements in accordance with Australian Accounting Standards (PDF 87KB).
In the course of considering applying the RCF in Australia, the AASB identified an inconsistency in the definition of ‘reporting entity’ in the RCF and the widely used and understood Australian ‘reporting entity concept’ (PDF 157KB) set out in Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (SAC 1).
This drew attention to the more emotionally charged issue of special purpose financial statements (SPFS). In response to the above the AASB issued ITC 39 Applying the IASB's revised conceptual framework and solving the reporting entity and special purpose financial statement problems (ITC 39).
The aim of the AASB’s financial reporting framework project is to develop a consistent, comparable, transparent and enforceable financial reporting framework. Once complete the ability of such entities to prepare SPFS will be removed.
The RCF applies to annual reporting periods beginning on or after 1 January 2020.
The AASB’s proposals will not impact the ‘grandfathered proprietary companies’ having lodgement relief under s1408 of the Corporations Act 2001.
Two-phased approach
Phase 1
In May 2019 the AASB released the RCF and an amending standard AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework. The pronouncements are effective for financial years beginning on or after 1 January 2020.
The application of the RCF under Phase 1 was limited to:
- for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards
- other for-profit entities that voluntarily elect to apply the RCF.
Further information can be found in GPFS – Tier 1.
Phase 2In March 2020 the AASB released a new Tier 2 disclosure standard to replace the current Reduced Disclosure Requirements framework, AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (PDF 1.96MB). The disclosure standard contains a minimum prescribed set of disclosures. Additional disclosures may also be necessary to provide financial statement users with an understanding of the entity’s financial performance and position.
Entities preparing GPFS – Tier 2 financial statements will need to comply with the full recognition and measurement (R&M) requirements of Australian Accounting Standards.
Further, the AASB also released AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (PDF 1.47MB).
Both pronouncements are effective for financial years beginning on or after 1 July 2021, with early adoption permitted.
Further information can be found in GPFS – Tier 2 Disclosures
How will Phase 1 and Phase 2 impact me?The following diagram summarises the impacts of the combined AASB pronouncements issued since May 2019.
Entities not required by legislation, constituting or other documents or for-profit public sector entities, may voluntarily prepare GPFS. In such circumstances, the RCF will be required to be applied.
Additional resources- GPFS – Tier 1 financial statement resources
- Example Public Company Limited – Australian example annual financial report
- GPFS – Tier 2 (SD) financial statement resources:
The AASB decided that it would pursue financial reporting reform in the public sector via consultation based on the AASB Discussion Paper Improving Financial Reporting for Australian Public Sector (PDF 1.44MB) and Appendices (PDF 1.26MB), which were issued in June 2018.
In May 2019 the AASB released the revised Conceptual Framework for Financial Reporting (RCF) and an amending standard AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework. The pronouncements are effective for financial years beginning on or after 1 January 2020.
The application of the RCF under Phase 1 was limited to:
- for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards
- other for-profit entities that voluntarily elect to apply the RCF.
Having the RCF in place was important so that entities that claim compliance with IFRS® Standards could continue to do so.
Other for-profit private sector entities, whether preparing GPFS using Tier 2 or SPFS were considered in Phase 2, GPFS – Tier 2 Disclosures.
Additional resourcesIf an entity is publicly accountable the Australian accounting framework requires the preparation of GPFS – Tier 1. The AASB identified a separate public accountability sub-project, which will consider whether there should be any changes to who is deemed to have public accountability.
Public accountability is defined by the IASB® Board but needs to be applied in an Australian environment. The AASB’s sub-project planned to contemplate whether exemptions from the IASB Board public accountability definition would be in the Australian public interest and whether additional guidance should be included to assist in interpreting the public accountability definition in an Australian context.
We will to release further information when this sub-project progresses. The sub-project is not a current focus of the AASB.
In March 2020, the AASB released a new Tier 2 disclosure standard to replace the current Reduced Disclosure Requirements framework, AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (PDF 1.96MB). The disclosure standard contains a minimum prescribed set of disclosures. Additional disclosures may also be necessary to provide financial statement users with an understanding of the entity’s financial performance and position.
Entities preparing GPFS – Tier 2 financial statements will need to comply with the full recognition and measurement (R&M) requirements of Australian Accounting Standards.
Entities that comply with AASB 1060 are exempt from the disclosure requirements in specified paragraphs of other Australian Accounting Standards (AAS). GPFS – Tier 2 Simplified Disclosure entities are also not required to comply with other AAS that deal only with presentation and disclosure.
Who is impacted?For-profit private sector
The following diagram summarises the impacts of the combined AASB pronouncements issued since May 2019.
Prior to the adoption of AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (PDF 1.47MB) and AASB 1060 an entity can either continue to report under the existing framework (Reduced Disclosure Regime or RDR) or early adopt the revised Conceptual Framework for Financial Reporting (RCF) (Simplified Disclosures or SD).
So, for a for-profit entity with a June reporting date who does not have public accountability and elects to prepare GPFS – Tier 2 the following choice is available:
Information on transition relief for for-profit entities can be found in GPFS – Tier 2 Transition.
Not-for-profit (NFP) private sector
The RCF does not yet apply to NFP entities – the AASB is still working on the requirements for these entities. However, NFP entities that prepare GPFS – Tier 2 using the Reduced Disclosure Regime will need to change to prepare GPFS – Tier 2 Simplified Disclosures for financial years beginning 1 July 2021 – that is, using AASB 1060.
The AASB has provided limited comparative information relief for NFP entities adopting AASB 1060 early when transitioning from Tier 1 or Tier 2–Reduced Disclosure Requirements to Tier 2–Simplified Disclosures. Further details are discussed in 21RU-008 Tier 2 transition relief for Not-for-profit entities.
What is the effective date?AASB 1060 is effective for financial years beginning on or after 1 July 2021, with early adoption permitted.
Additional resourcesThis project is what is referred to as part of Phase 2.
With the implementation of Phase 2 of the revised Conceptual Framework for Financial Reporting (RCF), a number of entities who were previously preparing SPFS will be required to transition to prepare GPFS – Tier 2.
The AASB has issued AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (PDF 1.47MB).
Who is impacted?AASB 1053 Application of Tiers of Australian Accounting Standards (updated by AASB 2020-2) outlines entities which are required to prepare GPFS and where the entity is not publicly accountable it can elect to prepare GPFS – Tier 2 in accordance with Australian Accounting Standards (AAS). This will remove the ability for certain for-profit private sector entities to prepare SPFS as indicated in the following diagram.
The requirements of AASB 2020-2:
- will work in conjunction with the release of AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (PDF 1.96MB) – refer to GPFS – Tier 2 disclosures for further detail
- does not change which entities are required by legislation to prepare financial statements
- does not impact the not-for-profit (NFP) or public sector entities. The AASB has separate financial reporting reform projects in each of these areas.
AASB 2020-2 is effective for financial years beginning on or after 1 July 2021, but can be early adopted.
TransitionAn entity that is required to transition from SPFS to GPFS – Tier 2 Simplified Disclosure will need to comply with the requirements contained in AASB 1053 (updated by AASB 2020-2).
Transitional relief will depend on whether the entity chooses to apply the requirements for periods beginning before 1 July 2021 (for example, 30 June 2021 financial year) or for periods beginning before 1 July 2022 (for example, 30 June 2022 financial year).
The table below sets out the available transitional relief, depending on the period to which the amendments are first applied.
For further discussion on the transitional relief provided refer to 20RU-006 farewell SPFS … Welcome SD.
If an entity elects not to utilise the above transitional relief, when transiting from SPFS to GPFS – Tier 2 it will need to apply a fully retrospective transition approach in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Additional resourcesWe are planning to release further information on transition issues. Watch this space!
As part of the AASB’s financial reporting framework project it considered an entity’s ability to prepare financial statements in accordance with Australian Accounting Standards (PDF 87KB).
In the course of considering applying the revised Conceptual Framework for Financial Reporting (RCF) in Australia, the AASB identified an inconsistency in the definition of ‘reporting entity’ in the RCF and the widely used and understood Australian ‘reporting entity concept’ (PDF 157KB) set out in Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (SAC 1).
This drew attention to the more emotionally-charged issue of special purpose financial statements (SPFS). In response to the above the AASB issued ITC 39 Applying the IASB's revised conceptual framework and solving the reporting entity and special purpose financial statement problems (ITC 39).
Who is impacted?After the implementation of the updated financial reporting framework the ability for private sector entities to prepare SPFS will be changed. Where a regulator or user requires financial statements to be prepared in accordance with Australian Accounting Standards they will need to be GPFS – i.e. SPFS are not allowed. SPFS will still be available where an entity is not required to prepare financial statements in accordance with Australian Accounting Standards.
The AASB has stated that it expects that the directors or those charged with governance will need to consult with their user needs to determine an appropriate basis of preparation (including selection of appropriate accounting policies) when next preparing financial statements. This may be consistent with the most recent SPFS.
The issue is that the directors or those charged with governance will need to establish a process for the above consultation with users. This process should consider all users of the financial statements including owners, bankers, creditors, employees and any applicable regulator. The process will need to be robust and should be reconsidered each time the entity prepares financial statements.
When is the change effective?The AASB issued AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (PDF 779KB) in March 2020. AASB 2020-2 is effective for financial years beginning on or after 1 July 2021, but can be early adopted.
Further discussion can be found in GPFS – Tier 2 Transition.
Interim measure to improve transparency of basis of preparationNot-for-profit entities
SPFS continue to be able to be prepared during the implementation of the RCF. As a practical interim means of improving the quality of information provided to users of SPFS, the AASB issued Amendments to AASB 2019-4 Amendments to Australian Accounting Standards – Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements (PDF 773KB) (AASB 2019-4) in November 2019.
AASB 2019-4 will impact all not-for-profit (NFP) entities preparing SPFS that are required, through legislation, to comply with AASB 101 Presentation of Financial Statements and AASB 1054 Australian Additional Disclosures. This includes:
- each NFP entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act 2001
- each NFP entity, that has annual revenue of $250,000 or more, lodging SPFS with the Australian Charities Not-for-profits Commission (ACNC) in accordance with the ACNC Act 2012.
AASB 2019-4 requires preparers of SPFS to disclose the basis on which the decision was made to prepare SPFS. An entity will also need to disclose if all recognition and measurements (R&M) requirements of Australian Accounting Standards have been complied with or not in preparing the SPFS – both in the financial statements as a whole and for each material accounting policy. If not all R&M requirements have been complied with then sufficient information needs to be disclosed so users of the SPFS clearly understand the accounting policies.
Where the entity has investments in subsidiaries, associates or joint ventures, an entity will be required to disclose whether they have been consolidated or equity accounted as appropriate, in accordance with Australian Accounting Standards. If not consolidated or equity accounted, an explanation of why not is required. If the NFP entity hasn’t determined whether any interest in other entities that it holds gives rise to interest in subsidiaries, associates or joint ventures it must disclose the fact.
The amendments in AASB 2019-4 apply to annual reporting periods ending on or after 30 June 2020.
Additional resourcesIn April 2019, the government amended the statutory financial reporting thresholds for proprietary companies. The amended Corporations Regulations doubles the thresholds for determining whether a company is a large or small proprietary company for a financial year.
Under the Corporations Act 2001, large proprietary companies are required to lodge an annual financial report, a director’s report and an auditor’s report with ASIC. Small proprietary companies have no such requirement to lodge (unless directed to by ASIC, directed by 5 percent or more of their shareholders or are foreign owned) and are generally required to keep sufficient financial records.
A proprietary company is large if it meets two of the three thresholds at the end of its financial year. Otherwise it is small.
New thresholds, based on the financial year, are:
- Consolidated revenue – $50 million or more
- Consolidated gross assets – $25 million or more
- Employees of the consolidated entity – 100 FTE employees or more.
The change may impact some proprietary companies that are currently classified as large. In addition, the change will impact foreign controlled small proprietary companies that are able to get relief from preparation and lodgement under ASIC Instrument 2017/204 (i.e. part of a ‘large group’).
The above change applies in relation to financial years beginning on or after 1 July 2019 – i.e. 30 June 2020 year ends.
Further details on the above are set out in the additional resources below.
As part of the AASB’s financial reporting framework project it is considering an entity’s ability to prepare financial statements in accordance with Australian Accounting Standards. The project has been split into two separate streams:
- for-profit private sector entities
- not-for-profit (NFP) private sector entities.
The AASB decided that the proposals in ITC 39 Applying the IASB's revised conceptual framework and solving the reporting entity and special purpose financial statement problems (ITC 39) would apply only to for-profit entities after hearing concerns from the NFP sector, and considering the discussions with the ACNC and other State and Territory regulators regarding recommendations in the ACNC Legislative Review report (PDF 1.92MB).
Not-for-profit entity – Conceptual frameworkThe AASB is considering what amendments are required to the Conceptual Framework for Financial Reporting (RCF) to enable application of the RCF by NFP entities. The AASB commenced deliberations in September 2020 and is continuing with research and outreach activities in 2022-23.
We are planning to release further information as this project progresses.
Not-for-profit entity – Financial reporting frameworkThe objective of this AASB project is to lead the development of a simple, proportionate, consistent and transparent financial reporting framework for all NFP private sector entities in Australia.
Features of such a framework include:
- a single set of reporting thresholds for all Australian NFP private sector entities, backed by simple and objective criteria, developed in collaboration with other regulators
- simplified recognition and measurement accounting framework/s that are capable of being audited and enforced
- development of standards addressing service performance and other information integral to financial reporting in the NFP sector, such as remuneration reporting, fundraising, volunteer services, related parties to the extent justified by evidence.
The AASB commenced research and outreach on this project in the second half of 2020. We would anticipate that this phase of the project will take two to three years.
We are planning to release further information as this project progresses.
Public Sector FrameworkThe AASB decided that it would pursue financial reporting reform in the public sector via consultation based on the AASB Discussion Paper Improving Financial Reporting for Australian Public Sector (PDF 1.44MB) and Appendices (PDF 1.26MB), which were issued in June 2018.
The objective of the project is to clarify and simplify the Australian financial reporting framework for the public sector, in conjunction with government policymakers and regulators to:
- establishing consistent clear and objective criteria and thresholds that support transparency and openness
- specified financial reporting requirements based on needs of users matched with the level of public interest and external users (proportionate and fair)
- appropriate level of assurance matched with the reason why a public sector entity is reporting.
The timing for finalisation of this project is uncertain at present with no timeline indicated on the AASB work plan.
We are planning to release further information as this project progresses.
