Author
David H.

Should Australia develop a simpler, and better, reporting framework—particularly for entities that are not listed?

When we ask this question, most people respond with, ‘Yes’, or a more emphatic, ‘Yes!’.

When we ask the next question, ‘So, what would you like?’, the answer is often silence or something along the lines of, ‘Something simpler’.

So where to?

No more special purpose financial statements for public lodgement

The Australian Accounting Standards Board (AASB) recently issued proposals[1] and suggestions for improvements to the Australian financial reporting framework for for-profit[2], not-for-profit[3] and public sector entities[4].

These include the controversial proposal to eliminate the ability to prepare special purpose financial statements (SPFS) for publicly lodged financial statements and where compliance with Australian Accounting Standards is required. 

SPFS is the way Australia introduced a differential reporting framework, 30 years ago, to reduce the reporting burden on entities that were not listed. The AASB’s research[5] is that SPFS is not working as intended and should not continue as we know it for publicly lodged financial statements.

The AASB is proposing to require that compliance with Australian accounting standards means following recognition and measurement requirements of the 2,000+ pages of IFRS based standards with modifications for not-for-profit (NFP) issues. 

Is there something that someone overseas has done that not only has reduced disclosures, but has simpler measurement requirements?

Simplified frameworks used overseas

Well, there is! Over 80 countries[6] have adopted IFRS for SMEs[7], which was developed by the International Accounting Standards Board. IFRS for SMEs is based on IFRSs as they were in 2005 and simplified to approximately 250 pages. This simplification removed some options, and changed some measurement requirements, like requiring goodwill to be amortised over 10 years. For those countries that have not adopted IFRS for SMEs, many seem to have another simplified reporting framework for private entities.

Using IFRS for SMEs in Australia

The AASB considered IFRS for SMEs for Australia in 2012, and identified nine concerns[8]. One main concern was that IFRS for SMEs did not include modifications for NFP issues. The AASB recently reconsidered IFRS for SMEs and reiterated its concerns. Further, based on its research, the AASB identified that over 75 per cent of companies lodging financial statements in Australia already followed IFRS measurement requirements. The AASB reasons that by introducing IFRS for SMEs, with its different measurement requirements, that this would increase costs.

Do you agree? Does it make sense that over 80 countries have a simplified measurement framework, but Australia does not?

Improving IFRS for SMEs for Australia

Can IFRS for SMEs be improved? Well, there is a precedent. The United Kingdom recently replaced UK GAAP with a standard[9] based on IFRS for SMEs. The UK made a series of amendments including provisions for not-for-profit entities, some additional options and changes for their Companies Act. The first triennial review found that their approach was working well in practice[10]

Could Australia use the same approach, and introduce a standard based on IFRS for SMEs, with our own amendments? We could also cater for not-for-profit and public sector entities outside whole of government[11]. Why not?

Could we also ‘fix’ areas that cause grief to preparers and users? Why not?

My suggested list of areas to fix

My wish list for fixes from the measurement requirements we currently use, or soon to use, includes:

  • Capital grants (not-for-profits). An oldie, but a goodie. The mismatch of recognising upfront revenue, and expenses over time still does not make sense to many people.
  • AASB 16 Leases and putting operating leases on balance sheet. Does it make sense to recognise an asset for the leases of office and retail space? Does it make sense to change an entity’s profit or surplus with this accounting? How much time and effort will be spent explaining the new rules to non-accountants?
  • Peppercorn leases (not-for-profits). This is starting to cause a lot of grief with many not-for-profits being told that they need to go and get valuations for the introduction of the new standard next year. Do we need to impose these extra costs on not-for-profit entities when the information does not appear useful to either preparers or users? Does upfront revenue and over time expense recognition for the notional asset make sense? How much time and effort will be spent explaining the new rules to non-accountants and donors? While the has recently proposed[12] a temporary deferral of the requirements, why not make the deferral permanent?
  • Revaluations of property, plant and equipment. Allow revaluations, though do not force people onto the revaluation treadmill requiring regular valuations and their cost. A valuation, even if five years old, is probably better than historical cost.
  • Goodwill. Stay with the indefinite life approach, as the arbitrary amortisation of goodwill does not provide useful information, and simplify the impairment testing.

Are these changes from normal accounting standards easy to learn, understand and remember, so people can swap easily from one system to another? I think so.

AASB Consultation

The AASB is currently undertaking extensive consultation on its proposals[13], focusing first on for-profits. The AASB held roundtables around the country during September 2018, and the deadline for submissions on the initial proposals for for-profit entities closed 9 November 2018. Watch out for the proposals for not-for-profit and public sector entities. These are once in a generation changes. Have your say. The AASB accepts feedback in a variety of ways, ranging from formal submissions through to informal emails. I am also interested in your views to help me further understand your issues as I contribute to these projects. Please contact me at David.Hardidge@qao.qld.gov.au.

[1] Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems
Consultation Paper, ITC39 (May 2018)
http://www.aasb.gov.au/admin/file/content105/c9/ITC39_05_18.pdf
AASB Hot Topic summary (October 2018) – Later updated Jun 2019
https://www.aasb.gov.au/research-resources/hot-topics
https://www.aasb.gov.au/admin/file/content102/c3/CF_Hot_Topics_06-19.pdf
[2] Financial Reporting Requirements Applicable to For-Profit Private Sector Companies, AASB Research Report No. 7 (May 2018)
http://www.aasb.gov.au/admin/file/content102/c3/AASB_RR_07_05-18.pdf
and Comparison of Standards for Smaller Entities, AASB Staff Paper (April 2018)
http://www.aasb.gov.au/admin/file/content102/c3/AASB_Staff_Paper_Comparison_of_Standards_for_Smaller_Entities.pdf
[3] Financial Reporting Requirements Applicable to Charities, AASB Research Paper No. 5 (Oct 2017)
http://www.aasb.gov.au/admin/file/content102/c3/AASB_RR_05_10-17.pdf
AASB Discussion Paper: Improving Financial Reporting for Australian Charities and Appendices (Nov 2017)
http://www.aasb.gov.au/admin/file/content102/c3/ACCDP_IFRAC_11-17.pdf
http://www.aasb.gov.au/admin/file/content102/c3/IFRAC_report_support_materials.pdf
[4] Financial Reporting Requirements Applicable to Public Sector Entities, AASB Research Paper No. 6 (May 2018)
http://www.aasb.gov.au/admin/file/content102/c3/AASB_RR_06_05-18.pdf
AASB Discussion Paper: Improving Financial Reporting for Australian Public Sector and Appendices (Jun 2018)
http://www.aasb.gov.au/admin/file/content102/c3/DP_IFRPS_06-18.pdf
[5] Application of the Reporting Entity Concept and Lodgement of Special Purpose Financial Statements, AASB Research Report No. 1 (June 2014)
http://www.aasb.gov.au/admin/file/content102/c3/AASB_RR-1_06-14_Reporting_Entities_and_SPFSs.pdf
[6] Also refer ITC39
https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis, updated as at January 2018.  86 jurisdictions were noted as allowing IFRS for SMEs
[7] https://www.ifrs.org/issued-standards/ifrs-for-smes/
And https://www.ifrs.org/supporting-implementation/supporting-materials-for-the-ifrs-for-smes/
[8] AASB 1053 Application of Tiers of Australian Accounting Standards paragraph BC73
[9] FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland
https://www.icaew.com/technical/financial-reporting/new-uk-gaap/frs-102-the-financial-reporting-standard
[10] https://www.frc.org.uk/getattachment/ae214b3c-f7dd-4673-af0e-7a81023bc020/At-a-glance.pdf
[11] Entities consolidated into whole of government are likely to have to use the same measurement requirements as the whole of government financials (known as Tier 1 requirements). However, Australian jurisdictions may choose to follow the approach of Queensland of excluding immaterial controlled entities from Tier 1 requirements.  Following this reasoning, my suggestions above would be applicable to such entities.
[12] ED286 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-Profit Entities (November 2018)
https://www.aasb.gov.au/admin/file/content105/c9/ACCED286_11-18.pdf
[13] https://aasb.gov.au/news-events/upcoming-events/