Differential reporting in Australia has long been based on the Reporting Entity Concept. Now this is all set to change with the push by the Australian Accounting Standards Board (AASB) to replace the Reporting Entity Concept with a model based on a more prescriptive approach.
The AASB sees the International Accounting Standards Board (IASB)’s IFRS for SME Project as a key component of the model to adopt. Particularly, for companies that lodge financial reports with ASIC, other than those which are publicly accountable, for example listed companies.
A recent AASB action alert states:
"Differential Reporting/Small and Medium-sized Entities (SMEs) – The Board decided that under a revised financial reporting regime all financial reports that are prepared and lodged with the ASIC under the Corporations Act 2001 would be regarded as general purpose financial reports on the basis of being available on a public register for access by users."
There is much to be said for the AASB’s push to relieve non-listed companies from the complexity of AIFRS. At first glance the AASB has made significant simplifications with approximately 3000 AIFRS disclosures reduced to 400. However, the major issue for Australia will be whether the SME Standard should be applied to the majority of large proprietary companies and many non-listed public companies that are non-reporting entities and which currently prepare special purpose financial reports.
What Will Be The Most Likely Outcome?
Whilst the AASB has yet to finalise its reporting model, it seems to be leading to a two-tier reporting structure for corporates that lodge their financial reports with ASIC. The full IFRS standards will apply to publicly accountable entities, such as listed companies and deposit takers, but also extend to very economically significant private companies. The initial thinking is a very-large-size test, perhaps being revenues of $500 million.
Other entities lodging with ASIC, such as smaller public companies and large proprietary companies, would be required to apply the AIFRS for SME standard, in line with the AASB’s intention to abolish the non-reporting entity concept. This is a decision that will not be popular with those lodging non-reporting entities that have only adopted minimal disclosure standards and simplified measurement and recognition tests. The replacement standard is designed for reporting entities and contains much more complex measurement, recognition and disclosure requirements.
This second tier of the reporting structure is somewhat of a surprise, given the responses to the AASB’s ED 148 last June. A record 96% of the 180 submissions argued against this very point, as it will force many large proprietary and non-listed public companies that are preparing simplified non-reporting entity financial reports to significantly increase the size and complexity of financial statements.
When Will The Change Occur?
Change is unlikely to occur prior to the 2009 financial reporting period. However, once the IASB finalises its IFRS for SMEs Standard in late 2008, the AASB’s current intentions are clear - to replace the Reporting Entity Concept with the AIFRS for SME’s Standard.
Whilst the Government’s recent increase to the Size Threshold Tests, in respect of defining what is a large proprietary company, will relieve some companies from having to produce financial reports, many of the proposed changes will increase their reporting burden and consequent costs.
Understandably, many in our profession see the AIFRS for SME standard as still too complicated and in need of being simplified in terms of disclosure requirements, measurement and recognition requirements.
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