Controversial changes proposed for financial reporting

Wednesday, 13 June 2018


    As a director, do you approve publicly lodged ‘special purpose financial statements’?

    If so, your reporting requirements are up for review and the Australian Accounting Standards Board (AASB) has indicated in a consultation paper released in May that they intend to remove the ability to lodge ‘special purpose financial statements’.

    The biggest impact of these changes will be felt by large proprietary companies and all types of not-for-profit entities. We encourage you to give us your feedback.

    What are special purpose financial statements?

    Special purpose financial statements are prepared in accordance with a special purpose framework that is designed to meet the information needs of specific users. Not all accounting standards are adopted in special purpose financial statements, only those determined to be relevant to specific users of the financial statements. Directors often approve special purpose financial statements for public lodgement when it is considered that no users exist that cannot demand relevant information directly from the entity.

    Why does the AASB want to remove the ability for entities to lodge special purpose financial statements?

    The AASB is proposing removing the ability for entities to prepare and lodge special purpose financial statements for two reasons:

    1. The reporting entity concept in Australia, that supports the use of special purpose financial reporting, is inconsistent with the newly revised international Conceptual Framework. Therefore its removal is needed to maintain compliance with International Financial Reporting Standards (IFRS).
    2. Australia is the only jurisdiction in the world to allow directors and preparers to choose (or self-assess) what accounting standards will be adopted as part of preparing special purpose financial reports. Therefore, by their very nature they are not comparable across entities which undermines the fundamentals of trust and transparency.

    AASB’s preferred option and the impact

    The AASB has recognised that the removal of special purpose financial reporting will have a significant impact on many organisations – such that it intends to adopt a phased approach for change.

    Phase 1 will remove special purpose financial reporting being available for publicly accountable entities. This will allow these entities to continue to comply with IFRS.

    Phase 2 will apply in the medium term and impact non-publicly accountable entities which include some public companies, large proprietary companies and not-for-profit entities. Instead of preparing special purpose financial statements they will be required to apply the recognition and measurement of all accounting standards with some reduced disclosures. This means that the statutory result determined for these type of organisations is calculated on the same basis as that for a listed company.


    We understand that Phase 1 will impact a small number of entities involved in securitisation arrangements. It will likely apply as early as 2019/2020.

    The impact on entities of Phase 2 will vary and will depend on what accounting requirements the entities affected are currently applying. AICD expects the impact on the reporting burden of many entities to be substantial. This is particularly the case for entities that are not resourced sufficiently to have adequate knowledge of the application of accounting standards and may need to seek external advice on such matters.

    The AICD has always supported the use of special purpose financial statements in appropriate circumstances. The consultation paper does explore a number of options, but the AICD is concerned that the alternatives being explored by the AASB are too narrow in that they will increase the reporting burden for many organisations in Australia, without a commensurate benefit.


    Some alternatives (not all within the remit of the AASB) include:

    • Increase reporting thresholds for proprietary companies and not-for-profits (including charities) so that the number of entities impacted by the Phase 2 proposals is reduced;
    • Adopt simpler reporting standards for both for-profits and not-for-profits with simpler recognition and measurement requirements (based on assessment of user needs for these different sectors or through adopting the international IFRS for SME standard or similar); and/or
    • Continue to allow the flexibility of special purpose financial reporting, but instead of it being part of the reporting entity concept, it could be incorporated using a differently named concept.

    The AICD will be engaging further with members on this matter, as we prepare to respond to the AASB proposals by 9 November 2018.


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