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The March 2007 AASB meeting made some significant progress on a number of initiatives. The tentative decisions for a ‘size test’ around differential reporting may surprise many, as too will the proposals that wholly-owned subsidiaries should fully comply with all disclosure requirements. New exposure drafts on related parties and inventory measurement by the not-for-profit sector were approved.
In this Accounting alert we focus on the following developments:
Interpretations – revised AASB 1048 and the creation of the first two Advisory Panels
other developments – new exposure drafts, accounting by superannuation entities, short-term review of AAS 27, AAS 29 and AAS 31, and more.
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Differential reporting and SMEs
Proposals for a new ‘size test’
The AASB confirmed its previous decisions that a two-tier approach should apply to the corporate reporting sector and that all financial reports that are lodged with ASIC are to be considered general purpose financial reports for the purposes of the forthcoming ED on an Australian SME Standard.
However, the Board agreed that for corporates that do not satisfy the definition of a publicly accountable entity (as defined by the IASB) but are envisaged as being of high public interest because of their economic importance or dominant market position, a size test should be devised to differentiate between those that should follow A-IFRS and those that should follow an Australian SME Standard. Similar tests will also be proposed for non-corporate for-profit entities.
The above proposals effectively spell the end of the ‘reporting entity’ concept in the Australian context. Accordingly, these decisions have the potential to substantially increase the disclosure burden on entities that are currently considered ‘non reporting entities’. A lot of the discussion at the AASB meeting focussed around balancing the ‘public interest’, the reporting mandate and the accounting framework to apply.
The size test being considered by the AASB would only be used to determine which reporting framework (IFRS or SME) should be followed by particular entities, rather than disclosure relief. The AASB decisions will focus attention on the lodgement requirements for Australian companies under the Corporations Act 2001. The Federal Government’s red-tape review process is proposing an increase in the thresholds used to determine which companies must lodge financial reports, however this is not expected to offer widespread relief. |
Wholly-owned subsidiaries
The AASB agreed not to propose any disclosure concessions for wholly-owned subsidiaries that follow A-IFRS. Instead, the AASB proposed that such entities should follow A-IFRS if they are publicly accountable, whereas those that are not would follow an Australian SME Standard in its entirety (i.e. including all disclosures) unless they chose to use A-IFRS.
| These decisions by the AASB will significantly add to the reporting workload burden by corporate groups that have not implemented ASIC Class Order 98/1418, as the majority of these entities would generally be regarded to be non-reporting entities and so currently prepare special purpose financial reports. We question the need for certain wholly-owned subsidiaries to prepare general purpose financial reports, such as proprietary limited holding companies in corporate chains. This yet again highlights issues with the reporting mandate under the Corporations Act 2001. In effect, the AASB has taken the view that it should set Standards on how to report, not who should report. |
Other entities
The Board agreed that not-for-profit entities and public sector entities should generally be regarded as publicly accountable, but due to cost-benefit considerations, a two-tiered system based on a size test is appropriate. The top-tier would apply A-IFRS and the second tier would apply an Australia SME Standard.
Summary of the emerging financial reporting framework
The table below provides a summary of the financial reporting framework that is being developed by the AASB.
| Type of entity | A-IFRS | SME |
| Listed entities | Mandatory | Not available |
| Other entities that are publicly accountable (e.g. insurance entities, financial institutions) | Mandatory | Not available |
| Entities with high public interest because of their economic importance or dominant market position, i.e. above the ‘size test’ | Mandatory | Not available |
| Wholly-owned subsidiaries with public accountability | Mandatory | Not available |
| Other wholly-owned subsidiaries | Either* |
| Other corporate entities | Either* |
| Not-for-profit entities – ‘tier 1’ (based on size test) | Mandatory | Not available |
| Not-for-profit entities – ‘tier 2’ (based on size test) | Either* |
| Public sector entities – ‘tier 1’ (based on size test) | Mandatory | Not available |
| Public sector entities – ‘tier 2’ (based on size test) | Either* |
| * The Australian SME Standard would be the Standard applied by these entities in the absence of a decision to adopt A-IFRS. Entities applying the SME Standard could chose to adopt A-IFRS Standards in lieu of the SME requirements in particular areas. |
Next steps
The AASB will consider a draft Australian preface to the IASB’s ED of IFRS for SMEs for consideration at its April 2007 meeting with a view to exposing the document in Australia in May.
More information
For more information about on differential reporting and SMEs, see the following:
- Accounting alert 2007/04 – initial decisions regarding the implementation of the IASB SME proposals in the Australian context
- Accounting alert 2007/03 – overview of the IASB’s exposure draft of ‘IFRS for SMEs’ and our initial analysis of the proposals from the Australian perspective
- Accounting alert 2006/09 – our analysis from mid-2006 on likely developments in differential reporting in Australia
- IAS Plus page on the IASB SME Project – a history of the IASB’s decisions and deliberations in this long running project
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Redefining IFRS convergence
The AASB began its consideration of constituent comments on ED 151 Australian Additions to, and Deletions from, IFRSs. A draft amending Standard incorporating the changes resulting from ED 151 is expected to be considered by the AASB at its April 2007 meeting.
Our observer at the meeting reported the following significant decisions. Note that this summary does not represent every decision made by the AASB in relation to ED 151.
Accounting policy choices
| Standard | Agreed position |
| AASB 107 | Allow the ‘indirect method’ of presenting cash flows statements |
| AASB 119 | Remove Australian commentary regarding whether a deep and liquid corporate bond market exists in Australia, but insert a paragraph that requires not-for-profits to use the government bond rate |
| AASB 120 | Allow government grants to be accounted for as deferred income or as a deduction from the related asset. The choice affects the timing of recognition of the grant as income
Permit government grants in the form of a transfer of a non-monetary asset for use by the recipient to be accounted for at fair value or nominal amount
Allow government grants related to income to be presented as a credit in profit and loss or as a deduction from the related expense |
| AASB 127 | Amend definition of ‘separate financial statements’ and related application paragraphs
Require an ultimate Australian parent to present consolidated financial statements if it or the group is a reporting entity |
| AASB 131 | Permit the use of the proportionate consolidation for jointly-controlled entities |
Disclosures
| Standard | Agreed position |
| AASB 107 | Retain the requirement to present a reconciliation between operating cash flows and profit |
| AASB 127 | Retain the disclosure of significant subsidiaries in group financial statements where parent financial statements are not prepared, but only in respect of public sector not-for-profit entities |
| AASB 128 | Remove numerous disclosures including details of associates, investor’s share of capital commitment and other expenditure commitments |
| AASB 130 | Remove numerous disclosures including interest analysis, contractual maturities, impairment losses and fiduciary duties |
| AASB 132 | Remove disclosure of credit standby arrangements |
| AASB 133 | Remove alternative presentation of earnings per share information |
| AASB 134 | Remove disclosure of material subsequent events, dividends, labelling and contextual requirements, disclosures in annual financial reports |
A number of the concerns we raised in our submission on ED 151 were not specifically addressed by the AASB, or were deferred for consideration at a later time. These include: - the treatment of exploration and evaluation under AASB 6 Exploration for and Evaluation of Mineral Resources
- the need for an Australian materiality Standard
- the efficacy of Australian Interpretations, particularly those on non-Australian specific topics
- related party disclosures, particularly by disclosing entities
- some terminology differences and the introductory paragraphs of IFRS Standards.
It is clear that the long road to Australian convergence with IFRS has some way to go. |
Finalisation of the amending Standard and transitional provisions
The AASB intends that the amending Standard resulting from ED 151 will be approved prior to the end of the current financial year. It is expected that early adoption will be permitted.
However, the AASB decided that the requirements of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors should apply when an entity considers adopting a changed accounting policy that is available once certain options are added to the Standards.
The AASB’s decision not to include any specific transitional provisions in the amending Standard resulting from ED 151 may in some cases limit the ‘free choice’ in relation to the new accounting policy options being introduced. AASB 108 only permits a change in accounting policy that is not required by an Accounting Standard where it results in financial reporting that provides more relevant and reliable information. In some cases, some of the new accounting policy options being introduced may be considered ‘inferior’ to those previously prescribed by A-IFRS due to the AASB’s amendments to IFRS in creating A-IFRS. Accepted practice in this matter will develop over time. However, entities considering a change in accounting policy on implementation of the forthcoming amending Standard should carefully consider their justification for the change. |
More information
For more information on this topic, see the following:
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Interpretations
Revised AASB 1048
The Board made a revised version of AASB 1048 Interpretation and Application of Standards to incorporate references to Interpretation 11 AASB 2 – Group and Treasury Share Transactions and Interpretation 12 Service Concession Arrangements.
Establishment of Advisory Panels
The AASB agreed to the members of the Advisory Panels on the following matters:
- accounting for the service concession arrangements by the grantor
- whether Petroleum Resource Rent Tax (PRRT) is an income tax within the scope of AASB 112 Income Taxes.
One member from each panel has been drawn from Deloitte.
Advisory Panel appointees from Deloitte
The following people from Deloitte have been appointed to the Advisory Panels and would welcome any views you may have on these topics: |
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Other developments
Proposed amendments to AASB 124
The AASB agreed to issue ED 153 Proposed Amendments to AASB 124 Related Party Disclosures: State-controlled Entities and the Definition of a Related Party. ED 153 proposes to reduce the disclosure requirements in AASB 124 for some entities that are related only because they are each state-controlled or significantly influenced by the state.
The ED also proposes to amend the definition of a related party, with the main amendment being:
- the inclusion, in the definition of a related party, of the relationship between a subsidiary and an associate of the same entity, in the individual or separate financial statements of both the subsidiary and the associate
- the removal, from the definition of a related party, of situations in which two entities are related to each other because a person has significant influence over one entity and a close member of the family of that person has significant influence over the other entity
- the inclusion, in the financial statements of an entity controlled, jointly controlled or significantly influenced by a key management person (KMP) of an entity, of the entity for which the person is a member of the KMP.
More information
For more information about the proposed amendments to AASB 124, see the following:
- AASB Exposure Drafts page – ED 153 will be made available here soon
- IASB project page – the IASB exposure draft can be downloaded here
- IAS Plus project page – provides a history of developments around this project
Accounting by superannuation entities
The AASB discussed an issues paper in relation to the consolidation of subsidiaries by superannuation entities and alternative ways in which subsidiaries held by superannuation entities might be treated in the context of a full fair value accounting model.
The Board expressed the view that presenting a subsidiary as a net investment in the balance sheet of a superannuation entity provides insufficient information to users about financial performance and financial position of the subsidiary and the group as a whole.
More information
For more information about this topic, see the following:
Accounting alert 2006/12 – earlier AASB discussions on how superannuation funds should account for assets and liabilities
Inventories held for distribution by not-for-profit entities
The AASB considered a draft ED that proposed amending the requirement in AASB 102 Inventories for measuring inventories held for distribution by not-for-profit entities at the lower of cost and current replacement cost. The Board agreed to propose measurement at cost, adjusted when applicable for any loss of service potential.
The ED will be finalised out of session and is expected to be issued in late March or early April.
Other
The following topics were also discussed:
- GAAP/GFS harmonisation for whole of governments and PNFC and PFC sectors – the first draft of an exposure draft was considered
- short-term review of AAS 27, AAS 29, AAS 31 – a number of decisions surrounding a draft exposure draft were considered (details can be found in the AASB Action Alert [PDF 55kb]), including proposals for three new topic-based Standards and amendments to various existing Standards
- insurance – consideration of a draft Invitation to Comment that will incorporate the IASB’s Discussion Paper on insurance contracts, expected to be published at the end of March
- fair value measurements – consideration of the IASB’s Discussion Paper on Fair Value Measurement, with the AASB preferring fair value to be defined as an exchange price rather than as a selling price.
More information on these and all of the above topics can be obtained from the AASB Action Alert for the meeting, available on the AASB website.
The next meeting of the AASB is scheduled for 30 April 2007.
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