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Super vision

March 2012 | Edition 1

Proposed accounting standards for superannuation plans and approved deposit funds

The Australian Accounting Standards Board (AASB) has released Exposure Draft ED 223 Superannuation Entities (the ED), which proposes a new accounting standard to replace AAS 25 Financial Reporting by Superannuation Plans. A copy of the ED is available here.

This ED replaces the previous exposure draft (ED 179) that proposed a new accounting standard for superannuation funds and approved deposit funds (ADFs) to replace AAS 25. A summary of ED 179 is available here.

Based on its policy of transaction-neutrality and adopting the International Financial Reporting Standards (IFRS), the AASB originally considered withdrawing AAS 25 without replacing it. However, the AASB concluded that it is necessary to retain a domestic accounting standard that addresses certain reporting issues unique to Australian superannuation plans and approved deposit funds. Following the release of ED 179, the AASB received feedback that was generally supportive of a replacement standard that substantially aligned superannuation entities with other entities using the Australian accounting standards. However, there were concerns expressed with a number of the proposals, particularly from a cost-benefit perspective.

In light of this feedback, a number of the ED 179 proposals have been amended within ED 223, including those relating to:

  • Preparing and presenting consolidated financial statements
  • Measuring liabilities arising from insurance arrangements for defined benefit obligations
  • Adjusting transaction costs for those assets and liabilities at fair value
  • Disclosing information about the nature, extent and management of financial risks
  • Making disaggregated financial disclosures.

Importantly, AAS 25 requires superannuation entities to apply to Australian accounting standards with some significant exceptions. ED 179 proposed fewer exceptions than AAS 25 and this ED proposes fewer again. In particular, this ED proposes fewer exceptions for consolidation, insurance arrangements and disclosure.

While the title of the ED refers to 'superannuation entities', the new accounting standard will only apply to superannuation plans and ADFs that are reporting entities where the financial statements being prepared are general purpose financial statements. Small APRA funds (SAFs) and self-managed superannuation funds (SMSFs) that are not reporting entities will not be required to comply with the new accounting standard. In addition, the new accounting standard will not apply to pooled superannuation trusts (PSTs).  PSTs should apply the general Australian accounting standards and not the ED.

Unless otherwise specified in the ED, it is proposed that superannuation plans and ADFs that are reporting entities prepare their financial statements in accordance with other applicable Australian accounting standards.

The AASB has invited submissions on the ED by 30 April 2012. We expect the new accounting standard will first apply to annual reporting periods beginning on or after two years after the issue of the final standard. For example, if the new standard was issued before 30 June 2012, the new standard would apply for financial years commencing on or after 1 July 2014. Early adoption will not be permitted.

Tier 1 General Purpose Financial Statements

Subsequent to the release of ED 179, AASB 1053 Application of Tiers of Australian Accounting Standards was introduced, which created two tiers of general purpose financial statements (GPFSs). AASB 1053 specifically deems superannuation plans regulated by the Australian Prudential Regulation Authority (APRA), other than SAFs, to be entities that have public accountability and need to prepare Tier 1 GPFSs.

At this stage, there are no specific proposals in the ED to reclassify any of these APRA-regulated superannuation plans as Tier 2 GPFSs entities. The AASB has specifically requested feedback on this issue.

ED 223 requirements:

The main requirements of the ED are:

Main requirement of the ED for a superannuation entity Exceptions
Apply Tier 1 GPFSs requirements
  • For non-SAFs, there are no exceptions. However, the AASB has requested feedback as to whether certain superannuation entities may meet the criteria for Tier 2 disclosure requirements.

Prepare consolidated financial statements for parent entities.

Where a parent chooses or is compelled (due to licensing obligations) to present separate financial statements, the consolidated financial statements must also be presented.

Note: This is subject to further consideration of the recent ED/2011/4 Investment Entities released by the IASB. In an Australian context, we expect the new standard to be issued in the second half of 2012.

 

Present:

  • A Statement of Financial Position
  • An Income Statement
  • A Statement of Changes in Equity (where relevant)
  • A Statement of Cash Flows
  • A Statement of Changes in Member Benefits.
 
Recognise all of its assets and liabilities in accordance with other applicable Australian accounting standards and measure them at fair value through the income statement.
  • Tax balances to be measured in accordance with AASB 112 Income Taxes  
  • Defined contribution member vested benefits to be recognised as liabilities and measured at the amount payable to/on behalf of the members on demand
  • Defined benefit accrued benefits to be recognised as liabilities and measured using the projected unit credit method in accordance with AASB 119 Employee Benefits for defined benefit obligations
  • Liabilities arising from insurance arrangements provided to members (whether defined contribution or defined benefit) be recognised and measured in accordance with the approach in AASB 119 for defined benefit obligations and any reinsurance assets be recognised in accordance with AASB 1038 Life Insurance Contracts  
  • Any goodwill and non-controlling interest to be recognised and measured in accordance with AASB 3 Business Combinations, AASB 10 Consolidated Financial Statements and AASB 136 Impairment of Assets with non-controlling interests being initially measured at fair value under AASB 3.
Recognise and present all revenues, expenses, gains and losses in accordance with other applicable Australian accounting standards.

These items are to be recognised and presented as gains or losses in the income statement:

  • Changes in assets and liabilities measured at fair value
  • Changes in liabilities arising from insurance arrangements provided to members and changes in reinsurance assets
  • Net benefits allocated to members' accounts
  • Net changes in defined benefit members' accrued benefits.

Current tax and deferred tax is to be charged or credited directly to members' benefits and presented in the Statement of Changes in Member Benefits when relevant.

Present in the Statement of Changes in Member Benefits information that includes the following:

  • Contributions, rollovers and transfers from employers and members
  • Income tax on contributions
  • Benefits paid/payable
  • Investment income
  • Fees
 
Present any difference between total assets and liabilities (including member benefits and any obligations to employer sponsors) as equity in the Statement of Financial Position.  

Adopt a number of disclosure principles, including disclosure of information that provides users with a basis of understanding:

  • The nature of the entity, the benefits it provides to members and the expenses it incurs
  • The entity's obligations for member benefits
  • The size, nature, cause of and any strategies addressing any difference between the net assets attributable to defined benefit members and their accrued benefits
  • The component of changes in defined benefit members' accrued benefits
  • The deeming of obligations for members' benefits and non-financial liabilities (other than tax liabilities) to be within the scope of AASB 7 Financial Instruments Disclosures (but not the fair value disclosures)
  • Risks relating to employer sponsors for an entity with defined benefit members
  • The disaggregated financial information, based on the principles and requirements of AASB 8 Operating Segments , that provides users with a basis for understanding the risks, financial position and performance of the entity.
 

Comparison with the current AAS 25

When the new accounting standard is issued, it will supersede the current AAS 25. The main differences between the ED and AAS 25 are that the ED:

  • Does not differentiate between different types of superannuation plans (e.g. defined benefit and accumulation plans) or the statements to be presented by each type of plan
  • Requires assets and liabilities to be measured at fair value except for those relating to members' benefits, tax, acquired goodwill and insurance arrangements
  • Requires the defined benefit accrued benefits to be calculated annually and presented as a liability of the plan as opposed to being a note disclosure
  • Requires contributions, transfers, rollovers and benefit payments to be shown in the Statement of Changes in Member Benefits
  • Requires taxation amounts attributable to concessional contributions and members' benefits, including any contributions surcharge tax to be shown in the Statement of Changes in Member Benefits
  • Does not require all realised and unrealised gains or losses on assets to be disclosed separately
  • Does not include any specific disclosure requirements for superannuation plans that are wholly backed by life insurance policies
  • Does not require a copy or summary of the most recent defined benefit superannuation plan actuarial report to be appended to its financial statements.

Importantly, the ED requires superannuation plans and ADFs to disclose information that provides users with a basis for understanding superannuation-specific items and events. It also requires disaggregated financial information to be given regarding risks, financial position and performance as 'seen though the eyes' of the chief operating decision-maker based on the principles and requirements of AASB 8 Operating Segments . This requires trustees to identify who acts in the chief operating decision-maker role and to understand how that person (or persons) sees the risks, financial position and performance of the operating segments of the entity. This will assist trustees in considering what additional information needs to be included in their financial statements in order to satisfy these disclosure requirements. Examples of disaggregated financial information could include:

  • Investment strategy choices offered to members
  • Sub-plan related summary information
  • Asset classes
  • Directly held assets and those assets in collective investment vehicles/PSTs
  • Geography-based investments (local versus overseas investment
  • Investments supporting defined benefit obligations versus accumulation benefit options
  • Defined benefit and defined contribution sections of the fund.

Action required

The AASB has invited submissions on the ED by 30 April 2012 and has included a specific list of issues (see pages 13 – 14 of the ED) on which it would appreciate comments.

Given the nature of the proposed changes, it is possible that legislative amendments will be required so that the superannuation legislation caters for the revised format of the financial statements under the new accounting standard.

The Australian Prudential Regulation Authority (APRA) will face the challenge of reviewing and revising their annual return packages to synchronise this reporting with the new standard when it is issued.

In addition, the proposed outcomes-reporting regime included in the Stronger Super recommendations may impose additional reporting requirements for superannuation entities.

As a super fund, you should consider participating in the AASB's consultation process or advising us of your concerns so that we can take them into account when we are providing input into submissions. In addition, we suggest you:

  • Consider what segment reporting you will need to introduce into your financial statements
  • Consider whether you should provide specific feedback to the AASB on the proposed segment-reporting requirements, particularly on sub-plan related summary information for master trusts and other multi-employer funds that have specific corporate subsections
  • Consider what systems and processes you require so that financial reporting issues are identified early such as availability, form, and content of financial reports from controlled entities
  • Consider what systems will need to be re-configured to enable the extraction of the necessary financial information in an appropriate format so that appropriate disclosures can be made
  • Identify who performs the chief operating decision-maker role and document the risks, financial position and performance of each of the operating segments as seen through that person's eyes
  • Consider what additional information you will need to enable comparative financial information for prior periods and how you will obtain this information
  • Identify what entities the plan controls to determine if consolidated accounts are required
  • Consider what training your trustees, members of your audit committee and key finance personnel will need on the proposed requirements
  • Monitor the progress of the consultation and legislative process for any changes and consider the impact of those changes on your position
  • Consider whether you need to discuss the above with your contributing employers (in particular, your defined benefit employers).

As an employer, we suggest you:

  • Consider whether the proposed changes to the fund's financial statements will assist your understanding of the fund and your superannuation benefits.

As a member, we suggest you:

  • Consider the impact of the proposed changes on the accounting standard and gain an understanding of how these changes will affect your organisation and your understanding of your fund.

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