Deloitte welcomes financial reporting reform proposalsDOWNLOAD
Professional services firm Deloitte today welcomed proposals from Treasury and the Australian Accounting Standards Board (AASB) for reform in financial reporting. The reform proposals, (released 4 December), offer some real reductions in the red tape associated with financial reporting.
However, the proposals do have a sting in the tail for many entities and many may consider the proposals to be an incomplete reform package.
The proposals for reform to the Corporations Act 2001 and the way in which Accounting Standards are applied, represent a significant shake-up in Australian financial reporting. Many of the changes are proposed to be available for adoption from legislative enactment or 30 June 2010.
Bruce Porter, Lead Accounting Technical Partner with Deloitte, comments: “The proposal to eliminate the ‘parent’ columns from consolidated financial statements will bring Australia into line with global best practice and make financial statements easier to understand.”
“Another significant reform is the change to a ‘solvency’ rather than ‘profits’ test for the payment of dividends – a long overdue change in light of Australia’s adoption of International Financial Reporting Standards (IFRS) and the volatility it introduced in reported profits.”
“Additionally, charities and similar entities structured using a company limited by guarantee will welcome the streamlining of reporting for these entities – we believe the balance between reporting and the needs of users will be improved with these reforms,” said Mr Porter.
Elimination of the ‘reporting entity’ concept
However, there are some more controversial proposals in the reforms, including the elimination of the ‘reporting entity’ concept currently used by smaller and private entities to reduce the amount of disclosure made.
“The AASB’s proposals in this area overturn the long running reporting framework used in Australia and will see some entities, currently preparing ‘special purpose financial statements’, facing an increased disclosure burden,” said Mr Porter.
The proposed replacement for the reporting entity concept is a ‘reduced disclosure regime’ that would eliminate some of the disclosures made by entities that do not have ‘public accountability’. This would mean that only listed entities, financial institutions, managed investment schemes and similar entities would continue to apply all Accounting Standards in full – all other for-profit entities would be able to take advantage of the limited disclosure relief available.
“This is a real change in direction for the AASB, biased towards the level of disclosure needed for independent users of financial statements – even the ‘reduced disclosure regime’ will still require a significant amount of disclosure in practice,” said Mr Porter.
Mr Porter continued: “Whilst a limited reduction in overall disclosure is proposed, Australian entities should not consider these reforms a panacea for complaints about the voluminous disclosure regime faced by entities complying with IFRS.”
“In fact, without an increase in the thresholds for ‘small proprietary companies’ and an extension of the ‘small’ concept to unlisted public companies, many companies may face a sharp increase in the size and content of their financial reporting obligations, leading to significant cost increases” said Mr Porter.
Australia’s adoption of IFRS and other reform
These reforms also highlight some of the problems with Australia’s approach when adopting IFRS in 2005. The AASB ‘tweaked’ global IFRS standards in preparation for 2005, although many of these ‘tweaks’ were subsequently reversed. However, the process has left some questions globally whether Australia is truly ‘IFRS compliant’.
Mr Porter commented “We would have liked to have seen a move toward the adoption of ‘pure’ IFRS in the Corporations Act, particularly for listed entities and financial institutions, to finally put to bed questions about whether the ‘Australian flavour’ of IFRS is the same as global IFRS.”
“We also question the retention of the anachronistic requirement for subsidiary financial statements, particularly for wholly-owned subsidiaries,” concluded Mr Porter.
Deloitte has released an in-depth analysis of the financial reporting aspects of the proposals and their impacts on Australian entities. The Deloitte Accounting alert can be accessed at www.deloitte.com.au.