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Accounting alert 2010/07 - June AASB - RDR on track for early adoption at 30 June

The AASB’s June meeting was held on 9-10 June 2010.

The key outcome from the meeting was the AASB moving forward with a plan to implement the Reduced Disclosure Regime (RDR) in time for early adoption at 30 June 2010. The AASB also agreed to issue (out-of-session) new Amending Standards to implement the recent IASB annual improvements and to update AASB 1048 Interpretation and Application of Standards.

Differential reporting

Update July 2010
On 2 July 2010, the AASB released AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements to implement its revised differential reporting regime. These Standards were made by the AASB out of session on 30 June 2010 and mandatorily apply to annual financial reporting periods beginning on or after 1 July 2013. Early adoption is permitted to annual reporting periods beginning on or after 1 July 2009 (and so can generally be applied in financial statements at 30 June 2010). More information is available in Accounting alert 2010/08.
Key outcomes from the meeting

The AASB considered various papers and enabling Standards for the purpose of introducing a ‘second tier’ of reporting requirements for preparing general purpose financial statements.

The discussion focussed on those entities which may be deemed to have ‘public accountability’ in the Australian environment, the reduced disclosures themselves and the transitional requirements required.

Pre-ballot drafts of the necessary enabling Standards are being finalised by the AASB staff for out-of-session consideration over the coming weeks.

The implementation of the Reduced Disclosure Regime (RDR) is a complex exercise. There will be an ‘Application’ Standard implementing the RDR and an Amending Standard indicating which disclosures are not required to be applied by entities applying the RDR. The AASB is expected to produce a series of compiled pronouncements illustrating the disclosure exemptions by way of ‘shading’ (as was initially included in ED 192 Revised Differential Reporting Framework). This is likely to be an easier reference source to determine those disclosures which can be avoided by entities applying the RDR.
Who will benefit from the RDR?

The key potential beneficiaries of early adoption will be reporting entities and other entities preparing general purpose financial statements that do not have ‘public accountability’. Smaller not-for-profit and some public sector entities will also potentially be able to take advantage of the reduced disclosures offered by the RDR.

There will be no change at this stage to entities preparing special purpose financial statements, or to those having public accountability. More details of the impact of the proposals on various categories of entities can be found in Accounting alert 2010/05.

The tight timeframes mean entities need to prepare for the possibility it will not be available in the event the final approval process is delayed. Therefore, it may be that many entities eligible to adopt the ‘second tier’ will not do so in the current period, or will adopt a ‘wait and see’ approach. However, entities should not assume the RDR will be implemented in time for early adoption at 30 June 2010 and must have contingency plans in place in the event it is not available.

It is also understood that early adoption of the proposed RDR may not be limited to reporting periods ending on or after 30 June 2010. Accordingly, it may be possible to early adopt the RDR in the preparation of financial statements for earlier periods if they are not finalised at the time the RDR is enacted. However, this possibility will depend on further consideration of how the proposals interact with the pronouncements mandatorily applied to each reporting period – it may be necessary to early adopt other pronouncements applicable to 30 June 2010.

What is the ‘public accountability’ concept?

The draft Application Standard (PDF 44kb) considered by the AASB at the meeting defines ‘public accountability’ as follows:

“Public accountability means accountability to those existing and potential resource providers and others external to the entity who make economic decisions but are not in a position to demand reports tailored to meet their particular information needs. A for-profit private sector entity has public accountability if:

(a) its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.”

The following for-profit entities are expected to be deemed to have public accountability:

  • Disclosing entities, even if their debt or equity instruments are not traded in a public market or are not in the process of being issued for trading in a public market
  • Cooperatives that issue debentures
  • Registered managed investment schemes
  • Superannuation plans regulated by the Australian Prudential Regulation Authority
  • Authorised Deposit-taking Institutions.

The draft Standard explains that ‘public accountability’ is based on the IASB’s IFRS for SMEs and is different from the notion of public accountability in the general sense of the term that is often employed in relation to not-for-profit entities (as such entities might ordinarily be considered to have ‘public accountability’). It is for this reason that the ‘public accountability’ concept is not applied to the not-for-profit sector.

The AASB considered the application of the ‘public accountability’ concept in relation to insurers (‘captive’ insurers) and superannuation plans (smaller plans with few members). It may be that some of these entities may be effectively permitted to apply the RDR. In addition, guidance may be included to assist regulators in setting reporting mandates for the not-for-profit and public sectors.
What is happening with non-reporting entities?

Consideration of the appropriate financial reporting by entities currently considered ‘non-reporting entities’ will be undertaken in ‘Stage 2’ of the AASB’s project.

The AASB has appointed two consultants to undertake research on the application of the reporting entity concept by entities lodging financial statements with the Australian Securities and Investments Commission. This research will be used in the AASB’s deliberations in Stage 2.

These developments indicate the AASB intends to proceed with Stage 2 of the revised differential reporting framework. There are some unsubstantiated concerns that the reporting entity concept is being ‘abused’ to avoid full reporting requirements by some entities. The research being undertaken should confirm or refute this possibility and permit the AASB to make an informed decision.

The exact outcome of this process on non-reporting entities cannot be predicted with any certainty at this point. There remains some opposition to the elimination of the reporting entity concept from the differential reporting framework and its elimination would increase the financial reporting burden on affected entities.

In the event there is a change in the framework for these entities, it is unlikely to be mandatorily applied for a number of years (noting mandatory application of first stage of the RDR is not expected until annual reporting periods beginning on or after 1 July 2013).

More information

More information about the proposed differential reporting regime, see the following:

  • Accounting alert 2010/05 – initial AASB redeliberations, including the decision to split the project into two stages
  • Accounting alert 2010/02 – analysis of the final proposals in ED 192 Revised Differential Reporting Framework and AASB Consultation Paper Differential Financial Reporting – Reducing Disclosure Requirements
  • Accounting alert 2009/11 – overview of the initial draft proposals and the complimentary proposals to amend the Corporations Act 2001.
  • Our comment letter on ED 192 Revised Differential Reporting Framework.

Other topics

The following is a summary of the other matters discussed at the meeting:

Sector-neutral matters
  • Improvements to IFRS – agreed to circulate Australian Amending Standards to implement the IASB’s Standard Improvements to IFRSs (May 2010). For more information on the changes, see IAS Plus Update 10-09
  • Interpretations – agreed to make (out-of-session) a revised version of AASB 1048 Interpretation and Application of Standards (which will no longer list all versions of Interpretations that have been superseded), considered recent IFRIC activities
  • Financial asset impairment – the AASB decided not to support the IASB’s proposed model (due to complexity and concerns about combining revenue recognition and asset measurement) and instead propose an alternate model that would retain the ‘incurred loss’ methodology but utilises a broader range of information
  • Fair value option for financial liabilities – the AASB decided not to support the IASB’s proposals on the basis it is inappropriate to separately account for credit risk and also suggest the IASB reconsider the consistency between the measurement requirements for financial assets and financial liabilities
  • Extractive activities – education session on the IASB’s Discussion Paper DP/2010/1 Extractive Activities, issues to be considered at the July meeting
  • Conceptual Framework (reporting entity) – consideration of comment letter to the IASB
Public sector and not-for-profit matters
  • Superannuation – deliberations continued on ED 179 Superannuation Plans and Approved Deposit Funds. The AASB considered the appropriate measurement bases for various assets and liabilities by reference to other standards (AASB 119 Employee Benefits and AASB 1038 Life Insurance Contracts)
  • Liabilities – the AASB decided to carry forward (without exposure) certain not-for-profit requirements to the replacement standard for AASB 137 Provisions, Contingent Liabilities and Contingent Assets
  • Conceptual Framework – decided forthcoming chapters from the IASB’s conceptual framework project should be applicable to all entities, with limited additional guidance for not-for-profit entities
  • Service concession arrangements – considered submission on the IPSASB’s exposure draft, identifying a number of concerns and topics to be raised

More information on the outcomes of the AASB’s meeting can be obtained from the AASB Action alert (PDF 65kb) and Board papers for the meeting.

The next meeting of the AASB is scheduled for 28-29 July 2010 in Melbourne. This meeting will include a joint meeting with the New Zealand Financial Reporting Standards Board (FRSB).

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