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Accounting alert 2010/02- AASB's Reduced Disclosure Regime (RDR)

No laughing matter

In this Accounting alert:

Update
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.

 Introduction

On Friday 26 February, the AASB released its much anticipated proposals for a new differential reporting regime in Australia – the ‘Reduced Disclosure Regime’ (RDR). In addition to a finalised Exposure Draft, ED 192 Revised Differential Reporting Framework, the AASB formally released its Consultation Paper Differential Financial Reporting – Reducing Disclosure Requirements, which was originally issued in December 2009 in draft form.

The AASB hopes to finalise the proposals in time for them to be early adopted for 30 June 2010. However, mandatory application of the regime will not be required until annual reporting periods beginning on or after 1 July 2012. Comments on the proposals close on 23 April 2010.

The proposals would effectively eliminate the ‘reporting entity concept’ from Australian Accounting Standards and instead introduce a ‘Reduced Disclosure Regime’ (RDR). The entities most impacted by the proposals include:

Class of entity Impact
Reporting entities preparing general purpose financial statements but lacking ‘public accountability’* Able to take advantage of reduced disclosure regime, possibility of early adoption from 30 June 2010
Non-reporting entities currently preparing special purpose financial statements, including wholly-owned subsidiaries and large proprietary companies Substantial increase in disclosures would be required, mandatory from 2012-2013
Not-for-profit entities Able to take advantage of reduced disclosure regime, possibility of early adoption from 30 June 2010

* examples may include closely held entities, large proprietary companies, most wholly-owned subsidiaries, privately held corporate groups that are not financial institutions.

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Overview of the regime

A ‘two tiered’ reporting regime

The AASB has confirmed its intention of introducing a ‘two tier’ reporting regime:

  • Tier 1 – ‘full” International Financial Reporting Standards (IFRSs) as adopted in Australia, including all disclosures.
  • Tier 2 – the ‘Reduced Disclosure Regime’ (RDR), using all the recognition and measurement requirements of IFRSs, but with less disclosure.

The two-tier reporting regime effectively eliminates the ‘reporting entity concept’ currently used as the key differential reporting determinant. The ‘special purpose financial statements’ concept would effectively be relegated to financial reports not prepared in accordance with Accounting Standards, e.g. internal management reports, specific reports for financiers, financial reports and group reporting packages prepared for controlling shareholders, some trust and partnership financial reports.

Categories of entity applying each tier

The entities that would apply each tier are set out in the table below:

Sector Tier 1
(Full IFRS)
Tier 2
(Reduced Disclosure Regime)
For-profit private entities Publicly accountable entities (including specific ‘examples’) Non-publicly accountable entities, unless the entity elects to apply Tier 1
Not-for-profit private entities Choice of applying Tier 1 or Tier 2 requirements, unless the relevant regulator requires Tier 1
Public sector entities Federal, State and Territory governments, local governments and universities All other entities, unless the relevant regulator requires Tier 1

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The ‘public accountability’ concept

Definition

In relation to for-profit entities, the key determinant of which reporting tier is to be applied depends on the ‘public accountability’ concept.

Other than a minor scope amendment to restrict its application to for-profit entities, the AASB has borrowed the definition of ‘public accountability’ from the IASB’s IFRS for SMEs.

‘Public accountability’ is defined as “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”.

The definition deems a for-profit private sector entity to have public accountability in a number of circumstances.

Definition inclusion Examples
The entity’s 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*

Entities listed (debt or equity) on the Australian Securities Exchange (ASX), National Stock Exchange of Australia (NSX) or Bendigo Stock Exchange (BSX( or any global stock exchange

Entities with American Depository Receipts (ADRs) on issue

Entities listed on the Alternative Investment Market (AIM) of the London Stock Exchange

The entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses Banks, credit unions, building societies, insurance companies, securities brokers/dealers, mutual funds and investment banks

* a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets

Additional AASB guidance

In addition to the IASB’s guidance, the AASB has proposed a number of ‘example’ entities considered to have ‘public accountability’ in the Australian context:

  • 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 issuing debentures
  • Registered managed investment schemes
  • Superannuation plans registered with the Australian Prudential Regulation Authority, i.e. all superannuation entities other than those self-managed superannuation funds regulated by the ATO and exempt public sector superannuation schemes
  • Authorised deposit-taking institutions (ADIs).
The definition and AASB exclusions are quite wide and may be expected to capture a relatively large proportion of entities within Tier 1 (full IFRS) reporting. For-profit entities adopting Tier 2 (RDR) reporting would most likely include closely held entities, large proprietary companies, most wholly-owned subsidiaries, privately held corporate groups that are not financial institutions and entities currently preparing special purpose financial statements.

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Reduced disclosure requirements

AASB’s rationale

The AASB’s approach in determining the disclosures required has been largely guided by the IASB’s approach in developing the disclosure requirements for the IFRS for SMEs. Accordingly, disclosures omitted by the IASB in developing the IFRS for SMEs are also proposed to be excluded from the Reduced Disclosure Regime, and the ‘user need’ and ‘cost benefit’ principles applied by the IASB have been used where the IFRS for SMEs was not directly relevant.

Nature of the relief proposed

The importance of the ‘general purpose financial statements’ concept is a key guiding factor the AASB used in determining its Reduced Disclosure Regime. As a result there will be winners and losers; for example a reporting entity that is not publicly accountable is likely to be pleased with the RDR, while a non-reporting entity currently preparing special purpose financial statements is likely to have an increased disclosure burden. That disclosure burden, however, is no more onerous than would be imposed under the IFRS for SME regime.

The analysis and detail in the proposed disclosure relief is voluminous. ED 192 itself runs to over 200 pages in length, excluding the detailed standard-by-standard analysis prepared by AASB staff providing the rationale for each disclosure item for which relief is proposed which runs to many dozens of pages more. There is certainly a great amount of information to digest in understanding the proposals.

If the proposals are implemented, there will be only one ‘suite’ of Standards to refer to (rather than the possibility of ‘full’ IFRS and an Australianised IFRS for SMEs). Differentiation between ‘full’ and ‘reduced’ disclosures is illustrated in ED 192 using shading, and in some cases using special ‘RDR’ paragraphs.

Whilst there are numerous exceptions, the table below broadly summarises the disclosure matters generally retained and those proposed to be omitted from the Reduced Disclosure Regime.

Disclosure items generally retained Disclosure items generally omitted

Format and layout of primary financial statements

Descriptions of accounting policies and methods

Key amounts included in the financial statements, e.g. impairment and reversals, breakdown of revenue, discontinuing operations, fair value adjustments, gains and losses

Movement schedules, e.g. share-based payments, fixed assets, goodwill, intangibles, investment property

Reconciliations of key transactions and balances, e.g. business combination breakdowns, income tax expense and deferred tax balances

Significant uncertainties and judgements

Information about the entity and its related parties (but not necessarily details of transactions and balances)

Detailed narrative disclosure, e.g. nature and extent of risks arising from financial instruments under AASB 7, standards on issue but not yet effective

Detailed information on how amounts have been measured, e.g. share-based payments, fair values

Supplementary information about key transactions, balances and events, e.g. financial information about associates/joint ventures, alternate presentation of profit or loss information, impairment, defined benefit plan liabilities

Many additional Australian disclosures, e.g. audit fees, franking credits, capital commitments

Most disclosures required by Interpretations

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The transition dilemma

Nature of the issue

Australia is somewhat unique in its application of IFRS. From 2005, all Australian entities preparing and lodging financial statements under the Corporations Act 2001, and many other entities, were effectively required to follow at least the recognition and measurement requirements of IFRS. Most other countries adopting IFRS have focussed on entities listed on stock exchanges, banks and other financial institutions, and so on – in fact, the exact entities that the IASB had in mind as it ‘built’ IFRS.

The creation of the new ‘reduced disclosure regime’ (RDR) then creates an issue around transitional arrangements and the possible application of AASB 1 First-time Adoption of Australian Accounting Standards.

AASB 1 links its application to entity making an unreserved statement of compliance with Australian Accounting Standards or International Financial Reporting Standards (IFRSs). IFRS 1 First-time Adoption of International Financial Reporting Standards merely mentions the entity making an unreserved statement of compliance with IFRSs.

As a result, a technical reading of the standards would require an entity moving to the ‘Tier 1’ reporting regime (i.e. full IFRS with all disclosures) to apply AASB 1/IFRS 1 on transition, notwithstanding that the entity’s previous reports (special purpose financial reports or ‘Tier 2’/RDR reports) were fully compliant with the recognition and measurement requirements of IFRSs.

As a result, the AASB’s proposed transitional requirements need to be considered in light of the requirements of IFRS to ensure entities (particularly for-profit entities) adopting the Tier 1 requirements can make an unreserved statement of compliance with IFRS. To not so would be to undermine the benefits of IFRS adoption in Australia.

AASB’s proposals

With the need for IFRS compliance in mind, the transitional requirements are necessarily complex. The table below summarises the AASB’s proposals.

Type of report previous prepared IFRS recognition and measurement requirements* previously applied Application of AASB 1
Moving to Tier 1 Moving to Tier 2
Special purpose financial statements No Mandatory Mandatory
Yes Mandatory Cannot be applied
Some only Mandatory Mandatory
Tier 2 (for-profit entities) Always Mandatory n/a
Tier 2 (not-for-profit entities) Always Optional n/a
Tier 1 Always n/a Cannot be applied

* as adopted in Australia, including the requirements of AASB 1

The application of AASB 1 requires or permits a modified application of certain recognition and measurement requirements of numerous standards. For examples, entities applying AASB 1 could elect to use a deemed cost for various assets and reset foreign currency translation reserves.

Furthermore, the proposed transitional requirements do not explore the situation where an entity transitioning to Tier 1 has previously claimed compliance with IFRS, but subsequently has prepared special purpose financial statements or Tier 2 financial statements.

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Initial response and considerations

Uncertainty around timing

The proposals are open for comment until 23 April 2010, with the AASB to deliberate the feedback in meetings in May and possibly June. This means that the final amendments may not be finalised until close to, or even after, 30 June 2010.

The AASB has also additionally indicated that it is willing to reconsider alternate approaches in light of constituent comment. In this case, any finalised amendments will not be available for 30 June 2010.

This creates an interesting dilemma for entities wishing to early adopt the proposals to reduce the disclosure burden – reporting entities without public accountability. As the preparation of financial statements often necessarily requires a significant lead time due to information, systems and other considerations, this uncertainty may lead to many entities electing the ‘safe option’ of not early adopting the new regime if it is implemented.

The complimentary amendments to the Corporations Act 2001 will also need to be considered (particularly the elimination of parent entity columns from financial statements) and have not as yet been passed by the Parliament. More information on these proposed reforms can be found in Accounting alert 2009/11.
The AASB is ‘going it alone’

The Reduced Disclosure Regime approach developed by the AASB is unique amongst countries adopting IFRS, although it is acknowledged the New Zealand Financial Reporting Standards Board (FRSB) may consider an equivalent regime for New Zealand as part of the cross-Tasman convergence initiatives.

This position is effectively a result of Australia:

  • Also being alone in using the ‘reporting entity’ concept for differential reporting
  • Deciding to require IFRS recognition and measurement requirements for all entities in the context of that reporting entity regime, as part of the transition to IFRS in 2005 (while many other jurisdiction only adopted IFRS for listed entities)
  • Adopting a ‘transaction neutral’ approach to standard setting, i.e. the same transaction should be accounted for the same way across all sectors – the different recognition and measurement requirements of the IFRS for SMEs directly contravenes this approach.

ED 192 acknowledges the Reduced Disclosure Regime will need to be updated on an on-going basis as new and amended disclosure requirements are implemented. In contrast, the IASB will update the IFRS for SMEs on a periodic, rather than continuous, basis – as irregularly as at three-year intervals.

This places an additional responsibility on the AASB on a go-forward basis as it will be required to assess disclosures under the IASB’s criteria in advance of the IASB. The possibility exists that the AASB will make a different assessment to the IASB, requiring further amendments to ‘fine tune’ the regime.

IFRS is changing rapidly

Australia’s move to IFRS in 2005 heralded an unprecedented change in accounting in Australia. But IFRS continues to evolve and the IASB has many significant projects to be finalised in the coming months and years – including in such areas as financial instruments, revenue recognition, lease accounting, liability measurement and financial statement presentation (to name but a few). These promise another overhaul in many areas and will present great implementation challenges, and opportunities, for IFRS adopters.

‘Full’ IFRS is designed for the world’s major corporations listed on global stock exchanges. It remains unclear how the IASB will respond to its IFRS developments as it reconsiders its IFRS for SMEs requirements. Will the IASB retain existing requirements for IFRS for SMEs on the grounds they are simpler and easier to understand? Will other simplifications be implemented?

The potential for divergence between ‘full’ IFRS and the IFRS for SMEs may be significant. If ‘full’ IFRS recognition and measurement requirements become too complex for non-publicly accountable entities, there may be a need to reconsider the IFRS for SMEs in the Australian context – necessitating another transitional regime, new systems and training and so on.

In the event the Reduced Disclosure Regime is implemented, the ability of entities without public accountability to understand and apply the forthcoming IFRS requirements presents a significant challenge going forward. The AASB could consider a ‘deferred’ implementation period for Tier 2 adopters as major new requirements are implemented, but this would again undermine the ‘transaction neutrality’ approach.
The reporting mandate needs to be considered

The substantial increase in disclosure for entities currently preparing special purpose financial statements highlights an urgent need for the reporting mandate to be revisited. Because the AASB is effectively ‘washing its hands’ on the question of who should prepare financial statements, it is then incumbent upon regulators to reconsider the reporting mandate to ensure an appropriate cut-off for entities required to prepare financial statements in accordance with Australian accounting standards.

The key considerations could include removing the obligation to report from the following classes of entities:

  • Wholly-owned subsidiaries of entities reporting under full IFRS or the Reduced Disclosure Regime
  • Smaller companies – perhaps by lifting the thresholds for reporting and extending them to a wider group of entities.
We encourage the Federal Government to provide further relief in this area by considering further changes in the thresholds for small proprietary companies.

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More information

  • Our comment letter on AASB ED 192 Revised Differential Reporting Framework
  • Accounting alert 2010/05 – AASB redeliberations on ED 192, including a decision to split the RDR into two stages
  • Accounting alert 2010/01 – update on timetable for finalisation and consideration of transitional issues
  • Accounting alert 2009/12 – additional discussions and analysis of the AASB’s decisions on this topic at its December meeting
  • Accounting alert 2009/11 – our summary of the key differential reporting and Corporations Act proposals
  • AASB ED 192 Revised Differential Reporting Framework (from the AASB website, PDF 529kb)
  • AASB Consultation Paper Differential Financial Reporting – Reducing Disclosure Requirements (from the AASB website, PDF 196kb)
  • AASB press release ‘AASB proposes radical regime shift to cut burden of disclosures’ (from the AASB website)

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