Accounting alert 2009/09 - September AASB meeting
Differential reporting without IFRS for SMEs
The AASB's September meeting was held on 23-24 September. The headline development was the decision to adopt a reduced disclosure regime instead of the IFRS for SMEs in Australia, expected to be effective from June 2010.
New differential reporting regime to exclude IFRS for SMEs - for now
The AASB agreed with a draft consultative paper prepared by the AASB staff proposing a 'second tier' of reporting requirements for general purpose financial statements of certain entities both in the private and public sectors.
The key proposals are as follows:
- Not to adopt the IFRS for SMEs in Australia at this time
- Develop a new second tier of reporting with significantly reduced disclosures, but using full IFRS recognition and measurement requirements
- Rely on the IASB's definition of 'publicly accountable' to differentiate between those entities that must fully comply with IFRS and those able to take advantage of the 'second tier' requirements
- To implement the new regime in time for June 2010 year ends if possible
- Link the changes to Treasury work on reducing financial reporting costs.
Will the reporting entity concept be removed?
It is envisaged that the reduced disclosure regime will replace the reporting entity concept. However, the final decision to eliminate the reporting entity concept is yet to be made by the AASB, and it is understood at least some Board members favour its retention.
The proposed changes are linked to a wider Treasury project to reduce costs in financial reporting, which may see the reporting mandate removed for certain entities. This may encompass increases in the thresholds to qualify as a small proprietary company, the removal (or reduction) of parent entity reporting and changes to when dividends may be paid (moving from a 'profits' to 'solvency' test).
The 'elephant in the room' with the possible Treasury proposals is the position of financial reporting by wholly-owned subsidiaries. Many argue the preparation of financial statements by wholly-owned subsidiaries is anachronistic and somewhat meaningless in the context of the implicit recognition of the 'group' within the Corporations Act 2001 (e.g. the 'greater good' of the group can be considered by directors).
The vast majority of the financial statements of wholly-owned subsidiaries are currently prepared as 'special purpose', as the directors consider these entities to be 'non reporting entities'. The preparation of general purpose financial statements, albeit using the reduced disclosure regime being proposed, may introduce significant costs to those groups choosing not to implement a class order. However, there may be little choice for such entities but to adopt class order relief if the Federal Government refuses to entertain other exemptions.
How will the 'publicly accountable' criterion be applied?
The AASB has tentatively decided all for-profit entities that are not 'publicly accountable' as defined in the IFRS for SMEs should be permitted to use the reduced disclosure regime.
The AASB is also yet to consider how the reduced disclosure regime will be implemented in the not-for-profit sector, other than to acknowledge it will need to be 'suitably modified' (because all not-for-profit entities might be considered 'publicly accountable' in one sense of that term).
It also appears that public sector entities will generally not be able to apply the reduced disclosure regime, although some entities may be able to do so.
How will the reduced disclosures be determined?
The AASB has effectively decided to 'piggy back' on the IASB's work in developing the IFRS for SMEs, and apply the principles developed in that project to determine which disclosures should be made under the 'reduced disclosure' regime.
The approach the IASB took in developing the reduced disclosures in the IFRS for SMEs was to 'pare back' the disclosures of full IFRS, i.e. full disclosure under IFRS was the starting point. Accordingly, it might be expected that the reduced disclosure regime will look quite similar to the IFRS for SMEs, albeit making suitable allowances for differences between IFRS and IFRS for SMEs. This outcome is noted in the staff paper considered by the AASB at the meeting (PDF 180kb).
It is fair to say that the amount of disclosure required under the IFRS for SMEs is substantially greater than the mandatory disclosures for a 'non-reporting entity' under the existing reporting entity regime. Accordingly, non-reporting entities are the most likely group of entities to be adversely affected by the proposed 'reduced disclosure' regime.
However, reporting entities that are not 'publicly accountable' may discover a reduced disclosure burden when compared to existing requirements. So, as with many significant reforms, there will be winners and losers under the proposals.
Will Australia ever adopt the IFRS for SMEs?
Although the AASB's tentative decision is not to adopt the IFRS for SMEs at the current time, the door is being left slightly ajar for its potential adoption in the future. During the meeting, the Board received an update from the National Standard Setters and World Standard Setters, indicating which jurisdictions have or may adopt IFRS for SMEs, or otherwise permit its use. Many countries are moving towards adoption of the IFRS for SMEs, although it appears those countries may not have required IFRS accounting 'across the board' prior to moving to implementation.
The approach of effectively adopting IFRS for all entities in Australia from 2005, albeit with an overlaid 'reporting entity' concept, has meant that a lot of the 'pain' of adopting IFRS has already been incurred in the Australian context. Compared with IFRS, the IFRS for SMEs does not result in a substantial reduction in complexity in the recognition and measurement requirements - and in fact many 'simplifications' may be more onerous in practice (e.g. introduction of 'uncertain tax position' accounting for income taxes), be counterintuitive (e.g. mandatory amortisation of goodwill over a 10 year period) or may ultimately be adopted in 'IFRS proper' (e.g. rewrite of financial instruments requirements). Furthermore, there are as yet no widely accepted interpretations of contentious issues under the IFRS for SMEs, a position similar to the original IFRS transition in 2005, with all the uncertainty this brought on transition.
Taken in this context, the AASB's tentative decision not to adopt the IFRS for SMEs can be seen as a logical step. The future paths of IFRS and IFRS for SMEs may diverge over time, particularly in light of the significant projects being undertaken by the IASB. Accordingly, it is equally reasonable to not completely shut the door on the IFRS for SMEs quite yet.
- Agenda Paper 3.1 Memorandum from Ahmad Hamidi dated 8/9/09 (from the AASB website, PDF 34kb)
- Agenda Paper 3.2 The Alternative Regime: Recommended Approach (from the AASB website, PDF 89kb)
- Agenda Paper 3.3 Reducing the Burden of Financial Reporting Requirements: A Proposed Reduced Disclosure Regime for Non-publicly Accountable Private Sector Entities (from the AASB website, PDF 180kb)
- Our differential reporting page
The other topics discussed at the meeting were as follows:
- Discount rate for employee benefits - AASB submission to express disagreement with the proposal to eliminate the requirement the market yields on government bonds to determine the discount rate for employee benefit obligations
- Approval of AASB 2009-9 Amendments to Australian Accounting Standards - Additional Exemptions for First-time Adopters
- Interpretations - AASB submission on IFRIC D25 Extinguishing Financial Liabilities with Equity Instruments and whether entities can be key management personnel under IAS 24 Related Party Disclosures
- Rate-regulated activities - education session
- Insurance contracts - interaction with AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts
- Fair value measurement - finalisation of AASB submission
- Financial instruments - update on various IASB projects
- IASB Update - update on activities
- Emerging issues - AASB's approach to dealing with draft IASB Discussion Paper Extractive Activities
- Update on National Standard Setters and World Standard Setters - September meeting outcomes
- Not-for-profit entity definition - decision not to change the current definition of issue guidance
- Policy for modifying IFRSs for not-for-profit entities - finalisation of document jointly developed with the NZ FRSB
- Superannuation - report of issues from roundtables held in August
- Disclosures by private sector NFP entities - initial project scoping
- GAAP/GFS harmonisation - presentation from Department of Finance and Deregulation of the Australian Government
- IPSASB report - September 2009 report
Administrative and other matters
- Development of a policy on informal and confidential submissions
- Board membership - Ian McPhee and Bruce Porter appointed as Deputy Chairs of the AASB
The next meeting of the AASB is scheduled for 28-29 October 2009, a joint meeting with the New Zealand FRSB.