Accounting alert 2008/07 – May 2008 AASB meeting highlights
The AASB's May 2008 meeting predominantly considered not-for-profit sector issues, including the reporting framework in light of the SME project and the definition of a 'not for profit entity'. In addition, an amending standard to remove the duplication of key management personnel remuneration disclosures between AASB 124 and the Corporations Act was discussed.
In this Accounting alert we focus on the following developments:
- Key management personnel disclosures – an amending standard is to be made out of session
- Differential reporting – tentative decisions on how the introduction of the IFRS for SMEs will affect not-for-profit entities
- Other developments – 'not-for-profit entity' definition, superannuation plans and ADFs, GAAP/GFS harmonisation, and more.
The Board considered submissions on ED 162 Proposed Amendments to Key Management Personnel Disclosures by Disclosing Entities and agreed to make out-of-session a proposed Accounting Standard AASB 2008-X Amendments to Australian Accounting Standard – Key Management Personnel Disclosures by Disclosing Entities.
The proposed AASB 2008-X will exempt disclosing entities that are companies from complying with paragraphs Aus25.2 to Aus25.7.2 of AASB 124 Related Party Disclosures, as they are required to disclose remuneration information about individual key management personnel (KMP) in the remuneration report under section 300A of the Corporations Act 2001 and Regulation 2M.3.03.
It is understood that the amending standard was not made at the meeting so that the transitional provisions of the proposed standard can be finalised to allow early adoption in some cases. Early adoption is proposed and will be limited to companies required to comply with the new Corporations Act requirements prior to 30 June 2008, such as companies that have changed their year ends or the have a short financial year.
It should be noted that the Amending Standard will not completely remove the KMP reporting obligations under AASB 124, as:
- All disclosing entities (including companies) will continue to comply with the other 'Aus' paragraphs of AASB 124, dealing with KMP holdings and transactions in options, rights and equity instruments, loans from the entity and other transactions and balances
- Disclosing entities that are not companies, such as managed investment schemes, will continue to comply with all the 'Aus' paragraphs of AASB 124, i.e. continue to provide KMP compensation disclosures under AASB 124 rather than the Corporations Act 2001 and Corporations Regulation 2M.3.03, along with complying with the other requirements of the 'Aus' paragraphs
- To ensure IFRS compliance, paragraph 16 of AASB 124 will continue to apply, which requires disclosure of KMP compensation in total and for each prescribed category (short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payment).
|As noted in Accounting alert 2008/06, we continue to hold the view that the AASB should consider withdrawing the Australian-specific KMP disclosure requirements from AASB 124 in their entirety.|
The AASB made tentative decisions on how differential reporting should be applied in the not-for-profit (NFP) sector, deciding to differentiate between public and private sector NFP entities and providing choices in most cases.
These changes will be implemented as part of the adoption in Australia of the forthcoming IFRS for SMEs standard being developed by the IASB and are dependent upon the final form of that standard.
The AASB decided that the original differential reporting proposals based on the notions of publicly accountability and accompanying size tests should not be adopted. These proposals were included in Invitation to Comment ITC 12 A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities.
The Board also took the view that it was the responsibility of NFP jurisdictional authorities to determine whether particular choices should be available or mandated in each jurisdiction. This approach also permits particular jurisdictions to mandate particular approaches or require other bases of accounting (e.g. cash basis) for particular classes or types of NFP entities.
NFP entities in the private sector
It is proposed all private sector NFP entities will have a reporting system consisting of three choices. These choices mirror those that are expected to be available to for-profit entities that are not publicly accountable (see Accounting alert 2008/03):
- Full IFRSs (as adopted in Australia)
- The IFRS for SMEs (as adopted in Australia)
- A regime of full IFRS recognition and measurement requirements and limited specified disclosures to be determined by the AASB, most likely to be consistent with the SME disclosures.
At the May 2008 IASB meeting, the IASB decided that a subsidiary of a full IFRS company should not be allowed to use the recognition and measurement principles in full IFRS but only make the disclosures required by IFRS for SMEs in their general purpose financial statements (see our May 2008 IASB meeting summary).
It will be interesting to see whether the IASB's decision changes the AASB's views as to whether this option will be permitted under the proposed differential reporting regime. As IFRS has wide application in Australia, it would seem reasonable that relief of this type should be afforded to entities across all sector types, even at the risk of non-compliance with IFRS for these entities.
In addition, the IASB's reference to 'general purpose financial statements' may offer another solution to this dilemma, although the AASB appears to view lodgement of financial statements as making them 'general purpose'.
NFP public sector entities
Financial reporting by public sector entities is proposed to be split into two tiers.
Tier 1 would apply to financial reporting at the Federal, State and Territory levels and would require the application of full IFRSs (as adopted in Australia).
Tier 2 would consist of all other public sector entities (e.g. local governments) which would have the choice of applying one of the following:
- full IFRSs (as adopted in Australia)
- the IFRS for SMEs (as adopted in Australia)
- a regime of full IFRS recognition and measurement requirements and limited specified disclosures to be determined by the Board, most likely to be consistent with the SME disclosures.
The emerging financial reporting framework that is expected to apply when an Australian version of the IFRS for SMEs is evolving as a pragmatic and flexible system. In particular, avoiding 'public accountability' and size tests from the not-for-profit sector framework and aligning the choices across various categories of entities are excellent steps forward.
>The AASB continues to work on the possibility of a so-called 'Application Standard' that would scope which IFRS Standards and Interpretations apply to which entities, and in what circumstances. This also holds the intriguing possibility of there effectively being only one Accounting Standard under the Corporations Act, which then refers directly to all IFRS pronouncements. Implementation of this initiative would result in a substantial elevation of the global perception of Australia's true compliance with IFRS.
'Not-for-profit entity' definition
The AASB considered comments received on Invitation to Comment ITC 14 Proposed Definition and Guidance for Not-for-Profit Entities, which effectively proposed to adopt the New Zealand definition and guidance on 'public benefit entities'.
The AASB decided that there is not a sufficient basis for changing from the existing term 'not-for-profit entity'. Going forward, this project will be dealt with as part of the criteria being developed for determining when it might be appropriate to permit or require a departure from IFRS in respect of NFP entities.
In our view, before embarking on a project focused on the determination of appropriate terminology, definitions and guidance for not-for-profit entities, the AASB needs to more fully develop and articulate its policy for standard-setting in relation to not-for-profit entities.
For example, the significance of the distinction between 'for-profit' and 'not-for-profit' may be substantially reduced if the AASB was to fully apply its sector-neutral or transaction neutral approach to standard-setting (subject to one's interpretation of 'neutrality').
The differences that currently exist between the accounting requirements applicable to for-profit entities and those applicable to not-for-profit entities are significant and, in many cases are, in our view, unnecessary. This being the case, the classification of an entity as either 'for-profit' or 'not-for-profit' has unnecessarily become a significant aspect of financial reporting in Australia.
|Topic||Overview||Comments and more information|
|Superannuation plans and approved deposit funds (ADFs)||
The AASB agreed that the primary users of superannuation entity financial statements include members and beneficiaries and those that are employed to act on behalf of members (such as financial analysts, advisors, employers, etc).
It was also agreed that a deficiency of net assets in a defined benefit fund would only give rise to the recognition of a receivable where a contractual agreement between the employer sponsor and its superannuation plan exists.
Various other measurement issues were also debated
|It is understood that the AASB is intending to finalise an exposure draft on this topic at its August 2008 meeting. However, given the number of unresolved issues, this timeline may be a little ambitious.|
|GAAP/GFS harmonisation||The Board discussed the extension of GAAP/GFS harmonisation project to entities within the General Government Sector (GGS). The AASB decided that the broad principles currently applicable to GGSs as a whole through AASB 1049 Whole of Government and General Government Sector Financial Reporting should be applied to not-for-profit entities within the GGS.||
We question whether this project should proceed, as many entities in the GGS do not prepare GFS financial statements.
This project is being addressed as a result of a Financial Reporting Council directive.
|Amendments to AASB 1049||The AASB approved ED 163 Proposed Amendments to AASB 1049 for Consistency with AASB 101, which proposed amendments to AASB 1049 to align it with the September 2007 version of AASB 101 Presentation of Financial Statements.||ED 163 will be made available on the AASB's website shortly and will have a one-month comment period.|
|Other||The board received an update of various interpretation issues in progress, noted a working paper of the European Commission on the convergence of third country GAAP with IFRS and held a meeting with its Consultative Group.|
More information on above topics can be obtained from the AASB Action Alert (PDF 67kb) for the meeting.
The next meeting of the AASB is scheduled for 25-26 June 2008.