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Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems

Published:2019-03-11
The International Accounting Standards Board (IASB) issued a revised Conceptual Framework titled Conceptual Framework for Financial Reporting (referred to throughout this Consultation Paper as 'RCF') in March 2018. In order to apply the RCF in Australia, the AASB has to address a 'reporting entity' definition clash.


Recourse: 'CONSULTATION PAPER Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems' by AASB.

The International Accounting Standards Board (IASB) issued a revised Conceptual Framework titled Conceptual Framework for Financial Reporting (referred to throughout this Consultation Paper as ‘RCF’) in March 2018. 

In order to apply the RCF in Australia, the AASB has to address a ‘reporting entity’ definition clash. This first problem is unique to Australia and highlights the importance of solving the second more significant financial reporting problem. There is currently a lack of comparability, trust and transparency, resulting from entities self-assessing that they can prepare special purpose financial statements (SPFS)).


The first problem – resolving the ‘reporting entity’ definition clash 

The reporting entity concept (referred to throughout this document as ‘the Australian reporting entity concept’) in Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity and some of the Australian Accounting Standards (AAS) is defined and used differently compared to the RCF. Therefore, applying the RCF without modification in Australia would remove the Australian reporting entity definition so that the IASB’s definition of RCF could be applied throughout AAS. Removing SAC 1 and the Australian reporting entity concept would remove the ability for entities to prepare SPFS. 


The second problem – SPFS 

Australia is the only country to have a concept that effectively permits entities to self-assess what type of financial reporting is required when legislation or otherwise (ie such as a constitutional document) requires the preparation of financial statements in accordance with accounting standards. Unlike other countries, in Australia, two similar entities can prepare very different sets of financial reports, one preparing general purpose financial statements (GPFS) using a robust and consistent framework and the other SPFS, with self-selected requirements. This reduces comparability for entities of similar economic circumstances and undermines the fundamentals of trust and transparency. 


The AASB’s preferred option – Option 1: Two-phased approach to applying the IASB’s RCF

Phase 1: Short-term approach – operate with two conceptual frameworks to maintain IFRS compliance for publicly accountable entities. This involves: 

(a) the RCF being applied to publicly accountable for-profit entities and other entities voluntarily reporting compliance with IFRS to enable them to maintain IFRS compliance; 

(b) all other entities continuing to apply the existing Framework, enabling them to continue using the ‘Australian reporting entity concept’; and 

(c) amendments being made to the definition of ‘public accountability in AASB 1053 Application of Tiers of Australian Accounting Standards to align with the revised IASB definition in IFRS for Small and Medium-sized Entities (SMEs).


Phase 2: Medium-term approach – maintain IFRS compliance for publicly accountable entities and entities voluntarily claiming IFRS compliance, maintain IFRS as a base for all other entities, by having one conceptual framework, remove SPFS and provide a new GPFS Tier 2 alternative. This involves: 

(a) the RCF being applied to all entities required by legislation or otherwise to comply with AAS; 

(b) the Tier 2 framework in AASB 1053 being revised to be one of the following: 

(i) Alternative 1: GPFS – Reduced Disclosure Requirements (RDR) – Existing Tier 2 (full recognition and measurement with reduced disclosures from each Accounting Standard, includes consolidation and equity accounting where applicable);   OR 

(ii) Alternative 2: GPFS – Specified Disclosure Requirements (SDR) – New Tier 2 (full recognition and measurement with specified disclosures from some Accounting Standards9, includes consolidation and equity accounting where applicable); and 

(c) Consequential amendments being made to AAS10 and transitional relief provided for entities moving from SPFS to GPFS or to another tier of reporting.


Overall benefits of Option 1 

(a) allows time for further research and constituent feedback 

(b) facilitates for users consistent, comparable, transparent and useful financial statements for entities required to prepare financial statements in accordance with AAS

(c) has the greatest net benefit to users, directors, preparers, regulators, and auditors as it removes the inconsistencies and risks associated with self-assessment, ensures a ‘level playing field’ between entities and increases stakeholder confidence in reporting.