What is a special purpose reporting framework?

A special purpose framework is a financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework.  Prior to accepting an engagement under a special purpose framework, it is the auditor’s responsibility to consider the requirements under CAS 210 Agreeing the Terms of Audit Engagements in establishing whether the preconditions for an audit are present.

In particular, paragraph 210.06 requires the auditor to:

1. Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable; and
2. Obtain the agreement of management that it acknowledges and understands its responsibility:
   1. For the preparation of the financial statements in accordance with the applicable financial reporting framework, including, where relevant, their fair presentation; 
   2. For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and
   3. To provide the auditor with:
      1. Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;
      2. Additional information that the auditor may request from management for the purpose of the audit; and
      3. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

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Mark Story | March 2021

This article was current at the time of publication.

Businesses that until now have prepared special purpose financial statements (SPFS) need to anticipate the rapidly approaching removal of the SPFS framework.

However, the vast majority of the estimated 2.8 million for-profit entities in Australia that do not have financial reporting obligations under the Corporations Act, due to being under the large company threshold, are not impacted by the decision of the Australian Accounting Standards Board (AASB) to axe SPFS.

This shift reflects the AASB’s desire to better align the “definition and intent” of the term “reporting entity” with International Financial Reporting Standards (IFRS).  

The AASB decision also reflects research findings that indicate the Australian “reporting entity” concept has not been applied as intended.

Less than 1 per cent (around 13,000) of reporting entities have financial reporting obligations under the Corporations Act. 

Furthermore, best estimates suggest moves to an SPFS-free framework will only impact roughly a third of this small group that has through self-assessment determined they are eligible to prepare SPFS. 

Given the changes are mainly an issue for unlisted companies at the top end of town, including large proprietary companies, unlisted public companies and others, Ram Subramanian, Policy Adviser Reporting with CPA Australia, is keen to reassure practitioners that there is no need to worry that their smaller corporate clients will be affected. 

Are your clients affected?

While many larger companies may already be preparing general purpose financial statements (GPFS), Subramanian urges practitioners to assess if they have any for-profit clients within the small cohort directly affected by the AASB’s scrapping of SPFS. 

Practitioners that do have such entities on their books as clients will need to remind them that their minimum reporting standard is now a Tier 2 GPFS.

“The only difference with Tier 2 GPFS, compared to Tier 1 GPFS will, be around simplified disclosures for those entities, with recognition and measurement requirements of accounting standards unchanged,” Subramanian explains. 

“Simplified disclosure contained in one single standard (AASB 1060) will effectively replace the current Tier 2 reduced disclosure requirements (RDR) framework from 1 July 2021.”

Meanwhile, the AASB also plans to issue a consultation on its not-for-profit (NFP) financial reporting framework proposals later this year, although Subramanian does not expect changes for NFPs to take effect before 2022 at the earliest.

Scrapping self-assessment changes the game

As of 1 July 2021, any for-profit entity with a statutory requirement to comply with Australian Accounting Standards (AAS), will no longer have the discretion to self-assess. 

In most cases, the first full year of the change will be 30 June 2022. However, Subramanian says the need to state comparatives means impacted entities will also need to restate comparatives to 30 June 2021 as GPFS.

While there are no fewer than 60 AAS applicable to GPFS, it is only those standards that are relevant to the economic circumstances of the client that need to be considered. 

However, Subramanian flags two standouts, including the new AASB Standards on lease accounting (AASB 16) and revenue from contracts with customers (AASB 15). 

Given many companies have leases, and all companies have revenue, new GPFS preparers cannot ignore these two Standards.

Under AASB 16, while some leases could previously be expensed – the most common being property leases – Subramanian reminds practitioners this will no longer be the case. 

“A large proportion of all leases are going to end up on [the] balance sheet,” he says. “This means leases will need to be capitalised before they’re written down”.

He adds that within the new revenue standard, there is a fundamental shift in the principle for recognition of revenue. 

While revenue recognition previously occurred when there was a transfer of risks and rewards from the seller to a buyer, under AASB 15 revenue is recognised on the transfer of control.

Kinks in the tail

In removing SPFS, the AASB has allowed grandfathering provisions for certain non-statutory entities (trusts, partnerships, and other entities) that have constitutional documents requiring them to prepare financial statements that also specifically reference AAS. 

These entities will be able to continue preparing SPFS with one caveat: once a constitutional document is amended for any reason, post 1 July 2021, the grandfathering exemption from preparing AASB-compliant financial statements is switched off, and these entities will be required to prepare GPFS.

The AASB is currently considering additional disclosures for entities that do prepare SPFS through a non-statutory requirement such as a constitutional document. 

“Such entities may be required to make additional disclosures around any compliance with recognition and measurement requirements, including the basis on which the decision to prepare a SPFS was made,” Subramanian says. 

“Similar disclosure requirements are already in place for NFP entities preparing SPFS.”

The 'two out of three' rule

A client is not deemed to be a large proprietary company unless – at the end of the financial year – it satisfies at least two of the following criteria:

• Consolidated revenue is A$50 million or more
• The value of consolidated gross assets is A$25 million or more and it has 100 or more employees.

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