18RU-001 The new Conceptual Framework – is special purpose going?

18RU-001 Conceptual Framework: special purpose going?

The International Accounting Standards Board (IASB) issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. In the course of considering applying the RCF in Australia, the AASB has identified an inconsistency in the definition of ‘reporting entity’ in the RCF and the widely used and understood Australian ‘reporting entity concept’.


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The AASB issued ITC 39 Applying the IASB’s revised conceptual framework and solving the reporting entity and special purpose financial statement problems to propose a preferred two-phased approach. The preferred approach will ensure maintaining IFRS compliance for for-profit publicly accountable entities, as well as address the issues identified: ‘reporting entity’ definition inconsistency and special purpose financial statements.

Applying the IASB’s Conceptual Framework in Australia

What is happening?

The International Accounting Standards Board (IASB) issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. In response, to be consistent with the AASB’s strategy and the Financial Reporting Council’s directive, the RCF needs to be applied in Australia. In the course of considering applying the RCF in Australia, the AASB has identified an inconsistency in the definition of ‘reporting entity’ in the RCF and the widely used and understood Australian ‘reporting entity concept’ set out in Statement of Accounting Concepts SAC 1 Definition of the Reporting Entity (SAC 1).

This has drawn attention to the more emotionally-charged issue of special purpose financial statements (SPFS). ITC 39 sets out the reasons behind the AASB’s decision to ‘make a move’ on SPFS at this particular time.

For more details on the RCF refer to the Appendix (PDF 89KB).

What the proposals do not impact

The AASB’s proposals would not impact reporting requirements of trusts and other entities (for example, self-managed superannuation funds) that are not currently required by legislation, deeds of constitution or otherwise to prepare financial statements in accordance with Australian Accounting Standards (AAS). They would also not impact the ‘grandfathered proprietary companies’ having lodgement relief under s1408 of the Corporations Act.

The proposals also do not impact the ‘large proprietary test’ in the Corporations Act 2001 or any other objective thresholds set out in any legislation.

Reporting entity issue
18RU-001 Applying the new Conceptual Framework in Australia reporting entity definitions

The RCF entity definition of reporting determines a boundary for what economic activities need to be included in general purpose financial statements (GPFS). The SAC 1 definition of reporting entity determines who should prepare GPFS – all other entities can choose to prepare SPFS.

The concern is that the inconsistency between the two definitions could result in misinterpretation, the wrong application of AASs or non-compliance with IFRS.

Special purpose financial statements issue

The dissatisfaction with SPFS has been building for some time as the proposition from which it was developed has diminished over the past 30 odd years. AASB data notes that greater than 60 percent of companies required to publicly lodge with ASIC lodge SPFS. The AASB would question if this is what was intended when the Australian ‘reporting entity concept’ was developed.

The AASB has also noted its legislative requirements under the ASIC Act require it to facilitate consistency, comparability and transparent financial statements. Arguably this is not best achieved with SPFS.

In making the move on SPFS, the AASB has acknowledged that this is an opportune time to deal with this issue. Australia is the only country permitting entities to self-assess what type of financial statements are required where financial statements are required by a regulator. The AASB sees this as a way to contribute to the current environment of building trust and comparability through transparency.

“The AASB has stated in the past that the ideal solution to the special purpose issue is for regulators to amend legislation to ensure that for those entities that are required to publicly lodge financial statements they should prepare general purpose financial statements. Making this happen is not easy in the current environment. It has been over ten years since the size thresholds around proprietary companies were last revised.

As such, the AASB has decided that with the revision to the Conceptual Framework that now is the time to address the special purpose issue.”

Michael Voogt
Director, Department of Professional Practice


AASB preferred approach

The AASB has a preferred option for adopting the RCF in Australia: Two-phased approach.

AASB preferred approach

Phase 1 involves two conceptual frameworks existing concurrently. Publicly accountable for-profit entities and entities voluntarily reporting compliance with IFRS – that is, entities preparing GPFS Tier 1 – applying the RCF (that includes the new definition of “reporting entity”). All other entities – that is, entities preparing GPFS Tier 2 and SPFS – continuing to apply the existing Framework (that includes the Australian “reporting entity” concept).

Phase 2 involves applying the one conceptual framework – the RCF. Publicly accountable entities prepare GPFS Tier 1. Entities that are not publicly accountable will either apply GPFS Reduced Disclosure Requirements (RDR) – existing Tier 2, or GPFS – Specified Disclosure Requirements (SDR) – a new Tier 2.

Phase 1

Phase 1 would ensure Tier 1 entities are able to maintain IFRS compliance and its adoption will be consistent with the IASB timelines.

During Phase 1 entities preparing GPFS using Tier 2 or those preparing SPFS will continue to do so under the existing Framework.

What is RDR?

GPFS RDR is the existing GPFS Tier 2 set out in AASB 1053 Application of Tiers of Australian Accounting Standards which applies full recognition and measurement of Australian Accounting Standards with reduced disclosures from each Accounting Standard. This includes consolidation and equity accounting where applicable.

What is SDR?

GPFS SDR is a new GPFS Tier 2 which applies full recognition and measurement of Australian Accounting Standards with specified disclosures from some Accounting Standards. This includes consolidation and equity accounting where applicable. The AASB is proposing the full disclosures of the following specified Australian Accounting Standards be applied:

  • AASB 101 Presentation of Financial Statements
  • AASB 107 Statement of Cash Flows
  • AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
  • AASB 1048 Interpretation of Standards
  • AASB 1054 Australian Additional Disclosures
  • Related party disclosures1
  • Revenue1
  • Impairment of assets1
  • Income taxes1

The above requirements are the minimum requirements. For example, an entity principally holding investment properties would also need to consider the disclosure requirements in AASB 140 Investment Property. So there is still an element of the preparer determine what to disclose.

Genuine consultation process

The AASB has been explicit in its communication that it is genuinely interested in feedback and views on all aspects of the consultation. For example, in relation to specified disclosures – are these the ‘right’ disclosures to meet users’ needs. The AASB is open to other suggestions. ITC 39 is the first step in the consultation process in relation to Phase 2, which will include significantly more gathering of data and research, targeted consultation and only then the issue of an Exposure Draft.

The consultation process may identify the need for an additional tier of financial reporting – for example, the ACNC’s legislative review. The AASB has not ruled out additional tier(s) and is seeking comment by all as part of the consultation process. The key for the AASB will be the development of an objective criteria to determine who falls in each tier.

Transitional relief

One of the most significant impact of an entity currently preparing SPFS moving to preparing GPFS is the application of consolidation and equity accounting – where these have not previously been applied. The AASB is aware of the practical difficulties that such a requirement brings and is committed to providing practical transitional relief to alleviate the challenges of sourcing historical data that may either not be able to be obtained, or not reliable if obtained, in order to apply consolidation or equity accounting, as applicable.

The other options considered

The AASB did consider four other options for addressing the perceived issues:

  • Option 2: Operate with two conceptual frameworks indefinitely
  • Option 3: All entities apply the RCF when it first becomes applicable
  • Option 4: Do nothing and lose IFRS compliance
  • Option 5: All entities to apply the RCF, change the name of the Australian reporting entity concept and prescribe minimum requirements for SPFS.

ITC 39 details each of these options together with benefits and barriers to each – and why the AASB has rejected the respective option and prefers Option 1.

The AASB also reconsidered IFRS for SMEs but dismissed it for all the same reasons as when AASB 1053 has initially adopted.

Next steps

Read the ITC for further information and full details. Submissions relating to Phase 1 are due by 9 August. Submissions relating to Phase 2 are due by 9 November.


  1. For a for-profit entity this would be AASB 124, AASB 15, AASB 136 and AASB 112 respectively.

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