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19RU-006 The new financial reporting framework is coming

19RU-006 New financial reporting framework is coming

The end of the unique Australian Reporting Entity Concept is closer. Phase 1 of the Australian financial reporting framework project has been issued by the AASB. The focus of this phase is on for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards.

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Michael Voogt

Director, Department of Professional Practice

KPMG Australia

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Applying the IASB’s Conceptual Framework in Australia

The IASB issued a revised Conceptual Framework for Financial Reporting (RCF) in March 2018. The AASB proposed a two-phased approach to adopt the RCF in Australia. As part of the AASB’s financial reporting framework project it is considering an entity’s ability to prepare financial statements in accordance with Australian Accounting Standards. The current proposal is to require entities to prepare general (not special) purpose financial statements (GPFS) in accordance with Australian Accounting Standards.

In May 2019 the AASB issued the RCF which effectively implements the first of the two-phased approach. The RCF incorporates the IASB’s meaning of ‘reporting entity’, which differs significantly from the reporting entity concept in current Australian pronouncements.

The RCF applies to annual reporting periods beginning on or after 1 January 2020.

Who is impacted?

The application of the RCF is at present limited to:

  • for-profit private sector entities that have public accountability and are required by legislation to comply with Australian Accounting Standards
  • other for-profit entities that voluntarily elect to apply the RCF.

So, for-profit entities currently preparing GPFS – Tier 1 as defined in AASB 1053 Application of Tiers of Australian Accounting Standards will continue to do so. Other entities (not preparing GPFS – Tier 1) are not impacted by Phase 1 of the implementation in Australia.

The AASB did not intend to force any for-profit public sector entity to adopt the RCF for periods beginning on or after 1 January 2020. The Phase 1 amendments are intended to allow for-profit public sector entities to apply the RCF where they elect to do so.

Having the RCF in place is important so that entities that currently claim compliance with IFRS Standards can continue to do so.

The AASB is continuing to develop the second phase of the financial reporting framework project, which will extend the RCF to additional for-profit private sector entities.

How does this impact me – when effective?

Conceptual Framework for Financial Reporting applicability

If you currently prepare GPFS using Tier 1 – you will now report under the RCF, continuing to claim compliance with IFRS.

Other entities, whether preparing GPFS using Tier 2 or special purpose financial statement (SPFS) will continue to report under the existing Framework.

GPFS Tier 1 and Tier 2 is defined in AASB 1053.

 

“We support the Phase 1. It is important that entities preparing GPFS using Tier 1 can continue to claim compliance with IFRS in their financial statements.”'

 – Michael Voogt
Director, Department of Professional Practice

In more detail…

In pursuing financial reporting reform the AASB is concurrently, but separately, undertaking consultation based on discussion papers in the following areas:

  • ITC 39 Applying the IASB’s revised conceptual framework and solving the reporting entity and special purpose financial statement problems (May 2018)
  • Improving Financial Reporting for Australian Charities (November 2017)
  • Improving Financial Reporting for Australian Public Sector (June 2018).

To implement the RCF in Australia the AASB has to work through a number of issues including addressing:

  • the reporting entity concept clash between the RCF and current Australian requirements
  • Australia’s unique SPFS accounting requirements that allow entities to self-assess as ‘non-reporting entities’ and prepare free form SPFS.

The overall project will run between 2-3 years. To date we are just over a third of the way through.

Further discussion on the Australian Financial Reporting Framework can be found in PDF version of this Reporting Update.

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