AASB research report on differential reporting

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20 Jun 2014

The Australian Accounting Standards Board (AASB) Research Centre has published a research report on the application of the 'reporting entity' differential reporting concept in Australia. The report explores a number of issues related to the adequacy of financial reporting by Australian entities without 'public accountability', noting the widespread use of 'special purpose financial reporting', which does not require the application of all Australian Accounting Standards.

The report, AASB Research Report No. 1 Application of the Reporting Entity Concept and Lodgement of Special Purpose Financial Statements, was commissioned by the AASB as part of its ongoing review of differential reporting requirements in Australia. As part of Australia's transition to Australian Accounting Standards equivalent to International Financial Reporting Standards (IFRS), the existing differential reporting regime based on the 'reporting entity concept' was carried over and implemented such that certain standards do not apply to 'non-reporting entities'. Non-reporting entities are not required to comply will the majority of Australian Accounting Standards, but can choose to do so. However, entities preparing special purpose financial statements under the Australian Corporations Act 2001 generally apply the recognition and measurement requirements of all accounting standards, but do not generally comply with the disclosure requirements of those standards.

The research report reveals the extent of the application of the reporting entity concept and the adoption of special purpose financial reporting, particularly by entities lodging financial statements with the Australian Securities and Investments Commission (ASIC) and with state-based regulators in Australia’s three most populous states. The findings of the report are based on empirical research analysis of a large number of financial reports of companies and other entities without public accountability who lodged financial statements. The findings include:

  • Nearly 60% of companies lodging financial statements with ASIC classified themselves as non-reporting entities and lodge special purpose financial statements (SPFSs), with nearly 80% of large proprietary companies (as defined) within this group lodging SPFSs
  • The research findings highlight the variation in the application of the reporting entity concept, consistent with the differing views apparent among practitioners regarding the essence and application of the reporting entity concept
  • The research did not discern a particular pattern of accounting policy choices amongst companies lodging SPFSs, but did identify a wide range of variation in disclosure practices
  • An analysis of quality of SPFRs lodged by companies was undertaken by reference to the disclosure of the application of recognition and measurement requirements of accounting standards, the quality of accruals recognised in financial statements, and the timeliness of lodgement of financial information. This analysis indicated a lower quality of SPFRs than general purpose financial reports, and lower quality SPFRs where the financial statements either do not apply the recognition and measurement requirements of accounting standards, or where unclear on this point
  • The majority of entities lodging financial statements with state-based regulators did so without following accounting standards and the reports were prepared in an inconsistent format.

The report notes its findings are "intended to inform any future discussion by public-policy makers, regulators and the Australian Accounting Standards Board (AASB) on the application of the reporting entity concept and what that concept implies for financial statements lodged with various regulatory bodies". The report identifies a need to address the apparent inconsistent application of the reporting entity concept by companies, and that further consideration could be given to the current lodgement requirements having regards to cost/benefit considerations. In respect of state-based regulators, the report recommends reassessing user needs for lodged financial statements and measures that might bring about greater consistency of financial statements across lodging entities, particularly whether some entities should be required to lodge general purpose financial statements.

The AASB had previously tentatively decided to eliminate the reporting entity concept from Australian Accounting Standards, and the AASB will continue to consider how Australia's differential reporting regime should operate, particularly in light of the 'Reduced Disclosure Requirements' (RDR) which can be applied by reporting entities that do not have public accountability. In addition, at its May 2014 meeting, the AASB tentatively decided to amend the application paragraphs of standards which currently apply to corporate non-reporting entities so that they apply to reporting entities and general purpose financial statements only. This would mean that there would be no specific standards that apply to SPFRs.

Click for press release (link to AASB website).

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