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Australia seeks to finesse its differential reporting regime in light of IFRS 1 changes

  • AASB (Australian Accounting Standards Board) (lt blue) Image

19 Mar 2014

The Australian Accounting Standards Board (AASB) has issued an exposure draft, and accompanying research paper, discussing the implications for entities moving between different 'tiers' of its differential reporting regime in light of changes made by the International Accounting Standards Board (IASB) to permit the repeated application of IFRS 1 'First-time Adoption of International Financial Reporting Standards'.

As part of its annual improvements cycle for 2009-2011, the IASB amended IFRS 1 to permit an entity to reapply its requirements in circumstances where it had already applied International Financial Reporting Standards (IFRSs) in a previous period, but did not make an explicit and unreserved statement of compliance with IFRSs in its most recent annual financial statements. The possibility of reapplying IFRS 1 is effectively optional, as entities can instead apply IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, as if the entity had never stopped applying IFRSs.

Australian Accounting Standards issued by the AASB are equivalent to IFRSs, and for-profit entities fully applying the standards are required to make an explicit and unreserved statement of compliance with IFRSs. These 'Tier 1' reporting requirements apply to for-profit private sector entities that have public accountability (and also to Australian governments in the not-for-profit sector).

Other entities preparing general purpose financial reports are eligible to apply 'Tier 2' reporting requirements, which require full compliance with the recognition and measurement requirements of all standards, but which provide relief from particular presentation and disclosure requirements under the AASB's 'Reduced Disclosure Requirements' (RDR). Accordingly, entities applying 'Tier 2' reporting requirements are unable to make a statement of compliance with IFRSs.

Furthermore, entities which do not meet the definition of a 'reporting entity' are eligible to prepare 'special purpose financial reports' which are required to comply with a minimal number of Australian Accounting Standards, although in practice many entities apply the recognition and measurement requirements of all standards and make minimal disclosure.

Because 'Tier 2' reporting requirements, and many special purpose financial reports, are fully compliant with the recognition and measurement requirements of Australian Accounting Standards (and so also the recognition and measurement requirements of IFRSs with respect to for-profit entities), the IASB's amendments to IFRS 1, duplicated in AASB 1 First-time Adoption of Australian Accounting Standards, causes a dilemma for the AASB. This is due to the exemptions or modifications from the recognition and measurement requirements of other standards permitted or required by IFRS 1 when it is reapplied allowing additional options for entities moving between reporting tiers.  For example, an entity could elect to 'reset' the carrying amounts of certain assets to a deemed cost on applying AASB 1, even though the entity's accounting policies with respect to recognition and measurement may already be IFRS compliant.

The proposals in AASB Exposure Draft ED 248 Amendments to AASB 1053 – Transition to and between Tiers, and related Tier 2 Disclosure Requirements, seek to provide additional modified requirements for entities that may be impacted by the IASB's changes to IFRS 1. It does so by in some circumstances requiring entities already fully compliant with the recognition and measurement requirements of Australian Accounting Standards to apply AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors (equivalent to IAS 8 for for-profit entities), instead of AASB 1, so that it would not inappropriately imply a change of accounting basis.

In addition to the above, not-for-profit entities applying Australian Accounting Standards are subject to some modifications to IFRS requirements, and are also subject to additional 'domestic' standards that are not compliant with IFRSs. Because of these differences, these entities are not able to claim compliance with IFRSs, and this also introduces additional issues when these entities move between reporting tiers. ED 248 also seeks to provide guidance on how such entities should move between reporting tiers using similar methodologies, and the exposure draft also addressing a number of additional related issues.

Because of the various reporting tiers under Australia's differential reporting regime, the proposals in ED 248 are complex and the AASB staff paper issued by the Australian Accounting Standards Board Research Centre, seeks to provide more analysis and information about the rationale adopting in developing the proposals in ED 248, and explain the consequences of the different pathways by which an entity might move between reporting tiers.

The requirement in Australian Accounting Standards for compliance with the recognition and measurement requirements of IFRSs by a wide group of for-profit entities has been a contentious issue in the Australian context for some time. The AASB had previously written to the IASB seeking acknowledgement of the RDR within the broader IFRS framework, and has more recently been critical of the IASB's exposure draft on the IFRS for SMEs on the basis of the differential recognition and measurement requirements between IFRSs and the IFRS for SMEs.

Comments on the AASB ED 248 close on 19 May 2014. Click for (links to AASB website):

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