General Purpose Financial Statements

What are general purpose financial statements?
Tier 1 and Tier 2 frameworks for GPFS
GPFS – purpose and components
Key aspects of fair presentation and compliance with standards
Going concern assessment
Accrual basis of accounting
Materiality and aggregation
Offsetting
Net presentation of gains and losses
Comparative Information
Continuing relevance of narrative Information
GPFS vs SPFS

What are general purpose financial statements?

General purpose financial statements (GPFS) are financial reports that present relevant financial information in a standard format to a wide range of stakeholders.

Australian Accounting Standards, as outlined in AASB 101 Presentation of Financial Statements, govern the preparation and presentation of GPFS. These standards define general purpose financial statements as reports intended to meet the needs of users who lack the authority to request customised reports tailored to their specific information needs.

GPFS must comply with all applicable Australian Accounting Standards to ensure consistency and reliability in financial reporting. This adherence to standards is essential for maintaining transparency and accountability in financial disclosures.

Tier 1 and Tier 2 frameworks for GPFS

In the context of GPFS in Australia, the Tier 1 and Tier 2 frameworks define the level of disclosure required in the financial statements based on the type and size of the entity.

These tiers are part of the Australian Accounting Standards Board (AASB) strategy to cater to different entities while ensuring the quality and relevance of financial information.

Here’s how they relate to GPFS:

Tier 1 – full australian accounting standards for GPFS

Tier 1 applies to entities with public accountability. This includes publicly listed companies, banks, insurance companies, and other entities holding assets in a fiduciary capacity for a broad group of outsiders.

Entities under Tier 1 are required to prepare GPFS in accordance with the full Australian Accounting Standards. This means they must comply with all recognition, measurement, presentation, and disclosure requirements as per these standards.

GPFS for Tier 1 entities are comprehensive, reflecting the complex nature of these entities and the broad range of stakeholders interested in their financial affairs. The disclosures are extensive, providing detailed insights into various aspects of the entity’s financial performance and position.

Tier 2 – Reduced Disclosure Requirements (RDR) for GPFS

Tier 2 is designed for entities without public accountability, such as smaller, privately held businesses, non profit organisations, and subsidiaries of publicly listed companies that do not have public accountability themselves.

While Tier 2 entities follow the same recognition and measurement requirements as Tier 1, they are subject to RDR. This means their GPFS can be less detailed in terms of disclosures compared to Tier 1 entities.

The RDR framework under Tier 2 aims to reduce the burden of financial reporting on smaller entities. The GPFS under Tier 2 still provides sufficient information for users to make informed decisions but omits certain disclosures that are less critical for these types of entities.

Key differences in GPFS between Tier 1 and Tier 2

Level of Disclosure: The most significant difference is in the level of disclosure. Tier 1 GPFS are more detailed, adhering to full disclosure requirements, while Tier 2 GPFS are simplified with reduced disclosures.

Intended Users: Tier 1 GPFS cater to a wide range of stakeholders, including investors, creditors, and regulators, who require detailed information. Tier 2 GPFS, however, are tailored for users who do not need as extensive information due to the entity’s smaller scale and lower level of public accountability.

GPFS – purpose and components

GPFS serves as structured representations of an entity’s financial position and financial performance. The primary goal of a GPFS is to provide valuable information to a wide range of users, aiding them in making informed economic decisions.

Additionally, GPFS offers insights into how effectively management has handled the resources entrusted to them. To achieve this objective, financial statements furnish information regarding the following aspects of an entity:

Assets
Liabilities
Equity
Income and Expenses, including gains and losses
Contributions made by owners and distributions to owners in their capacity as owners
Cash flows

This information, when combined with additional details found in the notes accompanying the financial statements, helps users in predicting an entity’s future cash flows, including their timing and certainty.

Components of a complete set of financial statements

A comprehensive set of financial statements typically consists of the following components:

A statement of financial position, reflecting the entity’s financial status at the end of the reporting period.
A statement of profit or loss and other comprehensive income, outlining the entity’s financial performance during the reporting period.
A statement of changes in equity, presenting the changes in equity over the reporting period.
A statement of cash flows, summarising the entity’s cash inflows and outflows during the reporting period.
Notes, which include essential accounting policy information and other explanatory details to enhance understanding.
Comparative information regarding the preceding period, as specified in specific paragraphs (38 and 38A).
A statement of financial position as of the beginning of the preceding period in situations where the entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements, or reclassifies items in its financial statements.

It’s worth noting that entities have the flexibility to use titles for these statements that may differ from the ones mentioned in this Standard.

For instance, an entity may opt to use the title statement of comprehensive income instead of statement of profit or loss and other comprehensive income.

Presentation of profit or loss and other comprehensive income

An entity has the flexibility to present a single statement of profit or loss and other comprehensive income, divided into two sections. These sections must be presented together, with the profit or loss section shown first, followed immediately by the other comprehensive income section.

Alternatively, an entity can present the profit or loss section in a separate statement of profit or loss. In this case, the separate statement of profit or loss must directly precede the statement displaying comprehensive income, which starts with profit or loss.

Equal prominence of financial statements

All financial statements within a complete set of financial statements should be given equal prominence. This means that no one financial statement should be emphasised over others in terms of visibility or importance.

Financial review by management

Many entities provide a financial review by management outside the financial statements. This report explains the key aspects of the entity’s financial performance and financial position, as well as any significant uncertainties it faces.

The review might cover factors influencing financial performance, sources of funding, and resources not recognised in the statement of financial position in accordance with Australian Accounting Standards.

Reports and statements outside the financial statements

Some entities also present reports and statements outside the financial statements, such as environmental reports and value added statements. These are common in industries where environmental factors are significant or where employees are regarded as an important user group. It’s important to note that reports and statements presented outside the financial statements are not governed by Australian Accounting Standards.

Key aspects of fair presentation and compliance with standards

GPFS must present an accurate and fair representation of an entity’s financial position, financial performance, and cash flows. This entails faithfully reflecting the effects of transactions, events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income, and expenses as outlined in the Conceptual Framework for Financial Reporting.

Compliance with Australian Accounting Standards, along with additional disclosure when necessary, is generally presumed to result in financial statements that achieve a fair presentation.

Achieving fair presentation also requires the entity to:

Select and apply accounting policies in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. This standard provides guidance on the hierarchy of authoritative sources that management should consider when there is no specific Australian Accounting Standard applicable to a particular item.
Present information, including accounting policies, in a manner that offers relevant, reliable, comparable, and understandable information.
Provide additional disclosures when merely complying with the specific requirements in Australian Accounting Standards does not provide sufficient information for users to comprehend the impact of specific transactions, events, and conditions on the entity’s financial position and financial performance.

Inadequate Accounting Policies Disclosure:
It’s important to note that an entity cannot rectify inappropriate accounting policies solely through disclosure or explanatory material in notes. Appropriate accounting policies must be selected and applied in accordance with established standards and principles.

Going concern assessment

When preparing financial statements, management must assess whether the entity can continue as a going concern. Financial statements are generally prepared on a going concern basis unless management intends to liquidate the entity, cease trading, or has no realistic alternative but to do so.

If there are material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, these uncertainties must be disclosed. When financial statements are not prepared on a going concern basis, the entity must disclose this fact, explain how the statements were prepared, and provide the reasons for not considering the entity a going concern.

Timeframe for going concern assessment

In assessing the appropriateness of the going concern assumption, management considers all available information about the future, typically for at least twelve months from the end of the reporting period.

The level of scrutiny depends on the specific circumstances. Entities with a history of profitability and easy access to financial resources may conclude that the going concern basis is appropriate without extensive analysis. In contrast, other entities may need to assess factors such as current and expected profitability, debt repayment schedules, and potential sources of replacement financing before deciding on the going concern basis.

Accrual basis of accounting

GPFS, excluding cash flow information, should be prepared using the accrual basis of accounting. Under this method, items are recognised as assets, liabilities, equity, income, and expenses when they meet the definitions and recognition criteria outlined in the Conceptual Framework.

Materiality and aggregation

Financial statements should separately present each material class of similar items. Dissimilar items should be presented separately unless they are immaterial. Financial statements result from aggregating transactions into classes based on their nature or function.

The final presentation involves condensed and classified data, forming line items in the financial statements. If a line item is not individually material, it may be aggregated with other items in the statements or in the notes.

However, this should not obscure material information with immaterial details or aggregate material items with different natures or functions.

Offsetting

Entities should not offset assets and liabilities or income and expenses unless required or allowed by an Australian Accounting Standard. Offsetting, or combining these items in financial statements, should only occur when it reflects the true substance of the transaction or event.

Offsetting can make it difficult for users to understand transactions and assess future cash flows. Measuring assets net of valuation allowances, such as obsolescence allowances on inventories or doubtful debt allowances on receivables, is not considered offsetting

Net presentation of gains and losses

Entities can present gains and losses arising from a group of similar transactions, such as foreign exchange gains and losses or gains and losses on financial instruments held for trading, on a net basis. However, if these gains and losses are material, they should be presented separately.

Frequency of reporting

Entities must present a complete set of financial statements, including comparative information, at least annually. If an entity changes its reporting period’s end and presents financial statements for a period longer or shorter than one year, it must disclose the reason for the change and the fact that comparability with prior periods is affected.

While many entities prepare financial statements for a one year period, some may choose a different period, like 52 weeks, for practical reasons, which is permitted.

Comparative information

Entities are generally required to present comparative information for the preceding period in their financial statements. This includes all amounts reported in the current period’s financial statements. Narrative and descriptive information relevant to understanding the current period’s financial statements should also have comparative information.

As a minimum, entities should present two statements of financial position, two statements of profit or loss and other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash flows, two statements of changes in equity, and related notes.

Continuing relevance of narrative information

In some cases, narrative information from the preceding period remains relevant in the current period. For example, if there was uncertainty about a legal dispute’s outcome at the end of the preceding period, and it’s still unresolved, disclosing this information and steps taken to resolve it during the current period can benefit users.

GPFS vs SPFS

Special purpose financial statements

Special Purpose Financial Statements (SPFS) are financial statements that are specifically prepared for a particular purpose or user. These statements are typically less comprehensive and detailed compared to GPFS.

SPFS are tailored to meet the specific requirements of the user or purpose for which they are created. For instance, you might prepare SPFS as part of a grant application, loan application, or tax return. These statements only include the information necessary to fulfil the specific needs of the user and may not provide a complete overview of the entity’s financial position and performance.