- What are special purpose financial statements?
- Entities eligible or required to prepare SPFS
- Benefits of special purpose financial statements
- Disclosure requirements for special purpose financial statements
What are special purpose financial statements?
Special Purpose Financial Statements (SPFS) are a type of financial reporting used to convey financial information to a particular group of stakeholders. SPFS are used by certain for-profit private sector entities in Australia.
Unlike General Purpose Financial Statements (GPFS), which are prepared for a broader audience, SPFS are customised to cater to the specific needs and preferences of certain stakeholders. These stakeholders often have the authority and the ability to shape the content of the financial statements according to their requirements.
Typically, SPFS are of interest to individuals such as owners and directors who have a direct operational interest in an organisation.
Entities eligible or required to prepare SPFS
Entities eligible or required to prepare Special Purpose Financial Statements (SPFS) in Australia can vary based on several factors such as legal status, size, and legislative obligations.
Entities Not Subject to Legislation
A category of entities eligible for SPFS preparation includes those not legally mandated to follow Australian Accounting Standards (AAS) for their financial reporting. This group often comprises smaller private companies, not for profit organisations, and other entities that choose to align their financial reporting practices with AAS voluntarily.
Entities with References to AAS
Some entities explicitly reference Australian Accounting Standards in their constituting or governing documents, indicating their intent to adhere to these standards. However, they are not legally compelled to do so. Instead, these entities use SPFS as a means to align their reporting practises with AAS without the full obligation of compliance.
Entities Registered with ACNC
Entities registered with the Australian Charities and Not for Profits Commission (ACNC) are subject to SPFS requirements. This obligation arises from the Australian Charities and Not for Profits Commission Act 2012, which mandates compliance with specific accounting standards, even when preparing SPFS.
Entities within the Scope of AASB 1057
Entities within the scope of Part 2M.3 of the Corporations Act are generally required to comply with AAS, including when preparing SPFS. AASB 1057 specifies this requirement, extending the financial reporting obligations to certain entities based on their legal status and activities.
Benefits of special purpose financial statements
SPFS serve as a valuable alternative for certain entities, offering several advantages that cater to their specific needs and circumstances.
Here are some key benefits of using SPFS:
Cost Effective and Less Burdensome
SPFS can significantly reduce the financial and administrative burden associated with financial reporting. Preparing full compliance with accounting standards can be time consuming and costly, involving complex calculations and detailed disclosures.
SPFS, on the other hand, are often more cost effective and less demanding to create, making them an attractive choice for entities looking to manage their reporting expenses.
Streamlined Financial Reporting
SPFS provide a streamlined approach to financial reporting. This simplicity is especially beneficial for entities with straightforward financial structures and reporting needs.
Rather than navigating the complexities of GPFS, which are designed for a wider audience, SPFS allow organisations to focus on presenting information that directly pertains to the interests of their key stakeholders.
Tailored to Specific Stakeholders
SPFS are highly customisable, allowing entities to tailor their financial reports to the precise requirements and preferences of specific stakeholders. This level of customisation is particularly valuable for small and medium sized businesses, where the owners, directors, or members often have a direct operational stake in the organisation.
These stakeholders may command and shape the content of SPFS to meet their informational needs, ensuring that the financial statements are relevant and meaningful to them.
Transparency through Disclosures
While SPFS provide flexibility, they also come with a responsibility transparent disclosures. Even though SPFS may simplify reporting, entities must still adhere to disclosure requirements. These disclosures ensure that stakeholders receive essential information and maintain transparency in financial reporting.
Disclosure requirements for special purpose financial statements
To ensure transparency and provide users of special purpose financial statements with essential information, the Australian Accounting Standards Board (AASB) has established specific disclosure requirements. Here is a breakdown of these requirements:
Basis for preparing special purpose financial statements
When entities opt to prepare SPFS instead of GPFS, it’s essential to provide clear and comprehensive explanations for this decision. Simply stating that an entity is not a reporting entity isn’t enough. Entities are required to articulate why they have chosen SPFS over GPFS.
This explanation could involve the belief that all users of their financial statements possess the capacity to request reports tailored to their specific information needs, as determined by the entity’s directors.
Material accounting policies
Another requirement of SPFS is the disclosure of accounting policies. Many entities preparing SPFS weren’t previously required to disclose detailed information about their accounting policies.
However, this lack of transparency could leave gaps in understanding how well the entity aligns with the Recognition and Measurement (R&M) requirements in Australian Accounting Standards.
To address this, certain entities are required to disclose material accounting policies in their SPFS. This disclosure would encompass details about the measurement basis used and any changes made to accounting policies. This way, financial statement users can gain a more complete picture of how an entity applies accounting standards.
Here’s a more comprehensive explanation of this requirement:
Identification of Material Accounting Policies: The entity must first identify material accounting policies within its financial statements. Material policies are those that have a significant impact on the financial statements’ presentation and interpretation. These are often core policies affecting revenue recognition, expense allocation, asset valuation, and liability assessment.
Assessment of Compliance: For each identified material accounting policy, the entity should evaluate whether it complies with the R&M requirements set forth in Australian Accounting Standards. The assessment should determine if the policy aligns with the specific standards and principles outlined in these accounting standards.
Disclosure of Non Compliance: If the entity identifies material accounting policies that do not fully comply with Australian Accounting Standards, it must disclose this non compliance. The disclosure should be explicit, mentioning the nature of the non compliance and the specific policy affected.
Explanation of Reasons: The entity should provide an explanation for why the material accounting policy does not comply with the R&M requirements. This explanation should help stakeholders understand the underlying reasons for the non compliance.
Quantification of Non Compliance Impact: When practical and possible, the entity should quantify the financial impact of non compliance. This quantification is important for users to assess the materiality of the non compliance in the context of the financial statements.
Disclosure of Risks and Uncertainties: The entity should also disclose any associated risks and uncertainties stemming from the non compliance with material accounting policies. This may include potential legal or regulatory consequences and their implications for the financial position and performance.
Changes in material accounting policies
This requirement pertains to situations where an entity decides to make significant alterations to its accounting policies. Material accounting policies are those policies that have a substantial impact on the financial statements.
When an entity changes such policies, they need to provide specific information about these changes, including:
Nature of the Change: This involves explaining what specific accounting policy has been modified. For instance, they might change their method of recognising revenue, depreciation of assets, or the way they value inventory.
Reasons for the Change: The entity needs to provide a clear explanation of why they have decided to alter their accounting policy. It could be due to a change in regulations, a shift in business strategy, or a desire for better alignment with industry practices.
Impact on Financial Statement Line Items: The entity must disclose the impact on key figures such as revenue, expenses, assets, and liabilities. Stakeholders need to understand how these changes influence the reported financial results.
Treatment of interests in other entities
This disclosure requirement appears where an entity has investments or interests in other entities. It primarily focuses on how those interests are accounted for, particularly in cases where different accounting standards might apply to these interests. Here’s a breakdown of this point:
Consistency in Accounting Treatment: The entity is required to disclose whether they have consistently applied accounting treatment to their interests in other entities in accordance with specific accounting standards. In other words, if they have investments or interests in other entities, they should clarify whether these have been accounted for consistently based on the relevant accounting standards.
Disclosure of Inconsistencies: If there are inconsistencies in the accounting treatment of these interests, the entity must explain the reasons for the divergence. This means that if, for example, they have applied different accounting methods or standards to similar types of investments or interests in other entities, they need to provide a clear explanation as to why this inconsistency exists.
Suppose an entity has investments in both subsidiaries and associates. Under Australian Accounting Standards, subsidiaries are often consolidated, which means their financials are combined with the parent entity’s financials. On the other hand, associates are typically equity accounted for, where the entity’s share of the associate’s profits and losses is reflected in the financial statements.
Now, if the entity is applying different accounting treatments to these two types of investments, they need to disclose this inconsistency. For instance, if they consolidate some subsidiaries but equity account others, they should explain why they’ve chosen different approaches, perhaps due to the nature of their involvement or differences in control.
Non compliant material accounting policies
This disclosure requirement focuses on situations where an entity has material accounting policies that do not fully comply with the recognition and measurement (R&M) requirements outlined in Australian Accounting Standards. It mandates that entities provide information regarding how these non compliant material accounting policies have been applied. Following is an explanation of this disclosure requirement:
Identification of Non Compliant Material Accounting Policies: The entity should first identify and recognise any material accounting policies that do not fully adhere to the R&M requirements specified in Australian Accounting Standards. Material policies are those that can significantly impact the financial statements.
For each identified non compliant material accounting policy, the entity must explain the nature of the non compliance. In other words, they should describe which specific aspects of the accounting standards are not being followed.
Application of Non Compliant Policies: The entity should also provide details on how these non compliant material accounting policies have been applied in its financial statements. This could include quantifying the financial impact, if feasible, and explaining any deviations from the standard requirements.
Potential Impact on Financial Statements: It is essential to convey to stakeholders how these non compliant policies affect the financial statements. This involves discussing the impact on line items within the financial statements, which could include assets, liabilities, revenue, expenses, and other key financial metrics.
Disclosure of Risks and Uncertainties: In addition to the explanation of non compliance, the entity should disclose any associated risks and uncertainties resulting from these non compliant policies. This could encompass potential legal or regulatory consequences, as well as the impact on the entity’s financial position and performance.
Suppose an entity has adopted an accounting policy related to the valuation of its inventory that deviates from the specific guidance outlined in Australian Accounting Standards. The accounting standard might require inventory to be valued using the lower of cost or net realisable value, but the entity has chosen to use a different valuation method.
In this case, the entity should disclose:
- The specific inventory valuation policy that does not comply with the standard.
- Details about how they value their inventory under this non compliant policy.
- The financial impact of using this non compliant policy on the balance sheet, income statement, and other relevant financial metrics.
- Any potential legal or regulatory risks associated with using a non compliant policy and how they plan to address these risks.
This disclosure requirement highlights the entity’s assessment of whether its financial statements as a whole comply with all recognition and measurement (R&M) requirements specified in Australian Accounting Standards.
It dictates that entities explicitly disclose whether the financial statements overall conform to these R&M requirements. An explanation of this disclosure is as follows:
Assessment of Overall Compliance: The entity should assess and determine whether its financial statements, taken as a whole, adhere to all R&M requirements outlined in Australian Accounting Standards. This evaluation involves considering the entire set of accounting policies and practises applied in the financial statements.
Disclosure of Compliance Status: The entity must disclose its conclusion regarding the overall compliance of its financial statements. Specifically, it should state whether it believes that the financial statements, as presented, are in full compliance with the applicable accounting standards.
Justification for Compliance or Non Compliance: If the entity concludes that its financial statements are in compliance with the R&M requirements, it should provide a brief justification for this compliance statement. On the other hand, if there are instances of non compliance, the entity should explain the reasons for these deviations.
Quantification of Non Compliance Impact: If feasible, the entity should quantify the financial impact of any non compliance on the financial statements. This quantification should help users understand the materiality of the non compliance in the context of the overall financial statements.
Disclosure of Risks and Uncertainties: Similar to the Non Compliant Material Accounting Policies disclosure, the entity should disclose any associated risks and uncertainties arising from non compliance with R&M requirements. This includes potential legal or regulatory consequences and their impact on the financial position and performance.
Suppose an entity believes that its financial statements, as presented, comply with all R&M requirements specified in Australian Accounting Standards. In this case, the entity should disclose:
- Its conclusion that the financial statements overall are in compliance with the accounting standards.
- A brief justification, such as stating that it has diligently applied all relevant standards and policies.
- If there are no instances of non compliance, there would be no need to quantify the impact or discuss associated risks in this context.
On the other hand, if the entity identifies any instances of non compliance in the financial statements (e.g., due to an error in applying a specific accounting standard), it should:
- Clearly state the areas or aspects of non compliance.
- Explain the reasons for non compliance.
- Quantify the financial impact, if possible.
- Discuss any risks and uncertainties associated with the identified non compliance.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.