May 07, 2020 / News

Audit and Assurance / COVID-19 / Financial Reporting

Financial Reporting Developments

The AASB has been very active during the past two months, issuing a number of new requirements. Nexia Australia Technical Director Martin Olde highlights some of the key changes as well as financial reporting considerations relating to COVID-19.

‘Non reporting entity’ concept removed for for-profit entities

For annual reporting periods commencing from 1 July 2021, all for-profit entities that are required by legislation to prepare financial statements that comply with either ‘Australian Accounting Standards’ or ‘accounting standards’ will be required to prepare General Purpose Financial Statements (“GPFS”). 

This means that, unless an ASIC exemption exists, all for-profit companies such as large proprietary companies (including grandfathered or wholly-owned subsidiaries), unlisted public companies, foreign controlled small proprietary companies and financial services licensees preparing financial statements under the Corporations Act 2001 will have to prepare GPFS.

Other for-profit private sector entities that are required by their constituting document or another document to prepare financial statements that comply with ‘Australian Accounting Standards’ will also have to prepare GPFS, if that document was created or amended on or after 1 July 2021. 

Those for-profit entities that currently prepare Special Purpose Financial Statements (“SPFS”) will have to comply with full recognition and measurement requirements of Australian Accounting Standards. 

These changes are set out in AASB 2020-2, which do not apply to not-for-profit entities.  For-profit entities not in scope of the new requirements, for example small proprietary companies and trusts, can still prepare SPFS.

Replacement of Tier 2 Reduced disclosure Regime (RDR)

The second part of the AASB’s changes is to replace the existing Tier 2 RDR (Reduced Disclosure Regime) GPFS standard with a new disclosure standard called ‘Simplified Disclosures for Tier 2 Entities’ (“SDS”). 

The new Tier 2 SDS will apply to for-profit and not-for-profit entities preparing Tier 2 GPFS.  The replacement of the existing RDR by the SDS standard will also be mandatory for reporting periods beginning on or after 1 July 2021, although early adoption is permitted.

The SDS disclosures are somewhat less than the existing Tier 2 RDR disclosures.  Because many entities currently preparing SPFS do not comply with many disclosure requirements in accounting standards, it is likely that financial report disclosures will increase under SDS compared to their existing SPFS.

Transition relief is available for entities that choose to early adopt before 1 July 2021 (eg, for 30 June 2020 or 30 June 2021 balance dates) and move from SPFS to Tier 2 SDS.  This relief allows an entity not to restate comparative financial information, which will be presented in accordance with the entity’s previous accounting policies. 

For those entities affected by these changes, we can assist you by:

• reviewing your existing accounting policies and identify those areas of change;
• comparing the effects of early adopting the new requirements before 1 July 2021 or waiting until 2022; and
• identifying whether any changes are needed to internal systems and processes to enable consolidation of controlled entities and to capture information in respect of the new disclosure requirements. 

Considering the implications of Coronavirus (COVID-19)

As we all grapple with the daily developments and effects of the spread of COVID-19 on our lives, the effects on businesses and the implications on financial reporting is also evolving daily.  Without attempting to pre-empt where we will be in three months’ time, some of the financial reporting effects that entities need to consider and plan for include:

• Asset impairments and fair value adjustments for intangible assets and goodwill;
• Net realisable value of inventory;
• Reassessment of inventory costing models, where disruptions to production capacity causes abnormal overhead allocations;
• Review and consideration of borrowing covenants;
• Effects of business disruptions on cash flows, forecasts and going concern assessments;
• Disclosures of contingencies and significant risks and uncertainties;
• Listed companies need to be mindful of their continuous disclosure obligations.

Regulators are considering contingency plans regarding financial reporting and lodgement deadlines for businesses that are severely disrupted by COVID-19. 

ASIC has allowed companies with a 31 December 2019 balance date an additional two months to hold their AGMs; that is, until the end of July. ASIC will take no action if companies use online and virtual methods to hold their AGMs. They have also extended the deadline to lodge financial reports by one month for unlisted entities with balance dates between 31 December 2019 and 31 March 2020.  This means that a proprietary company with a 31 December 2019 balance date will now have until 31 May 2020 to lodge their financial statements.  ASIC will monitor developments that may affect 30 June 2020 financial reporting and may extend reporting deadlines for those entities. Companies should monitor bulletins issued by their respective regulators for more information.

2020 Financial Reporting Updates

Our popular national Financial Reporting Update sessions will move from physical events to live online webinars on 14 and 20 May. Details are available here.

Stay safe everyone.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.