Financial Reporting changes in Australia that will affect your clients!

The Australian financial reporting framework has a unique “reporting entity” concept which has often been the cause of much debate, and dilemma, particularly when considered on an international stage.

Whilst public interest and disclosing entities are required to report in line with the International Financial Reporting Standards (IFRS) in full, Australia has had since 1990 a reporting entity concept which distinguishes between such “general” purpose reporting with a less onerous “special” purpose reporting.

For-profit private sector entities that meet certain criteria are required to prepare and lodge audited financial reports under the Australian Corporations Law. These would usually be under the special purpose reporting framework which would be compliant with all the measurement and recognition criteria of IFRS, but not all the disclosure requirements.

This difference in reporting has meant financial statements under the special purpose framework could be of limited value in capturing the activities of a business, and importantly, lacked consistency, comparability and transparency. This goes against the essence of a uniform, internationally recognised financial reporting framework.

The Australian Accounting Standards Board (AASB) determined it necessary to reform reporting requirements for those entities currently lodging special purpose financial statements. Instead, the AASB proposes to require these entities to also produce general purpose financial statements, and under certain guidelines, would be able to adopt reduced disclosure requirements based more closely to the IFRS for Small to Medium sized entities (SMEs).

Almost in sync with this, the Federal Government of Australia doubled the financial reporting size thresholds for Large Proprietary Companies under the Corporations Act 2001 (the Act) effective for reporting periods on or after 1 July 2019.

The previous thresholds, which have remained unchanged for almost 12 years, determine whether a Company is deemed to be “small” or “large” under the Act. If a Company is deemed to be large, it is required to prepare and lodge its financial report with ASIC, and, subject to certain limited exceptions, also have an audit performed of that financial report.

What are the thresholds?

The table below summarises the updated reporting thresholds. A Company is deemed to be “large” under the Act if it satisfies at least two out of the three parameters below:

Parameter * Thresholds applicable up to 30 June 2019  

Threshold applicable on or after 1 July 2019

 

Consolidated revenue for the year

 

$25 million or above $50 million or above
Consolidated Gross Assets as at year end

 

$12.5 million or above $25 million or above
Number of employees at the end of the year

 

50 employees or more 100 employees or more

*Each of the thresholds must be assessed for the Company and any entities it controlled for the year on a consolidated basis

 What you should also be aware of?

Whilst the doubling of the thresholds is expected to mean almost a third of large proprietary companies that have been reporting to ASIC will no longer be required to lodge their financial reports post 1 July 2019, the following will most likely still require financial reports to be produced in accordance with the Accounting Standards:

  • Entities that have bank covenants that require financial statements to be prepared in accordance with the Accounting Standards;
  • Entities that are directed by ASIC or 5% or more of the shareholders to produce a financial report (and possibly have it audited)
  • Certain foreign controlled entities
  • Entities deemed to be part of Significant Global Entities (SGEs).

A further impact on the above is that if and when the special purpose reporting framework is removed, compliance with Accounting Standards will require preparation of general-purpose financial reports with limited disclosure reliefs.

If you are in any doubt as to what this means to your clients, don’t hesitate to contact Kamal Thakkar of this office.