No major changes in Financial Reporting for business....Yet!

A welcome relief for the 2008 financial reporting period is the absence of major changes to the Australian financial reporting framework. This in part is due to the decision by the International Accounting Standards Board (IASB) to delay the running improvements to its suite of Standards (which Australia now automatically adopts) to financial years commencing 2009 (typical December 2009 and June 2010 balancers). But as we all know, the devil is in the detail, so read on for insight into the few new standards we do have to contend with, as well as developments that may lead to future changes.

AASB 7 ‘Financial Instruments: Disclosures’ replaces the disclosure provisions of AASB 130 and AASB 132 with the only new disclosures being credit risk, and disclosure of financial assets that are either past their due date, or are considered to be impaired. Additionally the new capital management disclosures contained in the amended AASB 101 ‘Presentation of Financial Statements’ also need to be considered.

Much of the IASB’s focus has been on the convergence program with the Unites States Financial Accounting Standards Board’s (FASB) Standards and this has lead to minor amendments coming through to the existing suite of IFRS Standards, but again delayed until effectively 2010. The acceptance in the US market of foreign companies being able to lodge IFRS Financial Statements without the need to reconcile with FASB Standards (US GAAP) is an important milestone in the acceptance of IFRS as the global Accounting Standards and indications are that US based companies will in the next 2 years be able to also use IFRS instead of US GAAP. That will ensure that IFRS is the global default Accounting Standards framework, justifying Australia’s decision in 2001-3 to adopt IFRS for its financial reporting framework.

However progress appears to have slowed on the smaller end of town’s financial reporting requirements. Whilst the Accounting Standards setters hoped to have a specific accounting standard for small business (SMEs) in place by the end of 2008, both the Australian Accounting Standards Board (AASB) and the IASB have encountered significant opposition in their proposed IFRS for SME’s Standard and at this time it appears most unlikely that a Standard will be issued by the IASB’s initial deadline of late 2008. At its March 2008 meeting, the AASB decided that it will need to wait until the IASB has determined what if any amendments are needed following the Submissions made on its IFRS for SMEs Exposure Draft.

At this time it is not clear just what the IASB will do. Although there has been no official Collation (summary) of Submissions publicly released, Grant Thornton Australia’s review of the submissions made to both the AASB and the IASB indicates that there is an overwhelming call for further simplification of the measurement, recognition and disclosure requirements well beyond what the IASB had done in its 2007 IFRS for SMEs ED, and a strong call (over 90% of the AASB Submissions) for the retention of the reporting entity concept that allows simplified reporting for SMEs in particular. The IASB’s Working Group started its review of the Submissions in April and it is likely to take some months before a final recommendation is put to the IASB who will then need to independently consider how it wishes to progress the project. Already the Working Group has identified close to 100 changes on simplifications, and that is before it has discussed disclosure issues. Certainly there is little doubt that the IASB needs to issue an IFRS for SMEs Standard but whether the IASB Members are prepared to follow its Constituents’ wishes and have effectively a two tier financial reporting system with minimal fair values required, remains to be seen.

So it is very much a ‘watch this space’ firstly with the IASB having to make some hard decisions on whether to further simplify the recognition, measurement and disclosure requirements of the IFRS for SMEs ED and hence move very much to a two tier financial reporting system (fair values for IFRS and historical cost with impairment for SMEs). Thereafter the AASB needs to determine the applicability of the resulting IFRS for SMEs International Standard for domestic requirements.

Given the Rudd Government’s priority to further alleviate business from unnecessary red tape, all eyes will be on the AASB once the IASB has finalized its IFRS for SMEs Standard sometime in 2009. Either way given the need for at least a full year of transition to a new financial reporting framework, it is unlikely that there will be any significant changes to SME financial reporting until 2010 or later. This is a shame for those non-publicly accountable reporting entities that are over burdened with IFRS requirements (which the IASB has already acknowledged are no longer relevant in many instances).

A first step by the Rudd Government will be to take action on the Submissions made to the previous Government which argued for threshold relief for non-listed public companies similar to that granted to around 30% of Large Proprietary Companies in June 2007. Raising the reporting thresholds by 2.5 times eliminated the need for those former Large Proprietary Companies (2 out of 3 size tests: Revenues less than $25 million, Assets less than $12.5 million, less than 50 full time equivalent employees) from mandatory Corporations Act reporting.

Grant Thornton Australia has been in contact with the Minister for Superannuation and Corporate Law Senator Nick Sherry requesting immediate action to apply a similar concept to the smaller non-listed public companies who in many cases are burdened by financial reporting requirements that the IASB is saying are effectively only relevant to listed companies.


Postscript: Call for input
The federal Government as part of it's commitment to reduce red tape, is looking for examples of duplication and inefficiency in reporting and ways small business could be relieved from unnecessary regulation.  Grant Thornton will be lobbying the Government on this issue on behalf of clients, so any examples or suggestions would be welcomed. Please email Keith Reilly at kreilly@gtnsw.com.au.

Author: Keith Reilly

Keith is Grant Thornton’s National Head of Professional Standards and leads a team that has responsibility for ensuring Grant Thornton is at the leading edge of local and global regulatory requirements. Keith works closely with Grant Thornton’s International Public Policy Group, Independence Working Party, and IFRS Committees.

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