Implementation guidance and illustrative examples for certain for-profit private sector entities (AASB1054_05-11_COMPdec22_01-23)

IG15

The AASB has prepared this guidance and examples to explain and illustrate the application of the requirements in paragraph 9C of this Standard.

IG16

The table below has been provided for ease of reference to illustrate the types of entities that would generally be within or outside the scope of the requirements in paragraph 9C of this Standard.

IG17

The following flowchart summarises some of the key decisions in determining how to apply the disclosure requirements in paragraphs 9C(d)-(f) of this Standard in relation to special purpose financial statements.

IG18

In disclosing the information required by paragraphs 9C(d)-(f) of this Standard, entities are not expected to provide quantitative information, or reconciliations, where accounting policies do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

Disclose the basis on which the decision to prepare special purpose financial statements was made

IG19

Paragraph 9C(a) requires an entity to disclose the reasons why the preparation of special purpose financial statements was considered appropriate. It is not sufficient for the entity to merely disclose that it is ‘not a reporting entity’; the entity must articulate the reasons why it concluded general purpose financial statements were not required. For example, the reason could be that in the opinion of the directors of the entity all financial statement users are in a position to require the entity to prepare reports tailored to their particular information needs.

Disclosure of accounting policies

IG20

For-profit private sector entities within the scope of this Standard that are preparing special purpose financial statements are required to include sufficient information to enable users of those special purpose financial statements to obtain an understanding of the material accounting policies applied in the preparation of the special purpose financial statements, including changes in those policies

IG21

The disclosure of this information may be required by another Australian Accounting Standard, such as AASB 101 Presentation of Financial Statements or AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. Where this is the case, the entity also complies with the requirements of the other Standard.

Accounting policy assessment step 1: Compliance at the individual accounting policy level

IG22

Paragraph 9C(e) of this Standard requires an entity, for each material accounting policy applied and disclosed in the financial statements, to first assess whether that policy complies or does not comply with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128).

IG23

Using those assessments:

(a) an entity discloses for those policies not complying with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128), an indication of how it does not comply; or

(b) if the material accounting policies applied and disclosed in the financial statements comply with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128), no additional disclosures are required.

IG24

Where an entity’s accounting policies do not comply with the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128), the presentation of the disclosure providing an indication of that non-compliance may differ depending on the extent of non-compliance. Entities may choose to provide disclosures for non-compliant policies in one place or placed with each accounting policy disclosed in the financial statements, as appropriate. For example:

(a) an entity may choose to disclose which Australian Accounting Standards are not complied with and provide details of the non-compliance in one place – for example, within the basis of preparation note – where the instances of non-compliance are not extensive (see Example 3); or

(b) where the instances of non-compliance are extensive, details of the non-compliance may be provided within the relevant accounting policy note (see Example 4).

Accounting policy assessment step 2: Overall compliance

IG25

Based on the assessment required by paragraph 9C(e), paragraph 9C(f) then requires an entity to disclose whether or not overall the material accounting policies applied and disclosed in the financial statements comply (that is, there are no instances of non-compliance) (see Examples 1 and 2) or do not comply (there are one or more instances of non-compliance) (see Examples 3 and 4) with all the recognition and measurement requirements in Australian Accounting Standards (except for AASB 10 and AASB 128).

IG26

Based on the AASB’s research, some of the most frequent examples of non-compliance with recognition and measurement requirements in Australian Accounting Standards include:

(a) in accounting for income taxes, deferred tax was not recognised, which does not comply with AASB 112 Income Taxes;

(b) in accounting for property, plant and equipment, assets were not depreciated based on their useful lives, which does not comply with AASB 116 Property, Plant and Equipment;

(c) in accounting for impairments, the recoverable amount of assets for impairment testing was calculated on an undiscounted basis, which does not comply with AASB 136 Impairment of Assets;

(d) in accounting for leases, certain leases that would previously have been considered operating leases in accordance with AASB 117 Leases ^[1] have not been recognised in the statement of financial position, which does not comply with AASB 16 Leases; and

(e) in accounting for revenue, revenue was recognised based on the transfer of risks and rewards or the percentage of completion method in accordance with AASB 118 Revenue,^[2] which does not comply with AASB 15 Revenue from Contracts with Customers.

Application of the consolidation and equity accounting requirements

IG27

In relation to paragraph 9C(d) of this Standard, information about the accounting for subsidiaries and investments in associates and joint ventures is fundamental for a user’s understanding of the scope of the financial statements.

IG28

Exemptions from consolidation of subsidiaries are provided in AASB 10, paragraphs 4(a)-Aus4.2, including when the entity is a wholly-owned subsidiary, its debt or equity instruments are not traded in or to be issued in a public market and its ultimate parent produces consolidated financial statements that are available for public use and comply with accounting standards. Those charged with governance preparing special purpose financial statements might have other reasons for non-consolidation of some or all of an entity’s subsidiaries, and paragraph 9C(d) requires these reasons to be disclosed (see Example 2).

Illustrative examples

IG29

The following illustrative examples are provided:

IG30

There are additional illustrative examples in paragraphs IG13 and IG14 of this Standard that may be useful, notwithstanding that they have been prepared for not-for-profit private sector entities.

IG31

The following examples illustrate how an entity might apply some of the disclosure requirements in paragraph 9C of this Standard, on the basis of the limited facts presented. Although some aspects of the examples might be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern need to be evaluated when applying the Standard.

#	Example	Illustrative disclosure
1	Compliance with all recognition and measurement requirements in Australian Accounting Standards, including AASB 10 and AASB 128 CMA Pty Ltd, a small for-profit parent company, has prepared special purpose financial statements to satisfy requirements of the major supplier of its raw materials. The special purpose financial statements: · consolidate all its subsidiaries in a manner consistent with the requirements set out in AASB 10; · equity account all its investments in associates and joint ventures in a manner consistent with the requirements set out in AASB 128; and · apply accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards.	CMA Pty Ltd is a small for-profit entity that prepares special purpose financial statements under its raw material supply agreement with Company X. These special purpose financial statements have therefore been prepared in accordance with the reporting framework agreed with Company X, which specifies limited note disclosures to accompany the financial statements. The Directors note that Company X may obtain further financial information upon request. CMA Pty Ltd has consolidated all its subsidiaries consistent with the requirements set out in AASB 10 Consolidated Financial Statements and equity accounted for its investments in associates and joint ventures consistent with the requirements set out in AASB 128 Investments in Associates and Joint Ventures. These consolidated special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards.
2	Compliance with all recognition and measurement requirements in Australian Accounting Standards, excluding AASB 10 and AASB 128 KC Pty Ltd, a small for-profit parent company, prepares separate special purpose financial statements in order to meet the requirements of its financing agreement. The separate special purpose financial statements apply material accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards. The separate financial statements do not consolidate KC Pty Ltd’s subsidiaries.	These special purpose financial statements have been prepared to satisfy the company’s reporting requirements under its financing agreement with Bank X, which requires the financial statements to comply with Australian Accounting Standards. In the opinion of the Directors, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. KC Pty Ltd is a for-profit entity. Consolidated financial statements have not been prepared for KC Pty Ltd and its subsidiaries as the Directors have decided not to comply with AASB 10 Consolidated Financial Statements – the Directors would provide consolidated information to financial statement users upon request. KC Pty Ltd’s special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards for separate financial statements.
3	Known non-compliance with recognition and measurement requirements in Australian Accounting Standards that is not* extensive* ABC Trading Trust, a for-profit entity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply material accounting policies that do not comply with all the recognition and measurement requirements in Australian Accounting Standards. The differences are not extensive.	ABC Trading Trust, a for-profit entity, has prepared special purpose financial statements as, in the opinion of the Trustees, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. Accordingly, these financial statements have been prepared to satisfy the Trustee’s reporting requirements under the Trust Deed, which requires the financial statements to comply with Australian Accounting Standards. These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards. The recognition and measurement requirements that have not been complied with are those specified in AASB 116 Property, Plant and Equipment. In accounting for property, plant and equipment, ABC Trading Trust has [calculated depreciation on the basis of the useful lives determined by the Australian Taxation Office for income tax purposes / insert further details, including an indication of how material recognition and measurement requirements in Australian Accounting Standards have not been complied with].
4	Known non-compliance with the recognition and measurement requirements in Australian Accounting Standards that is extensive HIJ Public Trading Trust, a for-profit entity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply material accounting policies that do not comply with all the recognition and measurement requirements in Australian Accounting Standards. Although the differences have not been quantified, they are extensive, and an indication of the differences are presented with the appropriate note disclosing the accounting policy.	HIJ Public Trading Trust, a for-profit entity, has prepared special purpose financial statements as, in the opinion of the Trustees, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. Accordingly, these financial statements have been prepared to satisfy the Trustee’s reporting requirements under the Trust Deed, which requires the financial statements to comply with Australian Accounting Standards. These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards. [The material accounting policies adopted in the special purpose financial statements are set out in notes Q-Z and indicate how the recognition and measurement requirements in Australian Accounting Standards have not been complied with. … Note X: Impairment … Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is determined on an undiscounted basis as the higher of an asset’s fair value less costs of disposal and value in use. This does not comply with AASB 136 Impairment of Assets. Note Y: Income Tax … The income tax expense or credit for the period is based on the tax payable on the current period’s taxable income based on the applicable income tax rate. This amount is not adjusted for changes in deferred tax assets and liabilities as HIJ Public Trading Trust does not recognise deferred tax balances. This does not comply with AASB 112 Income Taxes. …]

#

Example

Illustrative disclosure

1

Compliance with all recognition and measurement requirements in Australian Accounting Standards, including AASB 10 and AASB 128

CMA Pty Ltd, a small for-profit parent company, has prepared special purpose financial statements to satisfy requirements of the major supplier of its raw materials. The special purpose financial statements:

· consolidate all its subsidiaries in a manner consistent with the requirements set out in AASB 10;

· equity account all its investments in associates and joint ventures in a manner consistent with the requirements set out in AASB 128; and

· apply accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards.

CMA Pty Ltd is a small for-profit entity that prepares special purpose financial statements under its raw material supply agreement with Company X. These special purpose financial statements have therefore been prepared in accordance with the reporting framework agreed with Company X, which specifies limited note disclosures to accompany the financial statements. The Directors note that Company X may obtain further financial information upon request.

CMA Pty Ltd has consolidated all its subsidiaries consistent with the requirements set out in AASB 10 Consolidated Financial Statements and equity accounted for its investments in associates and joint ventures consistent with the requirements set out in AASB 128 Investments in Associates and Joint Ventures.

These consolidated special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards.

2

Compliance with all recognition and measurement requirements in Australian Accounting Standards, excluding AASB 10 and AASB 128

KC Pty Ltd, a small for-profit parent company, prepares separate special purpose financial statements in order to meet the requirements of its financing agreement. The separate special purpose financial statements apply material accounting policies that comply with all the recognition and measurement requirements in Australian Accounting Standards. The separate financial statements do not consolidate KC Pty Ltd’s subsidiaries.

These special purpose financial statements have been prepared to satisfy the company’s reporting requirements under its financing agreement with Bank X, which requires the financial statements to comply with Australian Accounting Standards. In the opinion of the Directors, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. KC Pty Ltd is a for-profit entity.

Consolidated financial statements have not been prepared for KC Pty Ltd and its subsidiaries as the Directors have decided not to comply with AASB 10 Consolidated Financial Statements – the Directors would provide consolidated information to financial statement users upon request.

KC Pty Ltd’s special purpose financial statements comply with all the recognition and measurement requirements in Australian Accounting Standards for separate financial statements.

3

Known non-compliance with recognition and measurement requirements in Australian Accounting Standards that is not extensive

ABC Trading Trust, a for-profit entity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply material accounting policies that do not comply with all the recognition and measurement requirements in Australian Accounting Standards. The differences are not extensive.

ABC Trading Trust, a for-profit entity, has prepared special purpose financial statements as, in the opinion of the Trustees, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. Accordingly, these financial statements have been prepared to satisfy the Trustee’s reporting requirements under the Trust Deed, which requires the financial statements to comply with Australian Accounting Standards.

These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

The recognition and measurement requirements that have not been complied with are those specified in AASB 116 Property, Plant and Equipment. In accounting for property, plant and equipment, ABC Trading Trust has [calculated depreciation on the basis of the useful lives determined by the Australian Taxation Office for income tax purposes / insert further details, including an indication of how material recognition and measurement requirements in Australian Accounting Standards have not been complied with].

4

Known non-compliance with the recognition and measurement requirements in Australian Accounting Standards that is extensive

HIJ Public Trading Trust, a for-profit entity, determined that it does not have any subsidiaries, associates or joint ventures (and therefore AASB 10 and AASB 128 are not applicable) and prepares special purpose financial statements that apply material accounting policies that do not comply with all the recognition and measurement requirements in Australian Accounting Standards. Although the differences have not been quantified, they are extensive, and an indication of the differences are presented with the appropriate note disclosing the accounting policy.

HIJ Public Trading Trust, a for-profit entity, has prepared special purpose financial statements as, in the opinion of the Trustees, it is unlikely there are users of these financial statements who are not in a position to require the preparation of reports tailored to their information needs. Accordingly, these financial statements have been prepared to satisfy the Trustee’s reporting requirements under the Trust Deed, which requires the financial statements to comply with Australian Accounting Standards.

These special purpose financial statements do not comply with all the recognition and measurement requirements in Australian Accounting Standards.

[The material accounting policies adopted in the special purpose financial statements are set out in notes Q-Z and indicate how the recognition and measurement requirements in Australian Accounting Standards have not been complied with.

…

Note X: Impairment

…

Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is determined on an undiscounted basis as the higher of an asset’s fair value less costs of disposal and value in use. This does not comply with AASB 136 Impairment of Assets.

Note Y: Income Tax

…

The income tax expense or credit for the period is based on the tax payable on the current period’s taxable income based on the applicable income tax rate. This amount is not adjusted for changes in deferred tax assets and liabilities as HIJ Public Trading Trust does not recognise deferred tax balances. This does not comply with AASB 112 Income Taxes.

…]

1

AASB 117 was superseded by AASB 16 for periods beginning on or after 1 January 2019.

2

AASB 118 was superseded by AASB 15 for for-profit entities for periods beginning on or after 1 January 2018.