From 01 July 2021, AASB 2020-2 removed the ability for certain for-profit sector entities to prepare special purpose financial statements. Instead, they will have to prepare general purpose financial statements*
How this impacts small non-reporting entities
If you are not required to lodge financial statements with ASIC, the ATO, nothing will likely change for you.
However, you will now need to prepare GPFS if any third party requires you to prepare financial statements that comply with accounting standards. For instance:
- Company constitution
- Trust deed
- Partnership agreement
- Joint venture agreement
- Bank agreement (e.g. loan)
Where this can be an issue
Imagine that ABC is a small non-reporting entity (it does not lodge financial statements with ASIC). It applies for a loan with the bank after 1 July 2021. As part of its loan terms, the bank requires yearly financial statements that comply with accounting standards.
Prior to the new rules, ABC’s special purpose financial statements would have been sufficient. Under the new rules, ABC will now have to provide general purpose financial statements*.
What’s the difference?
Special purpose financial statements only need to comply with the most basic accounting concepts. General purpose financial statements* require compliance with all recognition, measurement and disclosure standards. This means a lot more time spent by the company itself, and a lot more compliance costs.
For ABC, it might need to redo its 2021 AND 2022 financial statements, at a similar level and cost as a large company. Knowing this in advance, ABC might have reconsidered taking on the loan.
That is, unless ABC can negotiate a loan on different terms with the bank!
You will not have to switch to general purpose* if the requirement to prepare financial statements predates 1 July 2021, and has not been amended since.
Where to go from here
We recommend that you keep an eye out for any requirements to prepare financial statements when entering any new agreement. If the clauses require these to be prepared in accordance with accounting standards, please get in touch with your Accru contact before signing the agreement, to ensure we discuss the implications
For more information, please contact your local Accru office.
*or simplified disclosure financial statements