What do the changes to Australian financial reporting mean for SMEs?

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The overhaul of the Australian Financial Reporting Framework involves a new level 2 reporting framework that includes a simplified reporting standard. Does this new structure meet the needs of small and medium-sized enterprises and their stakeholders?

In one look

  • The financial report – and the financial statements it contains – are considered the most important information in an annual report.
  • There is no significant difference in the usefulness of information from financial statements prepared using RDR (Reduced Disclosure Requirements) or IFRS for SMEs.
  • The cost equation when preparing financial statements using IFRS for SMEs versus RDR or its replacement should be further explored.

By Zilla Efrat

The annual reports of unlisted companies are not just a compliance exercise, but an important decision-making tool for a variety of stakeholders. It is the discovery of Annual reports of Australian unlisted for-profit entities, a study commissioned by CPA Australia and run by the Swinburne University of Technology School of Business.

The research also compared the current Level 2 reduced disclosure regime (RDR) against International Financial Reporting Standard for SMEs (IFRS for SMEs), noting that there was no significant difference in the usefulness of the information provided in the financial statements prepared using either of these frameworks.

This finding is timely, given that the IFRS for SMEs is under review by the International Accounting Standards Board (IASB) and that the RDR framework currently used in Australia will be replaced by the Simplified Disclosures Standard (AASB 1060) as of July 1, 2021.

“Based on our comparative case studies, the Australian Accounting Standards Council (AASB) The decision not to introduce the IFRS standard accounting framework for SMEs is justified – for large enterprise owners, ”says Dr Janine Muir CPA, Lecturer in Accounting at the University of Business School of technology from Swinburne and one of the researchers involved in the study.

RDR vs IFRS for SMEs

Although Australia has decided not to adopt IFRS for SMEs, Ram Subramanian, senior director of reporting policy at CPA Australia, said Singapore, Hong Kong and Malaysia have all adopted the standard, as have about 83 other countries.

Initially, Subramanian was somewhat surprised by the results of the research on the comparison between the two frameworks. “Then I thought about it. Ultimately, users don’t necessarily see the frameworks themselves. They only see the end product, the financial statements, ”he says.

“If the frameworks are doing their job well, then either one can be used. “This tells me that both frameworks serve their purpose from a user needs perspective.”

While the benefits are the same from a user perspective, Subramanian believes that policymakers and standard setters should determine which framework is most cost effective for SMEs to apply.

“At this point, we don’t know if using another frame might be cheaper in the long run. But, as they say, a bird in the hand is worth two in the bush. There is a point of view that it works, and we should just continue with what we’re used to.

“The evidence from our research clearly indicates that the financial report is the most important part of the annual report when making important decisions.” Dr Janine Muir CPA, Swinburne University of Technology

However, Subramanian notes that the RDR framework is based on the full recognition and measurement requirements of Australian accounting standards based on IFRS.

“IFRS for SMEs, as a stand-alone document, is essentially a filtered version of the 3,000 odd-numbered IFRSs with reductions not only in disclosures but also in recognition and measurement requirements. That’s 250 odd pages, ”he says.

“So applying a simpler set of requirements should, in theory, be easier. This is why some people argue that over time IFRS for SMEs will meet the needs of the market better than the broader RDR framework currently applied and its replacement based on the simplified disclosure standard. “

CPA Australia has expressed support for IFRS for SMEs in the past. “We haven’t reiterated this lately, simply because the AASB ruled out IFRS for SMEs as an option, but we still believe it should be considered in the future,” Subramanian says.

CPA Australia Podcast:
What readers want to know from annual reports. Listen now.

The value of annual reports

“Some commentators view the reporting requirement required of certain unlisted entities as nothing more than a compliance exercise,” says Muir.

“They doubt the usefulness of these reports, including the financial report to stakeholders, including shareholders and debt providers. But the evidence from our research clearly indicates that the financial report is the most important part of the annual report when making important decisions.

“Our research shows that annual reports from unlisted companies are used to make decisions after they are produced – evidence that will be welcomed by members of CPA Australia as yet another affirmation of the importance of the work they do.”

In fact, the study found that the financial report is considered the most important information in the annual report, especially the financial statements.

These, for the current and comparative years, as well as the notes to the financial statements, are considered more important for the most important decision of the users than the declaration of the directors.

When making their most important decision, the top three pieces of information used in the annual report are the financial report (40%), the directors’ report (29%) and the auditor’s report (28%).

Information from outside the annual report – for example, that on the company’s website – is considered only moderately important by survey respondents.

According to the study, analysis and making recommendations are the most common reasons for using the annual report. This is followed by making equity investment decisions and monitoring or evaluating the performance of those responsible for the governance or management of the entity and regulatory compliance decisions.

Where to go from here

The report recommends that, as a matter of principle, regulators and standard-setters better connect with users of annual reports to understand their information needs as a prerequisite for determining reporting requirements for unlisted for-profit entities.

It also recommends that the IASB broaden the scope of its Disclosure Initiative – Subsidiaries project to all SMEs, and also focus on the interaction of this project and the project involving the full revision of the IFRS for SMEs.

“We believe the report could provide the IASB with significant research results, which it can use to develop the IFRS for SMEs standard,” says Subramanian.

CPA Australia Resource:
Annual reports of Australian unlisted for-profit entities

A call for more detailed reports

Jeffrey Luckins FCPA, Director of Audit and Insurance at the Accounting Firm William buck, does not promote RDR or IFRS for SME-based executives.

“The difficulty with introducing IFRS for SMEs is that it creates a whole new framework for financial reporting and will generate confusion among readers of these financial reports as to the extent to which measurement standards have been implemented. and the type of disclosure applicable, ”he said. .

“I think it will actually add levels of complexity and give you less information than the Level 2 General Purpose Financial Report.

“It could be good, depending on the entity. But if stakeholders rely on the information in the financial report, it tells you that general purpose level 2 financial reports are in fact required, not a watered-down version.

“The whole point of special purpose financial reporting is that, if you are a key stakeholder, you actually have the power, authority and ability to directly obtain the information you need, which will not appear. not in the financial report anyway. “

Luckins says special purpose financial reports are normally prepared with the aim of minimizing required disclosures and therefore tend to be of marginal value to stakeholders.

“If you are an unlisted for-profit entity that wants to raise your profile, attract investments, key relationships and new clients, the ideal approach would be to produce a high quality general financial report and ask the auditor publish an improved audit report. which addresses key audit questions for a higher level of assurance among report readers. Indeed, the non-listed for-profit company now has a high quality financial report to increase its credibility and potential for success in all its endeavors.

Luckins asks for more detailed financial reports, not short reports.

“If you’re a pre-IPO company, it’s a bit like an employee who wants to be promoted. The best way to get promoted is to do the job of the person above you in the role you want to be promoted to. Then people can see that you are worthy of promotion through your demonstrated actions and abilities.

“Pre-IPO companies should act as if they were already listed to demonstrate to investors and others that they have operational, governance and reporting functions in place. The best way for them to achieve this is to set up an audit and risk committee that includes independent members, publish a general purpose financial report and request an improved audit report from their auditor ”, he said.

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