Executive Summary
KiMy Ltd a software service provider which is required to transition its financial reporting system. The basis of this report is to provide and enhance knowledge toward the new adaptation of accounting standard, by understanding its concept, differentiation, identification, analysis, challenges and solution.
Introduction
Australia was the only country in decades which allowed the entities to prepare to self-assess the required financial reporting legislation (Carey, Potter & Tanewski, 2014). The objective here is to understand the recently revised conceptual framework adopted by the Australian accounting standard boards (AASB). KiMy Ltd is a large family-owned software service provider, like many un-listed companies KiMy was also lodging its annual reports to ASIC by preparing and producing special purpose financial statements(SPFS), with SPFS being obsolete, it is now a requirement following the general purpose financial statements (GPFS). This report will create an understanding for the board of directors to effectively implement and transition into GPFS, also define and create an understanding of the history and comparisons, highlighting the requirements, analysis from stakeholders point an agency point of view, challenges and their possible solutions.
The difference between the SAC1 and RCF reporting entity definition:
The Statement of Accounting Concepts 1 (SAC1) was introduced years back, where the definition of the reporting entity was given as an entity which is required to prepare and produce GPFS, whereas all other non-reporting entities can choose to prepare and produce SPFS which is far less complex and is shorter compared to GPFS (Public sector accounting standards board, 1990). The International Accounting Standard Board (IASB) after revising the conceptual framework for financial reporting (RCF) where they defined reporting entity as an entity required, or chooses, to prepare financial statements, which cannot necessarily be a legal entity, it could be a portion of an entity or comprising of more than one entity. The boundary is set as to which economic activities are to be included in GPFS, determining the boundary can be achieved by the information required of the users of the entity’s financial statements (KPMG, 2018).
The distinction in the current requirements for GPFS Tier 1 and GPFS Tier 2 under the current reporting framework:
AASB introduced AASB 1053 in June 2010 to set the application of Tiers of different categories of entities preparing and producing GPFS. The differential reporting framework has two tiers, Tier 1: is incorporated with the International Financial Reporting Standards (IFRS) and are included with the requirements to specific Australian entities, whereas Tier 2: an entity can be defined as a ‘reporting entity’ in SAC1 that does not have public accountability. It has all the measurements, recognition and presentation of Tier 1 but with a reduced disclosure requirement. Both tiers are required to prepare their financial reports in compliance with Part2M.3 of the Corporations Act.
The differences between the GPFS Reduced Disclosure Regime (RDR) and the proposed GPFS ‐ Specified Disclosure Requirements (SDR) and the potential impact of each of these differences on shareholders’ ability to make investment decisions about the company:
The current GPFS RDR which is the existing Tier 2, under Application of Tiers of Australian Accounting Standards (AASB 1053) rather than IFRS for SMEs, it has the same presentation, measurement, recognition and requirements as Tier 1 expects for the third statement of financial position under tier 1. RDR complies Australian accounting standards with reduced disclosure from each for the accounting standards entities apply for ‘user-needs’ and ‘cost-benefit’ principles which underlie the disclosure obligation in the IASB’s IFRS for SMEs Standard. The proposed SDR is a new Tier 2 following the same full recognition and measurement of the Australian accounting standard with some specified disclosures for particular accounting standards. The proposed SDR also has particulars for full disclosure in Presentation of financial statements, cash flow statements, accounting policies change in accounting estimates and errors, interpretation of standards, a related party, and impairment of assets, revenue and income taxes. Full disclosure of financial statements will reflect the evaluation of performance for the investor, cash flow statements can reflect the cash generation, the impairment of assets can show the company potential loss due to the lower fair value of assets, the investors may look upon related party as an important factor to examine any changes in the financial results over time, revenue and taxes can be the subject to estimates and judgments for an investor and disclosing them can have a huge impact on investment decision (AASB, 2018).
Whether KiMy will be required to prepare GPFS Tier 1 under RCF:
With the issue of revised RCF, the large corporations are now obligated to lodge GPFS with Australian Securities and Investments Commission (ASIC), with no option left to prepare an SPFS. However, in the case of KiMy Ltd is not obligated to disclose all of their financial due to not being listed, even though the corporation is tied up with the government project. The AASB is yet to determine whether unlisted entities which operate crowd-sourced funding or over the counter market are eligible for Tier 1 or not. Under the revision, all corporations which were lodging SPFS are now obligated to lodge GPFS but under Tier 2 SDR. The new Tier 2 SDR framework will replace the current Tier 2 RDR framework (AASB, 2018).
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GPFS Tier 1 would provide better quality information for decision making for KiMy’s shareholders than GPFS Tier 2:
KiMy Ltd is a non-listed company whose majority shareholders consists of 5 board members, the family-owned business is a software service provider to the Victorian government but also has some other large customers. With a less number of majority shareholders, it is not essential and nor an obligation to provide GPFS with full disclosure. The closed family owned business allowed KiMy to share its financials with its shareholders, transitioning from SPFS to preparing a GPFS will be an addition to the company as more detailed financials will be prepared. There are many risks and benefits associated with both the Tiers. Firstly reviewing GPFS in Tier 1 for KiMy will that there may be opportunities for potential new business might learn about the entity and its business activities, the fully disclosed GPFS will allow that additional information for stakeholders to develop better quality decision. KiMy can also use this Tier 1 GPFS for using it as a marketing document to demonstrate and highlight their activities towards social responsibility or standing with a community to make a change, this information can enhance the relationship with the shareholders. Shareholders can accurately forecast using all the undisclosed financial data converting into value creation for the shareholder. Also recently, the hype in the media towards a delay in the development and implementation of the ticketing system, providing the undisclosed financials can provide a clearer picture for Victorians about the insights of the company. A Voluntary approach in adopting Tier 1 can have a strong positive impact that a company has been complying with all the standards in a lawful manner. Choosing Tier 1 GPFS voluntarily can have its risks that full disclosure can provide crucial information to its competitors and can provide them with a competitive advantage. The cost of disclosure is higher due to the transparent nature of the business, shareholders expect more from a company reviewing its financials. The GPFS Tier 2 allows the company to be in full disclosure in some of the required accounting standards for a stakeholder to review, the benefits of Tier 2 can be provided only the required information to stakeholders to make financial decisions while holding on to confidential information which can be misused by competitors to gain competitive advantage. The recent media hype and partially disclosed financials can deliver a strong message to the Victorians that KiMy is not only dealing with the government also with other clients but providing limited necessary information which can result into no controversy. The GPFS Tier 2 has some risks involved due to non-disclosure it can also create a negative impact on the minority shareholders of the company.
GPFS Tier 1 would provide better quality information for decision making for the Victorian Government than the current SPFS that is issued.
KiMY is not obligated to disclose all the financials, the nature of the business and the service that they provide to the government makes every Victorian a part of a stakeholder in KiMY, which can result into a negative perception for the organization for the general stakeholder. If KiMy voluntarily chooses to lodge its GPFS in Tier 1, it will reflect a strong image for the company in each stakeholder which is not possible in Tier 2. The Victorian Government can analyze the financials of the company and lead to better decision making on the business activities to maintain and update the ticketing system the disclosed financials in Tier 2 will not allow analyzing financials in a deep manner. The visible performance indications, liquidity, and the capabilities of the company can all be known from this disclosure. Improvement in information can be essential for KiMy, much financial information can be used by the government and convert it into information which would be beneficial for the customers. The government would like to be associated with a strong financial organization, less information means less certainty for its stakeholders. It can increase the trust and business relationship for both the Victorian government and KiMy. The current SPFS system allowed KiMy to self-assess be under the non-reporting entity. SPFS did not meet the criteria to make any financial decisions for a standpoint of a government level project. The = similar comparability of financial statements can have a better analysis.
Identifies the challenges that KiMy will face when it is required to prepare GFRS Tier 1 following the AASB’s adoption of the RCF and provides suggestions on how the company could meet the challenges.
Preparing GPFS is the application of consolidation and equity accounting. The first and foremost challenge will be to identify who their key stakeholders are, this will result into understanding what information is important and how it should be presented and what material is important and how it should be formatted and visualize, this challenge requires a continuous and a formal process to identify and understand clearly the key stakeholders. The high cost is associated with preparing GFRS, as the elimination of SPFS; the company has to invest in the preparation of GFRS this high cost is to adapt the GPFS culture in the system, enhancing knowledge of all the employees and regulatory cost increasing with additional audits incurring increasing the cost. There is a lack of measurement, knowledge, and expertise of the accounting standard which would require the company to train its employee or hire focused skilled workers company can apply all the requirements of AASB 1. The adoption by AASB is particularly new and will require modifications and amendments which will result in a more complex accounting system and would require expert consultation to be in compliance with the standard. The organization has to change its managerial system due to transparency; the company will now be bound to run its business activities according to the compliance. Lastly, the shareholders who reviewed the SPFS will now be reviewing GFRS which will increase awareness and the added information will allow the shareholders to raise concerns over knowledge of debt, asset devaluation or irregular losses which were not previously reported. The shareholders will be provided information with a comparison to SPFS to enhance their knowledge and present the information in a way that it minimizes the negative aspects of the company.
Conclusion
The benefits of adopting Tier 1 surpass the positives of Tier 2, due to the sensitive nature of the business and the clientele it is essential that the company voluntarily adopts GFRS Tier 1 system. It is essential for KiMy to hire experts in the transition phase to enhance the measurement, knowledge, and presentation, the adoption of Tier 1 will reflect transparency and attract new shareholders/investors to the company.
References:
Carey, P., Potter, B. and Tanewski, G., 2014. Application of the Reporting Entity Concept in Australia. Abacus, 50(4), pp.460-489.
Public sector accounting standards board. 1990. Definition of the Reporting Entity, accessed 27 March 2019, <https://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf>
KPMG, 2018. 18RU-001 The new Conceptual Framework – is special purpose going? , accessed 27 March 2019, < https://home.kpmg/au/en/home/insights/2018/05/18ru-001-applying-iasb-conceptual-framework-australia.html>
AASB, 2018. Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems, accessed 27 March 2019, <https://www.aasb.gov.au/admin/file/content105/c9/ITC39_05_18.pdf>
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