Financial reporting has always been debatable topic in Australia and there have been many changes in the disclosure requirement. Australian Accounting Standards Board (AASB) has issued the differential reporting for the Tier 2 accounting entities and this has been issued under AASB 1053 “Application of Tiers of Australian Accounting Standards” (Australian Accounting Standards Board, 2017).
In this report there will be discussion of differential reporting system in Australia and its impact on the two main qualitative characteristics of the conceptual framework issued by the IAB. This report also points out the cost benefit implementing the reduced disclosure requirement for the Tier 2 entities.
Differential Reporting System in Australia
The AASB (Australian Accounting Standards Board) owns the responsibility of developing and maintaining the financial reporting standards that its private and public entities need to follow for financial reporting. The differential reporting system in Australia is a notion that restricts some entities to follow the particular requirements of accounting standards. There is reduced disclosure adopted for some entities by AASB for avoiding the unnecessary presentation of financial information and increasing the relevancy of required disclosures. The system in Australia is largely based on the reporting entity concept and is largely applicable for small and medium-sized enterprises (SME’s) (AASB Standard 1053, 2010).
The reporting entity concept classifies ‘reporting entities’ as business enterprises that are required to develop complete GAAP based financial reports. On the other hand, non-reporting entities are required to develop simple and concise financial reports based on the nature of their business operations. The differential reporting regime of Australia has stated that non-reporting entities should develop special purpose financial statements that do not require compliance with AASB standards. The AASB has revised financial reporting requirements for SME’s that are prepared and developed under the ASIC Corporations Act 2001. The differential reporting system particularly aims at developing a separate reporting framework and guidelines for SME’s to develop their general purpose financial statements. The AASB differential reporting system consists of the following two stages:
- Stage 1: It involves the development of reduce disclosure requirements for small and medium sized companies
- Stage 2: It involves developing a revised differential reporting framework based on the concept of reporting entity.
The main objective behind the development of this system is to simplify the disclosure, measurement and recognition requirements for SME’s for reducing the burden and consequent costs for them in developing financial reports (Chand and Cummings, 2008).
Impacts due to use of Reduced Disclosure Requirements on the qualitative characteristics of the financial information represented by the Tier 2 entities in their financial statements
IFRS provides the conceptual framework that every entity has to follow in their disclosure requirement of the financial information in the annual report. The conceptual framework provides most important qualitative characteristics of the financial information that has been adhered by the entities while making the financial disclosure in their reports. The fundamental qualitative characteristics of the financial have been divided into two main types.
- Faithful Representation
The qualitative characteristics of the financial help the users of the financial report to easily understand the annual report and make the decisions accordingly. Financial information can only be useful if it is relevant and represented with true faith in timely manner. So to check the impact of the reduced disclosure requirement for the Tier 2 entities on the qualitative characteristics of financial information, let discuss the characteristics in detail and make comparison with the disclosure changes made in the reduced disclosure:
Fundamental qualitative characteristics
- Relevance: Relevance financial information refers to such information that is user oriented and has capability to change the decisions of the users. As per the conceptual framework relevant financial information can make changes to the decision if it is predictive value, confirmative value or both. As per the reduced disclosure requirement issued by the AASB, the financial information must be concise to such extent that the user required data has been incorporated and no compromise has been made in such respect. The reduced disclosure for SME’s has resulted in minimizing the financial information presented in the financial items. The reduced disclosure requires that following items must pre presented as minimum in statement of financial position that are, assets, equity, liabilities. The income statement for tier 2 entities should present minimum information about the revenue, finance costs and tax expense. Also, the tier 2 entities require a separate disclosure of items of income and expense such as write-down of inventories, restricting costs, litigation statements and others. However, the disclosure must be in the statement of comprehensive income or in the notes to financial statements sections of the annual report of an entity. The presentation of extraordinary items is not permitted under the financial statements of the tier 2 entities. The management of tier 2 entities have the complete discretion in selection of the accounting policies adopted for the preparation of the financial statements. However, the complete disclosure about the adopted accounting policy must be presented in the notes to financial statement section (Australian Accounting Standards Board, 2017).
- Faithful representation: In order present true and fair picture of the financial performance of the entity it is important that such data must be represented faithfully the phenomena it purports to represent. Reducing the disclosure requirement does not means that standard has given power to misrepresent the financial data. The management of tier 2 entities can use judgment in development and application of accounting policies to meet the qualitative characteristic of faithful representation. The tier 2 entities are required to disclosure the nature and carrying amount of the assets and liabilities for which judgments, estimates and assumptions possess a risk of causing material adjustment to the carrying amounts within the next financial period. The respective change in the accounting policies are accounted as per the transitions provisions of the amendment during financial reporting of SME’s for ensuring faithful presentation of the financial information. The management through its own judgment develops and implements the accounting policies as per their nature of business operations but are not obliged to consider full IFRS (Australian Accounting Standards Board, 2017).
The cost of developing the general purpose financial statements was generally higher for some entities than the benefits obtained by them to the users. This is because the conceptual framework was very burdensome for small and medium-sized companies who have small scale business operations. The adopted RDR framework has the objective that its benefits should outweigh the costs. The RDR is providing the benefit of improving the relevancy of financial reporting if SME’s through reducing the disclosure requirements and removing the unnecessary disclosures on the part of some entities. Thus, it helps in achieving a good balance between the efforts of the developer and the needs of end-users (Jones and Higgins, 2006). Also, the RDR framework has helped in simplifying the reporting structure of small entities thus improving the transparency and comparability of the financial information disclosed by them in the special purpose financial reports. The reduce disclosure around the financial instruments ensures that the financial reports developed are not too detailed and seeks interest from the end-users (Faux and Wise, 2004).
Through analyzing all the above information about the reduced disclosure requirement it can be said that there is no big impact on the qualitative characteristics of the financial information and also it is cost beneficial to use this approach.
AASB Standard 1053. 2010. [Online]. Available from: [Accessed on: 28 August 2017].
Australian Accounting Standards Board. 2017. Improving reduced disclosure requirements for financial reports. [Online]. Available from: [Accessed on: 28 August 2017].
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