CPA Australia, Australia’s largest professional accounting body, is opposed to the Australian Accounting Standards Board’s (AASB) proposed removal of the reporting entity concept.

The AASB’s proposals are designed to achieve consistency with the International Accounting Standards Board (IASB). CPA Australia notes, however, that subsequent IASB decisions have superseded the thrust of the AASB’s proposals.

The AASB’s proposals would mean that the application of accounting standards would no longer depend on whether entities are reporting entities.

According to CPA Australia’s CEO Geoff Rankin, the reporting entity concept plays an important role in Australia and should be retained.

‘The IASB has rightly decided not to extend the definition of general purpose financial statements to include financial statements lodged with ASIC. By going ahead with its proposals, the AASB will in fact be inconsistent with the IASB’s position.

‘Throwing out the reporting entity concept would impose additional costs on entities, without corresponding benefits,’ said Mr Rankin.

Mr Rankin also called on the AASB to improve the reporting entity concept, to make it more robust. ‘Our members have told us about instances where large proprietary companies have been designated non-reporting when they are in fact reporting entities.

‘The reporting entity concept needs to be tightened to guard against errors of judgement or deliberate misclassification,’ said Mr Rankin.

CPA Australia has suggested that the AASB consider improvements to the reporting entity concept such as:

• a statement by the directors specifying their reasons for classifying the entity as a non-reporting entity; and/or
• requiring a ‘non-reporting entity’ statement by shareholders

CPA Australia has also encouraged the AASB to expand the definition of publicly accountable so that it can be applied to reporting entities of the not-for-profit and public sectors.

‘The AASB’s current approach of relying on quantitative thresholds to determine which reporting entities are publicly accountable is inadequate. The considerable differences in the economic size of public sector jurisdictions is just one example of why this approach doesn’t work,’ said Mr Rankin.

CPA Australia believes that the reporting entity concept will work well with the IASB’s proposed IFRS for small and medium sized entities (SME) standard.

‘A reporting entity without public accountability will have the option to use the IFRS for SME standard. This will result in more appropriate information for users of these financial reports than if the entity used standards that are capital markets focused,’ said Mr Rankin.

CPA Australia supports reporting entities without public accountability having the option to use the IFRS for SME standard as the basis for their general purpose financial statements.

Currently, accounting standards require all Australian reporting entities to prepare general purpose financial statements which are based on the full set of accounting standards. In contrast, the financial reporting of non-reporting entities is special purpose - with only a few externally imposed requirements.

CPA Australia opposed the IASB’s previous proposals to extend the definition of general purpose financial statements to include financial statements lodged with ASIC.

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