Consistency and transparency at what cost?

- February 2021
Person sitting on chair holding iPad

Transparency in financial reporting is a good thing, but sometimes it comes at a cost.

Increased transparency and cost are likely with the introduction of AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose Financial Statements for Certain For-Profit Private Sector Entities (AASB 2020-2). The new standard will remove the ability of certain For-Profit companies to self-assess their financial reporting requirements and produce a special purpose financial report (SPFR). Instead, they may need to produce a general purpose financial report (GPFR) and disclose more information in the notes to the financial statements than currently required.

The impact of the new legislation will be felt widely. Companies lodging financial statements under the Corporations Act 2001, principally large proprietary companies, unlisted public companies other than small companies limited by guarantee, small proprietary companies controlled by a foreign company, financial services licensees and small proprietary companies with crowd-sourced funding will all be affected. For-Profit companies with other legislative requirements requiring compliance with Australian Accounting Standards (AAS) will also be affected with this new standard. There will be a significant number of new disclosures – for example, those concerning related party transactions, taxation and financial instruments.

The change is designed to improve the consistency, comparability, transparency and enforceability of publicly lodged financial statements. Generally more disclosure leads to better informed financial decisions, and that’s a good thing. Or is it? The additional disclosures are only useful if users of financial statements understand the information being disclosed. Gaining that understanding will come at a cost.

For example, one is given blood test results from a pathologist. There are lots of numbers – some within the normal range and others above or below normal. What do they all mean? Most people have no idea. So, we pay the family GP to explain the results in simple terms and advise on a course of action.

Likewise, many users of financial statements will not truly understand the new disclosures, so will have to rely on their accountants to decipher the meaning and advise what actions to take. Great for auditors and accountants but not so good for the entities and users of its financial statements.

Transparency is a pro from this new legislation. Increased compliance costs is one of the cons. Nevertheless, the new standard will be mandatory for certain For-Profit entities for the reporting period commencing 1 July 2021.

If you are concerned and want to know how this will affect you, we can help you understand what is required, get ready to comply with the new standard and possibly help reduce the cost of compliance.

Kay Yang Loke is an accountant and auditor with over 25 years’ experience providing external and internal audits and consultancy to private and government sectors in Australia and overseas. He has extensive knowledge of the Australian Accounting Standards, Australian Auditing Standards and various Australian reporting frameworks.

Photo by Adeolu Eletu on Unsplash