5. Compliance with Accounting Standards
5.2 Application of AASB 1053 Application of Tiers of Australian
AASB 1053 Application of Tiers of Australian Accounting Standards establishes for general purpose financial statements, a differential financial reporting framework, which consists of two tiers of reporting requirements:
• Tier 1: Australian Accounting Standards (full IFRS classification, recognition, measurement and disclosure)
• Tier 2: Australian Accounting Standards – Reduced disclosure requirements (full classification, recognition and measurement but reduced disclosure). The reduced disclosure is highlighted in each standard.
The standards apply to annual reporting periods beginning on or after 1 July 2013.
Each accounting standard continues to have its own application paragraphs, indicating they are only applicable to reporting entities, or those holding themselves out as reporting entities. Accordingly, those entities preparing special purpose financial statements cannot use Tier 2.
5.2.1 Tier 1
The following entities must apply Tier 1 requirements:
• for-profit entities in the private sector that have public accountability (see section 5.2.1.1)
• the Australian Government and State, Territory and Local Governments.
5.2.1.1 Public accountability
A for-profit private sector entity has public accountability if:
• its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market, or
• it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.
The AASB has deemed that the following have public accountability:
• disclosing entities (see section 2.3.1), even if their debt or equity instruments are not traded in a public market or they are not in the process of issuing such instruments for trading in a public market
• cooperatives that issue debentures
• registered managed investment schemes
• superannuation plans registered with APRA, other than small APRA funds as defined by APRA Superannuation Circular No. III.E.1 Regulation of Small APRA Funds, December 2000
• approved deposit taking institutions (‘ADIs’).
The following should also be considered:
• family unit trusts and discretionary trusts are not likely to have public accountability unless the beneficiaries are a ‘broad group of outsiders’
• if the fiduciary responsibilities are for reasons incidental to a primary business (for example, real estate and travel agents requiring deposits) they will not have public accountability
• captive insurers are not likely to have public accountability unless they provide insurance coverage to parties outside the group
• an entity holding an Australian Financial Services Licence (‘AFSL’) does not automatically have public accountability
• responsible entities/trustees generally do not have public accountability as a result of the assets they hold on trust, the trust or scheme itself is more likely to have public accountability.
It should be noted that the ‘reporting entity’ concept under SAC 1 is not entirely synonymous with the
‘publicly accountable’ concept under AASB 1053. Therefore, even if entities were correctly assessed as non-reporting entities for SAC 1 purposes, they could be regarded as being publicly accountable for AASB 1053 purposes. Therefore, it is important to assess an entity’s status under AASB 1053. If an entity is regarded as being ‘publicly accountable’ under AASB 1053, then, that entity will need to prepare general purpose financial statements under Tier 1, i.e. comply with all IFRSs as adopted in Australia.
5.2.2 Tier 2
The following entities may apply either Tier 1 or Tier 2:
• for-profit private sector entities that do not have public accountability (for example, large proprietary companies)
• all not-for-profit private sector entities
• public sector entities other than the Australian Government and State, Territory and Local Governments.
However, other regulators might require the application of Tier 1 to the entities they regulate.
5.2.2.1 Impact of applying Tier 2
Entities applying Tier 2 reporting requirements are not able to state compliance with IFRS.
Entities considering moving to Tier 2 that are considering listing in the next few years should be aware that the transition requirements to return to Tier 1 are particularly onerous, as they require a full re- application of AASB 1 First Time Adoption of Australian Accounting Standards. These transition requirements are discussed in more detail in section 5.2.3.
Furthermore, entities previously preparing special purpose financial statements that did not previously comply with all the classification, recognition and measurement requirements of Australian Accounting Standards, will have to apply AASB 1 on transition to Tier 2.
However, entities are likely to benefit significantly from the reduced disclosures of Tier 2.
5.2.3 Transitional provisions (Moving between Tiers or from special purpose to general purpose) Any entity moving from Tier 1 to Tier 2 need only state they have moved.
If a for-profit entity moves from Tier 2 to Tier 1, AASB 1 must be applied, in full, on transition. This ensures the entity is capable of claiming IFRS compliance.
As not-for-profit entities are able to claim compliance with IFRS in very limited circumstances, they may not be required to apply AASB 1 when moving from Tier 2 to Tier 1. Rather they may need to just increase their disclosures, see 5.2.3.1.
5.2.3.1 Moving between Tiers
The following decision tree sets out the issues with moving between Tiers. Having to reapply AASB 1 may result in different amounts being recorded on transition.
5.2.3.2 Changing status from non-reporting entity
Section 5.3.2.5 sets out the requirements on changing status from non-reporting entity to reporting entity.
5.2.4 A non-reporting entity considering changing to Tier 2
Non-reporting entities that want to start preparing general purpose financial statements using Tier 2 (Reduced disclosure regime) may do so. If they are already applying the full classification, recognition and measurement requirements of AASBs, including consolidating subsidiaries, the transitional
requirements only change their level of disclosure to that required for Tier 2 (Reduced disclosure regime), i.e. they do not have to apply AASB 1.
However, non-reporting entities that were previously not applying all the classification, recognition and measurement requirements of AASBs, including consolidating subsidiaries, are unlikely to want to consider using Tier 2 (Reduced disclosure regime) as AASB 1 would have to be applied in full.
Entity moving to
Tier 2 AASB 1 not
applicable
Not-for-profit entity moving to Tier 1 Is entity a for-
profit Tier 2 entity moving
to Tier 1?
Is entity Tier 1?
Does entity want to
comply with IFRS?
AASB 1 not applicable
Apply AASB 1
No
No
No Yes
Yes
Yes