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Entities that are accountable to the public are required to prepare the general purpose financial statements as demanded by IFRS. For an entity especially a small and medium enterprises to be publicly accountable, two conditions must be satisfied. The first condition requires that the company’s equity or debt instruments must be traded public in the stock exchange whether over the counter or foreign stock exchange (Deegan 2010).
An entity that is also in the process of trading its equity or debt in a public exchange is also required to make full disclosure by adhering to the IFRS. The second condition relates to entities that are in possession of assets in fiduciary to a large number of individuals or groups e.g. insurance companies, banks and even stock brokerage firms (Deegan 2010).
Seimagaz Pty Ltd is thus not an entity that must conform to the full disclosure requirements because the stocks are not traded in the stock market neither does it hold assets in fiduciary to a large group of individuals. This comes at a time that reforms have been introduced by the AASB. General purpose financial statements are described as statements that have been prepared by the application of the accounting standards and are available for the public to view or are prepared in consideration to the legal requirement for disclosure (Deegan 2010).
GPFSs must be intended to satisfy the requirements of the diverse users of the statements as it may be difficult to prepare different statements for all envisaged users. Entities that make such financial reports are thus mandated to avail their financial reports for public scrutiny or for the interested parties to view.
Special purpose financial statements are those prepared without adhering to full IFRS or adopts the RDR as accepted by the differential reporting standards (Deegan 2010). According to the AASB, privatively owned profit entities that do not require full disclosure of their information and the not for profit organization need not to use the full IFRS. This therefore led to the suggestion of introducing the reduced disclosure requirements for such entities.
It must however be noted that the use of reduced disclosure requirement does not mean there should be a conflict with the IFRS in matters like revenue recognition and use of the accounting principles. A reporting entity is one in which it is reasonable to expect users who will depend on the GPFSs in making their investment decisions (Deegan 2010). Seimagaz pty Ltd is thus a reporting entity as there are reasonable grounds to expect users who will depend on their GPFSs.
Before the reforms, there existed the differential reporting where different entities prepared their financial statements in varying ways. Some entities were required to conform to all the accounting standards while others were expected to use only some and not all of the standards. Moreover small companies were not needed to apply, the standards at all. These variations depended on the size of the entity, form of business or even the companies’ legal requirements.
The concern of the owners of Seimagaz Pty Ltd is based on reduced disclosure reforms proposed by AASB. The use of the reduced disclosure requirement by these organizations was not to be mandatory in preparation of the general purpose financial statements in Australia. This requirement provided a realistic manner of reducing the burden in preparation caused by adherence to full application of IFRS.
The disclosures would also be based on the IFRS for SMEs to determine the suitability of the standards. IFRS for SMEs is closely related to the reduced disclosure requirements. However, while SMEs that prepare GPFSs are accountable to the public and may prepare their statements by the application of the IFRS for SMEs, SMEs that are not publicly accountable will prepare their financial statements according to the RDR (Deegan 2010).
It must further be realized that both the IFRS for SMEs and the RDR were all aimed at reducing the burden of complying with the full IFRS by these entities. The trade off that was of importance to the AASB was that of cost and fairness concept. The reduced use of the IFRS was intended to reduce the unnecessary reporting to the users and to improve their understanding of the statements and not to impair the reliance and truthfulness of such reports (Deegan 2010).
Reduced disclosure requirement is a second tier requirement option that was proposed upon review of the full disclosure by entities that prepared GPFSs and were accountable to the public (Deegan 2010). The reduced disclosure requirement was meant for non profit organizations and for profit entities that did not need to be publicly accountable.
Due to the application of the reduced disclosure requirement, entities were able to substantially reduce the cost of preparing their financial statements. This was because of the reduction in the quantities of disclosure which was a portion of the full disclosure requirements.
Entities were also able to draw their reporting from a pool of knowledge. The audit and assurance cost reduced significantly as it depends on the bulkiness of the statements (Deegan 2010). Moreover, cost of preparation and that of audit and assurance are said to be correlated. Management of Seimagaz Ptsy Ltd should thus move on with their plans as cost and burden of preparation would be realized. The other positive effect of the use of the reduced disclosure requirements by the SMEs was the limited cost of transition.
Since there were no variations in the measurement and recognition of transactions, entities did not have to incur additional/ other cost in reconstructing their financial statements (Deegan 2010). Benefit also resulted from the additional information that would accrue to entities because both tier I requirements and RDR would be availed in one pronouncement. To the users, RDR has made understanding and analysis of information easier.
This is attributed to the fact that only pertinent and material information needed for decision making is given. The analysts are also able to make a quick comparison and contrast on information for various periods. Another benefit that accrues to the users is the unchanged comparability. The principles’ of recognition and measurements that are used in the full disclosure requirement is maintained if the RDR is used (Deegan 2010).
There will be thus no needed knowledge or skills in comprehending the GPFSs. There is as well no impact of RDR on the accounting profession. This is because no resources will be required in training the accountants and auditors on the new disclosures since the recognition and measurements are made constant.
True and fair value concept has become a major worry to the accountants and auditors with regard to the reduced disclosure requirement (Deegan 2010). This concept has no exact definition and is normally left to the subjectivity of the particular auditor. Financial statements are said to reflect a true and fair view if their preparation is compliant to the generally accepted accounting standards.
In the GPFSs prepared with regard to reduced disclosure requirements, full IFRS is not applied therefore posing the threat to this concept (Deegan 2010). In addition, the users of financial statements of these non public accountable entities also demand a true picture of the financial statements. It is on the above background that AASB requires that the RDR must not by any means impair the concept of true and fair view of the financial statements.
According to these standards, true and fair view is considered to be complied with when the statements are in conformity to the relevant legislation while the reduced disclosures are made to limit the complexities. Others have also argued that with the reduced disclosure requirements, non professionals are able to get only material information thereby encouraging the true and fair view concept satisfied (Deegan 2010).
Seimagaz Pty Ltd must therefore ensure that the transition from the full disclosure to RDR is not aimed at breaching these requirements. In as much as the company has few shareholders and a small proportion of debt finance, the potential investors, customers, and the government agencies will still require a true and fair view statements (Deegan 2010). This has therefore resulted in the return of the true and fair view override.
In conclusion, the views of the owners of Seimagaz Pty Ltd are appropriate and timely with the adoption of the reforms that are proposed with AASB. The adoption of the reduced disclosure requirement will enable the company significantly reduce the cost of preparation and auditing while at the same time making easy the understanding of the financial statements to the users.
Mae Tan’s proposal and new knowledge has thus made the company realize new reforms that would improve the financial reporting to the stakeholder. The accountant should as well continue monitoring closely the changes in the reforms and new AASB proposal that are likely to make simpler the preparation of the financial statements.
Reference
Deegan, C 2010, Australian financial accounting, 6th edn, McGraw Hill
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