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Q&As on SMEs
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Foreign owned subsidiaries and reporting entity 
as reported in ANT20/2008 
 
Q: Is a small proprietary company whose ultimate controlling entity is an overseas listed company still considered to be a reporting entity? I know this was previously a requirement of APS 1 but understood it had changed? 
 
A: To determine whether an entity is a reporting entity you need to refer to the definition; a reporting entity is ‘an entity in respect of which it is reasonable to expect the existence of users who rely on the entity's general purpose financial report for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries. This definition is in Appendix A of AASB 3 Business Combinations and in the AASB's glossary of defined terms, and came into effect with the new suite of AASB international accounting standards, operative from 1 January 2005.  
 
Under this definition the number of users dependent on general purpose financial reports for a small proprietary company is likely to be limited, so reporting entity classification may not be appropriate. However, as in all cases involving the application of reporting entity professional judgement is required in the circumstances.  
 
Paragraph 15 of APS 1 Conformity with Accounting standards and UIG consensus views refers the reader to SAC 1 Definition of the Reporting Entity for the determination of a reporting entity. SAC 1 provides additional interpretative guidance to support the definition of reporting entity found in the accounting standards. However while paragraph 17 of APS 1 identifies an Australian company being a subsidiary of a foreign listed company as a reporting entity it is considered that this is no longer an automatic requirement because: 

  • This paragraph was based on a AASB standard that has changed since APS 1 was issued, and
    •  
  • Paragraphs 16, 17 and 18 of APS 1 are guidance only on the interpretation of the standards at the time APS 1 was issued.
APS 1 has now been redrafted and replaced by APES 205 Conformity with Accounting Standards issued by the Accounting Professional and Ethical Standards Board (APESB) and operative from 1 July 2008.  
 
In the period before APES 205 becomes effective, the status of those subsidiaries of overseas listed entities needs to be assessed by reference to SAC 1 on a case by case basis and therefore members are encouraged to carefully consider the relevant circumstances and document their decision. 
 
 
IFRS and SMEs 
as reported in ANT02/2007 
 
Q: I am concerned that the adoption of AIFRS has imposed a heavy and expensive reporting burden on many of my smaller reporting entity clients. Is there anything that can be done to address this problem? 
 
A: The international Accounting Standards Board (IASB) is currently engaged in a project to review the application of IFRS standards to smaller reporting entities which are not publicly accountable, i.e do not raise funds from the public, take bank deposits, etc. A staff draft of the IASB's SME project has recently been published on the IASB website at http://www.iasb.org/News/Press+Releases/Small+and+Medium-sized+Entities.htm, so that interested parties can keep up to date with the project. A proper exposure draft will be released for public comment later in 2007. 
 
The AASB and FRC are also considering how such a standard would fit into the financial reporting framework in Australia. Members are encouraged to keep an eye on this project and comment on the ED when it is released to both the AASB and IASB as it will be instrumental in determining the future of the differential reporting concept in Australia. While the IASB's current definition of SME equates with entities that would be unlisted public companies (including companies limited by guarantee) and large non-reporting entities here, the feedback the AASB receives will be helpful in determining what changes are appropriate to our reporting regime (an issue also currently on the AASB work programme - see ANT 43 10/11/06 and FRC report, above).  
 
The release late last year of proposals to increase the thresholds for the cutoff tests between small and large proprietary companies by 2.5 times (refer ANT 44 17/11/06) is also likely to result in some companies that are currently large no longer having to file audited accounts with ASIC (although these changes are not likely to be enacted until 2008). 
 
In the meantime the application of AIFRS remains subject to the requirements of the Corporations Act and the application of the reporting entity concept. The Institute published a summary of the relevant factors to consider in Charter in November 2005 and has also published its Business Practice Guide for non-reporting SME's updated for AIFRS which may assist members in choosing appropriate accounting policies for non-reporting entities. 
 
Click here to access the Charter article and the Institute's Business Practice Guide can be accessed here.