Financial statements: compilation versus audit

In my review of ‘Medium’ sized[i] ACT charities in the weekend, via the ACNC charity register, I found that in five cases (approximately 10%) the ‘annual financial statements’ contained a ‘compilation report’. Why such an inclusion?

A compilation report is a report ‘prepared in accordance withAPES 315 Compilation of Financial Information, a standard applying to professional accountants issued by their standards board[iii].  It may be required as the result of you asking the accountant to ‘assist (you) in the preparation and presentation of financial information in accordance with an Applicable Financial Reporting Framework’ Which is what they would be doing if you asked them to prepare your financial statements for audit.

When, then, in the process leading to the lodgement of your Annual Information Statement (AIS) and annual financial statements, is a ‘compilation report’, necessary? The short answer is that normally it’s not. This is because no such report is required if you then get another public accountant to audit the statements that have been compiled[v]. And this is the normal situation.

Nor does the ACNC want to see one. However, with four of the five charities above, there was no audit report with the financial statements, so perhaps the charity thought that the compilation report[vi] was a good substitute?

With the fifth charity, there was an audit. But it was performed by the same accountant who compiled the statements, so a compilation report probably was appropriate. (Although it needn’t have been included in the annual financial statements package.)

More interesting things on Medium charities in a future instalment.

 

 

 

[i] Annual revenue is $250 000 or more, but less than $1 million.

[ii] Revised, February 2015. This revision applies for any compilations done on or after 1 July this year, but can be followed from now on.

[iii] Accounting Professional & Ethical Standards Board (APESB), www.apesb.org.au.

[iv] ‘Compilation Engagement’, APESB 315.2.

[v] Whether to issue a report is up to the practitioner [APESB 315.10.4], and if they don’t have to, why would they? (This was also the position in the superseded standard.)

[vi] The report will (or should) contain a description of the task (the ‘engagement’), your responsibility (‘those charged with governance’), their responsibility, and a disclaimer of any assurance of ‘the reliability, accuracy or completeness’ of the information you supplied. It may also contain a statement that they are not independent, and, if you have asked for (and your auditor has agreed) special purpose statements, some cautions because of that.

 

An auditor’s view of your financial statements

Your representations. Representations to the user. That’s how the auditor, in planning their audit of the draft financial statements you’ve just delivered to them, will see them. One overall explicit representation, and, as a consequence of that representation, many, explicit and implicit, subsidiary representations.

Auditors call these subsidiary representations ‘assertions’. (If you are a user of the statements, keep reading; you may gain a greater understanding of what the financial statements tell you.)

Auditors use these assertions ‘to consider the different types of potential misstatement that may occur.’[i] This occurs in the planning phase of the audit, as part of their identification and assessment of the the risks of material[ii] misstatement, both at the financial report level (your overall representation), and at the assertion level (your subsidiary representations).

The overall representation you are making is that the financial report is in accordance with the ‘applicable financial reporting framework’, for instance, the cash basis of accounting. The subsidiary assertions, which flow from the reporting framework, are about the classes of transactions, account balances and disclosures in the statements– their recognition, measurement, presentation and disclosure. That is, about the contents of the three reports usually required – the Income Statement, the Balance Sheet, and the Cash Flow Statement. (Or, in the case of our example, the cash basis of accounting, just a Statement of Cash Receipts and Payments.)

Here’s how the profession[iii] describes these assertions:

Classification Is the balance or transaction recorded in the proper account?
Existence Does the asset, liability or equity interest exist?
Accuracy Are the amounts recorded correctly?
Occurrence Did the transaction actually occur?
Rights and obligations Does the entity have the right or obligation associated with the balance?
Valuation & allocation Is the balance correctly valued and the resulting valuation or allocation adjustments appropriately recorded?
Cut-off Is the transaction recorded in the correct period?
Completeness Have all assets, liabilities & equity interest, transactions and events been recorded?
Presentation & disclosure Is the balance or transaction appropriately disclosed in terms of occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation?

Perhaps now you can see the reason for some of the questions that the auditor asks you.

And the fee they charge (or give up).

 

P.S.  Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the least, last and lost of the world.

 

 

 

 

[i] Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through the Entity and Its Environment, Auditing and Assurance Standards Board, June 2011, paragraph.4(a)

[ii] For what errors, omissions and misstatements may remain in the accounts, after an audit, due to the ‘materiality’ restriction, see here.

[iii] Small Entities Audit Manual, CPA Australia Ltd, 2014, page 1:18.

No true and fair view required if using the cash basis?

Recent survey evidence[i] shows that there are great many associations that report using the cash basis. Many of these associations are charities. And many of these charities are yet to submit their 2014 Annual Information Statement to the Australian Charities and Not-for-profits Commission (ACNC)[ii].

If they used the cash basis ‘in the past’ they can use the cash basis for 2014[iii].

The ACNC says that this cash information ‘does not need to comply with the accrual accounting requirements of Australian Accounting Standards.’ There is only a choice between cash and accrual, so that follows. But it goes on to say that, as a consequence, the information ‘does not need to present a true and fair view.’[iv]

No true and fair view?

The cash basis, a basis that results in the presentation of a single statement, a Statement of Cash Receipts and Payments, is, in accounting language, an ‘applicable financial reporting framework’. These are of two types: a fair presentation framework and a compliance framework[v]. And it is this choice that determines whether or not a true and fair view is required, not cash or accrual.

This is a choice that you, the charity makes. And then that choice is assessed by your auditor.

A fair presentation framework requires not only compliance with the requirements of the framework, but also one of two acknowledgments: an acknowledgement (explicit or implicit) that, in order to achieve fair presentation, extra disclosures may be required; or an explicit acknowledgment that, in very rare circumstances, it may be necessary to depart from the framework[vi].

If this is the type of framework applicable then the auditor’s opinion will include one of the following phrases (which the profession sees as being equal): ‘presents fairly’ or ‘gives a true and fair view’[vii].

That a fair presentation framework is far from unexpected by the accounting standard setters is shown by the following entry in their table showing the applicability of ASA 805 to a Statement of Cash Receipts and Payments:[viii]

Entity and Information Type: Small company – statement of cash receipts and     payments, with related notes

Framework:                             Cash basis of accounting

Form of opinion:                     “Presents fairly in all material respects”

So, I’m sorry, but it would be unwise to rely on the ACNC’s statement that cash accounting means there’s no need for a true and fair view. You may need to get some professional accounting advice.

 

 

 

 

 

[i] AASB Research Report No. 1, Application of the Reporting Entity Concept and Lodgement of Special Purpose Financial Statements, www.aasb.gov.au.

[ii] (ACNC) ‘Commissioner’s Column – 4 February 2015’ page, www.acnc.gov.au, accessed 7.02.2015.

[iii]Transitional reporting arrangements’ page, www.acnc.gov.au, accessed 7.02.2015

[iv]Transitional reporting arrangements’ page, www.acnc.gov.au, accessed 7.02.2015

[v] Auditing Standard ASA 200, paragraph 13, www.auasb.gov.au.

[vi] Auditing Standard ASA 200, paragraph 13, www.auasb.gov.au.

[vii] Explanatory Guide: Auditor’s Reports, AUASB, February 2010, page 15-16.

[viii] Explanatory Guide: Auditor’s Reports, AUASB, February 2010, page 20.

NSW associations: is Class order 11/01 effective relief from reporting rigour?

Preparing for the audit of a Tier 1 NSW association, we naturally came across Class order 11/01[i]. Without this Order, issued by the Director-General of Office of Fair Trading in May 2011[ii]an association with revenue greater than $250 000 would be required to prepare financial statements ‘in accordance with the Australian Accounting Standards[iii]. Instead they can, if they have revenue less than $2 million, choose to follow the less onerous requirements in Schedule B of the Order.

Before accepting an audit engagement an auditor is required by the Australian Auditing Standards[iv] to ‘establish whether the preconditions for an audit are present[v]. This includes determining ‘whether the financial reporting framework to be applied in the preparation of the financial report is acceptable[vi].

If it is acceptable then it becomes the ‘applicable financial reporting framework’, the framework

adopted by management and, where appropriate, those charged with governance in the preparation of the financial report that is acceptable in view of the nature of the entity and the objective of the financial report, or that is required by law or regulation[vii].

Since ‘law or regulation’ is involved, we naturally thought that the requirements of Schedule B formed an acceptable reporting framework. However, after reading Fair Trading’s Regulatory Guide A1[viii], we found that Schedule B is not in fact required but is optional[ix].

Synonyms for ‘required’ are ‘obligatory’, ‘compulsory’, and ‘mandatory’[x], so it is clear that the standard-setters meant that only a legally required reporting framework takes precedence over one chosen to suit ‘the nature of the entity and the objective of the financial report’.

Therefore, since reporting according to Schedule B is not compulsory, the auditor of an association that has followed Schedule B must then assess the acceptability of that framework before they can accept the engagement.

ASA 210 gives an example of ‘the objective of the financial report’ criterion above:

whether it is prepared to meet the common financial needs of a wide range of users or the financial information needs of specific users[xi].

Schedule B doesn’t change the audience for the statements, just what has to be produced and what has to be included. The section headed ‘Why have Class order 11/01?’ makes it clear that the statements are for a ‘wide range of users’. For instance, the Class order

aims to ensure an appropriate level of transparency and accountability for incorporated associations, taking into account likely needs of persons who may wish to utilise the services of an incorporated association or make charitable donations to these entities[xii].

This makes the statements general purpose statements:

Financial reports prepared in accordance with a financial reporting framework designed to meet the common financial needs of a wide range of users are referred to as general purpose reports[xiii].

Is Schedule B an acceptable general purpose framework? Not according to ASA 210. It makes it clear that in Australia only the reporting standards established by the Australian Accounting Standards Board (AASB) are acceptable[xiv].

So isn’t the conclusion that we must reach this: either the association ignores the Class Order and follows all the Australian Accounting Standards, or the auditor has to decline the engagement[xv]?

 

 

[i] Financial reporting requirements for a class of Tier 1 associations, 27 May 2011, www.fairtrading.nsw.gov.au.

[ii] Under Section 53(1) of the Associations Incorporation Act 2009, www.legislation.nsw.gov.au

[iii] Section 43(2)

[iv] And there is no question that we have to follow the Australian Auditing Standards: Section 43(3) of the Act mandates that

[v] Auditing Standard ASA 210 Agreeing the Terms of Audit Engagements, paragraph 3, June 2011, www.aasb.gov.au

[vi] ASA 210, paragraph 6

[vii] AuAASB Glossary, www.auasb.gov.au

[viii] Associations Incorporations Act 2009, Regulatory Guide A1, May 2011, Financial Reporting Requirements for a Class of Tier 1 Associations, Registry of Co-operatives & Associations, NSW Fair Trading, NSW Department of Finance & Services, www.fairtrading.nsw.gov.au

[ix] Regulatory Guide A1, page 7

[x] Thesaurus function in Word 2013

[xi] ASA 210, paragraph A4

[xii] Regulatory Guide A1, page 5

[xiii] ASA 210, paragraph A5

[xiv] ASA 210, paragraph A8

[xv] ASA 210, paragraph 8

A new head on an old body: the ACNC on choosing between general and special purpose financial statements

In a post a few weeks ago, I showed the invalidity of the ACNC’s advice that general purpose (GPFS) or special purpose financial statements (SPFS) was a choice based on the Positives and Negatives of each. In response they have now

  1. Deleted the heading ‘Deciding between general purpose or (sic) and special purpose’, and
  2. Changed the explanation of the table toIf your charity is not a reporting entity but is still considering reporting using general purpose financial statements you many want to consider the following points.”

The question is: does this new description make sense with the old table contents, contents made up to answer a different question?

Before we look at that, one has to wonder why a charity that is not a reporting entity, and therefore can present SPFS, would forgo that concession; that is, decline to take advantage of a provision that was introduced in order to reduce ‘reporting overload’. Especially as they would, as non-reporting entities, still be obliged to respond to the requests of their users for reports tailored so as to satisfy, specifically, all of their information needs[i].

Even if there is a market for help with this GPFS versus SPFS decision, it has to be small. One then wonders why, given recent evidence of the profession’s difficulty with applying the concept of reporting entity[ii], the ACNC doesn’t take the opportunity to provide more help with that decision rather than providing information well outside the mainstream.

But leaving that aside, do the (unchanged) Positives and Negatives make sense now that the table is directed to only entities that are not a ‘reporting entity’?

‘Reporting entity’ means

an entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources….[iii]

So the table is addressed to the opposite of these charities: those whose users are able “to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs” (see above).

The first positive for SPFS – they are quicker and cheaper – matches the only negative for GPFS.   Fair enough, but now, because we are talking to charities considering spending the extra time and money, we need to find one or more benefits from GPFS to offset those increases. There are two given:

  • More financial information is disclosed. This encourages transparency and accountability, and will help your charity to meet Governance Standard 2.[iv]
  • Intended to meet the needs of users who depend on the information.

Governance Standard 2 says:

Charities that have members must take reasonable steps to be accountable to their members and provide their members adequate opportunity to raise concerns about how the charity is governed.

Note that it is accountability to the members only. And also that financial statements can only contribute to the first part of this Standard.  GPFS versus SPFS and meeting Standard 2?   I can’t see how providing a general statement (GPFS) contributes to compliance with Standard 2 more than offering to tailor reports to your members’ needs (SPFS).  So no benefit here.

The second Positive is that GPFS are “Intended to meet the needs of users who depend on the information”.   But the charity has recently concluded that it doesn’t have any such users, so this Positive now doesn’t make sense in this table. (In the same way that a Negative of ‘May not satisfy the needs of users who depend on the information’ doesn’t make sense in the SPFS column.)

It is arguable that, given the purpose of the table, the four entries discussed so far are the only ones relevant. However, there are three other entries in the SPFS column, one Positive and two Negative.

This is the Positive:

May demonstrate that your charity has taken steps to show members what you are doing and what the results of your activities are. This will help your charity meet Governance Standard 2.

The decision you are now making is post-selection of SPFS. That selection is deemed acceptable to the ACNC, and therefore a sufficient contributor in the area of financial reporting to members for Governance Standard 2. So this Positive does not help with the current decision.

These are the two Negatives:

  1. Less information is disclosed which reduces the level of transparency and accountability.
  2. May not satisfy the needs of users who depend on the information.

Given that you have users who are able “to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs”, No. 1 is not true.

And as we said above, as you don’t have any ‘users who depend on the information’, No. 2 doesn’t make sense.

The bottom line: putting a new head on an old body has not worked. I think it’s time to kill this table.

 

[i] See ‘general purpose financial statements’ in the Australian Accounting Standard Board’s Glossary, www.aasb.gov.au

[ii] Australian Accounting Standards Board, Research Report No. 1, Jun 2014, www.aasb.gov.au.

[iii] AASB 1053 Application of Tiers of Australian Accounting Standards, June 2010, www.aasb.gov.au

[iv] The disclosure of financial information doesn’t encourage transparency and accountability – at least not for the discloser. Such disclosure is transparency and accountability.

General purpose versus special purpose financial statements: not much choice for charities?

Financial statements, type thereof. You, the CEO or director make the decision; you, the auditor, check this decision; you, the ‘stakeholder’, use the result to make judgements about the organisation. Two types only: general purpose and special purpose.

But general purpose versus special purpose is not the decision. That would make it a choice, and it’s not a choice. The type of financial statements is the result of an assessment of whether the organisation is something called a ‘reporting entity’. Reporting entities have to prepare general purpose statements.

Old hat you say; we’ve been doing this for years. Yes we have, and we have been getting it wrong for years. And due to a lack of enforcement, getting away with it for years.

I’ll give you one example. Does the organisation call for donations on its website? And its annual report includes a special purpose statement? Well, according to the standard-setters, this organisation is then saying that there is something in their governing legislation or rules that means that, on demand, they will prepare a report to answer that donor’s questions about the organisation. That’s the corollary of the definition of ‘general purpose financial statements’:

General purpose financial statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs[i].

The usual way of making the decision is to assess whether the organisation meets the definition of a ‘reporting entity’:

Reporting entity means an entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources….[ii]

So for the organisation calling for donations on its website, doesn’t one end up with the same decision? Donors that could be anywhere in the world; donors mostly having no connection with the organisation other than via the internet – sounds like the epitome of users who have to rely on general purpose statements to me.

If only we could just choose between types of financial statements.

 

P.S.  Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the least, last and lost of the world.

 

[i] AASB 1053 Application of Tiers of Australian Accounting Standards, June 2010, Appendix A, www.aasb.gov.au

[ii] AASB 1053. Appendix A

The ACNC and right and wrong ways to decide between general purpose and special purpose financial reports

If you are a non-accountant charity CEO or board/committee member (and maybe even if you are an accountant), it would be reasonable for you to turn to your regulator’s website for help with deciding whether general purpose or special purpose financial statements were required for your charity. But at the moment you need to take care: there’s conflicting advice there.

In the third section of this advice, they state very clearly and correctly that the answer depends on whether you are something called a ‘reporting entity’. They then point you to the Australian Accounting Standards Board’s latest definition of ‘reporting entity’, and its guidance for how to decide whether or not you are a reporting entity. All good so far.

But then in the second last section they go and ruin this good advice. Under a heading ‘Deciding between general purpose or (sic) special purpose’, they list the main ‘Positives’ and ‘Negatives’ of each. These may well be the pros and cons, but they should play no part in the decision. It is not a matter of which type of statement gives you the better result, but a question of complying with the law. The law that their Governance Standard 3 requires. The law that was correctly stated in the third section of their advice.   Are you a ‘reporting entity’? If so, you have no choice – you must prepare general purpose financial statements.

The bottom line? I wouldn’t do what the ACNC suggests in their footnote to the table: ‘Make a decision…and get professional advice if you are unsure.’ No, don’t use the table, and if you think you may be eligible for the statements that are ‘quicker and cheaper to prepare’ (one of their ‘Positives’), then I’d jump straight to professional advice. And given that many professionals have got this wrong – see AASB Research Report No. 1be careful how you choose.

Special or general purpose report: don’t ask your users

Well I don’t think they actually asked their users individually, but they certainly thought about them in order to come to the conclusion that ‘there are no users dependent on a general purpose financial report’. I’m talking about the management and auditor of a $1m charity. And it appears from a Google search of the phrase that many others somehow concluded that their current users were similarly not dependent.

‘General purpose financial reports’ require compliance with the Australian Accounting Standards, so this meant that the charity could produce ‘special purpose financial reports.’ Less onerous, but, according to the standard setters, not useful to those who want to make money decisions about that charity.

‘No users’. That’s a bold claim. So if the management of this charity had made a mistake, and there was a user who doesn’t have the ability to ring up that charity and get the financial information that they need, then, at least according to the standard setters, they haven’t reported properly. Or if a new dependent user arises after their survey, the same applies. Silly, you say. I agree, and that’s why the standard setters didn’t say to ask the current users.

The latest definition of ‘reporting entity’ – for that is what determines whether or not you have to prepare general purpose financial statements – says that it is

an entity in respect of which it is reasonable to expect the existence of users who rely on

those kind of statements[i]. ‘Reasonable to expect’: that is, it doesn’t just mean existing users; it includes potential users. So to be able to prepare special purpose financial reports you have to be prepared to tailor a report for anybody in the future who has a legitimate interest in finding out how you had performed. Because you won’t have a general purpose report that you can give them.

For a few of the organisations that use the same phrase as that used by the $1m charity, there is a more charitable explanation. And that is that they thought about both existing and potential users, but then just used words that implied an assessment of the needs of only existing users. To be fair to them, it is not uncommon for my colleagues to recommend that phrase. But I’d maintain that it doesn’t accurately represent what accounting law requires, and the practice should change.

I say ‘a few of the organisations’, for I’ve little doubt that many of the organisations, including the $1m charity, should have concluded otherwise.

Do you need to think again about your decision to say that you are a non-reporting entity?

 

P.S.  Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the cultural equivalents of the Bible’s fatherless, widows and aliens.

 

[i] AASB 1053, www.aasb.gov.au, Appendix A

Your auditors: before they start, expect this

Did you know that it is not automatic – or, more correctly, it shouldn’t be automatic – that an auditor will say yes to doing an audit? In fact, if you’ve got an auditor who’s been auditing for any time longer than a football match and hasn’t thought about whether – other than because of money, distance or business – they should say yes to an organisation who wants an audit, then I’d suggest you should worry. This is because there are some pretty serious conditions that should be met before they agree to do business. And it’s not unusual for a couple of them to be a challenge.

The first hurdles are in their document called Framework for Assurance Engagements[i]. The annual statutory audit, one type of such ‘assurance engagements’, will normally exhibit the required characteristics to allow the auditor to accept the engagement; however, ‘relevant ethical requirements’ may mean they have to (should) decline. For instance, most people would think that if one of the auditor’s staff – especially in a small firm – is married to one of the directors of the organisation who has asked for an audit, then independence would be violated[ii]. Or if the organisation has complex arrangements overseas and the last time the auditor looked at foreign currency translation was at university, then perhaps ‘professional competence’ wouldn’t get a tick.

Having survived the tests in the Framework, auditors may have to say no to you when they come to apply Auditing Standard ASA 210 Agreeing the Terms of Audit Engagements[iii]. There are two hurdles here: (1) the presence of certain ‘preconditions’ for an audit, and (2) confirming a common understanding between you and the auditor about what is to happen and who is responsible for what.

The first precondition is that the ‘financial reporting framework’ you have chosen is acceptable. For example, if you have chosen to prepare a special purpose report where objectively a general purpose report is required, and the auditor is up-to-date with his reading, then unless you change he would be obliged to decline the engagement.

The second precondition, that you give an acknowledgement of your responsibilities, is not likely to stop the audit if you sign what they ask you to sign. (However, can I suggest that you carefully read this acknowledgement? Two of the things in it are heavy contributors to what they call the ‘audit expectation gap’: first, that the preparation of the financial report – all the statements and the Notes – is your responsibility, not the auditor’s, and second, if you haven’t got the proper internal controls in place, then again that’s your fault, not the auditor’s.)

So when you want an audit by all means ask away, but if the auditor says yes without any investigation, then be concerned.

 

P.S.  Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the cultural equivalents of the Bible’s fatherless, widows and aliens.

 

[i] Auditing and Assurance Standards Board (AuASB), 2010, paragraph 17.

[ii] Independence is so cherished by the accounting profession that they have issued a comprehensive Independence Guide (Joint Accounting Bodies, 2013).

[iii] AuASB, 2011.

 

Financial statements: they say for the year ended but that’s not the whole story

Did you know that financial statements have to be changed if certain things happen before they are issued? (‘Authorised for issue’ to be precise.) These things are called ‘events after the reporting period’[i]. That means that although the statements are said to be for the period up to a certain date (usually the year ended 30 June), they can actually contain information about things that have happened up to the date they were issued.

This makes the date of issue pretty important doesn’t it?

If you are a reader of the statements, not a producer, then if the organisation has complied with the relevant Standard, the date will be disclosed[ii].

But as a reader there’s one other thing you should look for – perhaps the first thing you should look for. For despite the finality of a year end, and then the cut-off given by their date of issue, the standard setters recognise the possibility of somebody having the power to amend the statements after their issue. Luckily for you such a power has to be disclosed[iii].

Back to the all-important date of issue. If you are in some way responsible for the statements, then you’ll need to know how this date is calculated for your organisation – so that you can distinguish ‘events after the reporting period’ from all other events.

Unfortunately the standard setters have not defined ‘date when the financial statements are authorised for issue’, saying that it will ‘vary depending upon the management structure, statutory requirements and procedures followed in preparing and finalising the financial statements[iv] [AASB 110, para 4]. However, the only two examples they give have a board and a body that has to approve them subsequently [paras 5 & 6]. And in both cases the authorisation ‘for issue’ is by the board.

This means that if you are a director then you need to be sure that, right up to the meeting when you say that the statements are fit to be issued, the organisation has been watching for these events and incorporating them in the statements.

And if you are the one preparing the statements, that you have a system for this watching.

So what are these events about which you have to be aware? They can be divided into five groups based on their effect on the financial statements:

  1. A deterioration in the finances of the organisation so bad that one of the two assumptions underlying the way the figures were derived[v], the assumption that the organisation will continue in operation for the foreseeable future (the going concern assumption), is no longer valid. In this case you will have to recast the financial statements without that assumption, and follow the disclosures required by AASB 101[vi].
  2. Events, both favourable and unfavourable, that give you better information about the situation at year end.   One of the most common examples is errors in the statements. The amounts recognised in the financial statements have to be adjusted[vii].
  3. Material events, both favourable and unfavourable, that relate to conditions arising after year end.   For each category of such events, you will have to disclose (in the Notes) the nature of the event, and either an estimate of its financial effect or a statement that no such estimate can be made. Entering into significant commitments would be an example of such a material event[viii].
  4. Receiving information about conditions at year end that, although not affecting the amounts in the statements, do affect the disclosures. In this case the Notes will have to be amended[ix].
  5. ‘Material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.’ The disclosures required by AASB 101 will have to be made in the Notes[x].

So, whether you are a producer or an approver of financial statements, the year end might be an end, but it is not the end of the story.  Happy watching.

 

 

P.S.   Business by The Book exists to provide accounting, audit and governance services, for no fee if necessary, to not-for-profits who are themselves serving those who are the cultural equivalents of the Bible’s fatherless, widows and aliens.

 

 

 

 

 

[i] Events after the Reporting Period AASB 110, www.aasb.gov.au.

[ii] AASB 110, paragraph 17.

[iii] AASB 110, paragraph 17. But the absence of such a power doesn’t, so if there is nothing said you will have to rely on the organisation having complied with the standard.

[iv] AASB 110, paragraph 4

[v] Framework for the Preparation and Presentation of Financial Statements, Framework, www.aasb.gov.au.

[vi] AASB 110, paragraph 14.

[vii] AASB 110, paragraphs 3, 8.

[viii] AASB 110, paragraph 21.

[ix] AASB 110, paragraph 19.

[x] AASB 110, paragraph 16(b).