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 to ”If 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.