158 Accounting: Business Reporting for Decision Making
financial statements for their decision-making. The factors taken into consideration when deciding if an
entity is a reporting entity include its size and indebtedness, the separation of the entity’s management and
ownership, and its economic or political significance. If an entity has indicators that suggest it is a reporting
entity, then the entity should prepare general purpose financial statements. Further, the financial statements
of a reporting entity should comply with specified accounting rules governing recognition, measurement,
presentation and disclosure requirements. If an entity is assessed as a non-reporting entity, then it can prepare
special purpose financial statements. For example, JB Hi-Fi Ltd is a reporting entity given its size and separa-
tion of ownership and management as its decision-making resides with management on behalf of the share-
holders. Conversely, a private school limited by guarantee may not be assessed as a reporting entity and may
produce special purpose financial statements. The reporting entity concept and its role in determining finan-
cial reporting requirements is currently being reviewed by the Australian Accounting Standards Board as
part of a project on differential reporting. This project includes a reconsideration of the role that the reporting
entity concept has on determining which entities must prepare general purpose financial statements.
What is the difference between general purpose financial statements and special purpose financial
statements? Statements that are purported to be general purpose financial statements must be prepared in
accordance with generally accepted accounting principles (GAAP), whereas special purpose financial
statements can be prepared without adhering to GAAP. GAAP is a set of rules and practices that guide
financial reporting.
A country’s GAAP is usually specified in accounting standards. Accounting standards detail specific
recognition, measurement, presentation and disclosure requirements applicable to various types of trans-
actions. For example, there are accounting standards governing accounting for inventory, accounting for the
acquisition of property, plant and equipment, and accounting for revenue. Historically, accounting standards
have varied by country. For example, Australia issued Australian accounting standards that were different to
the accounting standards issued in China, Japan, Germany and the United States. As markets have become
increasingly borderless, considerable progress has occurred in developing a set of acceptable international
accounting standards — International Financial Reporting Standards (IFRS). IFRS are particularly focused
on for-profit entities and are issued by the International Accounting Standards Board (IASB). At the time of
writing, more than 130 jurisidictions have adopted or converged their domestic standards with IFRS. Coun-
tries adopting IFRS include Australia, South Africa and all European Union countries. Countries substan-
tially converging their domestic standards with IFRS include China and India. Notable countries that have
not adopted or substantially converged their standards to IFRS are the United States and Japan.
A set of public sector accounting standards — International Public Sector Accounting Standards
(IPSAS) — issued by the International Public Sector Accounting Standards Board, are also available for
jurisdictions to adopt. In Australia’s case, rather than adopting IPSAS additional paragraphs have been
included in the Australian adopted IFRS to make them applicable to all entity types (e.g. for-profit, not-
for-profit, private sector and public sector entities) required to prepare general purpose financial state-
ments. References throughout this chapter and subsequent chapters are to IFRS.
Are there different versions of IFRS to use when preparing general purpose financial statements? The
IASB has issued IFRS as well as IFRS for Small and Medium-sized Entities (IFRS for SMEs). IFRS
for SMEs simplifies some of the recognition and measurement rules, omits topics not relevant to SMEs
and reduces disclosure requirements. The use of IFRS or IFRS for SMEs when preparing general pur-
pose financial statements depends on whether an entity has public accountability. Entities with public
accountability must prepare general purpose financial statements using IFRS. Public accountability is
applicable to entities with securities, debt or equity that are traded in a public market, or entities that
hold assets in a fiduciary capacity as their main business activity. For example, the shares of JB Hi-Fi
Ltd are traded on the ASX; therefore, JB Hi-Fi Ltd is subject to public accountability. IFRS for SMEs
are available for use by small and medium-size entities that are not subject to public accountability but
do publish general purpose financial statements.
Not all jurisdictions have accepted IFRS for SMEs. Some countries have followed a different path.
Australia, for example, has introduced differential reporting. In Australia, entities preparing general