1. Foundations for financial statements

All Commonwealth entities are required to prepare annual financial statements in accordance with the PGPA Act or other legislation that established particular entities. The financial reporting requirements for Commonwealth reporting entities are set out in the FRR and AAS.

All Commonwealth reporting entities are required to prepare their annual financial statements in accordance with the PGPA Act, FRR, AAS and any other applicable entity-specific legislation.

Legislative authority – the Financial Reporting Rule

FRR section 3 – Authority

This section of the FRR sets out the authority for making the FRR.

The FRR is made under the PGPA Act, and sets out the common financial reporting requirements for Commonwealth entities to:

promote consistency across entities in the preparation of financial statements
facilitate comparisons between entities’ financial statements
assist the financial statement preparation and auditing process
enable preparation of the Australian Government consolidated financial statements (Australian Government CFS) under section 48 of the PGPA Act.

Officials who intend to establish a new Commonwealth entity under the PGPA Act should refer to Reporting Guidance for a New Entity. The guidance identifies the reporting requirements mandated under the PGPA Act for a new Commonwealth entity.

Financial reporting requirements

Entities should refer to section 18 of the FRR to determine which tiers of AAS apply to their financial statements.

Australian Accounting Standards Board (AASB) 1053 Application of Tiers of Australian Accounting Standards (AASB 1053) applies tiers of AAS for entities’ general purpose financial statements:

Tier 1 Australian Accounting Standards: Incorporates international financial reporting standards issued by the International Accounting Standards Board and includes requirements that are specific to Australian entities.
Tier 2 Australian Accounting Standards - Simplified Disclosures: Comprises the recognition and measurement requirements of Tier 1 but with substantially reduced disclosure requirements.

The disclosures relevant to Tier 2 entities are set out in AASB 1060 General Purpose Financial Statements - Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060), subject to any specific requirements under the FRR. Tier 2 entities complying with AASB 1060:

are exempt from the disclosure requirements in specified paragraphs in other AAS
are not required to comply with other AAS that deal only with presentation and disclosure (for example AASB 101 Presentation of Financial Statements (AASB 101) or AASB 107 Statement of Cash Flows)
may refer to other AAS for guidance on the requirements in AASB 1060.

Tier 2 entities are not required to disclose, in their financial statements, the impact of any new AAS issued but not yet effective. However, information is required for Australian Government CFS purposes and is specified in the Supplementary Reporting Pack (SRP), issued annually to entities by Finance under section 18A of the FRR.

Entities are required to comply with end-of-year financial reporting requirements issued by Finance.

For further information on applying AAS tiers see Applying AAS tiers and other reporting requirements.

In preparing financial statements to present fairly the entity’s financial position, financial performance and cash flows, entities will need to refer to the items in Table 1 below.

Table 1 - Items for consideration for the fair presentation of financial statements

	Tier 1 reporting	Tier 2 reporting
Apply professional judgement – the entity should develop and document a formal position on each issue, and where appropriate, inform their auditors as early as possible. For example, when considering whether the reclassification of a comparative amount is impracticable, or the appropriateness of data and assumptions used when estimating provisions. Preparers of financial statements may also wish to consider matters listed in paragraph 120.5 A3 of APES 110 Code of Ethics for Professional Accountants when exercising professional judgement, such as: whether they have all the known facts and circumstances whether they have sufficient expertise and experience to reach a conclusion, or if they need to consult with others whether information obtained provides a reasonable basis on which to reach a conclusion whether other reasonable conclusions could also be reached. See also the Financial Statements Better Practice Guide.	For example, paragraphs 41-42 of AASB 101 (reclassification of comparative amounts)	For example, paragraphs 18-19 of AASB 1060 (reclassification of comparative amounts)
Cross-reference disclosures – each required disclosure should be cross-referenced with relevant notes and/or schedules in accordance with AAS requirements. Other cross referencing is to be included where it would provide useful additional information to the reader.	Paragraph 113 of AASB 101	Paragraph 92 of AASB 1060
Consolidate accounts – subsidiaries of the entity should be consolidated to present the financial performance and position of the consolidated entity. Therefore, the financial report of an entity must encompass all the entities it controls, accounted for in accordance with the consolidation standard AASB 10 Consolidated Financial Statements (AASB 10). See also section 6 of the FRR.	AASB 10	AASB 10
Disclose comparatives – comparatives should be disclosed for the previous reporting period unless they are not required elsewhere in the FRR or an applicable AAS, such as comparative budgetary information for the previous reporting period. This includes: narrative information, if it is relevant to the understanding of the financial statements re-presented or reclassified comparatives where the presentation or classification of an item is amended (unless this is impracticable) – disclosing the nature, the amount of and reason for the re-presentation or reclassification administered comparatives for entities that have moved from non-corporate to corporate, which may be included in a separate and shaded column next to the departmental comparatives. Whilst reclassification of an existing item between administered and departmental is not a change in accounting policy, an explanation is required to be included in the relevant note regarding the change in reporting departmental and administered items from the prior year.	For example, paragraph 8 of AASB 1055 Budgetary Reporting (comparative budgetary information not required for the prior period)	For example, paragraph 224 of AASB 1060 (comparative budgetary information not required for the prior period)
‘Net cost of services’ vs ‘profit or loss’ – to better reflect the operating environment and reporting format of not-for-profit (NFP) entities (where not restricted by the AAS) all references to the AASB's 'profit or loss' are to be replaced with 'net cost of services' (or 'surplus or deficit') in line with Primary Reporting and Information Management Aid forms of financial statements (PRIMA forms). For-profit entities need to adjust the disclosure to reflect their circumstances.	Not applicable	Not applicable

Additional notes

Where an entity includes notes and disclosures in addition to those required under the FRR and the AAS then these must be consistent with FRR and AAS requirements, including measurement and recognition.

Principles required for financial reporting

Entities should consider and apply the following when preparing financial statements:

SAC 1 and the AASB Framework are sources of guidance, which entities may refer to if there is no AAS or interpretation that deals with an accounting treatment or disclosure issue (see AASB 1048 Interpretation of Standards (AASB 1048)). By themselves, these are not mandatory in the preparation or presentation of a reporting entity’s financial statements.

The principles in these documents (while not explicitly stated in the FRR) are of such importance that they should be considered in the process of preparing financial statements. It is recommended that entities be able to evidence that the principles:

were considered and applied with due weight, in determining the entity’s situation
have supporting documentation that shows the reason for the extent of application by the entity.

Certification and assurance

To provide users of the financial statements with assurance on the completeness and accuracy of an entity’s financial statements:

the chief financial officer (CFO) of the entity must certify that information is based on properly maintained financial records, under subsection 41(2) of the PGPA Act
an independent auditor’s report, issued by the Australian National Audit Office (ANAO), provides the auditor’s opinion on whether the entity’s financial statements:
- have been prepared in accordance with the FRR and AAS
- present fairly the entity’s financial position, financial performance and cash flows.

Events after the reporting period

AASB 110 Events after the Reporting Period (AASB 110) prohibits the preparation of financial reports on a going concern basis if the going concern assumption is no longer appropriate.

If an entity receives information after the reporting date about conditions that existed at the reporting date, known as ‘adjusting events after the reporting period’, the amounts recognised in the financial statements are to be adjusted to reflect the new information (Tier 1 reporting: paragraph 8 of AASB 110, Tier 2 reporting: paragraph 185 of AASB 1060). For Tier 1 reporting, the disclosures that relate to those conditions are also updated, including when information does not affect amounts recognised in the financial statements (paragraphs 19-20 of AASB 110). For Tier 2 reporting, only the disclosures that relate to amounts recognised in the financial statements are to be updated (paragraph 185 of AASB 1060).

If non-adjusting events after the reporting date are material, non-disclosure could reasonably be expected to influence the economic decisions of users based on the financial statements. An entity is to disclose the following for each material category of non‑adjusting events after the reporting date:

the nature of the event
an estimate of the event’s financial effect or a statement that such an estimate cannot be made.