Issue
Does a special purpose financial report prepared by an entity comply with the accounting standards under the Corporations Act 2001 for the purposes of subparagraph 1.1(a)(i) of Schedule 2 of the Income Tax Assessment Regulations 1997?
Decision
No. A special purpose financial report does not comply with the accounting standards for the purposes of subparagraph 1.1(a)(i) of Schedule 2 of the Income Tax Assessment Regulations 1997.
Facts
Company A, as the head company of a tax consolidated group, prepares a Special Purpose Financial Report (SPFR) for the financial year ended 30 June 2011 for the purposes of lodgement with the Australian Securities and Investments Commission (ASIC). The SPFR meets the definition of a financial report under the Corporations Act 2001 (Corporations Act).
Company A's functional currency is the Australian dollar (AUD). Various subsidiaries within the consolidated group have a functional currency of US dollar (USD) for the purpose of preparing their stand alone accounts.
These USD amounts are required to be translated into Australian currency for the purposes of preparing Company A's SPFR.
Reasons for Decision
Subdivision 960-C of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount in foreign currency to be translated into an AUD amount. It sets out the rules for identifying the exchange rate for translation of foreign currency amounts into AUD. The table in subsection 960-50(6) of the ITAA 1997 specifies the exchange rate to be used for particular amounts. Item 12 of the table provides that, as an alternative to the result mentioned in any of the items 1-11, the amount may be translated into Australian currency using any of the rules set out in Schedule 2 of the Income Tax Assessment Regulations 1997 (the Regulations).
A key aspect of clause 1.1 of the Regulations is the requirement that the financial report must comply with the accounting standards. This requirement is also found in subsection 296(1) of the Corporations Act which states that: The financial report for a financial year must comply with the accounting standards.
The Corporations Act does not define what the words 'complies with the accounting standards' mean or how they are intended to operate. The only assistance provided by the Corporations Act in this regard is in relation to defining what the term 'accounting standard' means. Section 9 of the Corporations Act states that: " accounting standard " means: (a) an instrument in force under section 334; or (b) a provision of such an instrument as it so has effect.
Section 334 of the Corporations Act goes on to state, in effect, that the AASB (Australian Accounting Standards Board) has the power, by legislative instrument, to make accounting standards for the purposes of the Corporations Act. Therefore, 'accounting standard' effectively means any standard made by the AASB.
The AASB, as the responsible authority for administrating the accounting standards, has clarified the meaning of the two key phrases relevant for the purposes of subparagraph 1.1(a)(i) of the Regulations; 'accounting standards' and "preparation in accordance with the accounting standards (NB: terms such as "prepares", "complies" or "in accordance with" are in effect referring to the same concept in the context of whether a financial report is prepared in accordance with or complies with the accounting standards)."
In this regard the AASB state that: • the phrase 'Accounting Standards' is taken to be a reference to full IFRSs as adopted in Australia and any other reporting regime devised by the AASB for the preparation of General Purpose Financial Statements (GPFSs); and • 'preparation in accordance with Accounting Standards' means the application of all Accounting Standards in a reporting regime and not a subset of them. (Refer to paragraph 9.3 of the AASB Consultation Paper "Differential Financial Reporting - Reducing Disclosure Requirements" dated February 2010 (AASB Consultation Paper) and the minutes of the AASB meeting in September 2009 available at: http://www.aasb.gov.au/Publications/eNewsletter/Issue7_Differential_reporting_framework.aspx?preview=true).
On the basis of these principles, the AASB conclude that: Financial statements that are not GPFSs are regarded as special purpose financial statements (SPFSs) and would not fall within the ambit of Australian Accounting Standards...Accordingly SPFSs should not claim compliance, or be held out to comply, with Australian accounting Standards. (Refer to paragraph 9.5 of the AASB Consultation Paper)
The application of this principle means that a SPFR prepared on the basis of compliance with a subset of the accounting standards cannot claim to be prepared in accordance with or in compliance with the accounting standards. This is equally applicable in subparagraph 1.1(a)(i) of the Regulations which uses the same term. Therefore it is appropriate to interpret these words consistently with the pronouncements made by the AASB. Therefore in this context a SPFR cannot be said to comply with the accounting standards for the purposes of subparagraph 1.1(a)(i) of the Regulations.
Accordingly, Company A's SPFR is not a financial report that complies with the accounting standards under the Corporations Act and therefore does not meet the requirement in subparagraph 1.1(a)(i) of the Regulations. Therefore, Company A cannot rely on clause 1.1 for the purpose of translating its foreign currency amounts into AUD.