Relevance of parent entity financial reports

Relevance of parent entity financial reports

Executive Summary: This research addresses the issue of the extent to which parent entity financial information is needed by users of general purpose financial reports (GPFRs). It provides objective evidence aimed at assisting the Australian Accounting Standards Board (AASB) to determine whether it should recommend legislative changes in respect of the form, content and presentation of parent entity information. The broad research problem investigated in this paper is: For Australian entities that provide consolidated GPFRs, what form, content and presentation of separate parent entity financial information is needed by GPFR users? To address this issue, survey data were collected via both an internet questionnaire and personal interviews. The sample comprises users of GPFRs from across a diverse range of financial report user groups.

The results indicate that many financial report users, predominantly those working in roles involving credit risk assessment, use information from the parent entity financial reports. However, the frequency of use and particular components of the financial reports used varies across financial report user groups. There is no particular sub-set of information that would satisfy the parent entity information needs of all GPFR users. Therefore, there is limited potential to reduce parent entity reporting requirements to less than a full set of financial reports (financial statements and notes). However, an examination of financial report users’ needs for parent entity financial reports to be audited, lodged with the Australian Securities and Investments Commission (ASIC) and published in the annual report, as well as their information needs in relation to particular types of parent entities, reveals some potential for a reduction in reporting requirements.

In particular, the reductions in parent entity reporting requirements that could be achieved without compromising the information needs of GPFR users include:
o removal of the requirement for parent entity financial reports to be published in the annual report; and
o exemptions from the requirement to lodge audited general purpose parent entity financial reports with ASIC for parent entities that:
(a) do not conduct substantive operations, including treasury operations;
(b) are not borrowing entities;
(c) are not single guarantors for the debt of one or more subsidiaries .

Further, the research results indicate that a reduction in parent entity reporting requirements would need to be supplemented by additional disclosures in the annual report. These disclosures would provide details of:
o whether audited parent entity reports have been lodged with ASIC and, if not, a statement indicating that each of the exception criteria outlined above are satisfied;
o parent entity shareholders’ funds, including dividends and franking credits, if different from the consolidated amounts;
o how the group is structured, including which entities within the group conduct the major trading and treasury operations;
o in which entities the group’s borrowings and contingent liabilities reside;
o class orders, guarantees and indemnities in place, including which entities are party to the guarantee(s).

This is an unpublished discussion paper.