“Is Your Business Using Special Purpose Financial Statements? Here’s Why You Might Be Throwing Away Thousands!”
While the above sounds like a clickbait scam, it’s an uncomfortable truth that holding on to your old accounting practices does not inspire confidence or open financial doors.
Special purpose financial statements (SPFS) are those prepared for a specific purpose or limited group of users, such as for tax or internal management purposes, but are not required to meet any accounting standards.
They contrast with general purpose financial statements (GPFS), which are prepared in accordance with the Australian Accounting Standards and Corporations Act 2001.
While it is mandated that certain companies must prepare GPFS, the advantages these documents provide to other stakeholders are not frequently discussed.
Firstly, though let’s look at who needs to prepare GPFS as defined as a large proprietary company. A large proprietary company meets at least two of the following criteria:
- Consolidated revenue of $50 million or more;
- Consolidated gross assets of $25 million or more;
- Consolidated company with 100 or more employees.
The requirement to prepare GPFS is based on the impact these companies have on the broader community and consistent reporting standards ensures reporting integrity.
GPFS provide a more comprehensive picture of a financial position and performance, and importantly they must comply with all applicable accounting standards, such as Australian Accounting Standards or International Financial Reporting Standards (IFRS).
Essentially, they allow regulators, investors and stakeholders to compare apples with apples in terms of financial accountability.
There are a few key differences between the two types of financial statements and understanding them might be the key to setting your company on a growth trajectory.
There can be a level of flexibility in how SPFS are prepared, because they don’t need to comply with Australian accounting standards, and they are typically less comprehensive.
While this undoubtedly saves owners time, it may not give a full picture of a company’s financial position, performance, and cash flow, and this is where it may become a problem for those companies seeking to understand your firm’s financial health, borrow funds or attract investor attention.
The question you need to consider is, do your financial statements instil confidence for those using them outside the organisation, even if your methods have the full confidence of your board, directors and management?
SPFS may also lack information about how you are tracking against competitors, can’t give assurance in providing forecasts, and they are generally not considered best practice.
Transitioning from SPFS to GPFS should be viewed as a necessary step to unlock growth, an action that represents greater maturity in the organisation.
When it comes to succession planning or exit strategies, such as a business , a GPFS can be audited under the Australian Auditing Standards, which is good governance and provides comfort for a potential buyer or investor. It will also speed up any due diligence process and provide greater confidence in the valuation.
In contrast, SPFS can end up limiting potential sources of capital and make it harder to obtain finance through lenders, or obtaining business insurance – these organisations are always going to seek reassurance that their money or the assets covered are in safe hands.
If this is a wake-up call to your organisation, or you are close to becoming an entity that is required to use GPFS, what should you do?
Getting good advice is the first step.
Professional accounting support is important as you will likely need to go through previous financial statements to identify necessary adjustments and ensure you are compliant with accounting standards.
Once adopted, entities must comply with all recognition and measurement requirements of the Australian Accounting Standards, and it may be necessary to sensitive information, such as management remuneration.
As with all things that help a business grow, time and cost are factors to be considered, such as the potential for accounting software upgrades and staff training, as well triggering an update to internal accounting policies and processes to ensure compliance. These are all integral steps as a business matures and certainly should be part of an ongoing review process.
The upside lies in being able to unlock greater funding and a pathway to growth.
Robust accounting practices provides a more complete picture of the company’s finances, which lifts transparency and credibility in the eyes of external stakeholders, and creates better access to capital.
An accounting framework that stands up to external scrutiny could be vital in delivering a future financial win.
