Compile data required for preparing financial statements for non-reporting entities

Business operations generate financial data with every transaction. All similar financial transactions are converted into readable financial information in financial statements.

Financial statements summarise all an entity's financial transactions over time. They include:

• Statement of profit and loss, which outlines the total income earned and money expended to earn the income during a period
• Statement of financial position, which outlines the state of affairs, i.e., the value of assets and liabilities at the end of a financial year
• Statement of cash flows, which summarises the inflows and outflows of cash in the entity during a specific period

Financial statements sometimes include additional information in the notes and disclosures as required by a statute or accounting standards.

Financial transactions are the primary sources of data required for maintaining books of accounts. They consequently help in preparing financial statements. The origins of financial data are bank statements, sale receipts, and purchase invoices. Financial data include any transaction or business activity that impacts a business's income, expenses, assets, or liabilities. Examples include the sale of goods, purchase of raw materials, purchase of machines, and payment of taxes.

The data from these sources is then recorded chronologically in the books of accounts in the form of journal entries in line with the double-entry bookkeeping system. Further, the recorded transactions should also align with the accounting standards applicable to the business entity.

To collect the data required for preparing financial statements, you must understand the business thoroughly. This can be done by collecting the documents supporting the financial transactions in the books of accounts. This should be coupled with understanding the accounting standards applicable to the business entity. The Australian Accounting Standards Board (AASB) develops and prescribes accounting standards.

Various Types of Entities in Australia   

It is vital to understand the types of business entities having legal recognition in Australia to understand whether an entity is a reportable entity or otherwise. Below is a brief of the types of business entities.

To summarise, the commonly used business models are as follows:

Sole Trader	Company	Partnership Firm	Trust
Set up by an individual using their name	Set up by a group of individuals called shareholders/ directors	Set up by a group of Individuals called partners	Set up for the benefit of persons mentioned in the deed (beneficiaries)
Not a separate legal entity	Separate legal entity	Separate legal entity	Separate legal entity
Not required to obtain a separate tax registration	Needed to get a separate tax registration	Required to obtain a separate tax registration	Needed to get a separate tax registration
Easy to scale up the business	Easy to merge or transfer the business	Easy to scale up the business	Possible to extend beneficiaries only if the deed provides

Reporting and Non-reporting Entities   

You must now understand reporting and non-reporting entities and their differences. According to Paragraph 40 of Statement of Accounting Concept (SAC) 1 (as cited in Australian Securities Investments Commission, 2022), a reporting entity is an entity that has users of financial statements who rely on the information presented in the general-purpose financial statements to make decisions for the allocation of resources.

General Purpose Financial Statements (GPFS) are those financial statements prepared to meet the needs of a wide range of users, such as creditors and investors. These statements provide all the general financial information required to take economic decisions. The SAC 1 also lays down the method for determining whether the users are dependent on GPFS, which is based on the following:

• Whether there is a clear differentiation between the shareholders and the management of the entity
• The social, political, or economic influence of the entity on the society
• The amount of debt owed by the entity to third parties

Any entity not required to submit its GPFS to the ASIC but can instead submit a Special Purpose Financial Statement (SPFS) is categorised as a non-reporting entity. An SPFS is a financial report that only presents financial information to a specific set of users.

SPFS should mandatorily include the following:

• Financial statements and accompanying notes
• Declaration by directors

SPFS and any associated audit report, review report or compilation report should identify the following:

• That the financial statements are Special Purpose Financial Statements
• The purpose for which the SPFS has been prepared
• The significant accounting policies adopted in the preparation and presentation of the SPFS

Some of the non-reporting entities are under the following:

Non-Reporting Entities	Reporting Entities
They must prepare and submit SPFS in compliance with the limited accounting standards applicable to them.	They are required to prepare and submit GPFS to ASIC.
They include: Not-for-profit organisations Charities Sole proprietorship businesses Firms	They include entities that are required to prepare financial reports in line with the guidelines of the Corporations Act, which are: All disclosing entities Public companies Companies limited by guarantee (except small companies limited by guarantee) All large proprietary companies that are not disclosing entities All registered managed investment schemes Small proprietary companies that are foreign-controlled 1 Sourced from the Federal Register of Legislation on 4 May 2022. For the latest information on Australian Government law, please go to www.legislation.gov.au. Corporations Act 2001, used under CC BY 4.0

Now that you have understood the differences between the reporting and non-reporting entities, it is important to understand the common non-reporting entities, which are:

• Not-for-profit Organisations
• Charities
• Partnership Firms
• Sole Proprietorships

Some key characteristics of not-for-profit organisations and charities are outlined below

Additionally, the characteristics of partnership firms and sole traders have been outlined in Section 1.

Understanding Applicability and Extent of Applicability of Accounting Standards to Non-reporting Entities   

Now that you clearly distinguish between reporting and non-reporting entities, it is imperative to understand the accounting standards applicable to the non-reporting entities in preparing the SPFS. Not-for-profit organisations must prepare financial statements under Chapter 2M of the Corporations Act 2001 to comply with accounting standards' recognition and measurement requirements. These include the following:

• AASB 101 Presentation of Financial Statements -  Paragraph 13 of accounting standard AASB 101 requires an entity’s financial report to present a true and fair financial position, performance, and cash flows. This requires the correct representation of the effects of financial transactions, other events and conditions in line with the definition and recognition criteria for their classification as 'assets', 'liabilities', 'income' and 'expenses' as set out in the 'Framework for the Preparation and Presentation of Financial Statements' (Framework).  Paragraph 25 of AASB 101 also requires all entities to apply the accrual basis of accounting.
• AASB 107 Cash Flow Statements - The standard requires entities to provide information about the historical changes in their cash equivalents. Entities must use a cash flow statement that classifies cash flows during a period from operating, investing, and financing activities.
• AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors - If there is no Australian accounting standard specifically applicable to a financial transaction, other event or condition, paragraphs 10 and 11 of AASB 108 require that the management of an entity refers to and considers the applicability of the following sources in descending order:
  • The requirements and guidance in Australian accounting standards dealing with similar and related issues; and
  • The definitions, recognition criteria and measurement concepts for assets, liabilities, income, and expenses in the framework ²

Further Reading

The reporting requirements are taken from the official website of ASIC. The complete guide can be accessed here: RG 85 Reporting requirements for non-reporting entities

• AASB 1053 Application of Tiers of Australian Accounting Standards - This standard outlines the applicability of the tier 2 reporting of Australian accounting standards and the simplified disclosures to for-profit private sector entities, not-for-profit sector entities, and public sector entities other than the government.
• AASB 1054 Australian Additional Disclosures  - The standard outlines the additional disclosure requirements to be met by Australian entities. According to this standard, the not-for-profit private sector entities that prepare an SPFS are required to disclose the following while preparing SPFS:
  • Basis of the decision to prepare SPFS
  • Whether the entity has any interest in other entities like subsidiaries
  • List of material accounting policies that are not in compliance with recognition and measurement requirements of Australian Accounting Standards
  • The compliance of financial statements as a whole with all applicable accounting standards

However, the same does not apply to entities reporting under AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

• AASB 1048 Interpretation and Application of Standards
  • AASB 1048 identifies and classifies the Australian Interpretations based on their correspondence with the IASB Interpretation.
  • Entities are required to apply every Australian Interpretation when preparing financial statements.

The Australian Charities and Not-for-profits Commission (ACNC) is the regulator of charities. Together with the AASB, the ACNC develops financial reporting guidelines for entities registered with the ACNC. However, non-reporting entities registered with the ACNC are expected to apply only six essential accounting standards instead of the complete accounting standards. They are those standards deemed necessary for financial statements to give an accurate and fair view.

The non-reporting entities must comply with all the disclosure requirements of the above standards. In addition, they must comply with the other standards to the extent of recognition and measurement.

For example, an entity having property, plant and equipment (PPE) must recognise the PPE under AASB 116 Property, Plant and Equipment. However, they need not necessarily disclose a separate note in the financial statements. Nevertheless, it must disclose the property, plant and equipment accounting policy as AASB 108 applies.

The ASIC Regulatory Guide 85 Reporting requirements for non-reporting entities (March 2022) states that the SPFS should be prepared within the framework set by the Accounting Standards. Complying with the Accounting Standards ensures that the following requirements of the Corporations Act 2001 are met:

• A true and fair view of the financial position is presented in the financial statements (s.297).
• There is no misleading or false information in the financial statement (s.1308).

Therefore, all accounting standards' recognition and measurement requirements must be applied to determine profit or loss and the financial position of the non-reporting entities. The Accounting Standards outline the recognition and measurement requirements. The requirements include those relating to the following:

• Computation of depreciation of non-current assets
• Impairment of goodwill and other intangible assets
• Accounting for income and taxes
• Accounting for leases
• Valuation of inventories
• Recognition and measurement of liabilities for employee benefits
• Financial instruments and provisions

Additionally, you must follow the Accounting Standards that provide the mechanism for classifying financial items. For example, you may refer to the requirements of AASB 132 Financial Instruments: Presentation concerning the classification of financial instruments as debt or equity.

The ASIC has also issued Corporations (Non-Reporting Entities) Instrument 2015/841. The legislative instrument ensures that non-reporting entities can take advantage of reduced recognition and measurement requirements of accounting standards applicable to reporting entities. A reduced requirement includes the concessions available under AASB 1 First-time Adoption of Australian Accounting Standards and transitional provisions or other concessions open under a non-mandatory accounting standard. The non-reporting entity can avail of this relief if it ensures that the relevant financial report complies with all recognition and measurement criteria as if it were a reporting entity.

Further Reading

All the Accounting Standards previously mentioned can be found on the AASB website through the link below: Accounting Standards

1.1.4 Nature of Financial Transactions and Source of Data   

Every entity, reporting or otherwise, has similar financial transactions. These transactions can be broadly classified as follows:

Sources of information for each kind of data begin with the source document. A source document refers to a document validating the existence of financial transactions. For example, the electricity expenses are backed by electricity bills. Similarly, the purchase of assets is supported by the purchase invoice and liabilities by the documents proving the undertaking of liability by the business entity. These source documents form the basis for recording transactions in the books of accounts through double-entry bookkeeping systems.

Transactions are first recorded in the form of journal entries chronologically. A journal entry indicates a business transaction in the accounting system. All business transactions are first recorded in journals and then in ledgers. Journal entries are prepared based on the double-entry accounting system. It is the building block practised for ages to maintain business documents.

For example, cash sales would be recorded as follows:

Description	Debit ($)	Credit ($)
Cash A/c	XXXX
To Sales A/c		XXXX
(Summary of the transaction)

The journal entries of all similar transactions are grouped in the ledger. That forms the source of the trial balance, which is the basis for preparing the financial statements.

So, you must ensure that the trial balance is obtained and all the ledgers are appropriately grouped based on the nature of the transactions. You must also ensure that the numbers reflect an accurate and fair view.

For example, ledgers can be grouped as follows:

Mechanism for Collection and Compilation of Data   

The data can be collected from the books of accounts of the business entity backed by the appropriate source documents. You must additionally obtain additional external information such as bank statements and confirmation from lenders. This information can be obtained from external sources such as banks, vendors, lenders, and debtors. Further, a few year-end adjustments must be made to ensure that the financial statements provide an accurate and fair view as required by the Corporations Act 2001. This brings you back to the need for appropriate storage, management and accessibility of data collected from various sources and compiled. During data collection, you must ensure that the data collected is in line with the requirements of the accounting standards prescribed by the AASB.

The data can be collected from various sources within and outside the business entity. The external data can be collected in the following manner:

• Bank's website
• Requests via e-mail
• Accessing the vendor portal
• Accessing the customer portal
• Government website
• Placing data requests via phone

For data available with the business entity, you must first request access to all records and documents of the entity.

Once such access is granted, the data can be collected from the following sources:

As stated in the previous subchapter, preparing the financial statements of non-reporting entities requires data collection from various sources to present an accurate and fair view. The data collected from multiple internal and external sources must be collated, classified, and verified for accuracy and consequent reliability. This should be done systematically, so organising rules should be followed methodically.

Classifying data means arranging the data collected from various sources logically. Coding refers to labelling the data in a sequence for easy access and information retrieval. It is, therefore, imperative to ensure that the data is appropriately coded to facilitate accessibility for easy input of data into the accounting software of the organisation. This coding and classification must align with the organisational data management policy.

However, collecting, classifying, and coding the financial data is insufficient. Therefore, it is also vital to ensure that the data collected is reliable, requiring you to check it. Checking involves looking for any errors and inconsistencies observed in the data provided. You must also check if the data is accurate, i.e., without approximations or errors arising from estimations. Further, you must also ensure that the data is reliable. This means that data can be used for preparation and providing financial information to users of the financial statements.

This subchapter will help you learn about organisational policies and procedures for data coding and classification. You will also learn how to check data for accuracy and reliability.

Understanding Organisational Policy and Procedures for Data Coding   

Organisational policies and procedures usually go hand in hand. An organisation's policies are clear, concise statements of how it conducts its operations. In other words, the policies are the rules employees abide by to fulfil their responsibilities. For example, an organisation could have a policy to classify data based on the business function.

On the other hand, procedures are 'how' the organisation plans to achieve something. In simple terms, procedures are step-by-step guidelines for doing a particular activity related to the entity's business. For example, the procedure to code and classify would be to arrange all the data chronologically in a file and label the data according to the prescribed format. Therefore, understanding the base for all organisational policies to appreciate the standard procedures is crucial.

An entity creates a policy for all of its major functions; examples of organisational policies include the following:

These policies also outline the financial and accounting aspects of the transactions, including how to code such information. For example, understanding the organisational policy on asset management can be as follows:

1. Understand the policy's purpose, i.e., the scope and the assets covered.
2. Understand the data recorded in the asset register, e.g., the date of purchase, cost and taxes paid thereon. 
3. Understand how the invoices are to be coded, i.e., based on the nature of the asset and date of procurement.
4. Understand the depreciation policy, whether it is straight line depreciation or written down value method.
5. Understand the calculation method of the useful-life of an asset and its residual value.
6. Understand the provisioning requirements for impaired assets and frequency.

Once you have understood the organisational policies, it is crucial to understand the organisational procedures. As stated above, procedures are defined rules the organisation follows to achieve goals in line with its policies. The procedures clearly state the mechanism for carrying out an activity. For example, an organisation would have procedures for bank reconciliation, asset management, inventory management, year-end accruals, storing bills and supporting vouchers for payments. These procedures detail how to code and classify data related to these business functions. Examples of these procedures are arranging the data chronologically and the kind of coding mechanism, i.e., numeric or alphanumeric.

Some of these sample procedures are elaborated on below for reference.

The policies and procedures should be thoroughly understood and tested first to ensure they were followed while recording financial transactions during the year. For example, suppose the year-end accruals must be made for regular monthly payments like rent and telephone expenses before finalising the trial balance. In that case, you should check if the entity has provided the payments as dues payable or expenses accrued. All these transactions should be classified separately and coded uniformly to ensure easy identification.

Ensuring compliance with policies and procedures has to be done for all the policies directly impacting the financial statements. For example, the assets and the relevant supporting documents must be coded and classified according to the organisational policies and procedures.

Data Coding and Classification   

Once you have compiled all the data obtained from internal and external sources, including the data required to make the year-end adjustments, and understood the policies and procedures, it is vital to code and classify the data appropriately. How you code and classify must align with the organisational policies and procedures to ensure easy accessibility while preparing financial statements. The process of data coding and classification is outlined below.

1. Group similar data together: data relating to assets, liabilities, income and expenses can be grouped together. Data can further be grouped based on current and non-current assets or liabilities
2. Chronologically arrange data within the group: data grouped can be further arranged chronologically to access data further. Year-end adjustments must be arranged at the end of other data for easy identification.
3. Code the data in a logical manner: data can be coded using the alphabet, numerals or alphanumeric coding sequences in line with the organisational policy.
4. Classify the data: data can be classified based on the source of the data, the type, reliability or date.

For example, coding and classification of banking data could be done as follows:

1. Collect and group bank statements and supporting documents such as cheque books and deposit counterfoil of various banks into separate folders. Ensure to store them together with documents related to current assets.
2. Arrange the bank statements of every bank account based on the month to which it pertains. If any bank statements of subsequent periods are obtained for bank reconciliation, they need to be coded separately as subsequent period statements.
3. Code the bank statements and other documents by adding the labels showing the month to which they pertain.
4. Once the banking data is coded month-wise, they can then be classified into the data obtained from the bank, data obtained from the organisation (based on the source of the data).

Data coding and classification should align with the organisational policy and procedure. This will ensure uniformity in data management across the entity. For example, if the corporate policy mandates the maintenance of an asset register, the policy must be followed for all assets purchased across various departments. Therefore, any data or source documents obtained relating to purchased assets need to be mapped to the asset register and classified. Completing this action will also help map the assets purchased with the total additions made to fixed assets disclosed in the financial statements.

Further, suppose the organisational procedures require the asset registers to be numbered sequentially based on the financial year to which they pertain. In that case, the asset registers have to be coded with reference to the financial year they relate to, facilitating verification with the financial statements of the respective years.

Verification of Data Accuracy   

Once data is collected, compiled, classified, and coded from internal and external sources, it must be verified. Organisational policies and procedures lay down the various checkpoints for data verification and the manner of verification of the said data. For example, the policy could require validation of data related to borrowings with loan statements received from the bank. The procedure could require reconciling the loan statements with the loan account in the books of accounts.

Data verification is integral for relying on the data collected while preparing financial statements. Data accuracy is paramount in generating quality output.

Data is collected from internal and external sources. The mechanism for data verification varies depending on the source from which it is collected. However, the data must be verified in line with organisational policies and procedures. Usually, to ensure that financial statements provide an accurate and fair view, more reliance is placed on external rather than internal data. However, it is always better to place reliance on a healthy mix of data from internal and external sources.

For example, while verifying the amounts payable to trade creditors, the purchase requisitions, purchase orders, and invoices help ascertain the closing balance of vendors as reflected in the trial balance. Still, it always helps to have external confirmation from the vendor.

The data collected can be verified for accuracy in the following manner:

1. Verify with the source document and recheck the financial impact. For example, you can verify the invoice for expenses to see if the expense and related taxes are appropriately accounted for in the books of accounts.
2. Check the data with alternative source documents. For example, the inventory issued from the store can be cross-referenced and verified with the quantity sold to ensure that the inventory in hand is appropriately recorded at all times.
3. Analyse and reanalyse data for any anomalies compared to historical data.
4. Wherever calculations are involved, recalculate and recompute the information.
5. If the data obtained is from a secondary source, revisit the primary source to check accuracy.

The data collected can be verified for reliability in the following manner:

1. Check if the data provider is authorised to provide the said data
2. Check if the data called for and received is complete in all aspects. For example, suppose the loan statement is obtained from the bank. In that case, it should cover the 12 months of the financial year and cover all the loan transactions like interest, penal interest and principal repayments.

For example, for verifying bank balances, the internal source of data is the bank ledger from the books of accounts which can be verified for accuracy using the bank statements obtained from the bank. To check the reliability of the data, see if the person providing the said bank statements was authorised to provide the data in the first place.

Verification of fixed asset closing balances can be done physically using the fixed asset register and invoices in case of new additions. The depreciation charged thereon can be recalculated to ensure accuracy. The reliance on the data can be placed based on the person carrying out the check and by ensuring that a maker and checker are present during physical verification and subsequent reporting.

Checkpoint! Let's Review   

• Policies are the whys, and procedures are the how-tos of regular activities of the organisation.
• Data collected must be coded and classified according to organisational policies for easy accessibility.

Regardless of its nature, every business entity operates in a complex, dynamic, and highly inter-linked business environment. A business cannot function in solitude. Everyday operation of companies takes the form of financial transactions that lead to the generation of financial data.

This financial data is generated within the organisation in goods manufactured, sales made, and services rendered. However, in the case of transactions with connections to other businesses, like purchasing raw materials from vendors and depositing money into the bank, the data is generated from outside the organisation.

Internal financial data refer to financial information collected from within the organisation, such as reports generated from the accounting software, the ledgers, and the various registers maintained.

External financial data refer to financial information relating to the organisation provided by those outside the organisation.

This subchapter will help you understand the various internal and external financial data sources used to prepare financial statements. You will also learn how to check data for accuracy and reliability.

Meaning of Internal and External Data   

As previously stated, data generated from within the organisation is called internal data, and the data obtained from outside the organisation is called external data.

Internal financial data is within the entity's control and can benefit the entity in many ways if generated accurately and utilised effectively. For example, internal data helps draw financial information quickly due to its easy accessibility. Internal data also helps with facilitating analysis of the performance of the business. This data is then further used to understand areas of improvement so the entity can achieve its goals better, which in turn, helps drive the decision-making of critical issues related to the business.

Significant internally generated data that can help businesses strategize and review financial performance are:

External financial data refers to data collected from either primary or secondary sources outside the organisation. Examples of these are:

Verification of Internal and External Data   

Data needs to be checked for accuracy to enhance its reliability, whether obtained internally or externally.

Verification of internally obtained data can be done as follows:

External data can be verified in the following manner:

• Legal Documents
  • Verify the data available with the entity.
  • Check if the actual name, place, address, and contact particulars of the business align with the disclosures made to the authorities.
• Debtor and Vendor Balance Reports
  • Cross-verify the purchase/sales transaction in the confirmation report obtained with the purchase orders or sales invoices.
  • Cross-verify the payments and receipts marked in the external confirmation with the entity’s bank statements.
• Bank Statements
  • Verify subsequent clearance of cheques and bank reconciliation statements to ensure that the books and the bank statements align.
• GST Returns and Filings with ATO
  • Verify the sales register with the sales declared in the GST returns.
  • Check the income as per financial statements and the income filed with the ATO.

The data can be referenced with the financial information already available in the books of accounts (i.e., journals and ledgers) to ensure they align with the same. This means that the amount of the transaction, and the period to which the transaction or the data relates, are the same and mutually in line with each other.

Cross-verifying data across multiple sources can check data consistency to ensure they all present the same information similarly. For example, to ensure that information presented is the same everywhere, bank transactions can be verified across:

• Bank statements
• Bank vouchers
• Journal entries
• Ledger accounts

Data accuracy can be checked by verifying if the amounts, computations, quantitative and other financial particulars are recorded at the actuals without any estimations and approximations involved. For example, a purchase of raw materials paid through a check amounting to $456 cannot be recorded as $460 in the books of accounts.

In addition to verifying data for accuracy, one must also ensure that the data is consistent with one another. For example, the salary and wages paid to the employees as recorded in the payroll register should be the same as the actual salary paid out to the employees. Further, there must be consistency in the data obtained from external and internal sources. In case of discrepancies, the organisational policy must be adhered to, and the differences must be rectified.

This video talks about the basics of source documents. Tory Norman is a YouTuber who focuses on business education.

Checkpoint! Let's Review   

• Internal financial data refers to financial information collected from within the organisation.
• External financial data refers to financial information relating to the organisation provided by those outside the organisation.
• Internal and external financial data must be checked for accuracy to enhance reliability.
• Checking for consistency ensures that the financial data collected is the same across multiple sources.