The Australian Accounting Standards Board has recently issued AASB 2025-2 Classification and Measurement of Financial Instruments – Tier 2 Disclosures, an amendment to AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities that introduces Tier 2 disclosure requirements concerning the classification and measurement of certain financial instruments.
This amendment aims to provide a more streamlined reporting framework for entities that qualify for Tier 2 disclosure requirements and improve users’ understanding of how contractual terms might affect their cash flows.
What are the key changes?
Alignment with AASB 2024-2:
AASB 2024-2 previously introduced similar amendments for Tier 1 entities by modifying AASB 7 Financial Instruments: Disclosures and AASB 9 Financial Instruments.
The amendments addressed:
- Settling financial liabilities via electronic payments;
- Assessing financial assets with Environmental, Social, and Governance (ESG) features;
- Providing disclosures about financial instruments with contingent features.
Changes to AASB 1060 relating to Simplified Disclosure Standards:
Tier 2 entities must disclose information about financial instruments with contingent features that don’t directly relate to basic lending risks and costs. This ensures stakeholders can assess the potential impact of contractual changes on cash flows.
AASB 2025-2 both renumbers and relocates ‘Supplier Finance Disclosures’ moving such disclosures from the Basic Financial Instruments section to the Statement of Cash Flow section. Specifically, the new disclosure requirements mean entities must make disclosures to assist with users’ understanding of contractual terms which may impact the amount of contractual cash flows based on the uncertainty surrounding a contingent event that does not directly relate to changes in basic lending risks and costs.
Such disclosures include:
- The nature of any contingent event via a qualitative description;
- A quantitative assessment of the possible changes in contractual cash flows;
- The amounts affected i.e. the gross carrying amounts of assets/liabilities impacted.
When is it effective?
AASB 2025-2 Classification and Measurement of Financial Instruments – Tier 2 Disclosure is effective for annual reporting periods beginning on or after 1 January 2026 however earlier adoption is permitted.
The bottom line?
Entities currently applying AASB 1060 will need to review and adjust their financial reporting to ensure compliance with the new disclosure requirements if they are applicable to their financial instruments. Companies with financial instruments containing contingent features, including for example those relating to ESG financing, should prepare to quantify and disclose their potential impact on cash flows.
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