Since issuing a Discussion Paper (DP) late in 2022, the Australian Accounting Standards Board (AASB) has continued to work on a simplified financial reporting framework for smaller NFP entities. The AASB’s efforts have culminated in two exposure drafts, one of which will see the end of special purpose financial statements (SPFS) for many NFP entities.

For several years now, it has been on the AASB’s agenda to get rid of SPFS in Australia. This project focussed on for-profit private sector entities initially, with many of these entities having to move from special purpose to general purpose reporting from 2022. At the same time, the Tier 2 framework was revamped to provide simplified disclosure requirements for these entities having to prepare general purpose financial statements (GPFS) going forward.

NFP entities are about to embark on a similar journey.

To advance this phase of its project, the AASB has issued two exposure drafts:

ED 334

Currently, a NFP entity that does not deem itself to be a reporting entity as envisaged in SAC 1 Definition of the Reporting Entity is permitted to prepare SPFS to satisfy its reporting obligations.

ED 334 proposes to remove the ability of certain NFP entities to prepare SPFS by extending the scope of the Conceptual Framework for Financial Reporting to include:

  • NFP entities that are required by legislation to prepare financial statements that comply with Australian Accounting Standards (AAS) or ‘accounting standards’;
  • Other NFP entities required by their constituting or another document to prepare financial statements that comply with AAS; and
  • NFP entities that elect to prepare GPFS.

The term ‘accounting standards’ is included in the first dot point above since some legislation makes use of this general term when in fact it was intended to mean ‘Australian Accounting Standards’.

Constituting or other documents that refer to anything other than ‘Australian Accounting Standards’ (such as generally accepted accounting principles) will not result in the need to prepare GPFS.

Examples of the types of NFP entities that will be affected by the removal of SPFS include:

  • Medium and large charities registered with the ACNC
  • Non-ACNC registered companies limited by guarantee
  • NFPs that report under State or Territory legislation requiring the preparation of financial statements that comply with AAS or ‘accounting standards’ (e.g., incorporated associations and co-operatives)
  • NFPs such as trusts and partnerships with constituting (or other, such as finance) documents that require the preparation of AAS-compliant financial statements.

ED 335

This exposure draft proposes a stand-alone accounting standard that sets out a simpler, third reporting tier aimed at smaller NFP private sector entities. Financial statements prepared under these proposed Tier 3 requirements will qualify as GPFS.

Tier 1 and Tier 2 requirements are, in many instances, too onerous for smaller NFP entities. The new Tier 3 reporting framework is expected to provide an appropriate alternative for such entities, reducing their reporting burden while still meeting the needs of users of GPFS. This may be especially true for those entities impacted by the proposals in ED 334 and that will need to prepare some form of GPFS going forward.

Some of the simplifications include:

  • Omission of topics and requirements not relevant to NFP entities
  • The use of simpler drafting and language
  • Simplified presentation, recognition and measurement requirements
  • Fewer disclosures.

Based on the current proposals, the following criteria need to be met for an NFP entity to be able to report under Tier 3:

  • The NFP entity must not have public accountability; and
  • It must be a Tier 3 entity under relevant legislation or constituting (or other) documents.

Tier 3 entities will have the choice to report under Tier 1 or Tier 2 (instead of Tier 3) if they so prefer.

Make sure to have your say!

The AASB is seeking feedback on its proposals by 28 February 2025, so make sure to lodge a submission or complete the 30-minute online survey if you would like to assist in shaping the future of reporting for the NFP sector.

This article was first published in The Bottom Line, Issue 21.