Since 2020, the Australian Accounting Standards Board (AASB or the Board) has been keenly deliberating what simplified accounting requirements for smaller not-for-profit (NFP) entities could potentially look like.
The Board recently issued a Discussion Paper (DP) setting out its initial discussions and resultant views regarding a proposed Tier 3 reporting tier for NFP private sector entities. This marks the first step in updating the NFP financial reporting framework.
The significance of this project cannot be emphasised enough. The NFP sector in Australia is large, encompassing a broad range of organisations that pursue a variety of charitable objectives in an effort to advance the likes of social wellbeing, culture, education, health, animal welfare, the environment and religion, all for the benefit of the broader community.
NFP entities are accountable to those parties that rely on them for the goods or services they provide, as well as those that provide the NFP entities with resources. Users often rely on NFP financial statements when making decisions about whether to provide them with resources such as donated funds or assets. Financial statements are therefore a tool for NFP entities to communicate to stakeholders how they discharge their responsibilities and manage their resources (which are often limited).
It is therefore crucial to have a consistent, transparent and fit for purpose financial reporting framework for the NFP private sector.
Why is the Board pursuing this project?
The AASB’s intention is to remove the ability of certain NFP entities to self-assess their reporting requirements and prepare special purpose financial statements (SPFS). The existing Tier 1 or Tier 2 reporting requirements would be onerous for many of the smaller NFP entities affected by the removal of SPFS since these entities generally have fewer complex transactions and other events.
The aim is to develop a third reporting tier with accounting requirements that are easier to understand and apply, while ensuring the resulting financial statements remain useful to users.
Who are the proposals aimed at?
The preliminary views contained in the DP are expected to impact ‘smaller’ NFP private sector entities that are required to prepare financial statements in accordance with Australian Accounting Standards for a regulatory authority or as directed under a legal document.
In developing its initial views, the AASB considered a ‘smaller’ NFP entity to be one with annual revenue between $500,000 and $3 million. However, the scope of this project does not include specifying reporting thresholds for the application of general purpose financial statements by NFP private sector entities as this falls within the remits of the relevant regulatory bodies.
What would the proposed Tier 3 look like?
The Tier 3 accounting requirements will be based on those transactions that are common to smaller NFP entities. It is proposed that all these requirements be presented in a single, stand-alone standard.
The standard will be written in language that is easier to understand and will include guidance on applying the accounting requirements. It is proposed that the standard also be accompanied by template financial statements.
What are some of the proposed simplifications?
Income recognition, leases, employee benefits, consolidation, impairment and financial instruments are some of the key topics with significantly simplified recognition and measurement requirements.
For example, it is proposed that all leases remain off-balance sheet, with lease payments recognised on a straight-line basis over the term of the lease unless another systematic basis is more appropriate. This is a substantial simplification from the current requirements in AASB 16 Leases which require the capitalisation of the majority of leases.
Other topics such as property, plant and equipment, fair value measurement and volunteer services will have the same recognition and measurement requirements as Tier 1 and/or Tier 2, however the respective requirements will be expressed using simpler language and terminology.
To avoid cluttering the Tier 3 standard with reporting requirements that are not ordinarily applicable to smaller NFP entities, the AASB proposes to omit specific topics from the standard. These include share-based payments, business combinations and ‘more complex’ financial instruments.
What are the next steps?
The DP is out for comment until 31 March 2023. Comments submitted by stakeholders will drive whether and how the project proceeds. Assuming the DP gets the required support, the likely next step would be an Exposure Draft.
How do stakeholders get involved?
There is much to be gained from the success of this project in the form of simplified accounting and reduced costs for smaller NFP entities. It will ensure more consistent application of recognition and measurement requirements by these entities, meaning improved quality and comparability of financial reporting in the sector.
There are various ways for interested stakeholders to get involved at this early stage of the project. Comments can be provided via:
- an online survey (https://www.surveymonkey.com/r/AASBTIER3NFP)
- email to the AASB (firstname.lastname@example.org)
- a formal submission (aasb.gov.au/current-projects/open-for-comment/)
The online survey is a quick and easy means for stakeholders to have their say. We strongly encourage NFP entities that may be impacted by the reforms to read the 12-page overview of the DP and then complete the 20-minute survey before the closing date.
HLB Mann Judd will be submitting a response to the DP to make sure we take advantage of the opportunity to help shape the form and content of a potential third tier for smaller NFP entities. We will also keep our readers abreast of developments as they unfold over the span of this project.