As explained in our previous article, the Australian Accounting Standards Board (AASB) published Exposure Draft 335 General Purpose Financial Statements – Not-for-Profit Private Sector Tier 3 Entities (ED 335) in October 2024, moving closer to its goal of having a consistent, transparent and fit-for-purpose reporting framework for the not-for-profit (NFP) private sector.
ED 335 proposes reporting requirements designed specifically for smaller not-for-profit private sector entities, which are envisaged by the AASB to be similar in size to the Australian Charities and Not-for-profits Commission’s (ACNC) ‘medium’ charities (with revenue between $500,000 and less than $3 million).
The proposals aim to simplify financial reporting and reduce the current compliance burdens for these entities by introducing less complex recognition and measurement principles, along with reduced disclosure obligations, making it more accessible and cost-effective for smaller NFP entities.
Below we explore some of the key recognition and measurement simplifications being proposed in ED 335.
Revenue recognition
Revenue is deferred when there is a common understanding that an entity is expected to perform in a specific manner. Evidence of a common understanding includes written or oral communications or representations with respect to the purpose for which the asset is to be expended, transferred or used, or the period over which the asset is to be used. Deferred revenue is then recognised as the deferred obligation is satisfied.
In the absence of a deferred revenue obligation, revenue is recorded simultaneously with the initial recording of the asset which will be at the earlier of receiving the asset (such as cash) or controlling a receivable.
Leases
Lease payments are expensed on a straight-line basis over the lease term, unless another method better reflects how benefits are received from the leased asset. This essentially means that all leases will be ‘off balance sheet’.
Basic financial instruments
Financial assets and liabilities are initially measured at fair value, typically the transaction price, excluding transaction costs (which are expensed immediately). Financial assets are subsequently measured at cost, less any impairment losses. Financial liabilities are also subsequently measured at cost.
Employee benefit provisions
Provisions for employee benefits (other than defined benefit superannuation provisions) are recognised at the undiscounted amount expected to be paid.
For long-service leave, the most likely outcome approach may be used to estimate these provisions (as opposed to using the probability-weighted expected value approach).
Inventories
Inventory is measured at cost or current replacement cost, whichever is easier to determine.
Property, plant and equipment (PPE)
PPE is initially measured at cost. However, in the case of donated items of PPE, the entity may choose to measure the asset at cost or fair value.
Impairment of assets
The impairment assessment is simplified based on observable declines in asset value or when the entity has changed its strategy or is affected by a reduction in external demand for its goods or services.
The standard is less prescriptive about detailed cash flow projections, making it easier for smaller entities to assess impairment based on clear, observable declines in value, such as market value reductions or other straightforward indicators.
Provisions and contingent liabilities
Reduced complexity in recognising provisions, focusing on probable outflows without requiring a detailed measurement process.
Consolidated and separate financial statements
A parent entity has the option to present consolidated financial statements or separate financial statements with disclosure about ‘notable relationships’, thereby easing the reporting burden for smaller organisations.
Notable relationships
The concept of ‘notable relationships’ is new and refers to a relationship in which an entity has at least significant influence over another entity (with or without holding an investment in the other entity’s equity instruments, if any exist).
A reporting entity with a notable relationship preparing separate financial statements, has an accounting policy option to account for all its notable relationships:
- at cost
- at FVTPL (unless an irrevocable election is made at the initial recognition to measure at FVTOCI), or
- based on the equity method.
Entity combinations
ED 335 also introduces the concept of an ‘entity combination’ which combines separate entities or operating units into a single reporting entity. In an entity combination, the difference between the consideration paid and the carrying amount of the net assets acquired or merged is recognised directly in equity. There is no recognition of goodwill or discount on a bargain purchase.
Transitional provisions
Entities transitioning to Tier 3 reporting would be granted transitional relief from restating and presenting comparative information in the year of transition. Furthermore, there is no need to distinguish between correction of errors and changes in accounting policy upon transition.
Effective date
The AASB intends to allow for an implementation period of at least three years once the final standard is issued. For example, if the final standard is issued in December 2025, the effective date would be no earlier than annual reporting periods beginning on or after 1 January 2029.
Make sure to have your say!
The proposed simplifications aim to reduce the cost and effort involved in financial reporting for smaller not-for-profit private sector entities.
The AASB has invited stakeholders to provide feedback on ED 335, with the comment period closing on 28 February 2025. If you would like to assist in shaping the future of reporting for the NFP private sector, make sure to lodge a submission or complete the 30-minute online survey.
This article was co-written by Hui Ping Teoh, Manager Audit & Assurance Melbourne.