At a glance
- The Australian Accounting Standards Board (AASB) has proposed introducing a simpler financial reporting framework for smaller not-for-profits.
- The AASB is seeking feedback on its initial proposals, published in a discussion paper in September 2022, from sector participants until the end of March 2023.
- The proposals are a step in the right direction, but regulatory changes will be needed for the framework to become operational in Australia.
By Gary Anders
The Australian Accounting Standards Board (AASB) has recently focused its attentions on the not-for-profit (NFP) sector.
This comes after the AASB recently completed the for-profit phase of its project to remove the ability for certain entities to prepare special purpose financial statements.
Adhering to the full suite of Australian accounting standards (AAS) when fulfilling financial reporting requirements is often an onerous and costly exercise for most of Australia’s smaller NFP entities.
This problem has long been on the AASB’s radar, with many stakeholders having voiced the need for simplified reporting.
In September 2022, the AASB published a discussion paper setting out its proposal to introduce a far simpler Tier 3 financial reporting framework for smaller NFPs.
The AASB is seeking feedback by 31 March 2023 from sector participants and others who have an interest in this topic.
The AASB will not set the parameters for the NFP entity type or size suitable for this new standard. However, an indicative range of annual revenues between A$500,000 and A$3 million has been provided as a guideline.
The key objectives for the standard are to cut preparation costs, to improve the comparability and quality of financial reporting, and to introduce consistent recognition and measurement requirements for smaller NFPs.
According to the discussion paper, the proposed Tier 3 standard would specify the accounting requirements for smaller NFPs in an easy-to-understand manner and is expected to include guidance to assist with applying the requirements.
Under these proposals, smaller NFPs would be subject to reduced recognition, measurement and disclosure requirements compared to full AAS.
The AASB does not intend to develop service reporting requirements as part of its current project, establish reporting thresholds, change the existing Tier 1 or Tier 2 AAS, or to develop an even simpler accounting standard for a fourth reporting tier.
“The project is addressing the feedback from stakeholders that the Australian reporting requirements were overly complex for application by smaller not-for-profit private sector entities, and current reporting requirements may not result in the comparable reporting,” says Nikole Gyles FCPA, technical director at the AASB.
“For example, the use of special purpose financial statements remains extensive, with 36 per cent of charities lodging financial statements that are publicly available, leading to a lack of comparability in financial reporting for the not-for-profit sector.”
Gyles says some of the key proposals include a new income recognition model that is simpler to apply and an accounting policy choice to prepare consolidated financial statements or separate financial statements with additional disclosures.
The AASB’s discussion paper proposes that Tier 3 NFPs would still be able to “opt-up” to an accounting policy permitted or required by Tier 1 or Tier 2 AAS for certain transactions.
Also, if a smaller NFP private sector entity chooses to present either full general purpose financial statements (GPFS) in accordance with all AAS, or GPFS accompanied by simplified financial disclosures in accordance with AASB 1060, it will not be restricted from doing so.
Right direction, but challenges ahead
Ram Subramanian, senior manager reporting and audit policy at CPA Australia, says the AASB’s proposal to simplify accounting for smaller NFPs is a step in the right direction.
“We support what the AASB is doing. We think this is a great initiative from the AASB to create a fit-for-purpose standard for the smaller not-for-profits,” Subramanian says.
“This is recognition from the AASB that the reporting needs of the not-for-profit sector are different from the for-profit private sector and the public sector.”
Subramanian says the significant effort the AASB has put into developing the proposed simplified accounting framework for smaller NFPs is commendable, and its approach is reasonable.
However, he notes that the AASB’s proposed framework would require regulatory changes across Australia for it to work properly.
“The AASB’s new Tier 3 standard is one piece in the NFP regulatory puzzle.
“The requirements for preparing NFP financial reports are mostly set out in state and federal legislation. There will be a need to make changes to a fair few pieces of legislation because multiple pieces of legislation require NFP financial reports.
“We understand the AASB is working with various regulators and lawmakers around the country to make this happen, but experience tells us that it will be challenging to get all jurisdictions aligned and on board with this initiative,” Subramanian says.
“We do need to have some kind of common approach agreed to by all the states and territories and the Commonwealth to say this is the right thing to do, and they can all push the start button at the same time, which will be an ideal outcome.”
Andrew Marks FCPA, director in the audit and assurance division at William Buck, supports the proposals, but he says clarification will be needed around who can and cannot use the new Tier 3, given the proposed NFP annual revenue range from the AASB is only a guideline.
“That will obviously require discussions with the regulators as to how that is going to work,” he says.
“If it is self-assessed, could you – in theory – have a not-for-profit organisation with very large revenue applying Tier 3?”
Gyles says that, while many stakeholders support having specific reporting requirements for smaller NFP entities, there are different views about the requirements and how they could apply.
“From its preliminary outreach, the [AASB] board appreciates stakeholder feedback supporting a single set of objective reporting thresholds,” she says.
“Ultimately, the board views the establishment of appropriate reporting thresholds and any dictate of a specific form of general purpose financial statements to be more appropriately within the remit of the relevant legislation or regulatory authority.
“The board is aware that its planned scope puts the onus on the relevant regulatory body to specify the type of general purpose financial statements to be prepared, where the regulatory body considers such specification necessary.
“Any change to legislation or regulations to effect such specification – if considered necessary – would take time. The board intends to work collaboratively with key legislative authorities and regulatory bodies to enable the orderly application of the proposals, where invited to do so, and to the extent it is able.”
NFP accounting: Revenue vs income
The transition journey
Subramanian says that the transition considerations for the new Tier 3 reporting will be another key challenge, particularly because the new accounting standard would remove the ability for smaller NFPs to prepare special purpose financial statements using selected AAS.
“Experience tells us, based on what has already happened in the for-profit space in the private sector for 30 June 2022 year-ends, that there will be challenges with the transition,” Subramanian says.
“The legislative requirements in the for-profit space largely required no changes to accommodate the removal of special purpose financial reporting.
"The not-for-profit regulatory space will need changes and the magnitude of change is far more than the for-profit space.”
There are also questions around what applicable assurance will apply to the new standard, and whether there will be any bespoke guidance or other requirements coming out of the Auditing and Assurance Standards Board to assist in the audit or review of the financial reports that are based on the new accounting standard, adds Subramanian.
“There are always rough edges that can be worked on, and that is why there is a consultation period to identify rough edges and smooth them over,” he says.
Gyles says the AASB has not yet finalised a timeline for potential transition to the Tier 3 reporting framework.
“The proposals would be subject to further public consultation, such as an exposure draft.
"Typically, the AASB will issue a standard with at least two years of lead time before its effective date and generally permits entities to apply those requirements early should they wish to do so,” Gyles says.
What about smaller for-profits?
There is a clear need for a simplified reporting requirement or standard for smaller for-profit entities, says Ram Subramanian, senior manager reporting and audit policy at CPA Australia.
One example is licensees under the Queensland Building and Construction Commission (QBCC), which requires financial reporting under its Minimum Financial Requirements Regulation that affects small licensees with relatively low annual revenue of A$800,000 and above.
Small licensees are not able to lodge special purpose financials and are required to prepare general purpose financial statements based on the same Australian Accounting Standards (AAS) as large companies.
“We’re advocating with the QBCC, and will be advocating with the AASB [Australian Accounting Standards Board], that we need to think about a simpler solution for these licensees,” says Subramanian.
“Why not think about tweaking what they’re creating for the not-for-profit space and make it available for some smaller for-profits?”
Accounting expert David Hardidge FCPA has been advocating for a simplified accounting approach for small-to-medium enterprises (SMEs) for more than 15 years. He agrees that extending what evolves for smaller NFPs to small private companies makes a lot of sense.
The International Accounting Standards Board introduced the International Financial Reporting Standards (IFRS) for the SMEs Accounting Standard in 2009 to simplify reporting requirements for small enterprises.
This standard was never adopted in Australia.
“Why can’t we apply a similar system using what the AASB calls a ‘transaction neutral approach’, which essentially means broadly the same standards for both public sector, private sector, not-for-profits and for-profits?” Hardidge says.
“There is a broader question that, if you’re doing a simpler system for not-for-profits, how different is this to IFRS for SMEs? Would it be simpler to not go down this path of Australia writing their own standard – why not adopt IFRS for SMEs in Australia?”
Give feedback to the AASB
The AASB’s consultation period provides scope for interested stakeholders to help shape the financial reporting framework.