A new proposal to remove the concept of a ‘reporting entity’ has the potential to significantly impact the way in which not-for-profit entities and medium and large registered charities fulfil their financial reporting obligations. The proposed changes were released by the Australian Accounting Standards Board (AASB) in May of this year, in Invitation to Comment (ITC) 39 Consultation Paper – Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems.
Currently, many entities can self-assess as non-reporting entities, allowing them to prepare special purpose financial statements (SPFS). The Australian Accounting Standards Board (AASB), however, is proposing that such entities be deemed reporting entities, which will require them to lodge more complex general purpose financial statements (GPFS).
The AASB has proposed to defer application of the IASB’s RCF to NFP entities to enable it to consult with NFPs on the implications of the IASB’s proposals as well as NFP modifications that may be necessary in accordance with the AASB's NFP Standard-Setting Framework.
In addition, recently the AASB decided not to seek comments from NFPs on the proposals in ITC 39. Instead, the AASB intends to issue a separate consultation paper in due course with targeted proposals for NFPs.
- Read ITC 39 in full on the AASB website or further resources on the topic
- Contact your Pitcher Partners expert for further information and assistance on the proposals in ITC 39 (contact details below)
- Await the AASB's separate consultation document with targeted proposals for NFP entities.
Why are the changes proposed?
In March 2018, the International Accounting Standards Board (IASB) issued its Revised Conceptual Framework (RCF), which included the following definition of a reporting entity.
...an entity that is required, or chooses, to prepare financial statements...
The AASB is required to adopt the IASB’s RCF, including the new definition of a reporting entity, to ensure Australian entities comply with International Financial Reporting Standards (IFRS).
What is ITC 39 proposing to change?
Adopting the IASB’s new definition of a reporting entity for Australian entities is likely to have a significant impact on the way in which entities that are legally required to prepare financial statements fulfil their financial reporting obligations. As noted in paragraph 34 of ITC 39:
...according to the IASB’s RCF, an entity that is required by legislation or otherwise to prepare financial statements is a reporting entity... This is fundamentally different to the definition of reporting entity in Australia, where a reporting entity (as per SAC 1 Definition of the Reporting Entity) is an entity that is required to prepare GPFS and an entity that is not a reporting entity (ie non-reporting entity) can choose to prepare SPFS.
In Australia many entities are required by legislation, such as the Corporations Act 2001 and the Australian Charities and Not-for-profits Commission Act 2012, to prepare financial statements. Relatively few entities that prepare and lodge financial statements in accordance with such legislative requirements, however, currently prepare GPFS. Most companies and associations prepare SPFS, which need not be prepared in accordance with all applicable Australian Accounting Standards. Consequently, SPFS often do not:
a) Recognise all of the individual assets and liabilities the entity controls. For instance, an entity preparing SPFS might not prepare consolidated financial statements, which would mean that its balance sheet would not disclose all of the individual assets and liabilities of the subsidiaries that the entity controls;
b) Measure items in the same way as they would be measured if the entity prepared GPFS. For instance, a NFP entity preparing SPFS might measure some or all of the assets it has received as donations at $0; and
c) Provide detailed disclosures about the transactions and events the entity has been involved in. For instance, an entity preparing SPFS might not disclose the nature and amount of any related party transactions during the reporting period.
Accordingly, under the proposals in ITC 39, entities that have previously met their legal obligations to prepare financial statements by preparing SPFS may need to invest significant amounts of both time and resources into their financial reporting systems in order to transition to GPFS.
What is the AASB proposing in respect to implementation?
ITC 39 identifies five possible options for implementing the proposals in ITC 39. Of these five options, the AASB has identified Option 1: Two-phased approach to applying the IASB’s RCF as its preferred approach.
As the name implies, Option 1 comprises the following two stages:
- In the short term, adopt the IASB’s RCF for ‘publicly accountable’ entities (i.e., entities that currently apply (full) Tier 1 Australian Accounting Standards, such as companies listed on the Australian Stock Exchange and registered schemes) and entities voluntarily claiming IFRS compliance, thereby enabling these types of entities to maintain their IFRS compliance status (phase 1); and
- In the medium term, adopt the IASB’s RCF for all entities by removing SAC 1 and the Australian reporting entity concept, thereby removing SPFS from AAS. In addition, the AASB would provide an alternative Tier 2 (Reduced Disclosure Requirement) GPFS framework (discussed below), which would be available to all entities that are not publicly accountable or otherwise voluntarily claim IFRS compliance (phase 2).
The AASB considers Option 1 to have several advantages over the other four options it identified, including:
- Maintaining IFRS compliance on a continuous basis for publicly accountable for-profit entities and other entities that voluntarily report compliance with IFRS;
- Maintaining the status quo for all other entities in the short term;
- Meeting the AASB’s legislative obligations to facilitate comparability and thereby ensuring there are appropriate accounting standards for each entity required to comply with AAS; and
- Allowing time for the AASB to consult and determine the NFP modifications that may be necessary for the RCF to apply to NFP entities.
Nevertheless, Option 1 anticipates that in the medium term AAS would be aligned with the IASB’s RCF for all entities, including NFP entities, which would mean all entities that are required by legislation to prepare financial statements in accordance with AAS (including large proprietary and public companies, Australian Charities and Not-for-profits Commission (ACNC) -registered charities as associations) would be eventually required to prepare, at a minimum, financial statements that comply with all relevant recognition and measurement requirements in AAS.
What are the implications for NFPs?
As they are currently framed, the proposals in ITC 39 do not provide any reporting relief for NFPs. For instance, registered charities that are classified as ‘medium’ or ‘large’ are currently required by the Australian Charities and Not-for-profits Commission Act 2012 to prepare financial statements annually and apply AAS. In addition, section 60.30 of the Australian Charities and Not-for-profits Commission Regulation 2013 prescribes that if a registered charity is both not required to and chooses not to prepare GPFS, at a minimum the entity is required to prepare its financial statements in accordance with the following AAS:
- AASB 101 Presentation of Financial Statements;
- AASB 107 Statement of Cash Flows;
- AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors;
- AASB 1031 Materiality;
- AASB 1048 Interpretation of Standards; and
- AASB 1054 Australian Additional Disclosures.
If the AASB were to require an unmodified version of the proposals in ITC 39 to apply to NFPs, the provisions in section 60.30 of the Australian Charities and Not-for-profits Commission Regulation 2013 would be rendered ineffectual as there would no longer be a concept of SPFS within AAS. Consequently, medium and large registered charities that would otherwise qualify as non-reporting entities would be required to prepare and lodge GPFS rather than SPFS.
Nevertheless, ITC 39 does acknowledge that subject to the outcomes from the current five-year Legislative Review of the Australian Charities and Not-for-profits Commission Act 2012 and the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Act 2012, the AASB would be supportive of developing another tier of reporting for some private sector NFPs (such as modified accruals or cash accounting for some small charities) as an alternative to all registered charities being required to prepare GPFS.
At its August and September 2018 meetings, the AASB decided that the proposals in ITC 39 would, for the time being, only apply to for-profit entities and that AASB would commence work on a separate consultation document with targeted proposals for NFP entities. This NFP-specific consultation paper will be developed in consultation with the ACNC and state and territory regulators and is expected to explore the following three tiers of reporting for NFP entities, subject to the outcomes from the recommendations in the recently published ACNC Legislative Review:
- ‘Bottom tier’ – most likely to be cash accounting with a statement of resources and commitments for application by ACNC registered entities to support completion of the ACNC’s Annual Information Statement;
- ‘Middle tier’ – either Tier 2 General Purpose Financial Statements (full recognition and measurement with simplified disclosure); and
- ‘Top tier’ – either Tier 1 (full recognition, measurement and disclosure) or Tier 2 General Purpose Financial Statements.
It is also relevant to note that ACNC legislative review identified related party transactions and remuneration as areas warranting more detailed reporting by NFPs.
 AASB 1031 Materiality was withdrawn by the AASB, effective from 1 July 2015.