Special purpose financial reporting by not-for-profit entities (NFPs) has been the norm for over 20 years. Further, transaction neutrality (also referred to as sector neutrality) has been built into our financial reporting framework for just as long – this means that for-profit and not-for-profit transactions are for the most part accounted for in the same way. This is all set to change under the new Exposure Drafts (EDs) issued by the Australian Accounting Standards Board (AASB) in October 2024.
The AASB issued the following EDs in October 2024:
- ED 334 Limiting the Ability of Not-for-Profit Entities to Prepare Special Purpose Financial Statements
- ED 335 General Purpose Financial Statements – Not-for-Profit Private Sector Tier 3 Entities
ED 334 will require certain NFP entities to prepare general purpose financial statements (GPFS) rather than special purpose financial statements, consistent with the amendments introduced for for-profit entities for annual reporting periods commencing 1 July 2021. This change will apply to:
- NFPs that are required by legislation (such as the Australian Charities and Not-for-Profits Commission Act 2012 or the Corporations Act 2001) to prepare financial statements that comply with Australian Accounting Standards or accounting standards; and
- NFPs that are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards that are created or amended on or after the application date for the new requirements.
Other NFPs not covered by the above will continue to choose the relevant accounting framework to apply that meets the needs of the users of their financial reports.
ED 335 proposes to break the ‘transaction neutrality’ principles, and introduces simplified reporting requirements for Tier 3 entities, in the same way that other jurisdictions around the world have for smaller NFP and for-profit entities. The proposals have been developed with smaller NFPs in mind (revenues of less than $3 million), as a reference point, however the AASB will not be imposing thresholds for their adoption. They will leave it up to policy makers and/or regulators to introduce relevant thresholds as they see fit.
The simpler Tier 3 proposals contain the following:
- simplified recognition and measurement requirements
- simplified disclosure requirements
- relief from restating and presenting comparatives in the first year of adoption.
The AASB consider that Tier 3 introduces a proportionate response to the costs incurred by NFPs in preparing GPFS (those currently preparing GPFS and those that will be required to prepare GPFS under the proposals in ED 334), while still meeting the needs of users of the financial statements.
The types of simplified recognition and measurement requirements include:
| Topic | New simplified requirements |
| Consolidated financial statements | A parent entity may elect (but is not required) to prepare consolidated financial statements. |
| Revenue | Single accounting approach for all revenue (including donations, grants, membership fees and sales of goods or services). Deferred revenue is recognised if the entity and the other party have a common understanding (e.g., written communication) that the entity will perform in a particular manner (not necessarily an enforceable obligation) resulting in related expenditure or the transfer or using up of the asset received or other assets of the entity. |
| Donated items | Donated items of property, plant and equipment, investment property and intangible assets may be initially measured at either cost (which may be $nil or a nominal amount) or fair value. |
| Leases | Lease payments are recognised as an expense on a straight-line basis over the lease term (or another ‘more representative’ systematic basis). |
| Concessional loans | Concessional loan liabilities are measured at the transaction price (i.e., the amount of cash advanced). |
| Impairment of financial assets | Impairment losses are recognised for receivables (and other financial assets measured at cost) when there is objective evidence of impairment. |
| Impairment of non-financial assets | Non-financial assets are tested for impairment (i.e., recoverable amount is calculated) when the asset is damaged, spoilt or obsolete, or the entity has changed its strategy or been affected by a reduction in demand for its goods or services and in either case the asset’s capacity to provide goods or services may have been adversely affected |
| Entity combinations | Entity combinations are accounted for at book value (i.e., using the existing carrying amounts of assets and liabilities). Any difference between the consideration paid and the carrying amount of the net assets obtained is recognised directly in equity |
| Provision for employee benefits | A provision for employee benefits, and related employee benefits expense, is measured at the undiscounted amount of employee benefits expected to be paid. A provision for long-service leave is estimated using a ‘most likely outcome’ approach (not a ‘probability-weighted expected value’ approach). |
The AASB are looking for feedback on their proposals. To facilitate this they have developed a page on their website which provides an overview of the key proposals (through a key facts document as well as a webcast) as well as information on how to respond. There are various means to respond, either through an online survey, written submission and/or attendance at one of the many outreach sessions that they are holding in January and February 2025 either virtually or in person (in Sydney and Melbourne)
Pitcher Partners will also be responding to the proposals, based on experience that our partners and staff have developed over many years working with our NFP clients.
