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Financial Reporting Developments – Spring 2021

Our readers will be aware of the changes made to accounting standards last year that removes the ability of many for-profit entities to prepare special purpose financial statements. You’ll recall that from 1 July 2021 those affected for-profit entities will now have to prepare either Tier 1 (full compliance with all accounting standards) or Tier 2 general purpose financial statements. 

In making those changes, the AASB acknowledged that one size does not fit all and developed a separate project to address removing the reporting entity concept, and the resulting effects on financial reporting, for the not-for-profit (NFP) sector.
In this article, we’ll explain the AASB’s project to address the future financial reporting requirements of NFP entities and other changes affecting the sector.

Special purpose financial statements

At present, NFPs can still apply the previous reporting entity concept which permits those entities for which there are no users dependent upon general purpose financial statements to meet their information needs to prepare special purpose financial statements. The ACNC continues to accept special purpose financial statements for registered charities that are not reporting entities.

The AASB’s project will eventually remove the ability of NFPs to prepare special purpose financial statements. It is probable that the AASB will decide that NFPs required by legislation to prepare financial statements in accordance with Australian Accounting Standards would have to prepare general purpose financial statements.  This would mean that registered charities reporting to the ACNC and other NFPs required to lodge financial statements with other state or federal regulators would be required to prepare general purpose financial statements.

However, determining the final parameters for which NFPs will have to prepare general purpose financial statements  is challenging because of the different state and federal requirements relating to different types of NFP entities.

It’s not surprising, therefore, that the AASB hasn’t finally determined which NFPs would be captured by any new requirements.

Tiers of financial reporting

NFPs currently preparing general purpose financial statements can apply the existing two tiers of reporting requirements – Tier 1 and Tier 2. The AASB is not proposing to change these two tiers. However, you should remember that the Tier 2 reduced disclosure regime (RDR) has been withdrawn and replaced by the new Simplified Disclosure Standard (SDS) for annual reporting periods commencing on or after 1 July 2021.

A ‘third tier’ of reporting?

Some have expressed concerns that the Tier 2 reporting requirements, which requires the application of all recognition and measurement requirements of accounting standards, are too onerous and are not proportionate for some smaller NFP entities.

As a result, the AASB is exploring a possible new Tier 3 of general purpose financial statements that would be available to certain NFP entities. Their primary objective of Tier 3 reporting is to develop a simplified financial reporting model that balances cost and benefits for stakeholders of smaller NFP entities.  As an indication of which NFP entities may be permitted to apply a Tier 3 reporting, the AASB’s plan is to develop those requirements with NFP entities with revenue between $500,000 and $3 million in mind.  However, the AASB isn’t currently intending to specify which NFPs may or may not apply Tier 3 – that will be up to state and other regulators to decide. Time will tell.

Some of the Tier 3 issues being considered by the AASB include:

  • Whether to permit cash accounting or require accrual accounting;
  • The extent to which measurement and recognition requirements of other accounting standards are incorporated into Tier 3. For example, financial instruments, revenue recognition, leases, impairment, and employee provisions;
  • Whether to permit a NFP entity a choice of presenting either consolidated financial statements that consolidates all of its controlled entities or only stand-alone financial statements; and
  • Whether any modifications to existing standards are required for accounting for business combinations, investments in associates and joint ventures.

There’s clearly a lot of issues to work through to ascertain what is appropriate for preparers and users of smaller NFP entities’ financial statements.  Based on the AASB’s project timetable, the proposals won’t be finalised and a Discussion Paper publicly released to seek stakeholder feedback until late 2022.  The normal AASB process is to follow a Discussion Paper with an Exposure Draft before finalising an accounting standard.

While the changes won’t happen overnight, they will happen. It will be important for the NFP sector to engage with the proposals when they’re released to ensure that their views are heard. In the meantime, you can follow the AASB’s NFP project here.  I am a member of the AASB’s NFP Project Advisory Panel and I’m happy to receive any comments or feedback on the Board’s proposals as they’re developed.

ACNC reporting threshold changes

Complicating the AASB’s work on what NFPs will have to report, the ACNC is changing which registered charities will have to report.

The Federal Government announced that it intends to increase the reporting thresholds for charities reporting to the ACNC.  For a charity’s 2022 and later Annual Information Statement, the thresholds for:

  • small charities would increase from those with revenue under $250,000 to those under $500,000;
  • medium charities would increase from those with revenue between $250,000 and $1 million to those between $500,000 and $3 million; and
  • large charities would increase from those with revenue over $1 million to those over $3 million.

Other announced changes include reporting remuneration paid to responsible persons and directors from 2022, and the disclosure of some related party transactions from the 2023 financial years.  At the time of writing, legislation to implement these changes has not be enacted. We will advise clients when full details of the new rules are released.

Revisiting AASB 1058 Income of Not-for-profit Entities

The revenue accounting standards, AASB 15 and AASB 1058, seem to be the gift that keeps on giving for NFP entities.  Based on initial feedback, the AASB is now intending to conduct a post-implementation review (PIR) of these standards during 2022 and seek broader feedback from the NFP sector on the operation of these standards.  We will be monitoring the PIR closely and encourage our NFP clients to do likewise and provide feedback to the AASB on the challenges and issues preparers and users have experienced with those standards.

In addition to that planned review, the AASB is also looking to make additional narrow scope amendments to AASB 1058 and provide additional educational material on:

  • What are sufficiently specific performance obligations – which determines whether a transaction is in scope of AASB 15 or AASB 1058;
  • Accounting for non-refundable up-front payments;
  • Whether an entity is acting as principal or agent in certain arrangements;
  • The exemption from recognising peppercorn or concessional leases at fair value; and
  • Whether an asset arises in respect of grants received in arrears.

We’re expecting public consultations to occur later this year.

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