Financial statements play an important role in helping not-for-profit (NFP) private sector entities stay accountable, manage their limited resources effectively and provide transparency to users. However, many smaller NFP entities find that current Australian financial reporting requirements are overly complex to apply and onerous for stakeholders. In response to this, the AASB is proposing a third tier financial reporting framework for smaller NFP entities to make application of the framework easier, whilst improving the quality of reporting.
In September 2022, the AASB released a discussion paper - Development of Simplified Accounting Requirements (Tier 3 Not-for-ProfitPrivate Sector Entities) - and is asking for feedback on their preliminary views.
The intentions are to develop a simple, proportionate, consistent and transparent financial reporting framework for application by smaller NFP entities that meets the needs of users of their financial statements. In addition, this will help remove the ability of certain NFP entities to prepare special purpose financial statements (SPFS) based on their self-assessment of their financial reporting requirements.
The topics with proposed simplifications to the existing classification, recognition and measurement requirements are:
- Choice of consolidation approach
- Accounting policy choice for non-financial assets acquired at significantly less than fair value
- Approach to impairment of non-financial assets
- Treatment of leases
- Income recognition approach for inflows of resources
- Treatment and recognition of employee benefits
- Proposed simplification of financial instruments
- Application of changes in accounting policy/errors and changes in accounting estimates
- Accounting for borrowing costs.
Other proposals put forward by the AASB include:
- Simplifications in terminology and language on a number of topics
- An approach to determine disclosure requirements for topics covered in Tier 3 accounting requirements
- Guidance on interactions with other reporting tiers
- Preliminary views that a smaller NFP entity would be considered to have revenue between $500,000 and $3 million, but is to be ultimately to be determined by relevant regulator.
A useful snapshot of the discussion paper can be found here.
Key benefits of AASB’s proposed Tier 3 approach include:
- Simplified accounting and reduced costs for smaller NFP entities
- Improved comparability and quality of financial reporting
- Consistent recognition and measurement requirements to be applied by smaller NFP entities.
The AASB has not finalised a timeline for implementation but, typically, the AASB provides at least two years of lead time from finalising a standard and its effective date.
The AASB is accepting comments until 31 March via:
Please reach out to your local PKF Audit & Assurance office if you would like any guidance on this process.
