Accounting changes ahead for not-for-profits

A significant shift in the financial reporting landscape may be afoot.

Future financial reporting requirements may change following the release of AASB report.

A recently published research report by the Australian Accounting Standards Board (AASB) foreshadows a significant shift in the financial reporting landscape in Australia, including for entities in the not-for-profit sector.

In 2010, the AASB commissioned a research project to explore the application of the “reporting entity concept” by the different entities that prepare and lodge financial statements, including companies, incorporated associations and others.

Significantly, its research suggests a majority of financial statements examined are lodged as Special Purpose Financial Statements (see below), with many of them not applying the reporting entity concept as intended.

About 700,000 entities make up the not-for-profit sector in Australia. Many take no particular legal form, but others operate as incorporated associations, companies and trusts.

Statutory financial reporting requirements for these entities – particularly some state-based incorporated associations and public companies limited by guarantee – already include provisions to apply the Australian Accounting Standards (AAS) issued by the AASB.

And subject to statutory requirements, entities are able to apply the reporting entity concept, which is a fundamental part of the AASB’s current financial reporting framework.

But what is the significance of the findings of the AASB’s research report on financial reporting obligations for the not-for-profit sector? And what is its likely impact?

Three options are immediately apparent: 

1. Retaining the status quo

Although retaining the reporting entity concept remains a possibility, it appears doubtful given the significance of the research report’s findings. However, the research project may not have factored in the impact of the Australian Accounting Standards Reduced Disclosure Requirements (AAS RDR), which were issued in June 2010. The samples for the research project were selected from 2008-2011.

In deciding a suitable course of action, the AASB and other regulators may need to assess the take-up of AAS RDR by not-for-profits preparing General Purpose Financial Statements (GPFS).

For example, if the AAS RDR are considered an appropriate option by many not-for-profits, there may be no need to look any further, apart from promoting the take-up of the AAS RDR by these organisations. 

2. Removal of the reporting entity concept

The AASB may also consider removing the reporting entity concept from its financial reporting framework. In that case, all financial statements prepared by applying AAS will have to be GPFS, unless the applicable statutory requirements state otherwise.

Not-for-profits that currently prepare financial statements applying full AAS or AAS RDR will remain unaffected, but those not-for-profits not following AAS requirements will be impacted, subject to any applicable statutory overrides. (In Queensland, for example, incorporated associations legislation does not have a requirement for financial statements to be prepared in accordance with AAS.)

However, all CPA Australia members are required to follow APES 205 Conformity with Accounting Standards, which currently states that members should take all reasonable steps to apply the principles and guidance provided in the Statements of Accounting Concepts and the Framework when assessing if an entity is a reporting entity. And if an organisation is a reporting entity, then all reasonable steps should be taken to ensure it prepares GPFS.

3. A new standard for not-for-profits

Other jurisdictions around the world have adopted the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), and are also using it for not-for-profits. For example, the UK has now developed Financial Reporting Standard 102, based on IFRS for SMEs, to apply as UK GAAP for the financial statements of unlisted entities, including small and medium-sized entities and not-for-profits.

Until now, IFRS for SMEs hasn’t been considered suitable for adoption in Australia. But it remains an option for the AASB and other stakeholders to consider in their shaping of the future financial reporting framework.

The AASB has said it will consult with lawmakers and regulators in deciding its course of action. But independent of the AASB, Australia’s lawmakers and regulators should consider the impact of statutory financial reporting requirements imposed on not-for-profits.

The reporting entity concept

  • Reporting entities are those where it’s reasonable to expect there are users who depend on General Purpose Financial Statements (GPFS) for information that will help them make decisions about the allocation of scarce resources.
  • General Purpose Financial Statements (GPFS) are intended to meet the information needs common to users who are unable to command the preparation of reports tailored specifically to meet all their information needs. Reporting entities are required to prepare GPFS in accordance with AAS or AAS RDR.
  • The AAS RDR can be applied by non-publicly accountable entities, including not-for-profit reporting entities, in the preparation of GPFS. The AAS RDR replicate all the recognition and measurement requirements of the AAS, but provide relief from a number of disclosures that are required in the AAS.
  • Special Purpose Financial Statements (SPFS) can be prepared by non-reporting entities, which may choose not to apply all AAS. In some cases, legislation (e.g. Corporations Act 2001) can mandate the application of specific AAS that must be applied as a minimum.
CPA Australia is a key stakeholder in discussions on the future of Australian financial reporting and welcomes feedback on any of these issues affecting not-for-profits. Please email us at [email protected].
This article is from the August 2014 issue of INTHEBLACK.

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