Financial reporting update
While there are no significant new requirements for financial reporting by not-for-profit entities for the 30 June year end, there are various issues that still require attention to ensure they are properly dealt with in the financial reports.
By way of recap, a number of changes were introduced last year that some not-for-profits may still be unaware of. For companies limited by guarantee, Corporations Law amendments were passed in the middle of 2010. The key amendments are:
- A series of size thresholds to determine if the preparation and audit of financial statements (and lodgement with the Australian Securities and Investments Commission) is required
- New requirements for the Directors’ Report to be included with the financial statements
- New streamlined reporting provisions designed to make reporting to members more efficient
- Reduced Disclosure Regime (RDR).
Experience from the June 2010 reporting season suggests not-for-profit entities may encounter some challenges when implementing the changes.
At face value the size thresholds provide relief to smaller entities, however proper consideration must be given to the requirements of a company’s constitution before any change is made, to ensure the relevant reporting provisions are not breached.
The new Directors’ Report requirements also need careful consideration, as comments made will be publicly available when financial statements are lodged with ASIC. Companies must now comment on matters such as objectives, how principal activities contribute to the achievement of objectives and what performance measures are in place. Precedents are available from entities that lodged financials from the June 2010 reporting season and are worth examining.
The RDR applies from 1 July 2013 but can be adopted early by not-for-profit entities who already prepare general purpose financial reports. There are savings in disclosures relating to financial instruments, related parties, business combinations, and impairment.
Very long term leases of land can be classified as a finance lease where risks and rewards are effectively transferred, despite there being no transfer of title. The key question is what is a very long lease? 50 years? 99 years?
AASB 101 states that a liability to, for example a bank, must be classified as a current liability if the entity does not have an unconditional right to defer repayment for more than 12 months after the reporting date. If an explicit statement is contained in a loan agreement that states the bank can recall the loan at any time, or at annual review, the borrowing will likely be considered to be current. The wording of many annual review clauses in borrowing agreements may be vague, so legal advice should be obtained if there is any uncertainty.
In addition to these new issues, not-for-profit organisations must be mindful of recurring requirements such as the impairment of assets and going concern considerations.