Proposed changes to not-for-profit entity definition
Australian Accounting Standards currently follow a ‘transaction neutral’ approach, whereby similar transactions and events are generally accounted for in a similar manner by all types of entities (i.e. both for-profit and not-for-profit entities). However, not-for-profit entities (NFPs) are required to account for some items differently. For example, revaluation increments and decrements relating to an item of property, plant and equipment of NFPs are offset between assets in a particular class, whereas revaluations by for-profit entities are determined on an individual asset basis, and there is no offsetting.
Why the need to change the NFP definition?
Because of the differences outlined above, it is critical that preparers of financial statements appropriately classify an entity as being ‘for-profit’ or ‘not-for-profit’ so that the appropriate recognition, measurement and disclosure requirements are applied.
As part of the Australian Accounting Standards Board’s (AASB’s) consultation on its standard-setting framework in 2017, respondents supported keeping the term ‘not-for-profit entity’ but requested additional guidance on how to distinguish for-profit and NFPs in practice.
Respondents also supported using the New Zealand Accounting Standards Board’s (NZASB’s) updated definition of ‘public benefit entity’ (PBE) because it gives greater focus on what a NFP is, rather than what it is not. That is, the term ‘not-for-profit entity’ is currently defined in Australian Accounting Standards as:
“…an entity whose principal objective is not the generation of profit...”
Proposed new definition of a NFP entity
In June 2019, the Australian Accounting Standards Board issued Exposure Draft ED 291 Not-for-Profit Entity Definition and Guidance which proposes to amend the definition of ‘not-for-profit entity’ in Australian Accounting Standards.
The ED proposes to keep the term ‘not-for-profit entity’ but replace the definition with the updated New Zealand definition of ‘public benefit entity’ as follows:
“…an entity whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders...”
How will the new definition be implemented?
ED 291 proposes removing the definition of NFP from AASB 102 Inventories, AASB 116 Property, Plant and Equipment and AASB 136 Impairment of Assets, and including the revised definition and guidance in a separate standard, AASB 1057 Application of Australian Accounting Standards.
The Implementation guidance to be included as part of AASB 1057 will help entities to determine whether they are NFPs. The ED proposes extensive discussion on:
- The definition of a NFP
- Indicators (including stated objectives, nature of the benefits and quantum, primary beneficiaries of the benefits, nature of equity interests, purpose and use of assets and nature of funding)
- Conflicting indicators, and
- Changing classification.
These are also be included as part of AASB 1057 and include examples for the following types of entities:
- Wholly-owned state entity
- Bicycle shop
- Private education organisation
- Sports club
- Social enterprise.
The AASB is requesting comments by 9 September 2019. We encourage interested parties to make submissions on this ED.