ED 270 – The reporting proposal that nobody asked for
In August 2015, the Australian Accounting Standards Board (AASB) issued ED 270 Reporting Service Performance Information that proposes to establish principles and requirements for entities to report service performance information that is useful for accountability and decision making.
Accounting News, September 2015 includes a summary of the ED 270 proposals.
There has been a significant amount of debate on this exposure draft, with the AASB conducting extensive outreach via roundtables late in 2015. Some of the issues raised in this article relate to comments that have been made at the various roundtables by interested parties.
Should the AASB be making accounting topics on performance reporting?
The first question on ED 270 is that it is not an Accounting Standard, so therefore why is the Australian Accounting Standards Board straying into this area of reporting?
Equally, ED 270 proposes that reporting service performance information should be mandatory for all general purpose financial statements of not-for-profit entities (NFP). This obviously raises the question as to why the AASB should have within its jurisdiction, the power to impose a non-accounting standard on the NFP sector. If any changes are required to reporting for NFPs, they should be made by the responsible regulator, such as the Australian Charities and Not-for-Profits Commission (ACNC), rather than by the AASB?
Is this reporting really needed?
Without getting into the practicalities of the proposed standard, further questions then arise, including:
- Does the NFP sector need such reporting?
- Is the NFP sector truly homogeneous? That is, are the needs of users the same for government reports as for private sector NFPs?
- Is there a demand for this information from stakeholders?
- If it is needed, why haven’t those NFPs at the forefront of governance already reported such information?
- If this form of reporting was useful to donors and funders, and therefore would attract donors and funders towards a particular organisation, why haven’t organisations given such reports voluntarily (so as to attract more donors)?
- Does the issue of ED 270 imply that the AASB believes that government, who is the main funder of most of the impacted organisations, is funding these organisations without properly measuring the outputs that these organisations should be delivering?
- For government organisations or government funded organisations, is this reporting for tax payers to look over the shoulder of government and NGO’s?
- If this type of reporting is needed and valuable for the NFP sector, should it be extended to the for-profit sector?
- Many start-up organisations (junior explorers, etc.) do not make profits. Therefore is additional reporting required by these users too?
- Is there any value to reporting of this nature?
The AASB’s argument for requiring these mandatory reporting requirements centres on the proposition that in the NFP sector, financial reporting based on an IFRS for-profit accounting framework, does not give users sufficient information to make useful decisions. The proposal is to apply to all NFP’s in both the private and public sector.
ED 270 requirements
ED 270 requires preparers to report on their service performance, specificallyin respect of:
(a) Inputs used by the entity in delivering outputs
(b) Outputs delivered by the entity
(c) Outcomes sought to be influenced by that entity
(d) Efficiency of an entity in achieving its service performance objectives, and
(e) Effectiveness of the entity in achieving its service performance objectives.
Government already gets this reporting
In the case of the public sector, the funder is obviously government and government hopefully has very stringent models for allocating funds to programs and analysing the performance of its programs. We would hope that before allocating funds, government sets down strict performance conditions, and that the delivery on these performance conditions is both monitored throughout the project, and at the end of the project. It is therefore surprising that the AASB believes value can be added by way of further mandatory reporting, only providing historical information within four months after a reporting entity’s year end.
Input information already available from the financial statements
In the case of the private sector, it is obviously important that donors and funders have confidence in the performance of a NFP and its ability to deliver on its promises. A financial report can clearly report on the inputs an NFP has (monies in from grants, contributions and donations, investment income, etc.). We therefore do not believe that it is necessary to require further information on inputs, other than further mandatory granular disclosure on what the inputs have been spent on, i.e. amount spent on administration vs. delivery of front line services, amounts paid on sales and promotion vs. the monies actually received from the marketing effort.
Output information often hard to identify and measure
In respect of reporting on outputs delivered, this is obviously an easily reportable requirement if you are delivering meals, or are involved in a service such as providing accommodation for the elderly. However, for a large number of NFP organisations, there are no tangible outputs that are so easily measurable. Rather the effort is in the form of a hoped for outcome, that may take years to achieve, and may be very difficult to measure. Many NFP’s objectives involve the delivery of generalised outcomes, for example, to improve the environment for the community, promoting the arts, sports, religion, etc. Such outcomes are not easily measured or defined.
Efficiency and effectiveness
The whole concept of reporting of efficiency and effectiveness raises the concept of what framework should an entity use to measure its performance.
It is very unlikely that any organisation views itself as anything other than efficient or effective. If the entity believed it was not efficient and effective then this should result in the replacement of the CEO and senior executives and ultimately the board.
As there is no requirement for this statement or reporting to be audited, it would appear reasonable to assume that the vast majority of NFP’s reporting on their effectiveness and efficiency will merely claim to be both effective and efficient. It would therefore appear very unlikely that this will in anyway improve funder or donor confidence.
Could reporting for NFPs be improved?
While we believe there is a need to improve financial reporting in the NFP sector, particularly by way of improved disclosure in the NFP sector, this would involve writing specific requirements for specific types of entities, e.g. charities. However, the AASB’s dogma of ‘sector neutrality’ and grouping so many very different organisations under the heading of ‘NFPs’ is holding back any improved financial reporting in the sector.
We do not believe the proposals put forward will improve reporting and improve user confidence. If the AASB wishes to proceed with this project, we believe it should not be the AASB that declares it to be mandatory, and that the sector and the appropriate regulator should be the body to determine whether this reporting is required. We note that although the IASB did stray away from pure financial accounting when it issued guidance on the content of an MD&A (management discussion and analysis), it left it to individual regulators and stock exchanges to decide whether their constituents even required an MD&A.
Comments close on 29 April 2016 and we strongly encourage all those involved in the NFP sector to read the ED and pass their comments to the AASB.