New Tier 3 NFP private sector financial reporting

AASB a step closer to a new Tier 3 NFP private sector financial reporting framework

Currently, private sector not-for-profit entities (NFPs) that are reporting entities according to SAC 1 Statement of Accounting Concepts must prepare general purpose financial statements (GFPS). These must either be Tier 1 or Tier 2 GFPS as appropriate. Special purpose financial statements, applying certain minimum Australian Accounting Standards, may be prepared if the NFP is not a reporting entity.

The Australian Accounting Standards Board (AASB) has, for some time now, been considering alternative financial reporting frameworks for NFPs. It is expected to issue its long-awaited Discussion Paper regarding its proposals for a Tier 3 alternative reporting framework for private sector NFPs in October 2022. The Discussion Paper will have a six-month consultation period. The AASB will not be developing Tier 4 proposals for smaller NFP entities.

What does this mean for NFP financial reporting in future?

The concept of a ‘reporting entity’ will be removed and the AASB will only set accounting standards for general purpose financial reporting by private sector NFPs. This will include Tier 1, Tier 2, and the new Tier 3 reporting frameworks. We expect that special purpose financial statements will no longer be allowed, with the new Tier 3 general purpose framework applying to smaller private sector NFPs. We also expect that the financial reporting requirements for the Tier 1, 2, and 3 reporting frameworks for NFPs will be outlined in the Discussion Paper.

It is important to note that the distinction between the Tier 1, 2, and 3 frameworks is not based on the recently increased revenue thresholds contained within Australian Charities and Not-for-profits Commission Regulation 2013 (ACNC Regulation) 205.1 for small, medium, and large charities. Please refer to our April 2022 article for more information regarding increased reporting thresholds. These thresholds are merely used to determine which charities registered with the ACNC must have their financial statements reviewed or audited.

We expect the Tier 1 and 2 general purpose reporting frameworks for private sector NFPs will be similar to those used for for-profit private sector entities. Similarly, we expect the requirements for private sector NFPs to prepare financial statements according to the Tier 1, 2, or 3 frameworks to be determined by the relevant NFP regulators.

Key decisions for Tier 3 proposals

Some of the key decisions noted by the AASB regarding the Tier 3 proposals in the Discussion Paper include:

Entities can apply related Tier 3 requirements to account for a transaction or other event if it is not specifically addressed by, and not explicitly scoped out of, the Tier 3 Standard
If transactions and other events are specifically scoped out of the Tier 3 Standard, entities can consider the Tier 1 and Tier 2 reporting requirements that deal with similar and related issues, when applying judgement to develop accounting policies
Business combinations will be excluded from the scope of the Tier 3 Standard
Simpler accounting requirements for government bonds and units held in managed investments schemes and unit trusts, as basic financial assets
Entities will not be required to recognise embedded derivatives, or derivative financial instruments, if they are not readily identifiable and measurable
The Tier 3 Standard will align with AASB 9 Financial Instruments to identify when cost may be an appropriate estimate of fair value for financial assets
A parent entity that presents consolidated financial statements must also equity account its interests in associates and joint ventures in those statements, not in separate financial statements
A parent entity that prepares separate financial statements can choose to measure its interests in subsidiaries at either cost, fair value through other comprehensive income, or by applying equity accounting
Investors that do not prepare consolidated financial statements can choose to measure its interests in associates and joint ventures at either cost, fair value through other comprehensive income, or by applying equity accounting
Entities that acquire non-financial assets for significantly less than fair value cannot revalue these assets if they were initially measured at cost
No guidance is to be included on accounting for employee on-costs.

The AASB also decided that the Tier 3 requirements will be reviewed no more than once every five years, which is the AASB agenda consultation cycle, following revisions from a post-implementation review.

Need assistance?

Please contact our IFRS & Corporate Reporting team if you would like further information, or require assistance with any NFP financial reporting matters.