More decisions about the Tier 3 financial reporting framework for private sector not-for-profit enti
More decisions about the Tier 3 financial reporting framework for private sector not-for-profit enti
In September 2022, the Australian Accounting Standards Board (Board) published its Discussion Paper, Development of Simplified Accounting Requirements (Tier 3 Not-for-Profit Private Sector Entities), which sets out its preliminary views on how a Tier 3 financial reporting framework might work for private sector not-for-profit entities (NFPs). Comments on the Discussion Paper closed on 31 March 2023.
Progress so far
May 2023
At this meeting, the Board decided to proceed with developing an Exposure Draft for a Tier 3 financial reporting framework for private sector NFPs. To simplify the accounting requirements, the Board needs to simplify the wording for some recognition and measurement requirements in Tier 1 (full general purpose) and Tier 2 (Simplified Disclosures). Our previous article summarises the Board’s intended approach.
September 2023
Here, the Board outlined its approach for determining when entities can use Tier 1 and Tier 2 recognition and measurement requirements, how to address specific transactions or balances not addressed in Tier 3, and clarified scoping issues, including which topics the Tier 3 framework covers and excludes.
November 2023
This meeting made key decisions regarding the Board’s approach to consolidation accounting, accounting for investments in subsidiaries and notable relationships, associates and joint ventures in both separate and consolidated financial statements, other investments, related party transactions, financial instruments, employee benefits, and errors. You can find more information about decisions at the September and November meetings here.
March 2024
Here, the Board made decisions about the measurement of non-financial assets acquired at significantly less than fair value, concessional loans, unlisted equity instruments, inventories, aligning accounting policies, assets held for sale, related parties, and more. The Board also noted that the Exposure Draft for a Tier 3 financial reporting framework for private sector NFPs is expected to be released in late 2024. Our previous article provides more detail.
June 2024
The Board decided on a merger approach for all business combinations. It also decided to align the recognition and measurement requirements for intangible assets with Tier 2 requirements, with some exceptions. Lastly, it outlined reliefs for NFPs transitioning to Tier 3 general purpose financial reports. Our previous article provides more information.
Latest updates
At its 5-6 September 2024 meeting, the Board continued its consideration of proposals for a Tier 3 Exposure Draft and made the following key decisions:
Modified retrospective approach – additional disclosure
The modified retrospective approach will apply to changes in accounting policies and the correction of errors. Therefore, comparatives will not be restated. However, adjustments are made for the cumulative effect of applying the new policy or adjusting the error. This is done by adjusting relevant assets and liabilities and retained earnings at the beginning of the reporting period in which the new policy is applied, or the error is corrected. It will reflect the position as if the new policy had always applied, or the error had never been made.
The Board decided that if it is impracticable for an entity to determine the cumulative effect of applying the new policy, or adjusting the error, for the effects of prior periods, the entity can apply a prospective approach, and the cumulative adjustment can be determined from the earliest date practicable. In other words, the portion of the cumulative adjustment arising before that date is ignored. No explanation needs to be provided as to why it is impracticable for the entity to determine the full amount of the cumulative adjustments.
Transition disclosures
The Board is also proposing various additional disclosures for first-time adopters of the Tier 3 standard.
Measuring fair value of non-financial assets in a combination
The Tier 3 standard will permit an NFP that receives a non-financial asset, without paying any consideration for it, to elect to initially measure it at cost (i.e. Nil). If there is a combination of two NFPs, and one of the entities had previously recognised one of these non-financial assets at Nil value, the Board is proposing that the donated asset not be required to be measured at its fair value as at the deemed combination date.
No guidance proposed
The Board decided not to include guidance on the:
- Presentation of comparative information for periods prior to the combination date, or
- Impairment of cash-generating units.
Amendments to AASB 1053 Application of Tiers of Australian Accounting Standards
The Board decided to amend AASB 1053 in three respects:
- Tier 3 reporting requirements can only be applied by entities applying Australian Accounting Standards to general purpose financial statements of private sector NFPs that do not have public accountability, and are not prohibited from applying Tier 3 reporting requirements by the relevant legislation, constitutions, etc.
- Entities applying the Tier 3 reporting requirements for the first time must apply the first-time application requirements set out in the Tier 3 Standard, and
- Introduce requirements for entities reapplying the Tier 3 reporting requirements.
Amendments to AASB 1057 Application of Australian Accounting Standards
AASB 1057 will list the Australian Accounting Standards and Interpretations that won’t apply to entities applying the Tier 3 standard.
Long service leave
The Board will include a non-mandatory illustrative example of a possible methodology that NFPs can use to calculate their long service leave expense.
Nature or function expense classification
The Board will seek stakeholder feedback on the preferred approach for classifying expenses according to their nature or function. Would guidance be more helpful than developing a more principles-based approach?
Next steps
The Board has delegated the finalisation and approval of the Tier 3 Exposure Draft to a sub-committee. The Exposure Draft will be issued at the same time as an Exposure Draft on the proposed NFP amendments to the Conceptual Framework for Financial Reporting. There will be a comment period of at least 120 days.
Need help?
We expect that Simplified Tier 3 reporting requirements will still take some time to finalise. Meanwhile, smaller NFP private sector entities may still be grappling with the complexities of applying Tier 2 requirements. Please contact our IFRS & Corporate Reporting team if you require assistance with any aspects of your NFP accounting issues.