Tier 3 NFP requirements: Presentation, primary financial statements and notes

AASB 1061 General Purpose Financial Statements – Not-for-Profit Private Sector Tier 3 Entities is a new standard that sets out simplified recognition (referred to as ‘recording’ in this article), measurement, presentation and disclosure requirements for smaller private sector not-for-profit entities (NFPs). It applies to annual periods beginning on or after 1 July 2029 and may be adopted early.

Why was AASB 1061 developed?

AASB 1061 was developed to provide a simpler solution for smaller NFPs currently preparing special purpose financial statements that will have to prepare general purpose financial statements (GPFS) beyond 2029.

What is a Tier 3 entity?

Under AASB 1053 Application of Tiers of Australian Accounting Standards, Tier 3 entities are NFP private sector entities that:

• Do not have public accountability, and
• Are not prohibited by legislation, their constituting document or another document from applying AASB 1061.

Examples of the types of entities that cannot apply AASB 1061 include listed companies, governments, as defined in AASB 1049 Whole of Government and General Government Sector Financial Reporting, local governments and entities, including departments, that are controlled by those governments or local governments.

Despite the early adoption option, until legislators clarify which entities can use it, we recommend that private sector NFPs carefully consider and seek advice regarding adopting AASB 1061 before 1 July 2029.

Is AASB 1061 a ‘one-stop shop’ for Tier 3 entities?

AASB 1061 runs to 110 pages and is generally a ‘one-stop shop’ for the accounting requirements of Tier 3 entities. However, Tier 3 entities will have to refer to the recording, measurement and presentation requirements in Australian Accounting Standards for some of the more complex accounting topics, such as share-based payments, complex financial instruments, extractive industries, defined benefit plans, non-current assets held for sale and discontinued operations, and biological assets. They will also have to provide the relevant disclosures for these topics, as required by AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

Are all the requirements in AASB 1061 simplified?

No. AASB 1061 generally uses simplified drafting language, has simplified presentation requirements and fewer disclosures overall compared to Australian Accounting Standards, including AASB 1060.

However, simplified recording and measurement mainly applies to items such as non-financial assets acquired for significantly less than fair value, internally generated intangible assets, leases, employee benefits, revenue, consolidation, entity combinations, basic financial instruments, impairment losses, income taxes and changes in accounting policies. Recording and measurement of most other items remain the same or similar, using simplified language appropriate for Tier 3 entities.

AASB 1061 also contains new disclosures in some cases where the recording and measurement requirements are simpler than those in Tier 2 (AASB 1060).

Financial statement presentation (section 2)

This section covers fair presentation, compliance with AASB 1061, going concern, frequency of reporting, consistency of presentation, comparative information, materiality and aggregation, offsetting, what makes up a complete set of financial statements, and identification of the financial statements. These presentation and disclosure requirements are broadly consistent with the equivalent Tier 2 requirements in AASB 1060. However, we note the following differences:

• Going concern

  There is additional guidance that management judgement is required to determine whether the carrying amounts of assets and liabilities need to be adjusted. This will depend on whether the entity intends to transfer operations to another entity, have an orderly sale of operations or assets, or whether there will be a forced or rushed liquidation of assets.

  The entity also needs to consider whether changes in circumstances may lead to additional liabilities or trigger clauses in debt covenants, resulting in the reclassification of debts as current liabilities.

• Consistency of presentation

  No detailed disclosure is required regarding the reclassification of items in prior periods, i.e., the nature, amount and reason.

• Complete set of financial statements

  The statement of profit or loss and other comprehensive income is referred to as the ‘statement of financial performance’.

• Presentation currency

  Tier 3 financial statements must be presented in Australian dollars (AASB 1060 permits a presentation currency other than Australian dollars).

Statement of financial position (section 3)

The presentation and disclosure requirements regarding the statement of financial position are broadly similar to Tier 2, except we note that:

• For detailed line items - biological assets and non-current assets held for sale are not required because Tier 3 entities must refer to the Tier 2 requirements when accounting for these items
• Deferred tax assets and liabilities are not required because they are not recognised under AASB 1061
• The liquidity presentation format is not permitted for Tier 3, and entities will have to present current and non-current assets and liabilities in the statement of financial position (the assumption that the normal operating cycle is assumed to be twelve months has been removed from the current/non-current classification requirements for assets)
• Entities with share capital don’t have to provide additional information regarding shares, rights, preferences and reconciliations, which makes sense as many NFP private sector entities may not have ordinary corporate share capital structures.

Statement of financial performance (section 4)

The presentation and disclosure requirements regarding the statement of financial performance are consistent with Tier 2, except we note that:

• Profit or loss from discontinued operations is omitted because Tier 3 entities must refer to the Tier 2 requirements when accounting for these items
• Items of other comprehensive income do not have to distinguish whether or not they will be reclassified subsequently to profit or loss
• References to profit or loss or other comprehensive income of associates and joint ventures accounted for using the equity method have been expanded to include notable relationships accounted for in the same way
• Expenses can be classified by nature, by function, or by using a mixed presentation, provided that it represents the most useful, structured summary of expenses.

In addition, changing from a single statement of profit or loss and other comprehensive income to two statements is not considered a change in accounting policy.

Statement of changes in equity (section 5)

The requirements here are also mainly consistent with AASB 1060, except:

• The reconciliation for each component of equity only requires separate disclosure of contributions by owners in their capacity as owners, and changes of ownership interests in subsidiaries that do not result in a loss of control. Distributions to owners don’t have to be disclosed, as these are not expected to be common for NFP private sector entities
• The statement of income and retained earnings is not permitted if there are distributions to owners during the period
• A change between presenting a statement of income and retained earnings to presenting a statement of financial performance and a statement of changes in equity (and vice versa) is not a change in accounting policy.

Statement of cash flows (section 6)

The requirements for the statement of cash flows are essentially the same across Tier 2 and Tier 3. However, for Tier 3:

• Only cash flows from operating activities must be shown separately. Cash flows from investing and financing activities can be shown separately or as a combined section for ‘other activities’.
• Examples of cash flows from operating activities include NFP-specific examples, such as grants and donations received and paid to beneficiaries.
• The detailed requirements in AASB 1060 regarding presenting the unrealised gain or loss on remeasuring foreign currency bank accounts separately from cash flows from operating and other activities has been removed (although in practice, in order to ‘balance’ the cash flow statement, the unrealised gain or loss from translating foreign currency cash balances at the year-end exchange rate would need to be shown in the cash flow statement, separately from operating and other activities).
• A reconciliation of the cash and cash equivalent amounts presented in the statement of cash flows to the equivalent items presented in the statement of financial position is not required, even if the amounts are different.
• No disclosure is required for supplier finance arrangements.

Notes to the financial statements (section 7)

These are also consistent across both tiers of reporting, but disclosure of imputation credits has been removed (mainly because NFPs are not expected to declare franked dividends).

We are here to help

Whilst AASB 1061 simplifies the requirements for eligible entities, navigating the financial reporting framework for NFPs is currently a complex exercise, and is likely to become more so when the new GPFS requirements kick in in 2029. Also, the transition effort required to move from SPFS to a form of GPFS should not be under-estimated. Please contact our IFRS & Corporate Reporting team if you need help deciphering the new standards.