Update on proposed Tier 3 financial reporting framework for private sector not-for-profit entities (NFPs)

In September 2022, the Australian Accounting Standards Board (AASB) 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 NFPs. Comments on the Discussion Paper closed 31 March 2023.

This article summarises some key proposals and approaches that have been reached for certain simplified accounting treatments. We expect more to come as the Board continues to deliberate the feedback received on its earlier Discussion Paper and conduct targeted outreach with relevant stakeholders. There is no indicative timing yet for the issue of the Exposure Draft, which is the next step in the process.

AASB Board meeting – May 2023

At its May 2023 Board meeting, the AASB proposed a mechanism to simplify the wording for Tier 3 recognition and measurement requirements. This was summarised in our previous article.

AASB Board meeting – September 2023

At its September 2023 meeting, regarding a proposed Tier 3 Exposure Draft, the AASB decided that:

  • Entities would only be able to apply Tier 1 or Tier 2 recognition and measurement requirements in Australian Accounting Standards if there are no such requirements for the transaction or balance in a Tier 3 standard
  • If recognition and measurement requirements for a specific transaction or balance are not specifically addressed in a Tier 3 standard, entities preparing Tier 3 general purpose financial statements would have to apply judgement and develop an accounting policy by reference to the following hierarchy:
    • Tier 3 principles and requirements dealing with similar and related issues
    • The definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework (to the extent they do not conflict with Tier 3 reporting requirements)     
      In making this judgement, management may also consider the requirements and guidance in Tier 2 (Australian Accounting Standards – Simplified Disclosures)
  • Accounting requirements for business combinations and goodwill, other intangible assets, consolidation, investments in associates and joint ventures, and investment property would be addressed in a Tier 3 standard
  • Tier 2 requirements would be applied for biological assets, service concession arrangements (operators), complex financial instruments, insurance contracts, exploration and evaluation expenditure, defined benefit plans, share-based payments and assets held for sale
  • A single Conceptual Framework should apply to NFPs reporting under any Tier of Australian Accounting Standards.

AASB Board meeting – November 2023

At its November 2023 meeting, the AASB continued to develop its approach for a Tier 3 Exposure Draft. Key decisions are summarised below.

Consolidated and separate financial statements

Entities would have an accounting policy choice to either present consolidated financial statements or separate financial statements. If separate financial statements are prepared, these would include disclosure of the ‘notable relationships’ with other entities, including their primary purpose and an indication of the nature of their operations.

The assessment of ‘notable relationships’ will be based on the factors set out in AASB 128 Investments in Associates and Joint Ventures for determining significant influence and would include controlled and jointly controlled entities.

Investments in subsidiaries and notable relationships

Entities preparing separate financial statements (regardless of whether these are the only financial statements, or in addition to consolidated financial statements) would have an accounting policy choice to measure its investments in subsidiaries and, if applicable, its ‘notable relationship’ entities at cost, at fair value or by applying the equity method of accounting.

Investments in associates and joint ventures in consolidated financial statements

A parent entity preparing consolidated financial statements would be required to measure its investments in associates and joint ventures in those financial statements by applying the equity method under AASB 128.

Investments in associates and joint ventures in separate financial statements

A parent entity preparing separate financial statements in addition to consolidated financial statements, and an investor without subsidiaries presenting individual, equity-accounted or separate financial statements as its only financial statements, would have an accounting policy choice to measure investments in associates and joint ventures at cost, at fair value or by applying the equity method.

Investments

The same accounting policy would be required for all investments in a single class but permit different policies for different classes.

No investment entity exemption

The consolidation exemptions available to an investment entity set out in AASB 10 Consolidated Financial Statements would not be available in the Tier 3 framework.

Related party transactions

Related party disclosures would be required, consistent with Tier 2 requirements. However, donations from a related party would only be disclosed if there is evidence that the donations could influence the entity’s activities or use of resources.

Financial instruments

In addition to those listed in the Discussion Paper, the following financial instruments would be included in the scope of the Tier 3 requirements as ‘basic’ or’ commonly held’ financial instruments:

  • Listed corporate bonds
  • Non-convertible preference shares redeemable for a known amount of cash or the amount of cash equivalent to their share of the entity’s net assets.

Tier 2 requirements apply to more complex financial instruments and financial instruments not commonly held by Tier 3 entities. However, hedge accounting is prohibited. Transaction costs arising from financial assets and financial liabilities would be expensed when incurred.

Financial assets held for capital return and income in the scope of the Tier 3 requirements would be measured subsequently at fair value through profit or loss, subject to an irrevocable election available on initial recognition to recognise changes in fair value through other comprehensive income for a class of instruments.

Employee benefits

Entities would not be required to recognise provisions for non-vesting accumulating employee benefits, unless the amounts are due and payable. Entities would also not be required to consider future pay increases when determining a provision for employee benefits measured at the undiscounted future outflow expected to be required to settle the present obligation.

Errors

Lastly, a modified retrospective approach would be required to correct a prior period accounting error. This means that comparatives would not be restated, and any adjustments recognised in opening balances of retained surplus at the beginning of the financial year in which the error occurred.

Need help?

We expect that a Tier 3 reporting framework is still a few years away. 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.