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The Australian Accounting Standards Board (AASB) has significantly reformed financial reporting requirements for not-for-profit (NFP) private sector entities. It introduced these changes through AASB 1061 General Purpose Financial Statements – Not-for-Profit Private Sector Tier 3 Entities and related amendments to other Standards.
Following these changes, most NFP entities will no longer be able to prepare and lodge special purpose financial statements. They must instead apply a new three-tier reporting framework.
The changes are effective for reporting periods beginning on or after 1 July 2029, although early adoption is permitted.
Which NFPs have to prepare financial reports?
The changes to not-for-profit reporting do not affect the existing thresholds which specify who must report.
For all entities registered with the Australian Charities and Not-for-profits Commission (ACNC):
- Small charities with annual revenue under $500,000 are not required to prepare financial statements, but must lodge an Annual Information Statement with the ACNC.
- Medium charities with annual revenue of $500,000 to $3m must prepare financial statements and have them reviewed or audited and must lodge an Annual Information Statement with the ACNC.
- Large charities with annual revenue $3m or more must prepare financial statements and have them audited and must lodge an Annual Information Statement with the ACNC.
For not-for-profit companies limited by guarantee (CLGs), the same principles as above apply, but the thresholds differ slightly:
- Small CLGs with annual revenue under $250,000 are not required to prepare financial statements.
- Medium CLGs with annual revenue between $250,000 to $3m must prepare financial statements and have them
reviewed or audited. - Large CLGs with annual revenue $3m or more must prepare financial statements and have them audited.
For incorporated association entities, and similar entities operating under state-based legislation, financial reporting requirements differ between each of the eight states and territories. Many Australian states and territories have adopted frameworks similar to that of the ACNC but there are local variations, so preparers should check the specific law or regulation in their state or territory of incorporation.
Removal of Special Purpose Financial Statements
Most NFP entities in Australia have historically prepared Special Purpose Financial Statements (SPFS). Typically, preparers of SPFS only presented those disclosures they considered relevant. Some preparers of SPFS also optionally modified, or did not apply, some of the recognition and measurement requirements of Australian Accounting Standards such as not recognising lease liabilities and right-of-use assets in line with AASB 16 Leases, or opting out of the consolidation requirements of AASB 10 Consolidated Financial Statements.
This approach simplified compliance, but also reduced the value of financial reporting due to the inconsistencies and reduced comparability between financial reports of NFPs.
The option for for-profit entities to prepare SPFS was withdrawn in 2021, and the requirements for NFPs from 1 July 2029 onwards follow similar principles. An NFP entity must prepare General Purpose Financial Statements (GPFS) if:
- They are required by law or regulation to prepare financial statements in accordance with Australian Accounting Standards, or in accordance with “accounting standards.”
- Their constitution, grant agreement, loan agreement, or any other similar document has a requirement to prepare financial statements in accordance with Australian Accounting Standards, and that document has been created or amended since 1 July 2029.
An SPFS will be permitted only in limited circumstances, being where there is no legal or regulatory requirement to prepare financial statements, and where there is no constitutional or other document requiring financial statements under Australian Accounting Standards.
An example of when an SPFS may be permissible is where a small NFP entity prepares a financial summary for members, which is not lodged with ACNC.
Three tiers of General Purpose Financial Statements
Australian NFP entities who prepare GPFS will have three tiers of financial statements available, compared to the two available in the for-profit sector:
Tier 1: Full Australian Accounting Standards
Under Tier 1, entities must apply all of the recognition, measurement, presentation and disclosure requirements within Australian Accounting Standards. Tier 1 reporting generally applies to publicly accountable entities, or to entities required by legislation or regulation to apply full standards.
Tier 2: Australian Accounting Standards – Simplified Disclosures
Tier 2 entities apply the full recognition and measurement requirements of Australian Accounting Standards, but benefit from a substantial reduction in the volume of disclosure required, under the Simplified Disclosures framework. Tier 2 reporting is available to entities that do not have public accountability.
Tier 3: Simplified Financial Statements
Tier 3 is a new framework which has been designed for smaller NFP entities. Tier 3 entities apply both simplified recognition and measurement requirements and reduced presentation and disclosure requirements.
Applying Tier 3 is ‘all or nothing.’ Entities who choose to adopt Tier 3 must apply the standard in its entirety, as it is a separate recognition and measurement framework to Tier 2.
Who can use Tier 3?
Unfortunately, AASB 1061 offers only partial clarity on who can use Tier 3. Tier 3 is available to entities that:
- are not-for-profit private sector entities
- do not have public accountability
- are not prohibited by legislation, regulation or governing documents from applying Tier 3.
AASB 1061 does not set any size threshold or other restrictions on who can use Tier 3. The AASB have taken the approach of leaving it to the ACNC and the other bodies that regulate NFPs to determine whether entities reporting to them may use Tier 3. This leaves open the possibility that there may be different approaches between states and territories.
All government and public sector entities are prohibited from preparing Tier 3 financial statements.
What are the key differences to recognition and measurement under Tier 3?
One of the most significant features of AASB 1061 is that it provides a simplified recognition and measurement framework, rather than only reducing the required disclosures.
Key differences between AASB 1061 and full Australian Accounting Standards include:
Revenue
Revenue recognition requirements have been simplified compared with the detailed requirements of AASB 15 and AASB 1058. In particular, it does not contain the “sufficiently specific” obligation test, which remains difficult to apply in practice. Instead, AASB 1061 requires income to be deferred where there is a common understanding that any funds received must be used in a particular manner. 
Consolidation
Tier 3 preparers have the option of whether to prepare consolidated financial statements. A Tier 3 entity which holds subsidiaries, joint ventures or associates may instead choose to treat these investments as “notable relationship entities” and to show them at cost or fair value in its financial statements.
Financial instruments
AASB 1061 has a substantially simplified approach to financial instruments compared with AASB 9 Financial instruments. Investments are generally measured at fair value, while all other financial assets are measured at cost less any impairment losses. Financial liabilities are measured at cost.
Leases
Lease accounting is returned to the “off balance sheet” approach that existed prior to the adoption of AASB 16. Most lease payments are expensed over the lease term on a straight-line basis.
Intangible assets and development costs
Tier 3 requires all research and development costs, and other internally-generated intangible assets, to be expensed as incurred, with no option to capitalise.
Entity combinations
Tier 3 does not require NFP entities to perform acquisition accounting in accordance with AASB 3 Business Combinations. Instead, when a merger or acquisition occurs, assets and liabilities can generally be transferred at book value, subject to harmonisation. Any difference between the consideration paid and the carrying value is recognised as an adjustment to equity. Therefore no goodwill or gain on bargain purchase will ever arise.
How do I decide whether to use Tier 3?
Tier 3 Financial Statements have been developed as a simplified approach for smaller not for profit entities in order to ease the cost and burden of financial reporting. However, their existence creates a number of challenges which should be considered prior to any decision to adopt Tier 3.
Before adopting Tier 3, ask yourself the following questions:
Not all regulators may permit the use of Tier 3. Eligibility is not determined by AASB 1061 itself, and different jurisdictions may take different approaches to permitting Tier 3 adoption. The situation is currently fluid, and clarity from the various regulators prior to 2029 will be critically important.
Entities will also need to consider any potential future growth or other changes to their operations. Adopting Tier 3 only to discover that a reporting under Tier 1 or 2 is necessary a few years later could result in avoidable significant time and cost to transition recognition and measurement bases, as well as overall financial reporting back to fully compliant Australia Accounting Standards under Tier 1 or 2.
Readers may include not just the NFPs own members, but also governments, donors, or other funding bodies. They may have expectations for financial statement preparation, particularly given that adoption of Tier 3 will make financial statements less easily comparable to those of other entities which prepare under Tier 1 or Tier 2. Similarly, some members may not appreciate the reduced transparency that might come from not applying the consolidation standard.
Tier 3 was designed for small NFP entities with simple operations. If your entity has complex financing arrangements, multiple subsidiaries or associates, or a substantial investment portfolio, then Tier 3 may contain insufficient guidance on more complex transactions, meaning that Tier 2 may be a more suitable framework
Tier 3 is a new recognition and measurement basis. If your books and records are held under existing accounting standards, there may be a substantial one-off cost to convert them to a different recognition and measurement basis.
You would also need to consider the time taken for the finance team to become familiar with the new framework.
Tier 3’s new recognition and measurement requirements may prove challenging for auditors. Since it is an entirely new basis, auditors will not initially be familiar with it, and will need to put in place training and methodological changes to adapt to the new framework. Given its relatively niche application, audits of Tier 3 entities may become a specialism that not all auditors are willing to tackle.
RSM’s view on AASB 1061
While aimed at small and non-complex organisations, AASB 1061 is a radical departure for Australian Accounting Standards.
Previously, Australia has had just one set of Standards, with one set of rules for recognition and measurement, which apply to every entity, whether large listed entities, private companies, public sector organisations, or not-for-profits. AASB 1061 changes that fundamental approach by allowing a choice of frameworks.
Commenting on the new standard, Ralph Martin, RSM Australia’s National Technical Partner, says,
“We support the approach of seeking consistency between for-profit and not-for-profit entities in terms of the requirement to prepare General Purpose Financial Statements. The availability of Tier 3 reporting to not-for-profits is a choice that they will need to consider carefully, as there are both advantages and disadvantages to adoption of Tier 3. While it may be a simplification in some respects, having to choose between different recognition and measurement bases, and understanding all the effects of that choice, will be a challenge for less complex entities in the sector.
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