Some NFP entities have called for a new accounting standard specifically for the NFP sector because the 2018 IASB Revised Conceptual Framework doesn’t suit Australia’s sector neutral environment.
Briefly summarise the changes proposed in the 2018 IASB Revised Conceptual Framework that are suitable for NFP entities and those which are unsuitable.
Identify the main benefits and costs of Integrated Reporting which are most relevant to NFP entities and recommend whether Waste Not should prepare an Integrated Report based on these.
A new proposal to remove the concept of a ‘reporting entity’ has the potential to significantly impact the way in which not-for-profit entities and medium and large registered charities fulfil their financial reporting obligations. The proposed changes were released by the Australian Accounting Standards Board (AASB) in May of this year, in Invitation to Comment (ITC) 39 Consultation Paper – Applying the IASB’s Revised Conceptual Framework and Solving the Reporting Entity and Special Purpose Financial Statement Problems.
Currently, many entities can self-assess as non-reporting entities, allowing them to prepare special purpose financial statements (SPFS). The Australian Accounting Standards Board (AASB), however, is proposing that such entities be deemed reporting entities, which will require them to lodge more complex general purpose financial statements (GPFS).
The AASB has proposed to defer application of the IASB’s RCF to NFP entities to enable it to consult with NFPs on the implications of the IASB’s proposals as well as NFP modifications that may be necessary in accordance with the AASB's NFP Standard-Setting Framework.
In addition, recently the AASB decided not to seek comments from NFPs on the proposals in ITC 39. Instead, the AASB intends to issue a separate consultation paper in due course with targeted proposals for NFPs.
In March 2018, the International Accounting Standards Board (IASB) issued its Revised Conceptual Framework (RCF), which included the following definition of a reporting entity.
...an entity that is required, or chooses, to prepare financial statements...
The AASB is required to adopt the IASB’s RCF, including the new definition of a reporting entity, to ensure Australian entities comply with International Financial Reporting Standards (IFRS).
Adopting the IASB’s new definition of a reporting entity for Australian entities is likely to have a significant impact on the way in which entities that are legally required to prepare financial statements fulfil their financial reporting obligations. As noted in paragraph 34 of ITC 39:
...according to the IASB’s RCF, an entity that is required by legislation or otherwise to prepare financial statements is a reporting entity... This is fundamentally different to the definition of reporting entity in Australia, where a reporting entity (as per SAC 1 Definition of the Reporting Entity) is an entity that is required to prepare GPFS and an entity that is not a reporting entity (ie non-reporting entity) can choose to prepare SPFS.
In Australia many entities are required by legislation, such as the Corporations Act 2001and the Australian Charities and Not-for-profits Commission Act 2012, to prepare financial statements. Relatively few entities that prepare and lodge financial statements in accordance with such legislative requirements, however, currently prepare GPFS. Most companies and associations prepare SPFS, which need not be prepared in accordance with all applicable Australian Accounting Standards. Consequently, SPFS often do not:
a) Recognise all of the individual assets and liabilities the entity controls. For instance, an entity preparing SPFS might not prepare consolidated financial statements, which would mean that its balance sheet would not disclose all of the individual assets and liabilities of the subsidiaries that the entity controls;
b) Measure items in the same way as they would be measured if the entity prepared GPFS. For instance, a NFP entity preparing SPFS might measure some or all of the assets it has received as donations at $0; and
c) Provide detailed disclosures about the transactions and events the entity has been involved in. For instance, an entity preparing SPFS might not disclose the nature and amount of any related party transactions during the reporting period.
Accordingly, under the proposals in ITC 39, entities that have previously met their legal obligations to prepare financial statements by preparing SPFS may need to invest significant amounts of both time and resources into their financial reporting systems in order to transition to GPFS.
As they are currently framed, the proposals in ITC 39 do not provide any reporting relief for NFPs. For instance, registered charities that are classified as ‘medium’ or ‘large’ are currently required by the Australian Charities and Not-for-profits Commission Act 2012 to prepare financial statements annually and apply AAS. In addition, section 60.30 of the Australian Charities and Not-for-profits Commission Regulation 2013prescribes that if a registered charity is both not required to and chooses not to prepare GPFS, at a minimum the entity is required to prepare its financial statements in accordance with the following AAS:
If the AASB were to require an unmodified version of the proposals in ITC 39 to apply to NFPs, the provisions in section 60.30 of the Australian Charities and Not-for-profits Commission Regulation 2013 would be rendered ineffectual as there would no longer be a concept of SPFS within AAS. Consequently, medium and large registered charities that would otherwise qualify as non-reporting entities would be required to prepare and lodge GPFS rather than SPFS.
Some NFP entities have called for a new accounting standard specifically for the NFP sector because...