The experts in
not for profit

Comments on the AASB’s Tier 3 Standard for NFPs

The AASB Acting Technical Director, Carmen Ridley, and Board Member David Holland are calling for feedback from the industry on proposed changes to the current AASB reporting requirements, specifically for not-for-profit entities.

Here are some of the highlights and our comments on how we believe the AASB’s proposed Tier 3 Standard will have a positive impact on NFP accounting.

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What is the AASB NFP Tier 3 discussion paper?

In a refreshing bout of red-tape reduction from the AASB, the proposal to create an additional tier for preparers of General Purpose Financial Statements intends to respond to stakeholder concerns that the current AASB reporting requirements are overly complex for smaller not-for-profits.

The discussion paper highlights the need for the reporting requirements to be a “simpler, proportionate, consistent and transparent framework for application by smaller NFP entities that meets the needs of users of their financial statements.”

What defines a tier 3 NFP entity?

At this stage, Tier 3 not-for-profit entities are assumed to be those classified by the ACNC as medium-sized charities, that is, with an annual revenue of between $500,000 and $3 million. While that is the cohort that the AASB is considering in designing the proposed new tier, the AASB doesn’t intend to describe a financial threshold for inclusion in Tier 3 – as it doesn’t for the existing Tier 1 and 2.

AASB said that it would speak with the various regulators to help finalise its thinking about the application of a proposed Tier 3.

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The intention of the discussion paper

The proposal intends to reduce the time and money spent on reporting preparation, improve and optimise the compatibility and quality of NFP financial reporting and build a consistent set of recognition and measurement requirements.

The proposed introduction of a Tier 3 will be achieved via a stand-alone standard, and is intended as somewhat of a replacement for Special Purpose Financial Statements. This stand-alone standard will specify reporting requirements common to smaller NFP entities, using plain-English accounting language.

AFG views on discussion paper topics

Our CEO, Kirsten Forrester, says that the proposed Tier 3 changes are a welcome shift. In AFG’s view, some of the current requirements are onerous for modest-sized organisations to comply with and the resulting information presented in the financial statements arguably doesn’t add anything for the majority of readers of the statements.

Here are some of the changes the discussion paper plans to make:

  • A parent entity may choose to consolidate or to report separately with disclosures
  • Recognition of revenue based on common understanding between funder and recipient – see below
  • Choose whether to measure non-financial assets acquired at significantly less than fair value (think: donated or generously discounted) either at fair value (current requirement), or at cost with disclosures
  • Impairment of non-financial assets measured at cost to be impaired only when actually damaged or their service potential is adversely affected
  • Lease accounting – can we say goodbye to AASB16? – see below
  • Statement of changes in equity: to be excluded for Tier 3 entities?
  • Opting up – AASB seeking feedback on if and when to allow an entity to opt to use a Tier 1/2 recognition and measurement accounting policy

The most significant changes for us at AFG

There are two particularly exciting changes proposed in the discussion paper that we feel would be very welcome to most people engaged in NFP accounting: lease accounting and revenue recognition.

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Lease accounting

“One of the most significant changes we are enthusiastic about is the reporting requirements surrounding leases,” says Kirsten.

Under the proposed Tier 3 reporting requirements, leases would remain off the balance sheet with payments recognised on a straight-line or systematic basis over the term of the lease – just like they used to be before the advent of AASB16 in 2019! “We think that the current requirement to recognising leases on the balance doesn’t add much value or understanding for members, donors and stakeholders, and we would welcome the simplification proposed.”

Revenue recognition

Another area AFG is thrilled to see included in this discussion paper is revenue recognition. The introduction of AASB 15 in 2019 required accountants to identify the performance obligations contained within each contract and to identify whether they were ‘sufficiently specific’ by running through a set of questions that then drove how revenue was recognised for each contract.

It is complex: contracts aren’t always written well enough to be helpful in this situation, and the standard sometimes led to big variances for some organisations where their previous accounting policy was turned upside down and income had to be deferred when previously it was not, and vice versa.

“Now, the Tier 3 standard has proposed a much simpler process that is concise, relying on a documented common understanding between funder and recipient, that allows the revenue to be recognised when the related expenditure occurs.”

This allows a not-for-profit organisation to have a more consistent presentation of their financial statements for stakeholders, members and donors, as revenue can be matched to the related expenditure. This avoids the irregular surpluses and deficits – that had nothing to do with the entity’s ability to manage its funds – being driven by the recognition rules. “AFG welcomes the Tier 3 proposals.”

March 2023 blue color desk calendar on blue background

AASB Tier 3 feedback deadline

The AASB is encouraging feedback from NFP industry stakeholders by 31 March 2023. Information and links can be found here. It is very keen to hear from the sector and has contacted AFG to ask us to help spread the word.

There are many ways in which you can provide feedback and we believe the proposed Tier 3 standard would be a good thing for NFPs – we encourage you to take the opportunity to explore the information and respond to the AASB. Imagine never having to do an ROU asset calculation again… !

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