More decisions about the Tier 3 financial reporting framework for private sector not-for-profit entities (NFPs)

In September 2022, the Australian Accounting Standards Board (Board) 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 not-for-profit entities (NFPs). Comments on the Discussion Paper closed on 31 March 2023.

Progress so far

May 2023

At this meeting, the Board decided to proceed with developing an Exposure Draft for a Tier 3 financial reporting framework for private sector NFPs. To simplify the accounting requirements, the Board needs to simplify the wording for some recognition and measurement requirements in Tier 1 (full general purpose) and Tier 2 (Simplified Disclosures). Our previous article summarises the Board’s intended approach.

September 2023

Here, the Board outlined its approach for determining if and when entities can use Tier 1 and Tier 2 recognition and measurement requirements, how to address specific transactions or balances not addressed in Tier 3, and clarified scoping issues, including which topics the Tier 3 framework covers and excludes.

November 2023

This meeting made key decisions regarding the Board’s approach to consolidation accounting, accounting for investments in subsidiaries and notable relationships, associates and joint ventures in both separate and consolidated financial statements, other investments, related party transactions, financial instruments, employee benefits, and errors. You can find more information about decisions at the September and November meetings here.

March 2024

Here, the Board made decisions about the measurement of non-financial assets acquired at significantly less than fair value, concessional loans, unlisted equity instruments, inventories, aligning accounting policies, assets held for sale, related parties, and more. The Board also noted that the Exposure Draft for a Tier 3 financial reporting framework for private sector NFPs is expected to be released in late 2024. Our previous article provides more detail.

Latest updates

At its 6-7 June 2024 meeting, the Board noted its approach to Tier 3 on more topics.

Business combinations

Merger accounting will apply to all business combinations, whereby the assets and liabilities of the combined entity will be measured at their pre-combination book values. If there are any material assets and liabilities that do not have a carrying amount recognised in accordance with Australian Accounting Standards, these would be measured initially at their combination-date fair value. Any difference between the consideration paid and the net assets recognised in the combination would be recognised directly in equity. No goodwill would be recognised.

If a new entity is formed as part of the combination, a NFP may elect to present comparative information for the combined operations for the periods prior to the combination date.

Intangible assets

Recognition and measurement requirements for intangible assets will be aligned with Tier 2 requirements, however:

  • NFPs will be prohibited from recognising internally generated intangible assets
  • The useful life of indefinite-lived intangibles will be treated as finite, with the life not exceeding ten years
  • NFPs will only have to review the useful life, residual value and amortisation method if a Tier 3 impairment trigger event has occurred since the last annual reporting date.

The Board also indicated that it will not provide guidance on configuration or customisation costs in a cloud computing arrangement, or on development costs of a website that facilitates donations to the NFP entity.

Transitional requirements

For entities applying the Tier 3 Standard for the first time, transitional requirements will be based on AASB 1 First-time Adoption of Australian Accounting Standards. Otherwise, entities would apply the Tier 3 Standard directly using a modified retrospective approach. This would result in the cumulative effects of changes in accounting policies recognised in the current period’s opening balance of retained earnings, with comparatives not restated.

NFPs will also be offered transitional reliefs similar to those that were made available to for-profit entities when moving away from special purpose reporting. These include:

  • Transitioning from special purpose financial statements (SPFS) to Tier 3 general purpose financial statements (GPFS)

    Entities transitioning from SPFS to Tier 3 GPFS for the first time would not be required to provide comparative information for new disclosures. They also would not have to distinguish corrections of errors from changes in accounting policies.
     
  • Transitioning from Tier 1 or Tier 2 GPFS to Tier 3 GPFS

    Entities transitioning from Tier 1 or Tier 2 GPFS to Tier 3 GPFS can elect to continue applying any Tier 1 or Tier 2 recognition, measurement and disclosure requirements to balances that existed on the transition date.
     
  • Transitioning from Tier 3 GPFS to Tier 1 or Tier 2 GPFS

    In both cases, entities would apply AASB 1. However, entities preparing Tier 2 GPFS for the first time would not be required to:
    • Restate comparative information
    • Provide comparative information for new disclosures, or
    • Distinguish corrections of errors from changes in accounting policies.

Implementation

The Board envisages a three-year implementation period prior to the effective date of the Tier 3 standard. However, entities may choose to apply the standard early. The Basis for Conclusions will clarify the Board’s rationale for not specifying reporting thresholds for Tier 3 entities. That is, it will be up to individual regulators to set thresholds based on size or other metrics for entities permitted to apply the Tier 3 standard.

Next steps

Through the Exposure Draft, the Board plans to seek feedback from stakeholders as to whether further transitional relief should be provided to encourage NFPs to transition from SPFS to GPFS early. It will also seek feedback and on whether the proposed effective date is appropriate.

Need help?

We expect that Simplified Tier 3 reporting requirements will take some time to finalise because the Tier 3 Exposure Draft for private sector NFPs is only expected to be released in late 2024. 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.