Special purpose financial statements to be scrapped for NFPs but simplified accounting is in the pipeline

On 31 October 2024, the Australian Accounting Standards Board (AASB) published its proposals for a simplified Tier 3 financial reporting framework for certain NFPs preparing general purpose financial statements (GPFS). This is in line with its ultimate goal of scrapping special purpose financial statements (SPFS) for all types of entities.

Will SPFS be scrapped for private and public sector NFPs?

Exposure Draft 334 Limiting the Ability of Not-for-Profit Entities to Prepare Special Purpose Financial Statements (ED 334) proposes that both private sector and public sector NFPs will have to prepare GPFS if certain conditions are met.

Since 2022, for-profit private sector entities have been required to prepare GPFS using either the Tier 1 or Tier 2 (Simplified Disclosures) reporting frameworks.

The AASB is undertaking a separate project for a public sector financial reporting framework, which is not yet complete. Instead of waiting for the outcome of that project, the AASB nevertheless proposes to scrap SPFS for public sector NFPs at the same time as for private sector NFPs. It is expected that a significant portion of public sector entities will be affected by these proposals, including trusts or controlled entities required by legislation to prepare financial statements in accordance with Australian Accounting Standards. These entities will have to prepare Tier 1 or Tier 2 (Simplified Disclosures) financial statements in future.

Which NFPs will have to prepare GPFS?

NFPs (both private sector and public sector) will have to prepare GPFS if they:

Are required by legislation to comply with either Australian Accounting Standards or ‘accounting standards’
Are required only by their constituting document or another document to prepare financial statements that comply with Australian Accounting Standards (but only if the relevant document was created or amended on or after a date to be specified in a final standard), or
Elect to prepare GPFS.

Which NFPs must prepare GPFS?
↓		↓
Legislation requires financial statements in accordance with Australian Accounting Standards or 'accounting standards' (e.g. Part 2M of the Corporations Act 2001 or the ACNC act)		Constitution/Other document (e.g. trust deed, legal agreement, etc.) created or amended on or after XX date requires financial statements in accordance with Australian Accounting Standards

What is meant by ‘accounting standards’

While Australian Accounting Standards are those set by the AASB, the question arises as to what is meant by ‘accounting standards’. This is important because NFPs will no longer be able to prepare SPFS if legislation requires financial statements to be prepared in accordance with either Australian Accounting Standards or ‘accounting standards’. When setting this requirement for for-profit private sector entities, the AASB decided to refer to both Australian Accounting Standards and ‘accounting standards’ because some legislation uses the general term ‘accounting standards’ when it was intended to mean Australian Accounting Standards.

Legislation that refers to ‘generally accepted accounting principles (GAAP)’ is not considered to require Australian Accounting Standards. Examples of GAAP include the accrual accounting concept, historical cost accounting, the matching principle, going concern assumption, etc. GAAP does not refer to a particular set of Accounting Standards, nor does it address recognition and measurement issues for financial statement items.

How will SPFS be scrapped?

Currently, special purpose financial statements are permitted for a NFP that is not a ‘reporting entity’, as defined in SAC 1 Definition of the Reporting Entity, and which applies the old Framework for the Preparation and Presentation of Financial Statements (Framework). ED 334 proposes to amend SAC 1 and the Framework so that they can no longer be used by NFPs. Instead, NFPs will have to apply the new Conceptual Framework for Financial Reporting (Conceptual Framework) and all the Australian Accounting Standards. The new Conceptual Framework will be amended to incorporate NFP principles.

Who will be affected?

The following types of NFPs are likely to be affected by the new requirements if they currently prepare SPFS:

Companies currently lodging financial statements under Part 2M of the Corporations Act 2001. These are most likely to be companies limited by guarantee not registered with the Australian Charities and Not-for-profits Commission (ACNC)
Large and medium charities registered with the ACNC
Incorporated associations, co-operatives and other entities with financial reporting obligations under Federal or State/Territory legislation that requires financial statements in accordance with Australian Accounting Standards or accounting standards
Federal, State, Territory and local governments, and other public sector entities established pursuant to an Act or other legislative instrument that requires financial statements in accordance with Australian Accounting Standards or accounting standards
Trusts, partnerships, joint arrangements and other entities that are required only by their constituting or other document to prepare financial statements that comply with Australian Accounting Standards.

Who won’t be affected?

The following NFPs won’t be affected:

Small charities registered with the ACNC
Small NFPs operating through other structures, such as associations
Small proprietary companies preparing financial statements under an Australian Securities and Investments Commission (ASIC) or stakeholder direction that does not require compliance with Australian Accounting Standards
Entities with financial reporting obligations under Federal or State/Territory legislation that require financial information or financial statements that provide a true and fair view, but which are not required to comply with Australian Accounting Standards or accounting standards
Trusts, partnerships, joint arrangements and other entities that are not required by legislation or their constituting or other documents to prepare financial statements that comply with Australian Accounting Standards.

NFPs that currently prepare GPFS are also unlikely to be affected, unless they are eligible, and decide to, adopt the proposed new Tier 3 simplified financial reporting framework for NFPs.

Transition relief

Transitional relief will be provided for NFPs transitioning from SPFS to Tier 2 GPFS for the first time. If the entity transitions before the mandatory application date, NFPs won’t have to provide certain comparative information.

New Tier 3 Simplified financial reporting framework for NFP private sector entities

Exposure Draft 335 General Purpose Financial Statements – Not-for-Profit Private Sector Tier 3 Entities (ED 335) contains the proposed Tier 3 financial reporting framework for NFP private sector entities. Tier 3 contains simplified recognition, measurement, presentation and disclosures for private sector NFPs and can only be applied if the entity:

Does not have public accountability, and
Is a Tier 3 entity according to relevant legislation or constituting documents (trust deeds) and other documents.

Tier 3 entities can still opt to apply Tier 1 or Tier 2 Simplified Disclosures) if they so wish.

Entities will not have to provide comparative information in their first Tier 3 financial statements if they did not disclose the comparable information in their most recent previous financial statements.

Application date

The amendments in both ED 334 and ED 335 will apply to annual periods beginning on or after a date that is at least three years after the issue of the proposed Standard. Early application will be permitted but entities cannot early adopt one standard without the other.

Submit your feedback

The AASB is seeking feedback by 28 February 2025 and we encourage affected entities to make a submission. Although submitting a formal submission is the best way to express your views, the AASB recognises that this can be a time-consuming exercise. So, you can also provide feedback by completing the AASB’s 30-minute online survey.