Tier 3 proposals for simplified measurement by private sector NFPs

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

• Comparatives are not restated where there has been a change in accounting policy or prior period error. Instead, any retrospective effect is made by adjusting opening balances of retained earnings or other relevant account balances in the current period.

Consolidated financial statements and ‘notable relationships’

• Preparing consolidated financial statements is an accounting policy choice.
• A parent entity that chooses not to consolidate its subsidiaries can account for its interest at either cost, fair value through profit or loss, fair value through other comprehensive income if it makes an irrevocable election, or by using the equity method of accounting. The same accounting approach applies to ‘notable relationships’ (investments in subsidiaries, associates and joint arrangements).
• If a parent prepares consolidated financial statements, it must equity account investments in associates and joint ventures and recognise its share of any joint operations.

Combinations/mergers

• Combinations/mergers are to be accounted for using book values of assets and liabilities rather than fair values. Any difference between the consideration paid and the carrying amount (book values) of net assets acquired/merged is recognised in equity. Therefore, no goodwill is recognised, nor a bargain purchase in profit or loss.

Revenue recognition

• Timing of revenue recognition does not depend on there being a documented, explicit enforceable obligation to use monies in a certain way. Instead, it is aligned to a ‘common understanding’ of the parties to the agreement.

Leases

• All leases are ‘off-balance sheet’.
• The straight-line basis is used to recognise lease costs as expenses unless another systematic basis is more representative of the time pattern of the expected benefit from the leased asset.

Deferred tax

• Deferred tax assets and liabilities (if relevant) are not recognised.

Research and development

• All research and development costs are expensed.

Borrowing costs

• All borrowing costs are expensed.

Goodwill

• No goodwill is recognised, avoiding the need for an annual impairment test.

Hedge accounting

• Hedge accounting is not available. Entities, therefore, cannot choose to apply hedge accounting requirements in AASB 9.

Trade and other receivables

• The expected credit loss model does not apply. Instead, impairment is assessed only when there is objective evidence that some or all of the amount owed will not be collectible.

Basic financial instruments

• Financial assets held to generate both income and a capital return must be subsequently measured at fair value. All other basic financial assets are measured at cost less impairment losses. Financial liabilities are measured subsequently at cost.
• If the fair value of an unlisted equity instrument can no longer be reliably measured, fair value measurement is paused, and the asset carried at deemed cost less impairment. This continues until such time as the fair value is again reliably measurable.
• Transaction costs are expensed immediately.

Property, plant and equipment

• Changes in useful life, residual values and depreciation methods need only be reviewed if the asset is damaged or its capacity to provide services has been adversely affected by strategy changes or reduced demand.
• Impairment is only assessed when an impairment event has occurred. That is, they have been damaged, became obsolete or the entity has changed its strategy or been affected by a reduction in external demand for its goods or services.

Intangible assets

• All intangible assets are treated as if they have a finite useful life.
• The useful life of intangibles arising from contractual or legal rights cannot exceed the period of the contract or for which the entity has legal rights.
• If the useful life of an intangible asset is indefinite, the maximum useful life is 10 years.
• Changes in useful life, residual values and depreciation methods need only be reviewed if the asset is damaged or its capacity to provide services has been adversely affected by strategy changes or reduced demand.
• Impairment is only assessed when an impairment event has occurred. That is, they have been damaged, became obsolete or the entity has changed its strategy or been affected by a reduction in external demand for its goods or services.

Employee benefit provisions (other than defined benefit superannuation obligations)

• Provisions for vesting accumulating leave entitlements are recognised at undiscounted amounts.
• The ‘most likely’ outcome approach may be used to estimate provisions for long service leave.

Other provisions

• Future cash flows used to estimate provisions are not discounted.