Update on proposed 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
Finally, the November 2023 meeting took key decisions regarding the approach for 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 taken at the September and November meetings here.
Latest updates
At its most recent meeting on 7-8 March 2024, the Board made more decisions about proposals or approaches to be incorporated into a Tier 3 Exposure Draft. They include:
Non-financial assets acquired at significantly less than fair value
There will be an accounting policy choice to measure these initially either at cost (which may be nil or a nominal amount) or at fair value. Examples could include donated property, plant and equipment, inventory, etc.
Entities can apply either the cost model or the revaluation model for subsequent measurement, regardless of the initial measurement policy, and different measurement models can be used for different classes of non-financial assets.
The Board will also develop disclosures to help users understand the nature of, and the entity’s dependence on, non-financial assets acquired at significantly less than fair value.
Statement of changes in equity
The requirement for a statement of changes in equity in a Tier 3 framework will align with the existing Tier 2 requirements. This means it will generally be required. However, if the only changes to its equity arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy, the NFP can present a Statement of Income and Retained Earnings in place of a statement of comprehensive income and a statement of changes in equity.
Statement of cash flows
Entities can elect to present cash flows from investing and financing activities either separately, or together. Cash flows from operating activities can be presented using direct or indirect methods.
Concessional loans
Concessional loans can be measured initially at transaction price rather than fair value.
Unlisted equity instruments
The Board decided not to develop further guidance on how entities subsequently measure unlisted equity instruments when cost is not a reliable measure of fair value.
Inventories
It also decided to allow entities to elect whether to allocate production overheads to inventories’ cost of conversion, with the election to be applied to all inventories produced by the entity.
Aligning accounting policies
There will be an ‘impracticability’ exemption from the requirement to align the accounting policies of the investor and the investee when applying the equity method of accounting to an investment in an associate or a joint venture.
Additional guidance
The Board is also proposing guidance on:
- The recognition, measurement and disclosure of contingent assets and reimbursement assets
- The measurement of value in use for assessing the impairment of non-financial assets.
Assets held for sale
The fact an asset is held for sale will not be included as an impairment indicator. The Board also proposes to keep the Tier 2 requirements for classifying assets as held for sale.
Related parties
Entities must disclose the name of the entity’s parent and, if different, its ultimate controlling party. Suppose neither the entity’s parent, nor the ultimate controlling party produces publicly available financial statements. In that case, it must disclose the name of the next most senior parent that does so (if any).
Disclosure of key management personnel remuneration will not be required, but the Board will seek specific stakeholder feedback on this decision through the Exposure Draft.
Next steps
The Exposure Draft for a Tier 3 financial reporting framework for private sector NFPs is expected to be released in late 2024.
Need help?
Simplified Tier 3 reporting requirements are still a while away. Meanwhile, smaller NFP private sector entities may still grapple 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.