The Australian Accounting Standards Board (AASB) has this week released its new Tier 3 accounting standard AASB 1061 General Purpose Financial Statements – Not-for-Profit Private Sector Tier 3 Entities. Based on extensive input from members and other stakeholders, application of this new standard is expected to help many NFPs produce comparable, consistent general purpose financial reports while balancing user needs with the costs of preparation in this resource constrained space.

The development of the new Tier 3 standard has involved an extensive consultation process with key stakeholders, including CA ANZ members. It directly addresses concerns about both the inconsistency inherent in the current special purpose financial reporting framework and the potentially disproportionate requirements of the alternative AASB Tier 2 or Tier 1 accounting standards for smaller NFPs.

To achieve its objective, AASB 1061 is also accompanied by AASB 2026-2 Amendments to Australian Accounting Standards – Extending the Application of the Conceptual Framework and Limiting the Ability of Not-for-Profit Entities to Prepare Special Purpose Financial Statements. This amending standard includes revisions to SAC 1 Definition of the Reporting Entity  to remove the ability of certain NFPs to produce special purpose financial statements to meet legislative reporting requirements. Instead, these NFPs will need to transition to either the new Tier 3 accounting standard instead, if permitted, or to the Tier 2 accounting requirements.

Both standards apply to financial years beginning on or after 1 July 2029 with early adoption permitted. This timeframe gives the NFP sector regulators time to provide their respective populations with clarity as to which entities can adopt the standard within those legislative frameworks. CA ANZ continues to work closely with the AASB, regulators and policy makers for clarity and consistency on eligibility to apply the new Tier 3 standard.

For those entities that can adopt AASB 1061, it contains several simplifications compared to the Tier 2 recognition and measurement requirements. These simplifications have been made in response to member feedback about the need for more suitable requirements for the NFP sector. The key simplifications include:

1. Consolidation – There is a choice of presentation of consolidated financial statements or separate financial statements as its only financial statements. Where consolidation is applied, disclosure requirements are reduced.
2. Revenue – Revenue recognition is based on a shared understanding of performance expectations, rather than the more detailed performance obligation model contained in AASB 15 Revenue from Contracts with Customers.
3. Financial instruments – A list of common “basic financial instruments” is provided to which simplified recognition and measurement requirements are applied, limiting the use of AASB 9 Financial Instruments to more complex instruments. Transaction costs and upfront fees may be expensed as incurred.
4. Leases – Lease payments shall be recognised on a straight-line basis over the lease term, rather than the lease liability and right of use asset approach of AASB 16 Leases.
5. Inventories – Donated inventories may be measured at cost (including nil, nominal or significantly discounted amounts) or current replacement cost.
6. Related party disclosures – Reduced disclosures apply, including no requirement to disclose key management personnel compensation, and limited disclosure of related party donations unless they could influence the entity’s activities.
7. Provisions – Measured at the best estimate of the undiscounted amount required to settle the obligation; present value discounting is not required.
8. Interests in other entities – Parent entities may account for notable relationships including controlled, jointly controlled and significantly influenced entities using a consistent policy choice of cost, fair value through profit or loss (unless an irrevocable election has been made), or the equity method.
9. Statement of cash flows – Entities are not required to separately present investing and financing cash flows, although they may do so for consistency with Tier 2.
10. Borrowing costs – All borrowing costs are expensed as incurred, including those directly attributable to qualifying assets.

The changes represent the most significant reform of not-for-profit reporting in many years and represent the completion of the AASB’s NFP financial reporting framework reform project. To support the change the AASB, supported by CA ANZ, will shortly begin an education campaign to assist entities understand the changes and prepare for their implementation. We will also be developing or updating key resources to ensure members have the support they need to implement this change. Our Reporting and Assurance News newsletter will keep you up to date with all the latest news as we now move into the implementation stage of these reforms.