Financial Reporting

Charities make up a significant sector of the Australia’s economy, generating at least $134 billion in total income and managing net assets of over $180 billion.

Unfortunately, charities in Australia currently face too much complexity, inconsistent and uncertain requirements and inefficiency in financial reporting, according to a recent research report by the Australian Accounting Standards Board (AASB).

The Research Report, AASB Research Report No 5: Financial Reporting Requirements Applicable to Charities, argues that the financial reporting regime for charities in Australia needs reform.

The Research Report compares reporting in Australia to that in six overseas jurisdictions, arguing that other jurisdictions have a clearer, less onerous financial reporting framework.

The AASB’s paper highlights the opportunity for the sector to be engaged in addressing the issues through the upcoming Australian Charities and Not-for-profits Commission (ACNC) legislation review that commences on 3 December 2017, as well as outreach sessions facilitated by the AASB.

The research cites the following challenges with charity financial reporting under Australia’s current framework:

  • Multiple regulators
  • Variation in requirements
  • Open to significant judgement
  • Rationale unclear
  • Inconsistent audit requirements

Multiple regulators

Quite simply, there is only one regulator in New Zealand, compared with at least ten in Australia. Australian requirements vary between Commonwealth and State/Territory requirements, but also vary within the Commonwealth (such as between the ACNC and The Office of the Registrar of Indigenous Corporations (ORIC)). While the ACNC has been working on this there is still much work to be done.

This means that charities have to spend time navigating varied and overlapping requirements and regulators, each with different priorities and approaches.

Variation in requirements

The Research Report contends ‘there is no level playing field for charities when it comes to financial reporting’. There are different reporting thresholds between jurisdictions, and different criteria.

Some criteria are based on numbers derived from accounting standards (for example, revenue) and some are referenced to non-accounting criteria (such as employee numbers). For example, the ACNC requirements and some State requirements are based on ‘revenue’ while other jurisdictions are based on ‘gross receipts’. Whereas, the ORIC requirements are based on similar criteria to that for the distinction between large and small proprietary companies (therefore including gross assets and employees as well as gross operating income).

Minimum reporting threshold amounts are also different between jurisdictions. Some commonality exists for this being $250,000 in several jurisdictions, whereas ORIC is $100,000 and in Queensland the minimum reporting threshold is $20,000).

There is also inconsistency on reporting requirements for those entities that may temporarily exceed a reporting threshold.

Open to significant judgement

Charities are currently required to assess whether they are a ‘reporting entity’ as defined in the accounting standards in order to determine whether they prepare general purpose financial reports (GPFRs)or special purpose financial reports (SPFRs). This is a self-assessment process, the responsibility of the board (or their equivalent) and is not a straightforward process as it is open to significant judgement. According to the Research Report, recent research has revealed that charities do not consistently apply the guiding rules in the Statement of Accounting Concepts when deciding whether they prepare GPFRs or SPFRs.

Of the seven countries considered in the Research Report, Australia is the only one that permits charities to self-assess in this.

Rationale unclear

The rationale for some of the legislative requirements is often not clear, with little focus on why the information is likely to be useful to users. For example, Queensland’s reporting requirements for co-operatives are different from other states with no clear rationale as to why. As a result, there is no clear indication that the financial reports benefit the organisation or stakeholders.

There does not seem to be any objective criteria for how the relevant thresholds have been determined, and therefore it is not clear when these should be updated or reviewed for changes in economic conditions, such as inflation.

Inconsistent audit requirements

The audit requirements also vary according to the regulator. For example the ACNC requires a ‘review’ of the financial statements of medium sized charities, whereas ORIC requires an audit for these entities.

Further, the individuals that are allowed to perform audits vary between jurisdictions. The AASB intends that its paper, and the options for reform that it canvasses, will be a reference and ‘thought-starter’ for the more comprehensive ACNC Act review, where issues of thresholds and special purpose accounts may further considered.

Access the AASB’s paper here.

1Page 14 of Yang Y, Simnett R and Carson E (2017) Report Prepared for the AASB and the AUASB on the Reporting Framework Choice and Auditor Characteristics and Value among Australian Large and Medium Sized Charities in 2014-2015, UNSW Australia Report.