Financial Reporting

Not-for-profits (NFPs) broadly (and charities specifically) have been undergoing a major review by regulators, accounting standard setters, academics and users of not-for-profit financial reports. It is considered that now is the time to update and challenge the framework on which the accounting standards are based.

Many questions have been pondered by directors and other stakeholders: are the current financial statements useful to users and if not, what needs to change? What happens in other countries? Is ‘not-for-profit’ defined appropriately for the purposes of applying the relevant accounting standards? How does the framework link with legislative financial reporting requirements?

The Australian Accounting Standards Board (AASB) has released a number of papers considering how to improve and clarify the legislative requirements and reporting framework for charities and NFPs, including:

This work coincides with the upcoming review of the Australian Charities and Not-for-profits Commission (ACNC) which is expected to commence before the end of 2017.

The discussion paper considers three key proposals:

  • Removing the ability for entities to self-assess their reporting type (doing away with ‘special purpose reporting’);
  • Changing the basis of the current reporting threshold tiers for charities to be based on more objective criteria; and
  • Possibly, developing an additional suite of NFP-specific accounting standards.

These proposals are based on findings in the research report referred to above which reveals that Australian charities are burdened with a financial reporting regime that is overly complex, inconsistent and fails to promote accountability or efficiency within the sector.

Specifically, the research reveals the following current reporting challenges:

  • Inconsistency in regulatory requirements (such different thresholds and criteria);
  • Identifying reporting type (i.e., general or special purpose reporting) is based on subjective criteria;
  • Other international jurisdictions reviewed in the research have a clearer, less onerous financial reporting framework (e.g., no self-assessment or special purpose financial reporting is allowed).

We support continued efforts to bring regulatory requirements in line across different jurisdictions and within jurisdictions. This is consistent with the report once use often philosophy which will make governments and the sector more efficient when using reports and preparing the reports. Some progress has been achieved here to date, but there is a lot more to be done as evidenced by the research.

With the possibility of removing special purpose financial reporting, a simpler tier of accounting requirements for NFPs is necessary, especially for small to medium sized entities. NFPs are focused on meeting their core purpose, and often are lacking in skilled accounting resources. Therefore anything to simplify compliance obligations in this way would be extremely beneficial.

The AICD will be taking an active role in this consultation process and welcomes feedback from members on their experience of the Australian financial reporting framework and how it could be improved.

To provide your input please contact Kerry Hicks GAICD, Senior Policy Adviser, at the AICD on 02 9248 6635 or khicks@aicd.com.au.