FAQs not-for-profits

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I am auditing the 30 June 2014 financial report of a charity registered with the ACNC. Do I have to include an independence declaration in my auditor’s report?

No. While section 60-40 of the Australian Charities and Not-for-profits Commission Act 2012 (the ACNC Act) requires that you provide the charity with a signed written independence declaration that states that to the best of your knowledge and belief that:

  • There has been no contraventions of any applicable code of professional conduct in respect of the audit, or
  • The only contraventions of any applicable code of professional conduct in respect of the audit are those detailed in the declaration.

The ACNC’s current interpretation of the requirements of the ACNC Act is that you are not required to include this declaration within the auditor’s report. More information on the ACNC’s audit requirements can be found on their website.

I recently reviewed a set of special purpose financial statements (SPFS) prepared by a professional accountant. I was not able to determine from the accounting policy note or elsewhere in the report whether the recognition and measurement policies of all or only some accounting standards had been applied. I also couldn’t determine which disclosure standards had been adopted. Does this information need to be disclosed?

There is no specific requirement to disclose the individual accounting standards that have or have not been applied in the preparation of a special purpose financial statement (SPFS). The only standard that governs the preparation is APES 205 Conformity with Accounting Standards, which imposes requirements on members involved in the preparation, presentation, audit, review or compilation of financial information, regardless of whether those statements purport to be special purpose or general purpose. Paragraph 6.1 of APES 205 requires members producing special purpose reports identify the significant accounting policies that have been used in its preparation and presentation.

However, APES 205 does not define the term or provides any further guidance on what constitutes a significant accounting policy. It also does not require entities to list the accounting standards they have or have not complied with in the preparation of a special purpose report. Notwithstanding this, a “significant accounting policy” is generally taken to mean one that is significant to the understanding of the financial statements (see paragraph 117-118 of AASB 101 Presentation of financial statements).

In some cases the accounting standards themselves require, and some regulators expect, special purpose financial statements that are lodged in accordance with the legal requirements, regulations or guidance documents to comply with certain accounting standards.

For example, those entities lodging with ASIC under Chapter 2M of the Corporations Act are required to comply with the specific disclosure standards - AASB 101 Presentation of Financial Statements; AASB 107 Statement of Cash Flows; AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors; AASB 1048 Interpretation of standards and AASB 1054 Additional Australian disclosures because these standards apply to lodging entities rather than reporting entities. Paragraph 7 of AASB 1054 requires an entity whose financial statements comply with Australian Accounting Standards to make an explicit and unreserved statement of such compliance and that this statement shall not be made unless the financial statements comply with all the requirements of Australian Accounting Standards.

Paragraph 8 then goes on to require the entity to disclose in the notes the statutory basis or other reporting framework under which the financial statements are prepared. Paragraph 117 of AASB 101 requires an entity to disclose in a significant accounting policy note the measurement bases used to prepare the financial statements and other accounting policies that are relevant to an understanding of the financial statements. Commentary on determining significant policies is contained in paragraphs 119-121 which indicates that the selection of item for disclosure will depend on the nature and circumstances of the entity. Well disclosed accounting policies should indicate if they align with the requirements of the relevant accounting standard in each case.

Similarly, the Australian Charities and Not-for-profits Commission require special purpose financial statements lodged in satisfaction of ACNC reporting requirements to comply with the same standards as ASIC (see ACNC reporting FAQ number 5).

I recently read a set of what appeared to be special purpose financial statements prepared by a professional accountant. However it was not clear from the accounting policy note or elsewhere in the report that these were in fact ‘special purpose financial statements’. Isn’t making a statement about the accounts being special purpose a requirement of APES 205?

Yes it is. APES 205 Conformity with accounting standards sets the standards for members involved in the preparation, presentation audit, review or compilation of financial information, regardless of whether those statements purport to be special purpose or general purpose. Specific responsibilities exist in paragraph 6.1 that require members producing special purpose reports to take all reasonable steps to ensure that the report that is produced clearly identifies:

  • That the financial report a special purpose financial report
  • The purpose for which the special purpose report was produced and
  • The significant accounting policies that have been used in its production.

 

Members involved in the any aspect of the production of financial statements are reminded that compliance with APES 205 is a mandatory requirement of their Institute membership.  

Members are also reminded that if the special purpose financial statements are being lodged in satisfaction of reporting requirements under Chapter 2M of the Corporations Act, then stating that they are special purpose is also a requirement of paragraph 9 of AASB 1054 Additional Australian Disclosures which applies to these entities. It became operative for financial reporting periods ending on or after 1 July 2011. The same paragraph also applies to special purpose reports being lodged with the Australian Charities and Not-for-profits Commission (ACNC) in satisfaction of its reporting requirements (see ACNC reporting FAQ on this topic). 

Is a director’s report required to be prepared and lodged with the financial statements that a registered charity must lodge in order to comply with their ACNC reporting requirements?

No.

The content of a financial report that must be lodged with the ACNC is specified in paragraph 60.5 of the Australian Charities and Not-for-profits Commission Regulation 2013. It specifically requires submission of the documents that are required by the accounting standards, i.e. statements of financial position, performance and cash flow and notes to the accounts (paragraph 60.10), along with a declaration by the responsible entity that states the entity can meet its debts as and when they fall due and that the financial statements comply with the requirements of the ACNC Act (paragraph 60.15).

Since a directors report is not specifically mentioned, charities not subject to other legislative requirements would need to consult their own constitution’s reporting requirements to assess their need to prepare such a report. This may specify not only if they need to prepare one to accompany the financial report they issue to members but also in what format it should be prepared. If it does, this report must be completed in order to comply with the registered charity’s reporting obligations to its members. However, the entity can still choose not to lodge the directors report as part of the financial statements it lodged with the ACNC.  

Is there an exemption from consolidation available for reporting entities lodging financial statements under the Australian Charities and Not for Profits Commission (ACNC) Act?

No. A reporting entity that controls other entities is required by accounting standards to prepare consolidated financial statements. However, the ACNC Commissioner does have discretion to allow entities to provide collective or joint reports (Section 60.95 ACNC Act). Depending on the circumstances joint and collective reporting may diverge from particular accounting standards such as AASB 10 Consolidated Financial Statements. In such cases the entity would be required to apply all relevant accounting standards, except for those which are inconsistent with this type of reporting (Paragraph 6.85 Explanatory Memorandum to the ACNC Act).

Where can I find more detail on the differences in the accounting requirements between a for profit and a 'not-for-profit' (NFP) entity?

The AASB has a general principle of issuing ‘transaction neutral’ standards, i.e. standards that require, to the extent feasible, the same transactions and other events to be subject to the same accounting requirements for all entities preparing general purpose financial statements (whether for profit or NFP). Therefore ‘not-for-profit’ reporting entities are generally required to comply with the Australian Accounting Standards.

An NFP is defined in various standards where NFP specific requirements exist as ‘an entity whose principal objective is not the generation of profit’. While transaction neutrality is the universal principle, the AASB has included special requirements for NFP's into the AASB’s where appropriate to allow for this sector's special needs. These are generally special paragraphs inserted with the notation ‘Aus’ prior to the number. These standards also contain the “not-for-profit” definition. An example is paragraph Aus9.1 of AASB 102 which allows NFPs to measure inventories held for distribution at cost, adjusted when applicable for any loss of service potential, rather than the normal ‘lower of cost and net realisable value’ calculation.

The AASB has also exempted NFPs (both public and private sector) from two standards, AASB 8 Operating Segments and AASB 120 Government Grants and Disclosure of Government Assistance. However, it has also issued AASB 1004 Contributions, which deals with the accounting treatment for contributions received by NFPs. All the remaining AASB standards and their requirements apply to NFP's in the same way as for profit entities, which the exception of the application of the Aus paragraphs.

There is a AASB staff paper available that identifies all the NFP requirements that are contained in the standards and explaining the reasons for their existence. It identifies the following key differences:

  • revaluation increments and decrements attributable to non-current assets (AASB 1, 116, 136 and 138) and
  • impaired assets within cash generating units (AASB 136) 
  • Government grants/contributions (AASB 120 and 1004) 
  • assets received at no or nominal cost (AASB 102, 116, 138 and 140) 
  • inventories held for distribution (AASB 102)

It also provides guidance to NFPs with ‘for profit’ subsidiaries by comparing all the relevant different requirements which may impact their consolidation.

Will the Australian Charities and Not-for-profits Commission (ACNC) accept an association’s audit report signed by an auditor who is not a registered company auditor (RCA) even though the ACNC Act requires RCAs?

Yes. In respect of the 2014 reporting period the Commissioner has decided to accept these reports using her discretion under Schedule 1, Part 4, Item 10(1) (2) & (3) of the ACNC (Consequential and Transitional Act) Act 2012. Refer to the ACNC website for details. The audit requirements are different under the various State/Territory Acts governing incorporated associations and  the ACNC will accept the state/territory report audited by a non-RCA. It should be noted this rule is transitional and only in place for the 2014 financial year unless extended.

Are there any proposals to extend the application of AASB 124 Related Party Disclosures to public sector not for profits?

Since AASB 124 was first released as part of the international harmonisation programme in 2004, the scope of its application has specifically excluded the general purpose financial statements of “not for profit public sector entities” (AASB 124 Aus paragraph 1.3). This exclusion was on the basis that that the disclosures required by the standard could not be adequately applied to these types of entities, given their nature.

In 2009 the International Accounting Standards Board completed a major review of AASB 124’s international equivalent IAS 24 of the same name, which resulted in some significant changes to the definition of a related party and introduced partial exemptions for disclosures about transactions with governments (refer ANT 13/11 Q&A (PDF)).

In response the Australian Accounting Standards Board has, over the past year, been reconsidering the existence of AASB 124’s scope exclusion for public sector not for profit entities, in light of its commitment to sector neutrality of standards. This has involved the board considering several major issues including:

  • Whether the term “business” used in AASB 124 can be adequately applied to the NFP sector;
  • Whether the definition of key management personnel (KMP) is suitable for use in the public sector and whether any additional KMP disclosures are required; and
  • Whether additional exemptions are required for disclosure of transactions between ministers or local councillors and their respective arms of local, state and federal government.

At Board meetings in April and September 2010 and February 2011 the Board discussed these concerns and concluded that, in each case, the wording of the new AASB 124 was sufficiently robust to enable public sector not for profits to apply the new requirements and still achieve appropriate outcomes.

As a result, the AASB staff have now been directed to prepare an ED for public comment, proposing that these entities now be included within the scope of AASB 124. Based on the AASB’s current work programme the ED is due to be issued prior to June 30 with an amended version of AASB 124 issued before the end of the year. More details on the board deliberations on this topic can be found on the AASB website in the Action Alerts and meeting papers for the three meetings referred to above.

My client is a “not-for-profit” that has recently acquired a “for-profit” subsidiary. Is it possible for the subsidiary to have different accounting policies to that of its not-for-profit holding company?

[as reported in ANT27/2009]

Yes. It is possible for parents and subsidiaries to have differing accounting policies. This situation is quite a common occurrence, given the number of accounting options contained in current Australian accounting standards that are specific to not-for-profit organisations. 
 
The Australian Accounting Standards Board (AASB) has recognised this and has produced a document identifying all NFP-specific accounting policies and comparing them against their “for profit” counterparts. The document is available on the AASB website. 
 
However, the NFP parent will be required to deal with these differences when it prepares its consolidated financial statements, as required by AASB 127 Consolidated Financial Statements
 
Paragraph 28 of this standard requires that “consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances”. Therefore, adjustments will need to be made on consolidation to bring the accounting policies into line. 
 
This will require the “for-profit” subsidiary to collect appropriate information to enable its accounts to be adjusted on consolidation to comply with the parent’s accounting policies. This additional record-keeping may be substantial depending on the particular policy being considered. An example would be if the parent and subsidiary had different accounting policies for property plant and equipment under AASB 116, one of several standards identified by the AASB paper as having the potential to create a significant source of difference. 
 
Therefore, in selecting or changing accounting policies for either entity, it would be advisable to consider these cost benefit issues. However, the overriding criteria relating to any decision to change accounting policies must be the requirements of AASB 108, which states in paragraph 14 that an entity can only change policy if it is required by a standard or results in the financial report providing more reliable and more relevant information about the transactions being considered.

Is a small proprietary company whose ultimate controlling entity is an overseas listed company still considered to be a reporting entity? I know this was previously a requirement of APS 1, but I understand that it has since changed?

[as reported in ANT20/2008]

To determine whether an entity is a reporting entity, you need to refer to the definition; a reporting entity is ‘an entity in respect of which it is reasonable to expect the existence of users who rely on the entity's general purpose financial report for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries. This definition is in Appendix A of AASB 3 Business Combinations and in the AASB's glossary of defined terms, and came into effect with the new suite of AASB international accounting standards, operative from 1 January 2005.

Under this definition the number of users dependent on general purpose financial reports for a small proprietary company is likely to be limited, so reporting entity classification may not be appropriate. However, as in all cases involving the application of reporting entity professional judgement is required in the circumstances.  

Paragraph 15 of APS 1 Conformity with Accounting standards and UIG consensus views refers the reader to SAC 1 Definition of the Reporting Entity for the determination of a reporting entity. SAC 1 provides additional interpretative guidance to support the definition of reporting entity found in the accounting standards. However, while paragraph 17 of APS 1 identifies an Australian company being a subsidiary of a foreign listed company as a reporting entity it is considered that this is no longer an automatic requirement because: 

  • This paragraph was based on a AASB standard that has changed since APS 1 was issued; and 
  • Paragraphs 16, 17 and 18 of APS 1 are guidance only on the interpretation of the standards at the time APS 1 was issued.

APS 1 has now been redrafted and replaced by APES 205 Conformity with Accounting Standards, issued by the Accounting Professional and Ethical Standards Board (APESB) and operative from 1 July 2008.

In the period before APES 205 becomes effective, the status of those subsidiaries of overseas listed entities needs to be assessed by reference to SAC 1 on a case by case basis and therefore members are encouraged to carefully consider the relevant circumstances and document their decision.

How are “not for profits” (NFPs) affected by the new Australian equivalents to International Financial Reporting Standards (AIFRS) standards

Since the AASB has the power to issue sector neutral standards i.e. standards to cover reporting entities in the private and public sector, “not for profit” reporting entities are covered by and will be required to comply with the new AIFRS. An NFP is defined as “an entity whose principal objective is not the generation of profit”.

As part of the convergence process the AASB has included special requirements for NFP's into the new standards where these are appropriate to allow for this sector's special needs. These are generally special paragraphs inserted with the notation “AUS” prior to the number. These standards also contain the “not for profit” definition. An example is paragraph 9.1 of AASB 102 which allows NFP's to measure inventories held for distribution at the lower of cost and current replacement cost rather than the normal “cost and net realisable value” calculation.

The AASB has also exempted NFP's from two standards, AASB 114 Segment Reporting and AASB 120 Government Grants. However it has also issued AASB 1004 Contributions, which deals with the accounting treatment for contributions received by not-for-profits. All the remaining AASB standards and their requirements apply to NFP's in the same way as for profit entities.

The AASB has also published a staff paper titled Not-for-profit entity requirements in Australian Accounting Standards which identifies all the special NFP requirements that are contained within the accounting standards and which explains the reasons for their existence. It also provides guidance to NFPs with "for profit" subsidiaries by comparing all the relevant different requirements which may impact their consolidation.

The paper Not-for-profit entity requirements in Australian Accounting Standards can be downloaded from the AASB website.

I am looking for a definition of the term "not-for-profit", used in the standards. Can you help?

The definition is located in each standard that uses it, but which applies to both for-profit and not-for-profit entities - see AASBs 102, 116, 136.

I am preparing some financial reports for a charity that is a reporting entity. Where can I find help on the application of accounting standards to this type of entity?

The Institute has recently released the third edition of its “Enhancing not for profit annual and financial reporting” publication which is designed to provide preparers and auditors of financial and annual reports for this sector with the best practice information that they need to produce high quality documents.

Like its predecessor editions issued in 2007 and 2009, it contains extensive guidance on NFP reporting, summaries of the relevant requirements, an annual reports checklist, illustrative financial statements and commentary on the application of accounting standards to these types of entities.

The latest edition has been updated for the significant regulatory changes that have taken place since the second edition was published including the release of the reduced disclosure regime (AASB 1053) and the amendments to the financial reporting requirements of the Corporations Act 2001 (affecting companies limited by guarantee) and the state based incorporated associations legislation.

Its best practice recommendations take into consideration the recommendations from the 2009 PwC Transparency Awards (which the Institute supports) and the Global Reporting Initiative’s Reporting Guidelines, as well as the Institute’s research into Broad Based Business Reporting and the emerging concept of integrated reporting.

The Australian Accounting Standards Board has also published a staff paper titled 'Not-for-profit entity requirements in Australian Accounting Standards', which identifies all the special NFP requirements that are contained within the accounting standards and which explains the reasons for their existence. It also provides guidance to NFPs with "for profit" subsidiaries by comparing all the relevant different requirements which may impact their consolidation. It can be accessed from the technical articles and publications section of the AASB website.

How are “not for profits” affected by the new Australian equivalents to International Financial Reporting Standards (AIFRS) standards?

Since the AASB has the power to issue sector neutral standards i.e. standards to cover reporting entities in the private and public sector, “not for profit” reporting entities are covered by and will be required to comply with the new AASB standards. An NFP is defined as “an entity whose principal objective is not the generation of profit”.

As part of the convergence process the AASB has included special requirements for NFP's into the new standards where these are appropriate to allow for this sector's special needs. These are generally special paragraphs inserted with the notation “AUS” prior to the number. These standards also contain the “not-for-profit” definition. An example is paragraph 9.1 of AASB 102 which allows NFP's to measure inventories held for distribution at the lower of cost and current replacement cost rather than the normal “cost and net realisable value” calculation.

The AASB has also exempted NFP's from two standards, AASB 114 Segment Reporting and AASB 120 Government Grants. However, it has also issued AASB 1004 Contributions, which deals with the accounting treatment for contributions received by not-for-profits. All the remaining AASB standards and their requirements apply to NFP's in the same way as for profit entities.

The AASB has also published a staff paper titled Not-for-profit entity requirements in Australian Accounting Standards which identifies all the special NFP requirements that are contained within the accounting standards and which explains the reasons for their existence. It also provides guidance to NFPs with "for profit" subsidiaries by comparing all the relevant different requirements which may impact their consolidation.

I understand not-for-profit reporting is likely to undergo some major reforms in the not-too-distant future. Can you give me some more details please?

[as reported in ANT27/2011]

Reporting for "not-for-profits" has long suffered from regulatory neglect which has proved a difficult challenge for this sector as the financial reporting obligations on the "for-profit sector" have expanded without appropriate guidance available on how these developments are best applied to the not-for-profit sector.

There are several big projects currently underway, with which members of the not-for-profit community should become familiar:

  1. National regulation - The Federal Government plans to set up a national regulator, titled the Australian Charities and Not-for-profits Commission (ACNC). This new body will become the new one-stop-shop for the support and regulation of the NFP sector, bringing the myriad of state and federal requirements under common control. More details can be obtained from an article in July’s Charter titled “New charities commission”.
  2. Service performance reporting - the AASB in conjunction with the IPSASB, and the New Zealand FRSB are working on assisting private sector not-for-profits produce financial reports that better discharge their obligations to be accountable to their members and donors, by reporting more effectively on the services they provide and how they provide them. An issues paper and possible ED for the first stage of the project are currently scheduled for later this year. More details on the status of this project can be found by visiting the AASB website.
  3. Income from non-exchange transactions - this joint AASB/ NZFRSB project is to develop an ED that will replace AASB 1004 Contributions. Draft proposals were exposed in mid 2009 as ED 180 Income from non-exchange transactions (taxes and transfers). The Boards’ subsequent re-deliberations have included consideration of the IASB proposals on performance obligations included as part of their Revenue Recognition project (ED 198 Revenue) and the current draft is now broadly based on these proposed requirements. For more details see the AASB’s June action alert (PDF). Note that progress on this AASB project is now subject to the progress of the IASB’s revenue work. This has recently been slowed by the announcement of the IASB’s intention to re-expose its revenue proposals, moving the likely completion date of that standard into 2012. For more details, see the IASB’s revenue recognition project page.
  4. Control in the NFP sector - the Board is undertaking a review of the new requirments of IFRS 10 Consolidated Financial Statements, with a view to identify areas where domestic NFP/public sector paragraphs might be necessary to address NFP specific issues surrounding control. The Board hopes to issue an ED later in the year with a view to having any necessary “Aus” paragraphs  in place in its equivalent AASB 10 before it becomes mandatory in 2013.
  5. Public sector NFP work - in addition to the AASB’s work to improve the  financial reporting requirements for public sector not-for-profits within the general government sector released last week as ED 212 (refer to item 2 in ANT26/2011 (PDF)), the Board is also working on related party disclosures for this sector.

The above summary is not an exhaustive list of the Board’s work in the NFP sector and interested readers should consult the Board’s current work programme (PDF) for the nature and timing of all its projects.
 
Our ANT newsletter will keep you up-to-date on changes as they occur in these areas, including providing details of the NFP roundtables on ED 212 scheduled for September 2011.

When reading material on regulating the not for profit sector recently, I noticed references to a “National Standard Chart of Accounts”. What is it and where can I find a copy?

The National Standard Chart of Accounts (NSCOA) provides a common approach to the capture of accounting information by community organisations. Its purpose is reduce the administrative burden falling on not-for-profits in receipt of government funding by setting out a standard financial data dictionary that can be used by both the NFP and the relevant government agency. The dictionary defines each account category, ensuring that financial information is reported and recorded in a consistent way. While it is designed primarily for small to medium nonprofits due to their size, unsophisticated accounting systems and limited resources, it can also be used by larger NFP’s to align their systems to produce reports that are categorised consistently.

The NSCOA was written by the Australian Centre for Philanthropy and Nonprofit Studies within Queensland University of Technology (QUT) and was developed at the request of the Council of Australian Governments COAG. It is based on the MYOB accounting system, and is freely available for download from QUT's website, with a version available for use in each state. Each account number within the Chart of Accounts has a dictionary definition of what that account should be used for.

New South Wales, Victoria and Queensland have adopted the NSCOA from 1 July 2010, with other jurisdictions planning to follow suit from 1 July 2011. Extensive resources have been developed by each State adopting the NSCOA. These can be accessed through the QUT website.