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Q&As on not-for-profits
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Foreign owned subsidiaries and reporting entity 
as reported in ANT20/2008 
 
Q: 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 understood it had changed? 
 
A: 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. 
 
 
Small not-for-profit audits: is there an alternative? 
as reported in ANT15/2008 
 
Q: I have a small not-for-profit client that requires an audit as a result of its own rules rather than legislation. My understanding is that once such a NFP specifies the requirement for an audit and I – as an Institute member – accept the appointment (whether honorary or otherwise), I am required to meet the Australian Auditing Standards (ASAs). The ASAs do not give specific consideration to the small NFP area.  
 
If my understanding above is reasonably accurate, is there a practical option to offer the NFP entities referred to above an alternative form of assurance? 
 
A: You are correct - if you are performing an audit of historical financial information, you have to use the auditing standards. The Accounting Professional and Ethical Standards Board (APESB) pronouncement APES 410 makes it mandatory for members of the professional accounting bodies in Australia to apply Australian Auditing Standards (i.e. those issued by the AUASB) to all Australian audit engagements, review engagements, other assurance engagements and related services (whether financial or non-financial information). 
 
Currently, many small not-for-profits have an audit, even though the law does not require them to. If the entity's constitution and other legislative requirements permit, a good option could be for members to consider encouraging their clients to have review engagements performed in accordance with AUS 902 (soon to be replaced by ASRE 2400 and 2405). This lower level of assurance is likely to be less expensive for the organisation and may be something that meets their needs. 
 
Note that if there is a requirement in the entity's constitution or rules to have an audit, the entity will have to change its constitution or rules before it can opt to have a review rather than an audit.  
 
 
Not-for-profit accounting 
as reported in ANT10/2008 
 
Q: 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? 
 
A: In 2007 the Institute published a report titled ‘Enhancing not-for-profit annual and financial reporting’. It followed and updated the 2006 publication of the findings of a research project to provide assistance to the not-for-profit sector in applying NFP reporting requirements. The previous report was titled ‘Not-for-profit sector reporting: a research project’ (pdf).  
 
These two reports provide extensive guidance on NFP reporting and contain summaries of the relevant requirements that should assist NFPs in fulfilling their reporting requirements. Included is a set of specimen accounts and commentary on the application of accounting standards to these types of entities. For more information visit the Institute’s website.  
 
The AASB has also published a staff paper 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 can be downloaded from the AASB website. 
 
The AASB is currently engaged in a project to improve guidance for not for profit entities.  
 
In June 2007 the Board released Invitation to Comment ITC 12 ‘A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities’ (pdf). The proposals require all entities (including not for profits) that prepare general-purpose financial reports to apply either full IFRS or the IFRS for SMEs based on public accountability criteria and size thresholds. Comments closed in September 2007 and the Board issued its feedback to the IASB in December 2007 to allow the IASB to progress this project. More details about ITC 12 are available on the Institute website. 
 
The AASB also issued a further ITC in December 2007 which represents the next stage of the Board’s project to address the specific financial reporting needs of not for profit entities. ITC 14 ‘Proposed Definition and Guidance for Not-for-profits’ explores whether clarification and/or guidance is required in the determination of a ‘not-for-profit entity’. It also incorporates material from the New Zealand Financial Reporting Standards Board, which has undertaken significant work in this field. Roundtables to discuss this ITC have been held over the last week (see ANT09/2008) and comments on this ITC are open until 31 March 2008. The ITC can be downloaded from the AASB website.  
 
 
Help for not-for-profits 
as reported in ANT11/2007 
 
Q. I have recently acquired a "not for profit" client. Where can I find help on its reporting requirements? 
 
A: AIFRS accounting standards are sector neutral and therefore apply to all not for profit reporting entities. However 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 process of determining whethera not-for-profit is a reporting or non-reporting entity is also the same.  
 
The AASB has published a staff paper identifying all the NFP requirements that are contained in the standards and explaining 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 can be downloaded from the AASB website. 
 
In addition, the Institute in 2006 published the findings of a research project to provide assistance to the not-for-profit sector in applying NFP reporting requirements. The previous report titled Not-for-profit sector reporting: a research project has now been updated.  
 
 
Not-for-Profit Definition  
 
Q: I am looking for a definition of the term "not-for-profit", used in the standards. Can you help?  
 
A: 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. 
 
 
Not-for-Profits under AIFRS standards 
 
Q: How are “not for profits” (NFPs) affected by the new Australian equivalents to International Financial Reporting Standards (AIFRS) standards? 
 
A: 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 recently published a staff paper identifying all the NFP requirements that are contained in the standards and explaining 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 can be downloaded from the above article link.