Standards and financial reporting

Changes to the Australian Charities and Not-for-profits Commission Regulations 2022 (Cth) (the ACNC Regulations) mean that charities preparing SPFS have the option to apply the simplified disclosure requirements in AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

This option applies for the disclosure of key management personnel compensation only for the 2022 reporting period onwards and for all other disclosures from the 2023 reporting period onwards.

This is instead of the full presentation and disclosure requirements in the compulsory standards for SPFS listed in section 60.30 of the Regulations (AASB 101, AASB 107, AASB 108, AASB 124, AASB 1048, AASB 1054).

Under subsection 2A, charities preparing SPFS can choose to apply the relevant paragraphs from AASB 1060 instead of the presentation and disclosure requirements of the compulsory standards listed above.

Charities that choose to comply with the AASB 1060 Simplified Disclosure Requirements must comply with all of the relevant requirements in that standard as well as AASB 1054. The requirements are covered (with the defined terms in Appendix A) in paragraphs 8, 11, 14-103, 106-110, 189-203 of AASB 1060 and paragraphs 1 to 6, 9, 9A, 9B and 17 of AASB 1054.

This is a sample disclosure note for the Basis of preparation section of the financial statement notes:

This financial report is a special purpose financial report prepared in accordance with the disclosure requirements of AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities to the extent applicable as required by the ACNC Regulations 2022.

The ACNC Commissioner exercised discretion to all charities preparing SPFS for the first time to not have to provide comparative information for the preceding period when applying the relevant Australian Accounting Standard.

The reporting requirements of key management personnel remuneration and related party transactions are different for the first year.

Large charities are required to disclose key management personnel remuneration for the 2022 Annual Information Statement reporting period onwards (unless an exemption applies). Medium and large charities are required to disclose related party transactions from the 2023 Annual Information Statement reporting period.

This means that a charity preparing SPFS and disclosing key management personnel for the first time in the 2022 annual financial report is not required to provide a comparative figure for key management personnel remuneration from the 2021 reporting period.

Similarly, a charity preparing SPFS and disclosing related party transactions for the first time in the 2023 annual financial report is not required to provide comparative figure for related party transactions from the 2022 reporting period.

An interim measure was implemented with AASB 2019-4 Disclosure in Special Purpose Financial Statements of Not-for-Profit Private Sector Entities on Compliance with Recognition and Measurement Requirements. This interim measure will be in place until the Financial Reporting Framework Project for not-for-profit entities is finalised.

Recognition and measurement are the processes of including an item and determining its monetary amount within the balance sheet or income statement. Most accounting standards would specify the recognition and measurement requirements within each standard, generally under the headings ‘recognition’ and ‘measurement’.

The AASB 2019-4 introduces new disclosure requirements regarding compliance with the recognition and measurement (R&M) requirements in Australian Accounting Standards for charities preparing SPFS, including:

• the basis on which the decision to prepare SPFS was made
• whether the SPFS overall complies with the recognition and measurement requirements of the Australian Accounting Standards (except for consolidation and equity accounting), and
• application of the consolidation and equity accounting requirements.

The new requirements are not expected to be onerous. A charity is only expected to disclose information about their accounting policies based on what they already know.

Charities are not required to conduct a detailed assessment of each accounting policy, and must simply disclose what they already know about whether their accounting policies comply with Australian Accounting Standards, or not.

If a charity is not sure, it can simply disclose this fact. It is, however, best practice to undertake a proper assessment as it prompts the charity to consider their accounting policies to ensure the charity is preparing financial statements that give a true and fair view.

Accounting for government grants depends on the nature of the grant. Most commonly, they may be accounted for under the revenue standard AASB 15 Revenue from Contracts with Customers or under AASB 1058 Income of Not-for-Profit Entities.

To be accounted for under AASB 15, the grant should be enforceable and have sufficiently specific performance obligations. Accounting under AASB 15 would result in revenue being recognised when the performance obligations are satisfied.

Otherwise, a government grant shall be recognised as income immediately under AASB 1058 after recognising any related amounts (such as, but not limited to, a financial liability or provision), except when the grant is to enable a charity to acquire or construct a recognisable non-financial asset – for example, a grant to construct a building.

AASB 1058 does not require charities to recognise volunteer services. However, charities can choose to recognise volunteer services, or a class of volunteer services, if they can reliably measure the fair value of those services.

Generally, volunteer services are recognised as revenue under AASB 1058, but they can be recognised under other Australian Accounting Standards (for example, AASB 15) if the facts and circumstances satisfy the scope and recognition criteria of those standards.

Similarly, volunteer services are generally recognised as an expense upon receipt, but may be recognised as an asset under other Australian Accounting Standards (for example, AASB 116 Property, Plant and Equipment) if the facts and circumstances satisfy the recognition criteria of those standards.

Appropriate disclosures should be made to demonstrate the choice of accounting policy to enable users to understand the effects of volunteer services.

With the introduction of AASB 16 Leases a new single accounting model now requires lessees to recognise almost all leases on the balance sheet.

This means lessees will no longer determine whether a lease is an operating lease or finance lease, and most leases will need to be capitalised in the balance sheet recognising a lease liability and a right-of-use (ROU) asset.

There is minimal change to how the lessor accounts for leases. The standard is applicable to charities preparing GPFS and GPFS – Simplified Disclosures.

Charities preparing SPFS should also consider whether application of this standard is appropriate to any leases, including leases of right-of-use assets, particularly where accounting for leases may be a material and significant accounting policy, to present a true and fair view.

Under AASB 16, charities will need to recognise their right to use an underlying asset as a right-of-use asset and represent their obligations to make lease payments as a lease liability.

As a lessee, charities need to measure the right-of-use asset similar to other non-financial assets and recognise depreciation of this asset. The lease liability needs to be measured similar to other financial liabilities and requires classification of both principal and interest portions of cash repayments.

Identifying a lease

A fundamental difference between the previous accounting standards and how AASB 16 applies is in identifying a lease.

Under AASB 16, a lease is defined as:

The contract must:

1. relate to an identified asset – where the asset is physically distinct or where the lessee receives substantially all of the capacity of the asset
2. provide rights to obtain economic benefit from use – the lessee must have the right to receive substantially all of the economic benefit from the use of the asset, and
3. provide rights to direct use of the asset – the lessee must have the right to direct the use of the asset, or where use is predetermined, have the right to operate the asset.

Charities should note that short-term leases (12 months or less) or leases for low-value assets (such as office furniture and low value equipment) do not need to be recorded on the statement of financial position.

Management will need to exercise judgement in relation to how leases are identified. All types of contracts could be affected (including property and equipment leases which were previously ‘off-balance sheet’), and charities will need to apply judgement and develop accounting policies on how a lease is identified to ensure consistent application.

Initial recognition and measurement

When capitalising a lease on the balance sheet (as lessee), the lease will be represented by a lease liability and a new right-of-use asset. The lease liability is initially measured at the present value of the remaining lease payments, discounted using either the rate implicit in the lease agreement, or where that rate is not easily determined, using the charity’s incremental borrowing rate (for example, the interest rate that a charity would be given by a bank).

Over the lease term, the lease liability will need to be increased to reflect interest on the lease and reduced by the repayments, while the right-of-use asset will be depreciated.

Impacts to charity reporting

As all leases will now be considered finance leases (except for short-term and low-value leases), and will be added to the statement of financial position, there will be an impact to a charity’s key financial metrics such as Return on Assets (ROA).

The depreciation charges and interest expenses related to leases will also have an impact to the statement of profit or loss and other comprehensive income, where expenses for leases are front-loaded rather than being expensed on a straight-line basis.

For the purpose of the Annual Information Statement, interest expenses should be allocated under the financial line item ‘interest expenses’ (for large charities only) and depreciation allocated to ‘other expenses’.

Charities may also need to consider impacts to debt covenants, credit ratings and impairment testing. Management should not underestimate the effort, time and costs required to implement changes and should discuss these with their accountant.

Where a charity enters into a lease that has terms and conditions significantly below the market value, it is referred to as a ‘concessionary lease’. These types of leases are commonly referred to as ‘peppercorn leases’.

To account for such leases, AASB 1058 amends AASB 16 to ordinarily require charities to measure the right-of-use asset at fair value and the lease liability of future lease payments at present value.

The difference would be income under AASB 1058 if there are no other obligations on the lease, but is not considered to form part of revenue for determining the size of a charity for ACNC purposes.

However, the AASB has provided temporary relief for charities by allowing them to choose to measure a class (or classes) of right-of-use assets arising under concessionary leases at cost, rather than at fair value with the lease liability of future lease payments at present value. This temporary relief is effective from 1 January 2019.

For charities that choose to measure these concessionary leases at cost, additional disclosures are required in the financial statements; at a minimum:

• the charity’s dependency on the concessionary leases to further its charitable purposes, and
• the nature and terms of the leases, including:
  • the lease payments
  • the lease terms
  • a description of the underlying assets, and
  • restrictions on the use of the underlying assets specific to the entity.

With the introduction of AASB 9 Financial Instruments (which replaces AASB 139 Financial Instruments: Recognition and Measurement), charities may need to adjust how they account for financial assets.

The standard is applicable to charities preparing GPFS and GPFS – Simplified Disclosures.

Charities preparing SPFS should also consider whether application of this standard is appropriate particularly where accounting for financial assets may be material and significant in presenting a true and fair view.

Generally, a financial instrument refers to a charity entering into any contract that gives rise to a financial asset of one party with a financial liability or equity instrument of another party.

For charities, common financial assets are things like:

• cash at bank and term deposits
• trade receivables and other debtors
• bonds
• shares
• investments in managed funds
• derivatives.

AASB 9 introduced a new classification model for financial assets and a forward-looking expected credit loss model for impairment (impairment is where the carrying amount of an asset on your books is more than what you can recover for it if you were to use or sell the asset).

The business model assessment and contractual cash flow characteristic tests together determine how a charity should account for their financial assets.

Business model assessment

The term ‘business model’ here is not referring to how a charity undertakes its charitable activities but how a charity manages its financial assets in order to generate cash flows (for its charitable purpose). The business model for managing the financial assets may result in cash inflow from collecting contractual cash flows, selling those financial assets, or both.

Contractual cash flow characteristic test

The contractual cash flow characteristic test is to identify whether the contractual cash flows satisfy the ‘solely payments of principals and interest’ (SPPI) test or ‘basic loan features’ test.

Some examples of financial instruments that may pass the SPPI test are generally loans in basic lending arrangements or trade receivables and other debtors.

Normally, financial assets are measured at fair value through profit or loss.

However, if a charity holds financial assets where:

• the objective of their business model is to collect contractual cashflow, and
• the cash flow is SPPI (for example, term deposits held until end of maturity with a fixed market rate of interest)

these financial assets will be measured at amortised cost.

If a charity holds financial assets where:

• the objective of their business model is to collect contractual cashflow and sell financial assets (for example, a portfolio of debt instruments such as bonds, are held and traded on a regular basis), and
• the cash flow is SPPI

these financial assets will be measured at fair value through other comprehensive income (OCI).

Presenting fair value changes in Profit or Loss, or Other Comprehensive Income (OCI)

One important note for charities is that equity investments (for example shares) almost always fail the SPPI test because they give rise to equity risk. Therefore, any changes in the fair value are normally accounted for through profit or loss under AASB 9.

However, one exception is when a charity on initial recognition makes an irrevocable election to present fair value changes in OCI, provided other conditions are met. Subsequently any gains and losses on equity instruments recognised in OCI (except for dividend that are recognised in profit or loss), are not recycled on disposal of the asset and there is no separate impairment accounting.

If a charity receives a grant on behalf of another charity and then forwards it onto the second charity (sometimes known as auspicing), questions arise about the accounting treatment of the amounts received by the first charity.

The critical question for the charity that is forwarding on the grant is whether they are acting as principal or agent.

A charity can make this determination by assessing its arrangements against the relevant accounting standard.

Assuming the transfer requirement occurs in a contract within the scope of AASB 15, AASB 15 paragraphs B34-B37 outlines how an entity determines whether the nature of the contract is a performance obligation to provide specified goods or services itself (i.e. the charity is a principal) or whether it is to arrange to provide goods or services to another party (i.e. the charity is an agent).

That assessment involves determining whether the charity controls the underlying good or services before it is transferred to the other party.

When making the principal or agent determination, the following factors should be considered:

Principal

• A charity may be a principal if it controls a good or service before it is transferred to the other party, except where control and/or ownership is only momentary.
• A charity may be a principal if it has the option to perform an obligation itself or may choose to engage a subcontractor to satisfy some or all of a performance obligation on its behalf.

Agent

• A charity will be an agent if the performance obligation is to arrange for the provision of goods or services by another party.
• When a charity satisfies a performance obligation as an agent, the charity may receive a fee or commission from the other party for acting as agent.
• The other party is primarily responsible for fulfilling the contract.
• The charity is not exposed to inventory or credit risks from the contract.
• The charity does not have discretion in establishing prices for the other party’s goods or services.

Accounting for revenue

When acting as principal, a charity will recognise as revenue the gross amount of consideration it expects to be entitled to receive in exchange for the goods or services provided.

When acting as an agent, a charity will only recognise the amount of any fee or commission it expects to be entitled to receive as revenue.

AASB 1058 Income of Not-for-profit Entities applies to annual reporting periods beginning on or after 1 January 2019. Despite the reference to ‘income’ in the title, AASB 1058 will not affect the ACNC’s current interpretation of revenue and income.

Revenue for determining a charity’s size under the ACNC Act is calculated in accordance with the relevant accounting standards issued by the AASB, including AASB 1058.

Both revenue and other income can be recognised under AASB 1058, with revenue arising from a charity’s ordinary activities, as explained in paragraph BC36 of AASB 1058.

Under the new income recognition model, how do I know whether to apply AASB 15 or AASB 1058?

Charities can acquire or receive assets (including cash) in exchange for consideration significantly below market value or even for no consideration. For example, these can include grants and donations (including non-monetary items) received by the charity to further their objectives.

If there are no enforceable, identifiable and measurable obligations that the charity must perform to receive the asset, for example a donation without any conditions attached, AASB 1058 would account the income (for example, the donation) after the asset is recognised under the relevant accounting standard (for example, cash donations under AASB 9 Financial Instruments) and in this example there is no other related amounts as no condition is attached.

Whereas if a charity is required, under a contract, to perform sufficiently specific obligations in order to acquire or receive that asset, then the charity must consider whether AASB 15 would apply to the whole, or part of the transaction to acquire that asset. Therefore, a charity will need to determine if a contract exists.

A contract is within the scope of AASB 15 if and only if it:

• is enforceable – can the fund provider require a refund if the funds aren’t spent correctly or completely, or can they compel the not-for-profit entity to provide the services, and
• contains sufficiently specific performance obligations to enable the determination of when the obligation is satisfied – for example, a transfer of goods or services external to the not-for-profit entity. It must also be sufficiently clear what the goods and services to be provided are, as the discretion that the not-for-profit has over the funds received, the less likely the performance obligations will be sufficiently specific.

Charities will need to assess revenue contracts to determine whether they are in the scope of AASB 15 or AASB 1058, or both.

The ACNC’s interpretation of revenue is based on whether it is derived during the ordinary course of charity activities.

Receiving the services of volunteers is most likely an ordinary activity within a charity’s operations. However, the once-off initial recognition of a concessionary lease would not be part of the ordinary course of charity activities.

This is similar to when a charity sells a building and the proceeds are considered income rather than revenue. Again, this is because the once-off nature of the transaction means it is not considered part of the charity’s ordinary activities.

Auditors' responsibilities in relation to the financial reporting framework are outlined in the Australian Auditing and Assurance Standards Board (AUASB) standards listed below:

• ASA 700 Forming an Opinion and Reporting on a Financial report
• ASA 800 Special Considerations Audits of Financial Reports Prepared in Accordance with Special Purpose Framework
• ASA 705 Modifications to the Opinion in the Independent Auditor’s Report

The ACNC has developed audit and review templates that are designed for use by auditors and were developed with the assistance of the AUASB. Refer also to the AUASB bulletin outlining the Auditor’s Responsibilities and the Financial Reporting Framework.