Clarity in financial reporting – October 2021 not-for-profit edition
Focus on financial reporting considerations for not-for-profit entities
Welcome to the October 2021 edition of our not-for-profit newsletter
In this issue
Upcoming not-for-profit-specific client events
Helpful publications and tools
Accounting developments
Regulatory update
Emerging technical issues
Upcoming not-for-profit specific client events
Upcoming not-for-profit Client financial reporting update
We are pleased to announce that our not-for-profit (NFP) client financial reporting update will be delivered via a short podcast in November 2021.
Leading Deloitte NFP specialists in financial reporting from our audit and assurance practice will share their thoughts and lessons learnt from the recent reporting season. The podcast will also cover current and emerging reporting issues in the NFP space. Topics include:
- AASB not-for-profit financial reporting framework project
- Income of not-for-profit entities: Narrow scope amendments
- ACNC legislative review on revised financial reporting thresholds and new related party disclosures for ACNC-registered charities
- Removal of aged care bed licences
.The link to the podcast will be distributed in November 2021.
Action: If you would like to be on the distribution list, please reach out to your Deloitte contact to assist you on this.
Helpful publications and tools
Clarity publication Not-for-profit 2021 financial reporting update
The June 2021 reporting season continues to be a challenging period for many NFP entities as they continue to navigate through the post-implementation issues of income and lease accounting and also more recent developments, including the IFRIC agenda decision on accounting for certain cloud computing arrangements and the early adoption of the new Simplified Disclosures Framework, where applicable.
We published the Not-for-profit 2021 financial reporting update in August 2021 which highlights the key matters to consider for the June 2021 reporting season, including:
- Post implementation guidance on income recognition and accounting for lease modifications
- Cloud computing – Software as a Service (SaaS) arrangements
- Early adoption of the new Simplified Disclosures Framework
- ACNC legislative review.
More information: Clarity publication Not-for-profit 2021 financial reporting update
Accounting developments
AASB not-for-profit financial reporting framework project
The Australian Accounting Standards Board (AASB) considered proposals by entities which determine their accounting policies under Tier 3 reporting requirements for inclusion in a Discussion Paper (DP) on the Financial Reporting Framework. The DP is expected to be published in the second half of 2022.Below is an outline of the AASB’s considerations to date:
- On changes in accounting policies, the Board has proposed to:
- Permit Tier 3 entities to change accounting policies voluntarily if such changes result in providing more reliable and relevant information on the effects of transactions and other events or conditions on the financial statements
Require a limited retrospective approach for accounting for changes in accounting policies and correction of errors, which recognises the cumulative effects in prior periods in the current period’s opening retained earnings without restating comparatives
- For transactions not covered by Tier 3 requirements, Tier 3 entities should apply the requirements of a higher tier of Australian Accounting Standards in full.Where transactions are also not covered by Tier 1 or Tier 2 requirements, judgement would be required to determine an accounting policy
- For transactions covered by Tier 3 requirements, the DP for stakeholder feedback will include some options on applying higher-tier requirements.
The AASB decided to specify that the primary objective in developing Tier 3 reporting requirements is to develop simplified financial reporting requirements that meet the needs of users of the financial statements of smaller NFP entities. The AASB has therefore amended the principles underlying the Tier 3 reporting requirements in the DP to ensure that comparability considerations do not conflict with this primary objective.
More information:
Income of not-for-profit entities: Narrow scope amendments
The AASB considered several implementation issues raised by NFP stakeholders in the short-term, narrow-scope project on AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities and decided to:
- Add a narrow-scope project to its work program to consider accounting for right-of-use assets under concessionary leases by NFP entities
- Add an example to the AASB 15 Australian illustrative examples for NFP entities on the principles to be applied in accounting for upfront payments
- Amend AASB 1058 Illustrative Example 3A to clarify the analysis regarding the recognition of a financial liability
- Develop additional educational material to support consistent application of AASB 15 and AASB 1058 regarding:
- Factors to consider when assessing whether a contract has sufficiently specific performance obligations
- Principle vs agent considerations
- Underlying principles of these standards and their interaction to assist with understanding the financial reporting outcomes
- Identifying applicable standards of various types of NFP entities.
More information: AASB Action Alert No.210 (September 2021)
Regulatory update
ACNC legislative review: Exposure draft on new ACNC thresholds and additional financial reporting obligations
Following the 30 June 2021 announcement on red-tape reduction, the Treasury has issued the draft legislation Exposure draft: Australian Charities and Not-for-profits Commission Amendment (2021 Measures No. 3) Regulations 2021 (the ED Regulations) on 20 September 2021. The ED Regulations cover the reforms to increase the ACNC reporting thresholds and to introduce the disclosure of related party transactions for all large and medium charities.
In response to the ED Regulations, Deloitte has submitted its comment letter highlighting some observations on certain aspects of the ED Regulations.
Comments closed on 15 October 2021 and the Treasury will review the submissions and feedback from stakeholders, which will identify any potential refinements to ensure the amendment achieves its intended purpose.
The key amendments in the ED Regulations include:
Increased financial reporting thresholds
From the 2021-22 financial year onwards, the ED Regulations amend the thresholds as follows:
Related party transactions disclosures
From the 2022-23 financial year onwards, all registered charities are required to disclose related party transactions.
- For all medium and large registered entities preparing special purpose financial statements, the ED Regulations will prescribe compliance with an additional standard, AASB 124 Related Party Disclosures. The ED Regulations will require all medium and large registered entities preparing annual financial reports (not only those preparing general purpose financial statements) to disclose related party transactions
- Small registered charities will be required to make a simplified disclosure involving a brief description of related party transactions in the Annual Information Statement.
Key management personnel compensation disclosures
The ED Regulations will provide an exemption for some charities from the requirement to disclose, as part of their related party transactions, aggregate remuneration paid to responsible persons and senior executives. This exemption will apply from the 2021-22 financial year onwards, to medium registered charities and large charities with only one remunerated key management person.
More information:
- DTT submission to Treasury on ED Regulations (All submission letters will be uploaded by the Treasury in due course)
Revocation of charity status
The ACNC announced in September 2021 that they have revoked the registration of 420 Australian charities for twice failing to submit their Annual Information Statements.
These entities have been referred to the Australian Tax Office, as with their charitable status being revoked, they are no longer eligible for tax concessions only applicable to charities.
We remind our clients of the importance of compliance with all their regulatory obligations, as failure to comply can have significant adverse financial and operational impacts, such as the removal of tax concessions.
More information: ACNC news - September 2021
ACNC emphasises the importance of charities being transparent and accountable
Based on a landmark review conducted last year, the ACNC has found a number of charities to be credible and professional in managing donations, balancing immediate relief with the need to supply funds for the long-term recovery phase. In emergency and disaster recovery situations it is not always possible or practical for charities to begin delivering programs immediately, as charities may need information and time to plan how to maximise its impact. The ACNC has highlighted the importance for charities in such instances to take the extra steps to be transparent and accountable to donors in the expenditure of funds as well as to demonstrate the significant outcomes for people who have benefited from the support and services provided.
More information: ACNC news - August 2021
Emerging technical issues
Removal of aged care bed licences from 2024
In view of the announcement in the Federal Budget for 2021–22 and the decision by the Australian Government that bed licences will be discontinued from 1 July 2024, ASIC has noted that aged care providers should review the carrying amount of aged care bed licences.
In September 2021, the Department of Health released a discussion paper Improving Choice in Residential Aged Care – ACAR Discontinuation. Whilst the focus of the consultation is not on whether the bed licences will be discontinued, the paper has indicated the following:
- A large number of new bed licences remain available to be allocated at no charge in the period until 1 July 2024 and that a large number of provisional places will also be available
- Whilst further measures may be required to mitigate potential risks that may arise from the removal of the licences, currently there are no plans to provide direct compensation to providers for the removal of the licences as the licences were initially provided by the government at no cost.
Whilst the relevant legislation may not be passed before the next Federal election, ASIC has released guidance for aged care providers to consider how the discontinuation of the current licencing regime may affect any bed licence intangible assets appearing on their statement of financial position in the lead up to 1 July 2024, in particular it is recommended that entities consider:
- Changes in the amortisation period
- Impairment of the licences
- Revaluations of licences
- Other assets
- Disclosure of judgements and uncertainties.
ASIC noted that while the discontinuation of the bed licences may result in a provider reporting an accounting loss, the cash flows of the business and ability to continue as a going concern may not be affected
- More information:
Improving choice in residential aged care discussion paper
Pubished: October 2021
