Eric Hummer, Partner
Chartered Accountants Australia and New Zealand have recently published the fifth edition of Enhancing Not-for-Profit Annual and Financial Reporting, a tool developed to assist not-for-profit (NFP) organisations in their efforts to attain best practice in their annual and financial reports.
This report provides recommendations for the enhancement of NFP annual and financial reporting, drawing upon recommendations from the 2013 PwC Transparency Awards, the evolving concept of integrated reporting, industry experience in NFP reporting practices and advice received from the Chartered Accountants Charities and Not-for-Profit Advisory Committee.
In the foreword to the report, the ACNC Commissioner, Susan Pascoe, expressed the importance of maintaining, protecting and enhancing public trust and confidence in the NFP sector through increased accountability and transparency and the report sets out recommendations designed to enhance the quality of financial reporting by NFPs.
As part of a new blog series titled ‘Enhancing not-for-profit annual and financial reporting’, I will highlight key financial reporting areas to enhance the quality of your financial reporting in 2016-17. In this article, I focus on some key general reporting concepts and accounting and audit issues. Future articles will cover financial statements disclosures, impending changes to accounting standards that are likely to impact on NFP financial reporting in future years and enhancing annual reports.
There are three general reporting concepts that NFPs should understand when preparing their 2016-17 financial statements:
- Adoption of reduced disclosure regime
NFPs seeking to reduce the complexity of their general purpose financial reports should consider adopting AASB 1053 Application of Tiers of Australian Accounting Standards and apply the reduced disclosure regime available to NFP’s.
- Basis of accounting and special purpose financial reports
A basis of accounting note is required to be included in the financial report. This should disclose the reporting framework under which the financial report has been prepared.
For special purpose financial reports, it is expected that this disclosure will show the extent to which Australian accounting standards have been adopted in the preparation of the financial report.
The ACNC Regulation requires that special purpose financial statements comply with six minimum accounting standards being AASB 101, 107, 108, 1031, 1048, 1054. Charities preparing general purpose financial statements need to comply with all applicable accounting standards.
Common errors identified indicate that special purpose financial statements do not disclose compliance with above standards, nor do they disclose reporting framework (e.g. refer to ACNC Act).
- Report type – special purpose financial report or general purpose financial report
NFPs that currently prepare a special purpose financial report for presentation to stakeholders should consider whether such a report meets stakeholders’ needs with regard to:
- the number, diversity and location of stakeholders,
- the level of direct involvement by stakeholders in the day-to-day management of the NFP,
- the community impact of NFP activities, and
- the extent to which the NFP is reliant on government or philanthropic grants and donations.
There are several common accounting and audit issues can often add complexity to financial reporting. These include:
- Asset values and impairment
NFPs must ensure the carrying value of assets is not greater than its recoverable amount. Recoverable amount can be determined using the higher of fair value or value in use.
NFPs should ensure they annually review impairment indicators in order to determine whether a recoverable amount calculation is necessary. If necessary, a recoverable amount calculation should be undertaken and documented following the requirements of AASB 136 Impairment of Assets.
- Recognition of grant revenue and deferred revenue
When considering the application of accounting standards, NFPs should take the opportunity to:
- differentiate between reciprocal and non-reciprocal grants and adopt appropriate revenue recognition and deferred revenue policies for each,
- revisit the wording of their current revenue recognition policy notes and ensure they clearly explain the conditions that must be satisfied before grant revenue is recognised in profit or loss, and
- revisit the wording of any deferred/unspent revenue/grant policy to ensure it reflects the correct accounting treatment.
- Mergers and acquisitions
Australian Accounting Standards do not recognise mergers and require one entity to be designated as the acquirer and account for the transaction as a business combination. NFPs considering mergers should ensure that they are aware of the accounting implications of the transaction as part of the negotiations of terms.
In the next blog of this series I will focus on disclosure issues and upcoming significant changes in accounting standards that could have a significant impact on how NFP organisations account for and recognise revenue, leases and available-for-sale financial assets (i.e. investments). Stay tuned!