NFPs Encouraged to Use ACNC Review to Drive Financial Reporting Change

Not for profits are being urged to use the Australian Charities and Not-for-profits Commission legislative review to drive a positive change for financial reporting within the sector.

The Australian Accounting Standards Board is calling on not for profits to seize the opportunity to make a submission, after working with the sector for a number of months to identify some of the key issues surrounding financial reporting.

AASB chair Kris Peach told Pro Bono News it was a unique opportunity to press the reset button.

“These reviews don’t come around very often. If you don’t take this chance, it will be another five years before people are seriously going to look at this legislation again,” Peach said.

“If you genuinely think there are issues about who is reporting and what they are having to report, then this is a fantastic chance for charity stakeholders to have their say.”

The latest call builds on a number of outreach sessions hosted by the AASB in November 2017 that were designed to inform charities and stakeholders and assist them in preparing for the ACNC legislative review as well as stimulate conversation on how financial reporting in the charity sector can be improved.

As a precursor to the review, and as part of the Australian Financial Reporting Framework project, the AASB also released a research paper in October 2017 on the current financial reporting requirements for charities.

The research found that, despite ongoing simplification efforts, there are serious issues with the current financial reporting regime.

One of the main challenges was that Australia has a complex system for regulating financial reporting of charities, with multiple regulators, many with different reporting requirements.

“This impacts the cost of compliance as charities have to spend time and money navigating a maze of detailed and inconsistent requirements,” the report said.

“There is also duplication and overlap in the remit of regulators, making it difficult for charities to determine who they should be reporting to, about what.”

Another concern was that there is no “level playing field” for charities when it comes to financial reporting, with similar entities all having different reporting, driven by their geographic location, entity type or self-assessment of reporting obligations.

The report also found charities were often required to self-assess the most appropriate form of financial report to lodge.

Peach said the AASB would be relaying the key findings to the review committee.

“We will talk to the ACNC legislative review commission on 8 March, and as part of that we will feed back in what we’ve found. At a high level we need to work with the ACNC and also the Auditing and Assurance Standards Board,” she said.

She said their first recommendation would be to use three tiers for financial reporting.

“Broadly, what we heard from the outreach is that people think there should be three tiers. What is interesting is that at the moment there are three tiers for the audit piece, but actually only two for the financial reporting piece, so the medium and large charities have the same financial reporting requirements. That would be our first recommendation; you have got the three tiers, let’s use the three tiers,” Peach said.

“People were broadly happy that the top tier, the large tier, should be doing full general purpose reporting, so that is full recognition, measurement and disclosure.

“The bottom tier, it was thought, definitely should be doing cash accounting, which is not different to what they’re actually doing at the moment with their Annual Information Statements

(AIS). But I think we could actually give them a standard, a little bit like New Zealand’s, that says if you are going to have to do cash accounting to produce your AIS then here is how you do that.

“If you then added in templates that tie in with the National Standard Chart of Accounts, and with governance issues, then hopefully that would help the smaller charities.”

But Peach said while there was broad agreement from the sector with regard to what the requirements should be for the top and bottom tiers, there were “mixed views” about the middle tier.

“Some people thought it should be full recognition and measurement – but some form of reduced disclosure – and others thought it should be some form of modification to the recognition and measurement pieces. There are arguments for and against,” she said.

“Again, I suspect where it was coming to is that people would like another look at that depending on where you draw your tiers, what criteria you use and what thresholds you use.

“What we broadly heard was that people don’t think having revenue as the sole criteria for the thresholds was actually the best outcome. It seems to be it should at least consider assets, and I think that is sensible because, if you start from the premise (which is where everyone else started) that there needs to be some form of public accountability for all of these charities and you think about that as economic significance and receiving benefits from government and donors, then you do miss a large sector that has large assets and low revenues because there does seem to be two types of entity.”

Peach said the Australian Financial Reporting Framework was about “going back to basics”.

“[It is about] saying who should publicly lodge, and once you’ve made that decision, what is it that they should be doing, what is the right level of assurance that goes with that. Once you have got that first piece right, it then becomes easier to work out that middle piece,” she said.

She said there was a case to be made for the ACNC being a “one stop shop”.

“From our perspective, it is simplicity of regulation. So whether that is the ACNC doing it all, or whether it is having the same requirements in state regulation as well as the ACNC regulation, I don’t really have a view. But the end outcome should be that if you broadly have a sector in which entities are doing similar things and have similar user needs then you would expect to see a similar framework and that is the problem at the moment,” she said.

“Our charities consultation paper highlighted that even if you just look at charities and you don’t extend it beyond that, the level of legislation and regulation is just phenomenal.

“When you think these are entities that have got a not for profit objective, so they will be trying to add something back to society, is this actually enabling them to spend those scarce resources in the right way?”

Peach said the ACNC legislation review was a good opportunity to hear what the sector has to say and “tidy up the legislation”.

“Our key message is we want to work with the sector, we don’t want to be seen as just imposing things, it needs to be appropriate step change so everyone can see where we’re actually moving to,” she said.

Submissions to the ACNC legislation review close on Wednesday.