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NFPs and financial reporting – Challenges and opportunities


8 June 2021 at 7:00 am
Contributor
With tax time just around the corner, Breakthrough Accounting shares some of the trends, challenges and opportunities that can help charities pull together their annual financial reports.  


Contributor | 8 June 2021 at 7:00 am


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NFPs and financial reporting – Challenges and opportunities
8 June 2021 at 7:00 am

With tax time just around the corner, Breakthrough Accounting shares some of the trends, challenges and opportunities that can help charities pull together their annual financial reports.  

It is that time of year again, when the finance teams of Australia’s not-for-profits (NFPs) are busily tucked away preparing annual financial statements and reports. 

As one of the nation’s most trusted and important sectors, organisations in this space are generally required to prepare annual financial reports (AFRs) in order to maintain, and enhance, the confidence of funding bodies and donors. The nature and style of these reports will differ depending on an entity’s legal status and registration, and the regulatory regime that follows. 

This article specifically considers the annual financial reporting obligations of NFPs registered with the Australian Charities and Not-for-Profit Commission (ACNC). In particular, it discusses the trends, challenges and opportunities that we have identified from our 25+ years working with Australian charities and assisting them to pull together their AFRs.  

Financial reporting obligations for Australian charities 

The financial reporting obligations of NFPs registered with the ACNC will depend on their size. Only medium charities (with annual revenue between $250,000 and $1 million) and large charities (with annual revenue of $1 million or more) are required to submit an AFR. 

These entities can submit either a special purpose financial statement or a general-purpose financial statement. The financial reports of medium charities can either be reviewed or audited, whereas large charities must submit an audited financial report.

Observations from the ACNC 

Each year (or reporting period), the ACNC selects a small group of AFRs to review. As a result of this review, amendments are made to the ACNC register to correct errors and a summary of findings is published.

According to the ACNC, the purpose of these reviews is to identify trends and errors in financial reporting, improve guidance on financial reporting, and inform the ACNC when it is considering proposed changes to the financial reporting framework. 

As part of the ACNCs most recent review (involving the 2018 reporting period and published in March 2020), 207 of a total 15,152 AFRs submitted were selected for review. This review resulted in the ACNC correcting total revenue errors of $195,522,440 and total asset errors of $614,226,373.

As part of this review, the following observations were made:

  • 32 per cent of charities did not select the correct type of financial report to submit;
  • 5 per cent of charities incorrectly transposed information from the AFR to their annual information statement (AIS) for the total revenue category, while 3 per cent of charities made transposition errors for the total revenue and total assets categories; and
  • 25 per cent of AFRs did not contain a complete set of financial statements (with the most common missing financial statements being those covering the statement of changes in equity and cash flow statement). 

We continue to eagerly await the release of the ACNC’s 2019 report in order to see if there are any emerging challenges or opportunities for Australian charities with respect to their financial reporting.

Our observations 

General observations from working in this space

Across more than two decades working closely with many Australian NFPs and charities, we have observed some of our own trends that continue to pop up year after year. Some of these include: 

  • incorrect accounting standards being applied;
  • accounting standards being applied erroneously, resulting in potential exposures or missed opportunities;
  • new accounting standards (like AASB 16 and AASB 1058) not being adopted on a timely basis; 
  • late submissions of reports; and
  • registers not being kept up-to-date.

Accounting standards to be aware of 

In addition, and with respect to the 2021 reporting period, we believe that lease accounting and grant accounting will again be a key focus area for regulators. In particular, AASB 16 (Leases), AASB 1058 (Income of Not-for-Profit Entities) and AASB 15 (Revenue from Contracts with Customers). 

Whilst most NFPs are, by now, aware of these standards and would have included them in their 2020 financial statements, we thought it useful to again highlight these here, particularly as ACNC reporting statistics show a portion of NFPs as being slow to adopt newly introduced standards or apply them incorrectly in the first few years following their introduction. 

In this regard, we note that it will be important for NFPs to understand the implications of AASB 16 in bringing most operating leases (e.g. office premises, vehicles, equipment) on-balance sheet, with some notable exceptions. NFPs should also be aware that AASB 1058 and AASB 15 may change the timing of income recognition from many types of grants. This is because these standards introduce strict rules regarding the permissibility of income deferral in certain situations. 

Given the complexities involved in applying each of these standards, we recommend that specific accounting/auditing advice is sought. Doing so will not only ensure that an entity’s financial statements are compliant with the applicable standards but will also help organisations to not miss opportunities to structure their finances in more efficient ways. 

Other changes to reporting requirements

In recent months, we have also seen certain other changes to the financial reporting framework of NFPs being considered.

In February 2021, a consultation paper was released by Treasury proposing increases to the financial reporting thresholds for ACNC-registered charities. This paper notes the key benefit of this increase as being a corresponding reduction in professional service expenses for almost 6,800 charities (more than 10 per cent of the sector), allowing the redirection of resources to the fulfillment of charitable purposes. 

In addition, the Australian Accounting Standards Board is working on a project to develop a reporting framework that is simple, proportionate, consistent, transparent and cost effective for all NFPs.

Finally, and as part of the 2021-22 federal budget, it was announced that $1.9 million in funding would be going to the ATO for the purpose of building an online system to enhance the transparency of income tax exemptions claimed by NFPs.

Whilst all of these measures are continuing to be worked through, given the future potential impact they may have on the financial reporting of many Australian charities, we thought it important to include here. 

How can we help?

As a bespoke accounting firm that specialises in NFP accounting and financial reporting, we are well informed and experienced in regard to:

  • the different types of financial reports; 
  • which entities are required to report on which basis; and 
  • the supporting legislative frameworks, accounting standards and requirements.

We are also very knowledgeable about the way in which different regulatory regimes interact and can assist in streamlining a charity’s annual reporting obligations. 

We are very passionate about working alongside NFP organisations to educate and inform them about some of the key challenges and changes in the financial reporting space and empower them to see breakthrough for their organisations in this regard.

Please contact Breakthrough Accounting if you have any questions regarding the topics covered in this article, or any other questions about your organisation’s financial reporting obligations or processes.



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