A charity's financial statements must be either General Purpose Financial Statements (GPFS) or Special Purpose Financial Statements (SPFS).
The type of financial statements a charity must prepare depends on whether it is classed as a reporting entity.
Generally speaking, if people:
- use and rely on your charity's financial statements to help them make decisions about how to allocate resources, and
- cannot have their information needs satisfied if your charity prepared a Special Purpose Financial Statement
then your charity is most likely a reporting entity.
The Australian Accounting Standard AASB 1053 defines a reporting entity as:
'an entity in respect of which it is reasonable to expect the existence of users who rely on the entity's general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can be a single entity or a group comprising a parent and all of its subsidiaries'.
Ultimately, whether your charity is a reporting entity will depend on a number of factors, including its particular circumstances.
Consideration of these factors will help determine whether there are likely to be users of your charity’s financial statements - meaning your charity is likely to be classed as a reporting entity.
Primary factors for consideration
Where it is not apparent that people use and rely on your charity’s financial statements, the primary factors you need to consider are:
- If there is a spread of ownership/membership, or a level of separation between management and owners/members/others, that have an economic interest in your charity. The greater the separation of membership from management, the more likely members will use and rely on your charity’s financial statements.
- Whether your charity has economic or political importance or influence. The more economic or political importance or influence your charity has, the more likely it is that people will use and rely on your charity’s financial statements.
- If your charity is large, if it has a high level of sales/assets/debt/funding from governments or other parties, or if it has a high number of employees. The larger your charity is, the higher its level of sales/assets/debt/funding, or the higher its number of employees, the more likely people will use and rely on your charity’s financial statements.
For more information you can refer to the Definition of the Reporting Entity (Statement of Accounting Concepts SAC 1) on the AASB website.
If your charity is a reporting entity, it must submit General Purpose Financial Statements that comply with all applicable Australian Accounting Standards.
The standards are issued by the Australian Accounting Standards Board (AASB), and provide guidance for the presentation, measurement and disclosure of financial information for your charity.
Your charity can choose to prepare full General Purpose Financial Statements (Tier 1), or General Purpose Financial Statements under a simplified disclosure framework (Tier 2).
When applying a simplified disclosure framework, the statements are still considered to be General Purpose Financial Statements.
All private sector not-for-profit entities (which includes charities) are permitted to apply either Tier 1 or Tier 2 requirements when preparing GPFS. However some charities that must comply with other legislation or regulation may be required to prepare full General Purpose Financial Statements (Tier 1).
Simplified Disclosure Requirements
A new simplified disclosure standard has replaced the Tier 2 Reduced Disclosure Requirements (RDR) framework from 1 July 2021.
Charities preparing financial statements using Reduced Disclosure Arrangements will be required to apply the simplified disclosure standard for annual periods starting from 1 July 2021.
The changes have been introduced as part of AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.
Under AASB 1060, all relevant disclosure requirements are now contained in a single standard. The changes will apply to all Tier 2 entities and do not affect which entities are permitted to apply Tier 2. The recognition and measurement requirements of Tier 2 also remain unchanged and the same as Tier 1.
For more information about the changes and the new disclosures that will be required, refer to AASB 1060 on the AASB website, and to AASB Staff FAQs on New Standards for Not-For-Profit entities.
If your charity is not a reporting entity, it can submit either General Purpose Financial Statements or Special Purpose Financial Statements to the ACNC.
Submitting Special Purpose Financial Statements means you must apply, as a minimum, the following six accounting standards:
- AASB 101, Presentation of Financial Statements
- AASB 107, Statement of Cash Flows
- AASB 108, Accounting Policies, Changes in Accounting Estimates and Errors
- AASB 124, Related Party Disclosures
- AASB 1048, Interpretation of Standards
- AASB 1054, Australian Additional Disclosures.
Charities preparing a Special Purpose Financial Statement for reporting periods ending on or after 30 June 2020 should also note the new disclosure requirements as set out by AASB 1054 Australian Additional Disclosures regarding compliance with recognition and measurement requirements.
Recent amendments to AASB Standard 2020-2 do not affect charities' ability to prepare and submit Special Purpose Financial Reports. The AASB's amendments only prevent some for-profit entities from preparing and submitting Special Purpose Financial Statements.
Charities can continue to prepare Special Purpose Financial Statements which are currently allowed under s60.30 of the ACNC Regulation 2013.
However, changes to the Regulations mean that charities preparing special purpose financial statements now 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 is instead of the full presentation and disclosure requirements in the compulsory standards for SPFS listed in section 60.30 of the Regulation (AASB101, 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 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.
The ACNC also provides general guidance on the new Australian Accounting Standards that impact charities, including AASB 1058 Income for Not-for-Profit Entities.
The ACNC has been working closely with the AASB to provide further guidance. For more, visit the AASB Staff FAQs on New Standards for Not-For-Profit entities.