Simpler NFP accounting standard complicated by delays

But a leading expert has warned that organisations should hold off adopting it until regulators confirm who is permitted to use it.

The Australian Accounting Standards Board (AASB) has been developing the new Tier 3 standard, a simplified, plain-English set of reporting requirements, since 2019.

The board approved the changes in an “out of sessions” decision last month and confirmed the decision in an alert on its site last week.

The AASB 1061 standard complements the existing Tier 1 and Tier 2 standards and is aimed at medium-sized charities, incorporated associations, co-operatives and other private sector NFPs.

The reform has long been an agenda item for not-for-profit treasurers and sector advocates seeking a simpler system. As the AASB notes, as many as a third of NFPs rely on special purpose financial statements – informal reports outside the standard frameworks – and this leads to inconsistent financial reporting.

During consultation on the new standard, AASB chair Dr Keith Kendall said existing reporting requirements were too complex, and new guidelines developed by the federal agency would “provide simpler accounting while improving the comparability and quality of financial reporting and reducing costs for smaller not-for-profit private sector entities”.

What is this talk about tiers?

Australian accounting standards operate across three tiers. Tier 1 applies to publicly accountable organisations, including listed companies and large financial institutions, which must comply with international financial standards. Tier 2 covers other entities, including larger NFPs, and has reduced disclosure requirements.

The proposed Tier 3 is a new standard written for smaller NFPs, with key changes including:

• income recognition based on a simpler "common understanding" test, replacing the existing complex performance obligations assessment
• the removal of leases from the balance sheet, reverting to a straightforward expense model
• consolidation of related entities becoming optional, with disclosures provided instead.

While simplified, the draft standard still runs to 111 pages, including detailed commentary on the AASB’s deliberations.

The national head of technical accounting and sustainability reporting at Moore Australia, Kristen Haines, who began her career at the AASB, told Community Directors that the release was expected in late May, but that mandatory use of the new standard was expected to apply from July 2029.

But she stressed that the rollout would rely on Australian regulators accepting and applying the standards, primarily the Australian Charities and Not-for-profits Commission (ACNC) and Treasury, along with state and territory bodies.

Haines believed the standards board had got the settings right, achieving a balance between “keeping it simple and keeping it conceptually sound”.

She said organisations would be relieved when the new standards were active, and that in accounting webinars for NFPs over the past four years, “this has been the only topic people have wanted to talk about”.

What are the benefits?

Professor David Gilchrist has been among the advocates for change. He leads the Australian Non-profit Accounting Standards Research Program, part of the Not-for-profits UWA Research Group, which has had some financial support from Community Directors.

When the changes were proposed, Professor Gilchrist said they contained “significant improvements” and had the potential to:

• reduce red tape
• cut costs and keep a lid on rising auditing costs
• help groups make better financial decisions in a difficult environment
• boost the financial sustainability of not-for-profits
• enable organisations to demonstrate the true cost of programs
• help groups to better advocate for realistic funding of services
• provide tailored financial reporting that accounted for the different risk profiles within the community sector, such as those of mental health and disability support organisations.

But he also highlighted the need to change federal, state and territory laws to accommodate the new standard.

What’s changing with the new standard?

For NFPs preparing financial statements, three changes will be most noticeable once the new standard is in force.

Income recognition is supposed to be significantly simplified. The existing framework requires NFPs to assess whether funding arrangements contain "sufficiently specific performance obligations", a requirement that the AASB described as "inherently complex and prone to inconsistent application." Tier 3 replaces it with an assessment based on a "common understanding of what the entity is required to do."

Haines said she was “dubious” about whether the change solved the underlying problem. "I'm not entirely convinced that that isn't just renaming the same problem we've always had," she said. "This is meant for non-accountants to apply, but at the end of the day, it's going to be accountants who are interpreting the standard. We just have to wait and see how it unfolds in implementation."

Leases will come off the balance sheet. Under the current rules, if an NFP signs a lease, say for an office or a vehicle, they have to record it on their balance sheet twice: once as an asset (recognising their right to use the asset they are leasing) and once as a liability (the obligation to make future lease payments). The measure adds significant complexity to the accounts. Under Tier 3, leases would go back to an older, simpler approach: NFPs record the lease payment as an expense each month or year, spread evenly over the life of the lease.

Consolidation will be optional, and NFPs will be able to choose whether to consolidate controlled entities. If they do consolidate, enhanced disclosures about related entities will be required.

A community health service that controls a subsidiary social enterprise, for example, currently must produce a single set of consolidated accounts covering both. Under Tier 3, it could report on itself alone and disclose the relationship with the subsidiary in the notes instead.

Haines said the changes could significantly reduce complexity for groups with simpler structures.

Which NFPs fit into Tier 3, and when can they use the new standard?

While the AASB's role is to set standards, regulators will determine which organisations are required or permitted to use the new standard.

The Tier 3 criteria are expected to apply to groups with revenues between $500,000 and $3 million, based on the ACNC’s definition of a medium-sized charity.

“It will be up to regulators – including the ACNC, Treasury and state‑based regulators – to clearly specify which tier of reporting is acceptable or required. There is currently pressure on the ACNC and Treasury to clarify their expectations ahead of the standard’s release, but similar guidance will also be needed from other regulators,” Haines said.

She said the absence of regulatory guidance was a significant concern across the accounting profession. "Everyone has known this standard was coming for so long. We can't have it issued without regulators saying whether or not they're happy for their regulated entities to apply it. This is the part that is going to make transitions the messiest," she said.

She said even the ACNC's position had to be formalised through Treasury, while entities under state regulation faced further uncertainty. "Everyone seems to be passing the buck around as to whose responsibility it is," she said.

“There’s a huge risk in early adoption because the standard will allow it, but until regulators decide their rules, entities are taking a gamble.”

She said using the existing special purpose financial statements, were likely to require more substantial adjustments to reporting, and it was more important for those groups to avoid rushing to adopt revised reporting methods.

This was especially important for organisations using special purpose financial statements, as those groups may face significant reporting changes.

The AASB itself has acknowledged the regulatory gap in recent deliberations, suggesting “the effective date could be revisited and extended in the future, if circumstances necessitate it”.

What to do now

Haines suggested organisations should not leap into adopting the changes but should wait until the appropriate regulator clarified whether Tier 3 was available to their operation. She said once clarity was provided, they may begin preparing for adoption in December 2026 or at the end of the 2026–27 financial year.

In any case, she said, “implementation will take time”, and organisations should consider which reporting tier is likely to apply to them, and whether changing their reporting will trigger additional reporting requirements elsewhere.

In general, Haines advised organisations to keep their house in order.

“Ensure that records are well maintained and there is a clear understanding of how the organisation operates in practice. That groundwork will put entities in the best possible position to make the new assessments required once the final requirements are confirmed.”

More information

Moore Australia will host a webinar on June 20 to explain the changes

Read the draft changes in full