The AASB has recently issued an Exposure Draft (ED 291) proposing to amend the definition of a not-for-profit (NFP) entity. As proposed, NFP classification will no longer be based on whether an entity’s objective is not the generation of profit. Rather, to meet the proposed definition, the entity will be required to assess whether its primary objective is to deliver goods or services for community or social benefit.
The Australian Accounting Standards Board’s (AASB) published Exposure Draft 291 Not-for-Profit Entity Definition and Guidance (PDF 1.1MB) (ED 291) in June 2019. ED 291 proposes a new definition of a not-for-profit (NFP) entity, related implementation guidance and illustrative examples. ED 291 is in response to the feedback received on the AASB’s ongoing consultation relating to the standard-setting frameworks.
A ‘not-for-profit entity’ is currently defined as:
'an entity whose principal objective is not the generation of profit. A not-for-profit entity can be a single entity or a group of entities comprising the parent entity and each of the entities that it controls' [AASB 102 Inventories paragraph Aus6.1].
The proposed definition:
'an entity whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders'
is based on the definition of a public benefit entity in New Zealand’s XRB Standard A1 Application of the Accounting Standards Framework. The proposed definition comprises two interdependent parts: (i) the primary objective to provide goods or services for community or social benefit, and (ii) the provision of equity to support that primary objective rather than for a financial return to equity holders. Both parts of the definition need to be assessed in combination in determining an entity’s classification.
A NFP entity will no longer be negatively defined, that is, by assessing whether its principal objective is not the profit generation.
NFP classification is made at the entity level and is not affected by the classification of an entity’s controlling entity or group, or the entities or business units it controls.
The classification of an entity as either a for-profit (FP) or NFP entity is important as it determines which accounting requirements it applies.
International Financial Reporting Standards (IFRS) are made for FP entities, and therefore, Australian Accounting Standards incorporate NFP-specific requirements by way of including them in Australian-specific or ‘Aus’ paragraphs that encompass recognition, measurement, presentation and disclosure requirements.
In addition, there are NFP-specific standards and mandatory implementation guidance that do not apply to FP entities.
Therefore to the extent an entity’s classification is affected by the proposed definition, accounting may change for affected entities.
In addition to the new definition, ED 291 proposes guidance in the form of indicators that entities should consider in determining whether they would be classified as a NFP entity.
Six key indicators are proposed for determining the substance of an entity’s primary objective. If the indicators are in conflict with one another, professional judgement will be required to evaluate the indicators overall and in combination with each other, including the significance of particular indicators to the overall assessment, to determine whether, in substance, the entity meets the definition of a NFP entity.
The six indicators are:
Further discussion relating to the six indicators can be found in the PDF version of this Reporting Update.
The effective date of any change in the definition is yet to be determined. Submission on ED 291 close on 9 September 2019. If you have feedback, then consider providing it directly to the AASB or to your usual KPMG adviser.