New Tier 3 accounting standard for private sector NFPs

Tier 3 Standard

Tier 3 includes an important simplification: in some cases, an entity may elect not to prepare consolidated financial statements and instead elect to classify its investments in subsidiaries, investments in associates and interests in joint arrangements that involve a separate vehicle as investments in notable relationship entities which are measured at: 

• cost, less any accumulated impairment losses;
• fair value; or
• the equity method-based amount.

Tier 1 AASB Accounting Standards

Under AASB 10 Consolidated Financial Statements, if an entity controls a subsidiary, it is generally required to prepare consolidated financial statements while investments in associates and joint ventures are generally accounted for using the equity method.

Tier 3 Standard

Lease payments are generally expensed over the lease term. This means leases are usually kept off balance sheet for lessees under Tier 3.

Tier 1 AASB Accounting Standards

Under AASB 16 Leases, lessees generally recognise a right-of-use asset and lease liability on the balance sheet which can require complex judgements around the lease term and payments.

Tier 3 Standard

Tier 3 uses a simpler approach. Revenue is deferred when there is a ‘common understanding’ that the entity must use the funds or asset in a particular way. The commitment to perform in a particular manner does not have to be enforceable (by legal or other means).

Where revenue is not deferred, it is generally recognised when the entity receives the asset (e.g. cash) or gains control of a receivable.

Tier 1 AASB Accounting Standards

NFP revenue often requires applying AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of Not-for-Profit Entities (AASB 1058), which involve more detailed tests such as enforceability and sufficiently specific performance obligations.

Tier 3 Standard

Tier 3 has a simplified model for basic financial instruments such as cash and cash equivalents; trade and other receivables (‘debtors’); term deposits; government and listed corporate bonds; units held in managed investment schemes, ordinary shares; trade and other payables (‘creditors’); and loans.

Financial assets held to generate both income and a capital return are subsequently measured at fair value. All other basic financial assets are measured at cost less impairment losses rather than the more complex fair value or amortised cost models.

Financial liabilities are measured subsequently at cost.

Hedge accounting is not permitted.

Tier 1 AASB Accounting Standards

The full AASB 9 Financial Instruments model, including more complex classification, measurement, impairment and hedge accounting requirements apply.

Tier 3 Standard

Donated assets may, depending on the accounting policy choice, be measured at cost (including nil or nominal cost) or at fair value (or at current replacement cost for inventories). 

Tier 1 AASB Accounting Standards

Donated assets are typically recognised at fair value, with income accounted for under AASB 1058.

Tier 3 Standard

Employee benefit obligations are recognised only if payable to employees when they depart the entity if the entitlement is unused. 

Tier 1 AASB Accounting Standards

Employee benefits are recognised based on the principle that costs are recognised in the period in which the employee renders service, rather than when paid, with discounting required for long-term benefits.

Tier 3 Standard

Provisions are measured at the best estimate of the undiscounted amount expected to be paid.

Tier 1 AASB Accounting Standards

Discounting is required where the time value of money is material.

Tier 3 Standard

Tier 3 is more conservative and simpler. Internally generated intangibles and development costs are generally expensed as incurred, rather than capitalised.

Tier 1 AASB Accounting Standards

Some development costs are capitalised when strict criteria are met.

Tier 3 Standard

Tier 3 uses a narrower and simpler trigger-based model for impairment. The focus is on situations such as physical damage, obsolescence or where the entity has changed its strategy or been affected by a reduction in external demand for its goods or services.

There is a rebuttable presumption that an asset’s fair value less costs of disposal is the most appropriate measure of such a non-financial asset’s recoverable amount.

Tier 1 AASB Accounting Standards

Broader impairment requirements and, in some cases, more complex testing models, including testing at the level of an individual asset or a cash-generating unit, as well as additional requirements for items such as goodwill and indefinite-life intangibles. Where recoverable amount is based on value in use, the standard also includes detailed rules on how that amount is calculated.

Tier 3 Standard

Tier 3 uses a simpler approach that generally avoids the full acquisition accounting model.

The carrying amounts of the assets, liabilities and items of equity of the acquiree become the carrying amounts of the acquirer, subject to certain adjustments for major unrecognised assets and liabilities and differences in accounting policies.

Any difference between consideration paid and the net assets acquired is recorded in equity, with no goodwill or bargain gain recognised.

Tier 1 AASB Accounting Standards

AASB 3 Business Combinations applies the acquisition method, including fair value measurement of acquired assets and liabilities and recognition of goodwill or bargain purchase outcomes.

Tier 3 Standard

Tier 3 reduces some disclosure requirements. For example, key management personnel (KMP) compensation disclosure is not required.

Tier 1 AASB Accounting Standards

Generally requires broader related party disclosures, including KMP compensation.