By Alison Sadler, Lawyer
In 2017, the Australian Accounting Standards Board asked for specific feedback regarding:
- the definition of a ‘not-for-profit entity’; and
- whether there was sufficient guidance on how to distinguish a for-profit entity from a not-for-profit entity.
The feedback from the consultation was that the respondents supported retaining the term ‘not-for-profit entity’, but required more guidance in determining whether an entity is a for-profit entity or a not-for-profit entity.
The Exposure Draft 291 Not-for-Profit Entity Definition and Guidance (Exposure Draft) was published by the Australian Accounting Standards Board in June 2019. The Exposure Draft proposes a new definition of a ‘not-for-profit entity’ and provides implementation guidance and examples.
This article will discuss the proposed definition, the importance of the proposed definition, and the implementation guidance.
What is the proposed definition?
The current definition of a ‘not-for-profit entity’ is:
“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.”
The proposed definition of a ‘not-for-profit entity’ is:
“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.”
The proposed definition of a ‘not-for-profit entity’ encompasses two interdependent parts:
- that its primary objective is to provide goods or services for community or social benefit; and
- that the provision of equity is to support that primary objective rather than for a financial return to equity holders.
Both parts of the definition need to be assessed together to determine an entity’s classification.
What does this mean for not-for-profit entities?
The categorisation of an entity as a for-profit entity or a not-for-profit entity determines which accounting standards and policies are applied to that entity.
Currently, the Australian Accounting Standards set out different financial reporting requirements for for-profit entities and not-for-profit entities, subject to certain exemptions for not-for-profit entities. Therefore, to the extent that an entity’s classification is affected by the proposed definition, that entity’s accounting procedures may change.
Does the implementation guidance help?
The Exposure Draft provides six key indicators set out below that should be considered when determining if an entity satisfies the definition of a ‘not-for-profit entity’:
- the stated entity objectives;
- the nature of the benefits, including the quantum of expected financial benefits;
- the primary beneficiaries of the benefits;
- the nature of any equity interest;
- the purpose and use of assets; and
- the nature of funding.
Professional judgement will be required to evaluate the indicators if they are in conflict with one another, which includes considering the significance of each indicator to the overall assessment.
Whilst the Exposure Draft is not a comprehensive guide, it does provide certain guidance on each of the indicators above, and sets out when wholly-owned state entities, private education entities, sports clubs, and social enterprises may be a not-for-profit entity.
The feedback on the Exposure Draft closed on 9 September 2019. The Australian Accounting Standards Board will shortly provide a response as to if and when the definition will be implemented.
Given the above, entities should consider whether the proposed change to the definition may affect their status as a not-for-profit entity from an accounting perspective.