New Tier 3 Financial Reporting for Not-for-Profits: What Organisations Need to Know
Financial reporting requirements for not-for-profit organisations are changing, with a new simplified Tier 3 reporting framework set to apply to eligible private-sector not-for-profit entities.
While the changes don't take effect until reporting periods beginning on or after 1 July 2029, there are some important questions for charities, incorporated associations, co-operatives and other not-for-profit organisations to start considering now.
Will Tier 3 apply to your organisation? Will the way you prepare your financial statements need to change? And what could the changes mean for your audit or assurance requirements?
For boards, committees and finance teams, understanding these changes early can make the transition easier.
As independent auditors working with organisations across Australia, LBW's Audit & Assurance team helps organisations understand their financial reporting and assurance obligations and prepare for changes that may affect them.
What is the new Tier 3 reporting framework?
The Australian Accounting Standards Board (AASB) has introduced a new simplified reporting framework for not-for-profit private-sector entities through AASB 1061 General Purpose Financial Statements - Not-for-Profit Private Sector Tier 3 Entities, together with AASB 2026-2.
The reforms substantially limit the circumstances in which private-sector NFP entities can prepare special purpose financial statements, although limited exceptions may remain in some situations.
The intention is to reduce the reporting burden and simplify accounting requirements while still providing useful financial information to people who rely on an organisation's financial statements.
In practical terms, Tier 3 is intended to sit below Tier 2 in complexity, making financial reporting more proportionate for eligible smaller not-for-profit organisations.
Which organisations could Tier 3 apply to?
Tier 3 may apply to private-sector not-for-profit entities that do not have public accountability and are not prohibited by legislation or their governing documents from applying the framework.
Examples provided by the AASB include:
- charities
- incorporated associations
- co-operatives.
Importantly, eligibility depends on the requirements of AASB 1061 together with any applicable legislation, regulatory requirements and governing documents.
Some organisations may still be required to report under Tier 1 or Tier 2. Organisations also cannot mix and match requirements between Tier 3 and the other reporting tiers.
That distinction matters because two seemingly similar community organisations may have different reporting requirements depending on their structure, governing documents, regulatory requirements and circumstances.
Can our organisation use Tier 3?
Eligibility depends on whether the organisation is a private-sector NFP entity without public accountability and whether legislation, regulator requirements or governing documents permit the use of Tier 3.
What could this look like in practice?
An incorporated association may currently prepare special purpose financial statements under its existing reporting arrangements. Its committee will need to determine whether it is eligible to move to Tier 3 and what changes may be required to its accounting policies and financial statements.
A charity receiving funding from several sources may have additional reporting or assurance obligations attached to funding agreements. Even if Tier 3 is available from an accounting standards perspective, the organisation will still need to consider the requirements of regulators, funding bodies and its governing documents.
A larger not-for-profit organisation may find that Tier 3 is not available to it and that Tier 2 or another reporting framework remains appropriate.
This is one reason it can be helpful to discuss upcoming changes with your accountant and independent auditor rather than assuming the new framework will automatically apply.
How is Tier 3 different?
One of the key features of Tier 3 is that it has been designed as a single, simplified financial reporting framework for eligible not-for-profit entities.
Rather than requiring organisations to navigate numerous accounting standards, AASB 1061 brings together the relevant recognition, measurement, presentation and disclosure requirements into a single standard using more accessible language and reduced reliance on other accounting standards.
Compared with Tier 1 and Tier 2 reporting requirements, Tier 3 includes simplified recognition, measurement and disclosure requirements in areas such as financial instruments, revenue, leases, provisions and employee benefits. It also aims to reduce reporting complexity by focusing disclosures on information that is material to users of the financial statements.
However, Tier 3 is still a general purpose financial reporting framework and organisations will be required to prepare a complete set of financial statements in accordance with the standard.
This includes a statement of financial position, statement(s) of financial performance, a statement of changes in equity (or income and retained earnings), a statement of cash flows and accompanying notes, including significant accounting policies and other required disclosures.
While the framework is intended to make financial reporting more proportionate for eligible not-for-profit entities, it does not remove the need for proper financial reporting, governance and accountability.
What does Tier 3 mean for an organisation's audit?
This is where it is important to separate financial reporting requirements from audit requirements.
Tier 3 deals with how eligible organisations prepare their financial statements. Whether those financial statements require an audit, review or another form of assurance will depend on the organisation's particular obligations.
Those obligations can arise from legislation, regulators, governing documents, constitutions, funding agreements or other requirements.
For example, an organisation might be required to have its financial statements independently audited because of its size or regulatory obligations. Another may require an audit under its constitution or funding agreement, while others may require a review rather than a full audit.
Where an independent audit is required, management or those charged with governance remain responsible for preparing the organisation's financial statements. The independent auditor examines the relevant financial information and reports in accordance with the applicable auditing requirements.
For boards and committees, this independent perspective can provide greater confidence in the financial information they rely on for oversight and reporting, while supporting transparency and accountability to members, funders and other stakeholders.
For Geelong organisations, working with an independent auditor who understands businesses, associations and not-for-profits across the region can also provide the benefit of local knowledge and an ongoing professional relationship.
When do the Tier 3 changes begin?
The new Tier 3 framework applies to reporting periods beginning on or after 1 July 2029, although early adoption is permitted where the associated requirements of AASB 2026-2 are also applied.
While 2029 may seem some time away, organisations do not necessarily need to wait until their first Tier 3 reporting period to consider the implications.
The AASB recommends that preparers start by determining their eligibility, assessing the impact on current reporting and considering the most practical transition approach.
What should boards and committees be considering now?
For boards, committees and finance teams, some useful questions to start asking include:
Are we likely to be eligible for Tier 3?
Your entity type, accountability, legislation and governing documents can all affect eligibility.
What financial statements do we currently prepare?
Organisations currently preparing special purpose financial statements should understand whether and how the changes may affect them.
What requires us to have an audit or review?
Check legislation, regulatory requirements, your constitution or governing documents, funding agreements and other obligations.
Will our accounting policies need to change?
Moving to Tier 3 may affect the way particular transactions, balances and disclosures are treated.
What information will our auditor need?
Good preparation can make the audit process more efficient, particularly where an organisation is transitioning to a different financial reporting framework.
The AASB also provides two transition approaches for first-time Tier 3 adoption, including specific transition provisions and a modified retrospective approach.
Understanding which approach is appropriate will be an important part of preparing for the change.
Looking for independent audit services?
The introduction of Tier 3 is intended to simplify financial reporting for eligible smaller not-for-profit entities, but every organisation's reporting and assurance requirements are different.
At LBW, you'll have an experienced Audit & Assurance team working with you throughout the process. Our team is led by Audit Principal Sripathy (Sri) Sarma, who brings more than 22 years of audit experience and works with businesses, not-for-profit organisations and self-managed super funds.
Sri is supported by Lead Audit Manager Ben Kelly, a Registered Company Auditor with more than 19 years of audit and assurance experience, and Manager Jackson Donnan, who works closely with clients to identify issues, find practical solutions and make the audit process easier to understand.
Together, Sri, Ben and Jackson provide independent audit and assurance services across external audits, financial reporting, review engagements, governance and risk, internal controls and other assurance requirements.
If your board, committee or finance team is considering how the new Tier 3 reporting framework may affect your organisation, or you would like to better understand your existing audit requirements, the team can help you understand your obligations and prepare for what comes next.
Speak with LBW's Audit & Assurance team about your organisation's audit and financial reporting requirements.
Ref: https://www.aasb.gov.au/media/uhll5u0y/tier3_preparersfactsheet_06-26.pdf
This blog provides general educational information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. LBW Business + Wealth Advisors is an Authorised Representative of LBW Wealth Pty Ltd ABN 56 652 382 128 AFSL 534569. Please see our website www.lbwca.com.au or call 03 5221 6111 for more information on our available services.