2. Application and presentation

For-profit or not-for-profit
 

Entities are required to disclose whether they are a for-profit or not-for-profit (NFP) entity (for Tier 1 reporting: paragraph 8 of AASB 1054 Australian Additional Disclosures (AASB 1054); for Tier 2 reporting: subparagraph 11(b) of AASB 1060 General Purpose Financial Statements - Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060)). The distinction between for-profit and NFP entities is significant and has implications for the accounting policies that an entity can adopt. Entities are, by default, considered to be NFP – the onus is with an entity to make a case for being classified as for-profit.

A NFP’s principal objective is not the generation of profit (AUS6.1 of AASB 102 Inventories) – see the statement on the entity’s objectives. A NFP entity can be a single entity or a group of entities comprising the parent entity and each of the entities that it controls.

If legislation, regulations or the constitution of an entity explicitly states that its ‘principal’, ‘main’ or ‘sole’ objective is other than the generation of a profit, then it is presumed that the entity is NFP. If an entity’s principal objective is not explicitly stated, the secondary criteria for classifying an entity as for-profit or NFP is:

• the nature of funding
• if financial targets reflect profit concepts or an objective for commercial success
• whether the entity has an obligation to pay income tax or income tax equivalents
• whether the entity intends to distribute a surplus
• classification for Government Finance Statistics (GFS) reporting purposes.

Section 41 of the PGPA Act requires reporting entities to maintain proper accounting records to support all disclosures required by the prescribed rules such as the FRR, and the preparation of annual financial statements under sections 42 and 48 of the PGPA Act.

Proper accounting records of all transactions must be maintained in accordance with section 41 of the PGPA Act and other applicable legal requirements including:

• sections 9, 10 and 12 of the Electronic Transactions Act 1999
• section 24 of the Archives Act 1983.

Materiality

Unless otherwise stated in the FRR or applicable AAS, all disclosures are subject to materiality. The FRR requirements apply where information resulting from their application is material.

Section 35 of the FRR, however, deems the reporting and disclosure of appropriations (including special appropriations) as material by nature. That is, entities must report and disclose all appropriations they are responsible for, even if no amounts were drawn during the reporting period. For more information, see 8. Appropriations and Special accounts, as well as paragraphs 38-39 of AASB 1058 Income of Not-for-Profit Entities. 

Materiality assessments are to be performed at the level of the entity preparing the financial statements (and not at the general government sector (GGS) level or whole-of-government level). Professional judgement is critical in the assessment process.

Unless an item is material by nature or deemed to be material, transactions and items should be considered in the context of an appropriate measurement base (for example, all items in financial statements, relative items, or classes of items), such as:

• statement of financial position items could be assessed relative to the appropriate asset or liability base
• cash flow items could be assessed against the net cash flow for operating, investing or financing activities
• statement of comprehensive income items could be assessed against total own‑source revenue and total expense figures.

For 2022-23 onwards, entities are required to disclose material, rather than significant, accounting policies (refer to AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and Definition of Accounting Estimates and AASB 2021-6 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies: Tier 2 and Other Australian Accounting Standards).

For guidance on how to assess materiality for accounting policy disclosures, see AASB Practice Statement 2 Making Materiality Judgements.

Items reported in financial statements must be classified as either:

• Departmental items – those associated with the day-to-day operations and program-support activities of an entity, and over which an entity usually has control. They typically include: 
  • employee expenses (salaries and related employment costs)
  • property operating expenses
  • goods and services used for departmental operations and program support. This includes contractor and consultancy services, policy and program design, research, grant hub fees, non-campaign advertising and public relations services (excluding campaign advertising)
  • items where the benefits are exclusively internal to the GGS
  • assets for the entity’s own use, including Information Technology (IT) systems
  • the costs associated with the acquisition and capitalised maintenance of departmental assets
  • some shared services arrangements (one entity provides corporate services assistance to another entity).
     
• Administered items – those administered by a non-corporate Commonwealth entity (NCE) on behalf of the government and used to make payments on behalf of the government typically:
  • for assets and expenses for specific Government and/or public purposes
  • for entitlements provided by legislation (excluding legislated employment entitlements such as long service leave and maternity leave)
  • to states, territories and local governments
  • for public debt liabilities
  • for liabilities for public sector superannuation schemes
  • for direct program delivery costs (costs associated with the delivery of a program to its intended beneficiaries, such as grant payments and campaign advertising costs)
  • for an amount appropriated to an NCE for payment to a corporate Commonwealth entity (CCE), either through annual or special appropriations, is considered an administered item from the NCE’s perspective.

Entities must record transactions as either departmental or administered expenses/income/assets/liabilities in accordance with the classification of the appropriation from which the activity is funded and where relevant, decisions of government.

CCEs generally undertake departmental reporting only as they have control over all their assets and liabilities, income received and expenses incurred.

Reclassification between departmental and administered items

Entities seeking a reclassification of existing departmental and administered expenses, assets, revenue and/or liabilities (and associated funding) must:

• meet specified criteria – in the first instance, contact the relevant Finance Agency Advice Unit (AAU)
• obtain written approval from the Minister for Finance (Finance Minister).

Where the transfer of assets and/or liabilities under machinery of government (MoG) changes requires a reclassification between departmental and administered items:

• the receiving entity must notify the transferring entity of the need to reclassify and the transferring entity must reclassify the item/s prior to transfer
• transactions must be disclosed as ‘related party transactions’ for consolidation purposes.

For more information on accounting for machinery of government changes, see RMG-118 Accounting for machinery of government changes (RMG 118).

Reclassification of departmental appropriation

Where an entity has approval to reclassify a departmental appropriation between operating and capital, it must seek a new appropriation for the reclassification and where applicable, seek a section 51 withholding for the original appropriation. Without a new appropriation, entities are prohibited from redesignating the original departmental appropriation provided under Appropriation Act 1 between operating and capital, even following a government decision to do so. Failing to report appropriations as per the original designation in their financial statements will result in non-compliance with AAS – see paragraph 12 of AASB Interpretation 1038 Contributions by Owners Made to Wholly-Owned Public Sector Entities for more information.

See New policy proposals in RMG-124 Capital Budgeting by Commonwealth Entities in the General Government Sector for information on seeking a reclassification of funding between operating and capital expenditure.

The Finance Minister can grant an exemption from specific FRR requirements. A granted exemption may be subject to conditions, including a requirement for alternative forms of disclosure.

An exemption from specific requirements of the FRR would not be granted if it may lead to non-compliance with an AAS and hence section 42 of the PGPA Act, or a potential breach of other requirements of the FRR. Entities must be aware that material non‑compliance with the AAS would also breach the PGPA Act.

Approved exemptions from the FRR requirements are listed in the List of exemptions. Approvals remain effective until they are rescinded in writing or when the FRR is repealed, whichever occurs first. An exemption that has been:

• applied should be disclosed, in accordance with subsection 10(e) of the FRR
• granted but not applied by the entity does not have to be disclosed.

How to apply for an exemption from the FRR

Entities seeking an exemption from specific FRR requirements are to submit a written request to AccountingPolicy@finance.gov.au. The request should:

• demonstrate that the entity has a genuine need for an exemption, with consideration of:
  • the impact on potential users of financial statements (such as the parliament)
  • alternative approaches to meeting the FRR requirements.
• include the relevant section(s) of the FRR
• indicate the time period for which the exemption is required (for example, current reporting period only or ongoing)
• be approved by the entity’s CFO, or another senior executive responsible for the preparation of financial statements.

Finance will review the request and, if appropriate, seek approval on behalf of an entity from the Finance Minister.

The FRR sets out the tiers of reporting requirements entities are subject to when applying AASB 1053 Application of Tiers of Australian Accounting Standards (AASB 1053):

• Subsection 18(3) of the FRR lists the entities that must apply Tier 1 reporting requirements.
• Subsection 18(4) of the FRR lists those entities that must apply Tier 1 reporting requirements when applying AAS for listed matters. All other matters for these entities listed in subsection 18(4) of the FRR may be prepared by applying Tier 2 reporting requirements as a minimum, except when applying AASB 16 Leases (AASB 16).
• Those entities not listed in subsections 18(3) or 18(4) of the FRR, known as Tier 2 entities, are to apply Tier 2 reporting requirements as a minimum, except when applying AASB 16.
• Subsection 18(2) of the FRR requires all entities (regardless of whether they are Tier 1 or Tier 2 entities) to apply Tier 1 reporting requirements when applying AASB 16.

Entities preparing financial statements in compliance with Tier 2 reporting requirements can reduce the disclosure of certain information, to shorten their financial statements and enhance readability. All Tier 2 entities must:

• prepare the minimum set of disclosures
• ensure their financial statements disclose all relevant material information (see paragraph 16 of AASB 1053).

For guidance on how to assess materiality for accounting policy disclosures, see AASB Practice Statement 2 Making Materiality Judgements.

Under paragraph 16 of AASB 1053, Tier 2 entities may elect to apply Tier 1 reporting requirements, or include additional disclosures using Tier 1 reporting requirements as a guide if, in their judgement, the additional disclosures are consistent with the objective of general purpose financial statements.

Accounting policy changes and accounting estimates

Entities should liaise with their AAU when proposing material changes in accounting policy. Accounting policy changes may impact on whole of government reporting and budget aggregates, see RMG-117 General principles for the recognition of expenditure in budget aggregates for more information. 

Accounting policy changes must be separately disclosed in entity’s financial statements as per AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors (AASB 108) and AASB 1060.

Under AASB 108, accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty. The process for making accounting estimates requires sound professional judgement based on the latest available information. Inherent business uncertainties and other activities mean that many items cannot be measured precisely – these items must be estimated.

For guidance on how to assess materiality for accounting policy disclosures, see AASB Practice Statement 2 Making Materiality Judgements.

Other information for the Australian Government Consolidated Financial Statements

Under section 18A of the FRR, entities must make available to Finance any information not reported in their financial statements that is required for the Australian Government Consolidated Financial Statements (Australian Government CFS). Information provided to Finance must have been quality assured by the entity, with management assurance processes equivalent to those used in preparing the entity’s financial statements.

Due to potential impacts for preparing the Australian Government CFS, entities must seek approval from the accountable authority of Finance for early adoption of new AAS or AASB interpretations.

Entities seeking approval are to submit a written request to AccountingPolicy@finance.gov.au. 

Reporting entities should use professional judgement to improve the presentation of their financial statements for users, such as:

• reviewing the ‘Overview’ note in Primary Reporting and Information Management Aid forms of financial statements (PRIMA forms) to ensure it:
  • explains how FRR and AAS requirements relate to the entity
  • does not simply repeat standard accounting information
  • does not contain unnecessary information.
• using primary statements rather than the notes (an entity may not wish to include information in a note if it only restates information from primary statements)
• reconsidering the format of note disclosures, particularly the format of tables, to make information easier to read and understand
• removing information that is not material
• providing information/disclosures to support the Australian Government CFS, at the time and in the format requested by Finance.

Prompts to a user-focused presentation are included at Appendix A, available under Tools and templates.

For more information on improving the presentation of financial statements, see the Financial Statements Better Practice Guide.

PRIMA forms assist entities in preparing financial statements. PRIMA forms:

• detail common disclosures and related notes for financial statements required by the FRR and AAS, but do not cover disclosures for all AAS and AASB interpretations
• incorporate other reporting obligations (for example, Corporations Act 2001).

The use of PRIMA forms is not mandatory, however, entities are encouraged to follow the overall format and structure. Where required, Tier 2 entities may use professional judgement to modify PRIMA forms disclosures to reflect the entity’s circumstances or user’s needs. For example, an entity may:

• include further disclosures to reflect their business operations or meet stakeholders’ information needs – additional information or disclosures must not contravene AAS
• exclude components of the PRIMA forms that are not relevant to their operations or where no activity has taken place in either the current or previous financial reporting period, unless inclusion is mandatory under the FRR and/or AAS
• alter or amend the numbering of notes to financial statements as set out in PRIMA forms, to better support the contextual and logical flow of information for users
• alter the format (for example, change the font, use of italics or orientation of a table), or use graphs and tables to communicate key results, movements or variances
• aggregate line items that are not material
• amend disclosures to reflect the nature of the entity or its activities, financial results and position at the reporting date.

PRIMA forms demonstrate either Tier 1 or Tier 2 disclosures. Entities required to prepare Tier 1 disclosures, in accordance with subsections 18(2) to 18(4) of the FRR, may need to modify their disclosures accordingly.

Under section 15 of the PGPA Act, the accountable authority of an entity is responsible for the entity’s overall financial management and proper use and management of public resources in a way that promotes the financial sustainability of the entity, such as managing risks, obligations and opportunities of the entity.

It is not necessary for an NCE to continue in its current form for a statement to be made about payment of debts. If an NCE is abolished, or substantially restructured, the Commonwealth remains responsible for the debt.

Financial statements may be rounded-off, as shown in Table 1.

Table 1: General rounding rules

Appropriations receivable are to be measured at nominal amounts. Being non-contractual, they are not financial instruments under AASB 9 Financial Instruments (AASB 9) and, therefore, the fair value measurement and disclosure requirements in AASB 13 Fair Value Measurement (AASB 13) do not apply to appropriations receivable.

Appropriations receivable are to be assessed for impairment in accordance with AASB 136 Impairment of Assets (AASB 136). However, impairment expenses are unlikely to occur as amounts not expected to be available are normally addressed by applying section 40 of the FRR.

Appropriations receivable balances should not be recognised for administered activities.

Entities must include a statement with their financial statements in accordance with section 10 of the FRR, signed by the entity’s accountable authority or a member of the accountable authority (if the accountable authority is not an individual) and the CFO (or equivalent). For CCEs, the certification must state that the statement is made in accordance with a resolution of the members of the accountable authority.

In rare and exceptional circumstances where the accountable authority of a corporate Commonwealth entity, or a member of the accountable authority of the entity, cannot meet in person to certify the financial statements, electronic certification is permitted, unless the entity’s constitution does not allow the use of technology to certify the financial statements.

Where the entity’s constitution does not allow the use of electronic signatures, the entity should:

• seek an exemption from the Minister for Finance in accordance with section 11 of the FRR
• discuss the implications with auditors.

For assistance in seeking an exemption, email AccountingPolicy@finance.gov.au.

For further information on the use of electronic signatures, please see the Australian Government Solicitor’s Legal briefing - Execution solutions for remote working arrangements.

An entity is required to disclose additional information as necessary to present fairly the entity’s financial position, financial performance and cash flows, under section 10 of the FRR and under subsection 42(2) of the PGPA Act.