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.

• Tier 1 reporting: Australian Accounting Standards Board (AASB) 1054 Australian Additional Disclosures (AASB 1054) paragraph 8
• Tier 2 reporting: AASB 1060 General Purpose Financial Statements - Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060)) subparagraph 11(b). 

The distinction between for-profit and not-for-profit (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.

The definition of a NFP entity is included in AASB 102 Inventories (paragraph ASU6.1[1]), AASB 116 Property, Plant and Equipment (paragraph AUS 6.1) and AASB 136 Impairment of Assets (paragraph 6.2[1]).

A NFP entity is an entity whose principal objective is not the generation of profit. 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 Public Governance, Performance and Accountability Act 2013 (PGPA Act) requires the accountable authority of a reporting entity 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.

Materiality

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

Section 35 of the FRR deems the reporting and disclosure of appropriations (including special appropriations) as material by nature. Therefore, 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 Appropriations and 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. As an entity’s circumstances will change over time, materiality judgements should be reassessed at each reporting date in the light of those changed circumstances.

For guidance on how to assess materiality for accounting policy disclosures, see AASB Practice Statement 2 Making Materiality Judgements. For more information on the application of materiality, see the Financial Statements Better Practice Guide.

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
• Administered items – those managed by a non-corporate Commonwealth entity (NCE) on behalf of the government and used to make payments on behalf of the government. 

Entities must record transactions as either departmental or administered in accordance with the classification of the appropriation from which the activity is funded and where relevant, decisions of government. AASB 1050 Administered Items specifies requirements for government departments relating to administered items.

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

For further information on categorisation of financial transactions and balances for new policy proposals, refer to the current estimates memorandum on Classification of Administered and Departmental Items, located in CBMS. 

Reclassification between departmental and administered items

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.

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. The appropriations need to be reported as per their original designation in their financial statements – see paragraph 12 of AASB Interpretation 1038 Contributions by Owners Made to Wholly-Owned Public Sector Entities for more information.

For more information on reclassifications related to capital expenditure, see  RMG-124 Capital Budgeting by Commonwealth Entities in the General Government Sector.

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 are granted when they do not compromise compliance with an AAS, section 42 of the PGPA Act, or other FRR requirements.

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 Accounting Policy. 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). Aside from AASB 16 Leases where all entities are required to adopt Tier 1 reporting requirements, section 18 of the FRR sets out the applicable reporting tier of an entity.

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. 

Tier 2 reporting entities may elect to apply Tier 1 reporting requirements where they believe additional disclosures are of benefit to users (see paragraph 16 of AASB 1053). 

Accounting policy changes

Entities should liaise with their Agency Advice Unit (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 (see AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors (AASB 108) and AASB 1060)).

Accounting estimates

Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty (AASB 108). Due to these uncertainties, the amounts must be estimated. The process for making accounting estimates requires current, strong and evidenced professional judgement. 

The Financial Statements Better Practice Guide includes guidance on developing accounting estimates.

Other information for the Australian Government Consolidated Financial Statements

Under section 18A of the FRR, entities must provide Finance with any information required for the Australian Government Consolidated Financial Statements (CFS) that is not in their own financial statements. This information must go through the same quality assurance processes as those used for the entity’s financial statements.

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

Entities seeking approval are to submit a written request to Accounting Policy. 

Reporting entities should use professional judgement to annually 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
• removing information that is no longer required under the accounting standards or FRR
• providing information/disclosures to support the Australian Government CFS, at the time and in the format requested by Finance.

A checklist is available to support you in improving your presentations; refer to Prompts to a user-focused presentation, 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.

Financial statements may be rounded-off.

Rounding should be used consistently across financial statements, and data presented clearly to help readers see whether amounts have been rounded.

Rounding may be applied separately for departmental and administered reporting, but consistent practices are required within each type—even if different rounding methods are used for each disclosure.

To provide users of the financial statements with assurance on the completeness and accuracy of an entity’s financial statements:

• the accountable authority and the chief financial officer (CFO) (or equivalent) of the entity must certify that the statements comply with subsection 42(2) of the PGPA Act and that they were prepared based on properly maintained financial records, under subsection 41(2) of the PGPA Act and FRR section 10.
• an auditor report, issued by the Auditor-General as required by subsection 43(2) of the PGPA Act, provides the auditor’s opinion on whether the entity’s financial statements:
  • have been prepared in accordance with the FRR and AAS
  • present fairly the entity’s financial position, financial performance and cash flows.

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 Financer Minister in accordance with section 11 of the FRR
• discuss the implications with auditors.

For assistance in seeking an exemption, email Accounting Policy.

For further information on the use of electronic signatures, please see the Australian Government Solicitor’s Legal briefing - Execution of commercial documents.