How Not-For-Profits Can Simplify Accounting Policy Disclosures Under AASB 18

When you look at your financial reports from an outsider’s viewpoint, do your policy disclosures truly help the reader to understand the unique practices and approaches of your organisation? Or do they simply contain legacy wording in an attempt to comply with transparency obligations – generic phrasing that could apply to almost any NFP?

New standard AASB 18, which for NFPs comes into effect on 1 January 2028 (though earlier adoption is permitted) is your opportunity to improve your disclosure statements by reducing boilerplate clutter, clarifying your accounting practices, and focusing on information that genuinely helps users understand the specific policies of your organisation.

The shift from ‘significant’ to ‘material’

In replacing AASB 101, the new standard has transitioned from reporting ‘significant accounting policies’ towards providing ‘material accounting policy information’. But ‘material’ is not simply a new label for ‘significant’.

The move towards material accounting policy information is not entirely new. Earlier amendments to the Australian Accounting Standards, including AASB 2021-2 and AASB 2021-6, had already introduced this materiality-based approach. AASB 18 now carries that thinking into the broader presentation and disclosure framework.

AASB 18 reinforces an established materiality framework which has applied to financial reporting periods since 1 January 2023. It is based on the usefulness of information in making decisions, particularly when determining how financial information should be grouped, presented and disclosed.

AASB 18 also places greater emphasis on how information is grouped and presented in financial statements. In practical terms, this reinforces the need to avoid obscuring materially different information within overly broad or generic categories, while also avoiding unnecessary detail that can make important information harder to see.

In this context, information about accounting practices is considered material when, alongside other details in the financial report, it is likely to influence the judgements made by key financial statement users. This may include decisions or interpretations made by boards of directors, the organisation’s members, and funders or donors.

A practical guide to reviewing your disclosure wording

This gives you an opportunity to conduct a comprehensive evaluation of your existing accounting policy disclosures, to improve their clarity and usefulness rather than merely comply with the new standard. In doing so, you will decide what to retain, what to modify and what to remove. It should be helpful to ask yourself three key questions about entries in your financial statements:

1. Is the transaction, event or decision material?
2. Does the policy relating to it explain a choice, change, judgement or complexity?
3. Is the policy wording specific to your organisation?

Lengthy notes, especially ones which simply re-state the wording of the standard, are not necessarily adding value for users. Aim instead for brevity, precision and relevance to your entity.

What to retain and what to remove

Your judgement about what is material will depend on the specific activities of your organisation rather than on anything implied in the wording of the standard. And you may decide to retain information that may not be technically material, but will be useful to stakeholders provided it does not obscure any material information.

However, you may be able to remove generic taxation wording, or information about leases where there is no longer any material balance in the financial statements, and also extracts copied from accounting standards which have no material relevance to your own transactions or activities. But be sure to retain information about policy choices or changes, significant judgements or estimates, and complex or industry-specific treatments of particular matters.

The aim is not necessarily to create a shorter disclosure section in your annual report, but to produce the essential, clear and decision-useful statements for stakeholders.

For entities preparing Tier 2 simplified disclosure financial statements, these developments are also relevant. Proposed changes to AASB 1060 under ED 341 are intended to align aspects of Tier 2 presentation and disclosure with AASB 18, reinforcing the broader direction towards clearer and more useful financial reporting.

Examples of material accounting policy information

As a guide to what kind of information may be considered material, here are a couple of examples.

A community organisation receiving government grants as a significant funding source would need to report on how the timing of recognition of the grants as income is treated (e.g. when the organisation obtains control of the funds or not until any contractual obligations have been met). The timing may materially affect reported income and liabilities at the reporting date.

A charity that relies heavily on volunteers to deliver its services may need to provide information about them. This could include whether it has used a fair valuation of those services at market rates in the income and expense section of its accounts, or, failing that, some qualitative information about volunteer hours or FTEs, the types of volunteer roles, or pro bono contributions. If volunteer services make a substantial contribution to the organisation’s activities, financial report users may need to receive this information to interpret the financial statements correctly.

However, these statements should not automatically be included in the disclosure because the organisation receives grants or uses volunteers, but only when the policy information is material in the context of the financial statements.

Actions to take now

AASB 18 comes into effect for NFPs for annual financial reporting periods beginning on or after 1 January 2028. But the shift from ‘significant’ to ‘material’ information disclosures actually came into effect on 1 January 2023, so now is certainly the time to review and refresh your disclosure statements if you have not already done so.

Rewrite them in plain language specific to your entity, adding or discarding where you believe it to be necessary, and then discuss the resulting text with your auditors. Bentleys’ NFP specialists can help you understand how the AASB 18 requirements apply to your organisation, review your materiality judgements and identify opportunities to make your financial statement disclosures clearer and more useful.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.