Tier 3 and Tier 4 Public Benefit Entities – The proposal

The External Reporting Board (XRB) is proposing amendments to simplify and improve the Tier 3 and 4 Public Benefit Entities (PBE) standards in response to the feedback received as part of the post-implementation reviews. Consultations are currently open for all stakeholders to consider the proposed amendments and provide feedback.

What are the proposed amendments to the Tier 3 (Not-for-profit and Public Sector) reporting requirements?

1. Service Performance Reporting

PBE FRS-48 requires PBEs to “tell their story” in reporting service performance information. Changes proposed include:

• Removing references to the terms “outcomes” and “outputs”.
• Providing new guidance on “significant activities and achievements” and “appropriate and meaningful measures and/or descriptions” to help entities explain what they have done during the financial year.
• Providing new guidance around the consistency of service performance information reported on each year.

2. Asset Valuation

Simplified accounting requirements have been proposed for PBEs that choose to revalue certain assets, including allowing:

• The option to revalue property, plant and equipment based on an independent valuation or on a local council rateable value for land and buildings.
• Revaluation gains/losses to be recognised directly in accumulated funds through an asset revaluation reserve (previously required recognition in Other Comprehensive Revenue and Expenses, which is not required to be reported for Tier 3 PBEs).
• The same accounting requirements for investment property which apply to property, plant and equipment.
• The option to measure financial investments that are publicly traded at market value with changes in the market value recognised in the statement of financial performance.
• Additional note disclosures when a market value measurement is used.

3. Opting up to Tier 2 for certain transactions

The Tier 3 standards currently require PBEs to opt up to Tier 1 and 2 standards in certain areas.

• When opting up requires a transaction to be recognised in Other Comprehensive Revenue and Expenses, it is proposed that the Tier 3 Standard allows this transaction to be recognised directly in accumulated funds.
• A new Appendix has been introduced, which contains guidance on when (and how) to opt up to Tier 2 PBE Standards for certain transactions

4. Income and Expense categories

• Proposed increases in the number of required categories for presenting revenue and expenses (as outlined below) to assist preparers when allocating different types of transactions. The Tier 3 Standard only requires a category to be used when it is applicable and relevant to the reporting entity.

5. Revenue recognition

Increased flexibility in recognising grant, donation, bequest and pledge revenue is proposed. This includes:

• Removing the requirement for “use or return” conditions in determining when revenue is recognised. Instead, when a significant grant, donation, bequest and pledge has “documented expectations over use”, the funding received may be recognised as revenue over the period in which those expectations are satisfied.
• Documenting “expectations over use” with enough specificity to allow an entity to reliably measure and track the satisfaction of these expectations – and if requested, demonstrate to the resource provider that these expectations have been satisfied.
• Exercising judgement when determining when (or over what period) revenue should be recognised where there are documented expectations over use.
• Immediately recognising revenue when funding is received where there are no expectations over use (i.e. not deferring the revenue recognition).

¹ As per the graph above, items are “significant” if their omission or misstatement could, individually or collectively, influence the decisions or assessment of users relying on the performance report. Significance is considered in relation to both the nature and size of the item, or a combination of both

6. Accumulated funds

Increased transparency over the reasons for retaining accumulated funds is proposed, including:

• New disclosures to allow users to understand how an entity manages its accumulated funds.
• Requirement to provide a brief description of when (and how) accumulated funds are expected to be used to advance the entity’s objectives.
• Removing the requirements related to the presentation of restricted reserves.

What are the proposed amendments to the Tier 4 (Not-for-profit and Public Sector) reporting requirements?

1. Simplification of the Tier 4 Standard

Reducing complexity to meet user needs and promote increased adoption. Proposed changes include:

• Simplifying the existing requirements using plain English and removing technical accounting terms. The overall standard would reduce from 31 pages down to 19.
• Removing optional disclosures, allowing entities to focus on minimum reporting requirements.

2. Reduced reporting requirements for “small” Tier 4 entities

To better meet the needs of smaller public sector entities it is proposed that all requirements marked with a triangle cross symbol are removed, such as the requirement to include:

• The entity structure and the names of any entities controlled by the entity for financial reporting purposes.
• For each significant type of asset owned, either the amount paid to purchase the asset or the asset’s current value particularly if it was donated and its cost is unknown.
• For each significant event after the financial year, the nature of the event, an estimate of any associated cash expected to be received, or cash paid, and how (if at all) the event is likely to affect the entity’s ability to continue operating over the subsequent 12 months.
• Any additional information considered necessary for readers to understand the overall performance of the entity.

Please refer to Tier 4 (NFP) Standard Exposure Draft and Tier 4 (PS) Standard Exposure Draft.

Defining a "small” Tier 4 public sector or not-for-profit entity

3. Service performance reporting

New and updated guidance has been proposed to help Tier 4 entities “tell their story”. This includes:

• Removing references to “outcomes” and “outputs”
• Retain the requirement for a Tier 4 public sector or not-for-profit entity to report on what it is seeking to achieve over the medium to long term (i.e. its objectives) and the significant activities undertaken during the period to achieve those objectives.

4. Statement of Resources and Commitments

It is proposed that this Statement is no longer required, although certain disclosures would still be required, such as:

• Disclosure of significant assets and liabilities in the notes to the Performance Report.
• Disclosure of significant assets, either the amount paid or the estimated current value.
• Allowing the value of land and buildings to be estimated using rateable values.
• Disclosing the significant amounts owing to external parties that are expected to be paid in the future to settle any liabilities.

5. Required categories

It is proposed that additional categories are included and existing categories are clarified, including:

• Increasing the number of required categories for presenting cash received and cash paid 

The proposed effective date in both the Tier 3 and Tier 4 Exposure Drafts is accounting periods beginning on or after 1 April 2024, with early adoption permitted. This date is tentative and would be reviewed before issuing the final standards.

The proposed changes are a positive step in making it easier for not-for-profit and public sector entities to meet their reporting requirements.

For more information on what is required, please contact your local Baker Tilly Staples Rodway representative.