Introduction
For any Australian charity, preparing an annual financial report is a critical responsibility, forming a key part of its obligations to the Australian Charities and not-for-profits Commission (ACNC). A fundamental decision in this process is whether to prepare a General Purpose Financial Statement (GPFS) or a Special Purpose Financial Statement (SPFS), a choice that significantly shapes the charity’s approach to financial reporting.
The correct choice between these two types of financial statement hinges on whether the charity is classified as a ‘reporting entity’. This guide explains the key differences between a GPFS and an SPFS, providing clarity on the standards and financial reporting requirements to help your charity make an informed decision.
Defining a General Purpose & Special Purpose Financial Statement for Your Charity
Understanding General Purpose Financial Statements
GPFS are prepared to meet the needs of a wide range of users who are not in a position to request financial information directly from a charity. These statements are designed to provide a comprehensive overview of a charity’s financial position, performance, and cash flows to support informed economic decision-making.
To ensure consistency and transparency, a GPFS must be prepared in accordance with all relevant Australian Accounting Standards. These standards are issued by the Australian Accounting Standards Board (AASB) and provide a strict framework for how financial information is measured, presented, and disclosed in an annual financial report. This adherence to a recognised framework gives stakeholders a high degree of confidence in the information presented.
Understanding Special Purpose Financial Statements
In contrast, an SPFS is prepared for a narrower range of users who have specific information needs. An SPFS offers greater flexibility in financial reporting and is an option for charities that are not classified as a ‘reporting entity’. Recent regulatory changes that removed the ability to prepare an SPFS primarily affected for-profit entities, meaning eligible charities can continue to use this reporting method.
While more flexible, charities preparing an SPFS must still comply with a minimum set of six Australian Accounting Standards to meet their ACNC obligations. These standards include:
| Standard | Description |
|---|---|
| AASB 101, Presentation of Financial Statements | This standard dictates the overall structure and content of the financial statement, ensuring a baseline of clarity. |
| AASB 107, Statement of Cash Flows | This requires the charity to provide a statement showing how it generates and uses cash. |
| AASB 108, Accounting Policies, Changes in Accounting Estimates and Errors | This standard governs the consistency and disclosure of accounting policies. |
| AASB 124, Related Party Disclosures | This mandates the disclosure of transactions with related parties to ensure transparency. |
| AASB 1048, Interpretation of Standards | This standard provides guidance on interpreting other accounting standards. |
| AASB 1054, Australian Additional Disclosures | This requires specific disclosures relevant to Australian entities. |
100% Obligation-Free
Speak to one of our Experienced Lawyers Today
How to Determine Your Charity’s Financial Reporting Requirements
What is a Reporting Entity for an Australian Charity
Your charity’s classification as a ‘reporting entity’ ultimately determines whether it must prepare a GPFS or may opt for an SPFS. In general, a charity is deemed a reporting entity when it is reasonable to expect that external users will rely on its financial statements to make resource-allocation decisions, such as funding or donation choices.
Crucially, this classification is the single most important factor in determining your charity’s financial reporting obligations.
The Australian Accounting Standard AASB 1053 defines a reporting entity as one whose users depend on GPFS for decision-making. Accordingly, charities classified as reporting entities are required to prepare a GPFS for their annual financial report to the ACNC. By contrast, charities that are not reporting entities enjoy the flexibility to prepare either a GPFS or an SPFS.
Key Factors in Determining if Your Charity is a Reporting Entity
When it’s not immediately clear whether external users rely on your charity’s financial statements, you can consider several key factors to determine its reporting entity status. Since each charity’s situation is unique, evaluating the following indicators is crucial for accurate financial reporting:
| Factor | Description |
|---|---|
| Separation between management and members | A significant separation suggests members are more likely to rely on GPFS for information. |
| Economic or political influence | If a charity has considerable influence, a wider range of people will likely use its financial statements for decision-making. |
| Size and scale of the charity | Charities with large assets, substantial debt, significant funding, or many employees are more likely to be reporting entities. |
Key Differences Between GPFS & SPFS for Your Charity’s Annual Financial Report
Australian Accounting Standard Compliance
A primary distinction between a GPFS and an SPFS lies in their adherence to Australian Accounting Standards.
When preparing a GPFS, a charity must comply with all relevant accounting standards issued by the AASB. This comprehensive compliance ensures the financial reporting is consistent and follows a globally recognised framework.
In contrast, charities preparing an SPFS are only required to apply a minimum set of six accounting standards. These mandatory standards for an SPFS include:
| Standard | Title |
|---|---|
| AASB 101 | Presentation of Financial Statements |
| AASB 107 | Statement of Cash Flows |
| AASB 108 | Accounting Policies, Changes in Accounting Estimates and Errors |
| AASB 124 | Related Party Disclosures |
| AASB 1048 | Interpretation of Standards |
| AASB 1054 | Australian Additional Disclosures |
Level of Detail & Transparency in Financial Reporting
The level of detail required in each type of financial statement directly impacts its transparency and accountability.
A GPFS provides a high degree of transparency because it must adhere to all applicable standards, resulting in more detailed and comprehensive financial information. This ensures stakeholders receive a full picture of the charity’s financial position and performance.
On the other hand, an SPFS generally contains less detailed financial information. Because they are not bound by all accounting standards, SPFS can vary widely in form and may adopt unique accounting policies. This flexibility can result in:
- Reduced transparency
- Greater variation in reporting format
- Financial information that may require closer scrutiny
Intended Audience for the Financial Statement
The intended audience is a defining difference between the two types of financial statements.
GPFS are prepared for a broad range of users who do not have the authority to request information tailored to their specific needs. This includes donors, members, and other stakeholders who rely on publicly available reports for decision-making.
An SPFS is designed for a narrow and specific audience. These users, such as management or a specific funding body, often have particular information needs and can request reports tailored to their requirements. This customisation is a key feature of the SPFS, providing flexibility that is not available with a GPFS.
Request a Free Consultation with one of our experienced Lawyers today.
Get Your Free Initial Consultation
Understanding Simplified Disclosure Requirements for Your Charity
What the Simplified Disclosure Framework Means for a Charity
Your charity can prepare GPFS in one of two ways:
| Tier | Framework |
|---|---|
| Tier 1 | Full compliance with all relevant Australian Accounting Standards. |
| Tier 2 | Uses a simplified disclosure framework (AASB 1060) with fewer and less complex disclosures. |
This Tier 2 option allows for a financial statement with fewer and less complex disclosures, making financial reporting more manageable while still being considered a GPFS.
The simplified disclosure framework replaced the previous Tier 2 Reduced Disclosure Requirements (RDR) for reporting periods starting from 1 July 2021.
While the recognition and measurement requirements for Tier 2 are the same as for Tier 1, the key difference lies in the reduced disclosure obligations. This simplifies the annual financial report process for eligible charities.
Applying AASB 1060 in Your Charity’s Financial Statement
The simplified disclosure framework is governed by a single standard, AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities. This standard consolidates all relevant disclosure requirements into one document, streamlining the process for charities preparing a Tier 2 financial statement.
Under the Australian Charities and Not-for-profits Commission Regulations 2022 (Cth), charities preparing an SPFS also have the option to apply the simplified disclosure requirements in AASB 1060. This choice is available for disclosures related to:
| Disclosure Area | Applicable From |
|---|---|
| Key management personnel compensation | The 2022 reporting period and onwards |
| All other disclosures | The 2023 reporting period and onwards |
If a charity opts to use AASB 1060 for its SPFS, it must comply with all relevant requirements in that standard as well as certain paragraphs within AASB 1054, Australian Additional Disclosures.
100% Obligation-Free
Speak to one of our Experienced Lawyers Today
Conclusion
Choosing the correct annual financial report is a critical decision for any Australian charity, with the choice between a GPFS and an SPFS hinging on its status as a reporting entity. A GPFS offers comprehensive financial reporting by adhering to all Australian Accounting Standards, whereas an SPFS provides greater flexibility for non-reporting entities by meeting a minimum set of standards.
To ensure your charity navigates its financial reporting obligations correctly, contact the team at LawBridge for trusted expertise. Our specialised not-for-profit legal services are tailored to help your organisation meet its ACNC compliance requirements with confidence and clarity.
