Not for profit: Definition the key for NFPs

Not-for-profit organisations in Western Australia may be required to reassess their organisational status if a new policy, developed by national accounting body CPA Australia, is adopted.

CPA Australia has proposed a new definition of a not-for-profit entity, based on research undertaken by the University of Western Australia Business School.

Based on about 800 responses to the survey, the UWA researchers identified five factors that were considered essential in differentiating a for-profit entity from a not-for-profit organisation.

These factors, which relate to both private and public sector organisations, require a not-for-profit entity to have an operating purpose other than the provision of services or goods at a profit.

The criteria also state that no member or owner has the right to the surpluses of a not-for-profit entity and, conversely, a not-for-profit organisation may not transfer ownership to members or owners.

Finally, an organisation must not have the objective of generating profit in its constitution or other founding document if it is to be classified a not-for-profit, and its principal objective must not be profit generation.

CPA Australia senior policy adviser Dr Mark Shying said the existing definition of a not-for-profit entity was inadequate, given that some organisations had more than one principal objective.

“It became apparent that some organisations had multiple objectives, and as soon as you have multiple objectives, they cease to become useful,” he said.

“We think [the new definition] is a more robust definition and is better able to differentiate between for-profit and not-for-profit entities.”

Dr Shying said the definition would have implications for a number of organisations.

“In some clubs, in their constitution or winding up of the club, money or assets are distributed among the members. The feedback from the survey was members should not be able to financially benefit – their assets should go to a like organisation or charity,” he told WA Business News.

“That’s one example where, under the new definition, those organisations would be caught out and if they wanted to retain their not-for-profit status, they would have to change their constitution.”

UWA Business School researcher Professor Phil Hancock, who undertook the research with colleagues Lydia Kilcullen and Professor H Izan, said any changes would only affect not-for-profits which currently prepared general purpose financial reports.

“There may be the possibility for some government business enterprises to be affected,” he said.

Currently, not-for-profit organisations are only required to provide general purpose financial reports if they meet the subjective test of a ‘reporting entity’.

However, the Australian Accounting Standards Board is considering making its definition based on the concept of a publicly accountable entity.

In its April board minutes, the AASB said not-for-profit entities should generally be regarded as publicly accountable, but due to cost-benefit considerations, a two-tier system based on a size test was appropriate.

Top-tier organisations would apply general financial reporting standards, while second-tier organisations would apply an SME standard.

It also said that all public sector entities should be regarded as publicly accountable and that a size test similar to that devised for not-for-profits should be introduced for cost-benefit reasons.

Last week, the AASB issued an invitation to comment on these proposals, as well as a draft from the International Accounting Standards Board for an international document on financial reporting for SMEs.

The revised reporting regime would mean not-for-profit entities, both public and private, which have a revenue of $25 million or an asset base of $12.5 million, would apply a general financial reporting standard, but those satisfying neither of the thresholds would apply an SME standard.

The AASB has also asked constituents whether a third tier should be created for the smallest groups and if so, what the financial reporting requirements should be.