Date issued: 28 May 2007

CPA Australia has developed a new accounting definition of a not-for-profit entity to address perceived shortcomings in the existing one. It is advocating adoption of the definition to the Australian Accounting Standards Board (AASB) to improve the transparency and quality of financial reporting.

The definition was developed following a research survey undertaken by the Graduate School of Management at the University of Western Australia for CPA Australia. The research concluded that the current accounting standards’ definition of a not-for-profit entity has shortcomings and can be significantly improved by the inclusion of additional criteria.

The AASB defines a not-for-profit as one whose principal objective is not to generate profit. CPA Australia’s research found that this definition fails to capture five of the six criteria that its members consider essential to defining an entity as a not-for-profit.

CPA Australia recommends that an entity should be classified as a not-for-profit when:

• that entity has operating purposes other than to provide goods and services at a profit
• no member/owner has the right to surpluses of the entity
• that entity does not have the right to transfer ownership to members/owners
• that entity does not have:
  i. the objective of generating profit outlined in the entity’s legislation, associated regulation or constitution, or other founding document; or
  ii. as its principal objective the generation of profit. 

A not-for-profit entity can be a single entity or a group of entities comprising the parent entity and each of the entities that it controls.

CPA Australia’s chief executive officer, Geoff Rankin, said 'Defining not-for-profit entities isn’t just an academic exercise.

'There is currently too great an opportunity for variability in the application of the definition of not-for-profit entities across Australia. Without an agreed definition, organisations lack certainty about which standards govern their accounting practices operationally.'

Mr Rankin said a possible impact of the proposed definition would be that some organisations might have to review their constitution in order to maintain their not-for-profit status.

'Some organisations have constitutional clauses which would contravene the proposed definition. For example, some clubs are classified as not-for-profit entities and have a clause in their constitution that allows the distribution of club assets to members, in the event of the club ceasing to exist.

'Under the proposed definition, a club with this sort of clause would have to amend its constitution to maintain its not-for-profit status. CPA Australia strongly believes that such changes are justified, as a clear definition improves the transparency and quality of financial reporting and is therefore overwhelmingly in the public interest.

'It is imperative that the AASB takes action on this issue, as the current accounting definition of not-for-profit entities compromises the quality of financial reports.'

The six criteria that CPA Australia members consider essential to defining an entity as a not-for-profit, as identified in the research survey, are:

• its operating purpose is other than to provide goods or services at a profit 
• its principal objective is not the generation of profit 
• it may not distribute surpluses 
• generating profit is not an objective outlined in its legislation, associated regulations or constitution 
• it does not pay income tax or income tax equivalents 
• it is not able to transfer ownership

Australia’s not-for-profit sector includes both public and private entities and constitutes a significant proportion of the economy:

• The public not-for-profit sector employs more than 1.6 million people and contributes 4.2 per cent to GDP¹.
• The private not-for-profit sector employs over 600,000 people and contributes 4.7 per cent to GDP².

¹ Australian Bureau of Statistics, Australian System of National Accounts 2005-06, released 1 November 2006

 ² Australian Bureau of Statistics, Non-profit Institutions Satellite Account, released 28 November 2002.

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