As Australian financial regulations evolve, modified accrual accounting is increasingly in the spotlight for both public sector entities and not-for-profit organisations. With the Australian Accounting Standards Board (AASB) introducing new guidance for 2025, it’s crucial for finance professionals and business owners to understand what modified accrual accounting is, why it matters, and how to implement it effectively.
Understanding Modified Accrual Accounting
Modified accrual accounting blends aspects of traditional cash and full accrual methods. It recognises revenues when they become both measurable and available, while expenditures are recorded when liabilities are incurred. This hybrid approach aims to provide a clearer picture of an organisation’s short-term financial health—particularly useful for entities with public accountability and reliance on grants or appropriations.
- Revenue Recognition: Revenue is recorded only when it is both measurable and expected to be available soon (usually within the current fiscal period).
- Expenditure Recognition: Expenditures are logged when a liability is incurred, except for long-term items like debt service payments, which are recognised when due.
- Application: Widely used by Australian local governments, state agencies, and charities to ensure transparent and timely reporting.
For example, a council receiving a federal infrastructure grant in June 2025 but not spending it until September would only recognise the portion expected to be used in the current year.
2025 Policy Updates and Why They Matter
This year, the AASB has clarified reporting requirements for modified accrual accounting, aiming to reduce inconsistencies in public sector reporting. Notably, the 2025 updates:
- Mandate clearer disclosure of unspent grant funds and future expenditure commitments.
- Introduce stricter timelines for recognising revenue from conditional grants—revenue can only be reported when all eligibility criteria are met and funds are likely to be spent within the fiscal year.
- Align reporting templates across councils and charities, making it easier to compare financial performance sector-wide.
For instance, local councils receiving disaster relief funding must now break out how much has been spent, how much remains, and the expected timing of future outlays, all within their annual financial statements.
Practical Implications for Australian Entities
Adopting modified accrual accounting is more than a compliance exercise—it can improve financial management and stakeholder trust. Here’s what Australian organisations should prioritise in 2025:
- System Upgrades: Ensure your accounting software can handle modified accrual nuances, particularly around split recognition of revenue and expenditure.
- Staff Training: Finance teams must understand the difference between available and appropriated funds, and accurately report liabilities as they arise.
- Policy Review: Update internal controls and financial policies to reflect the latest AASB guidance, especially around grant management and conditional funding streams.
- Transparency: Leverage the new disclosure rules to demonstrate responsible stewardship of public or donor funds—an increasingly important factor for ongoing funding and public perception.
For example, a large charity running programs across multiple states will need to track each grant’s eligibility requirements, report on unspent balances, and clarify timelines for fund usage in their annual report.
Conclusion
Modified accrual accounting is no longer just a back-office technicality—it’s a vital tool for demonstrating accountability and sound financial management in Australia’s evolving regulatory environment. With the 2025 updates, now is the time for public sector and not-for-profit entities to invest in systems, training, and process improvements. Embracing these changes will not only ensure compliance, but also foster greater transparency and trust with funders and the community.
