Just prior to Christmas, the Australian Accounting Standards Board (AASB) issued its long awaited standard on income recognition for not-for-profit entities (NFPs), AASB 1058 Income of Not-for-Profit Entities.
‘Financial reporting for not-for-profit entities will now more closely reflect economic reality. Revenue from grants and donations will be recognised where any associated performance obligation to provide goods or services is satisfied, and not immediately upon receipt as usually occurs with current standards.’ |
Together with the new revenue standard, AASB 15 Revenue from Contracts with Customers, AASB 1058 is meant to simplify and clarify income recognition for NFPs, and supersedes all current income recognition requirements for private sector NFPs, and most of the requirements for public sector NFPs currently contained in AASB 1004 Contributions.
The requirements of the standard must be applied to each transaction based on its substance rather than its legal form, or any random description given to it (e.g. grant or donation).
The objective of the standard is to establish principles for recognising income:
This means that AASB 1058 does not deal with situations where either consideration is not significantly less than fair value, or it is significantly less than fair value but the difference is not principally to enable the NFP to further its objectives.
AASB 1058 will apply to transactions where the consideration to acquire an asset is significantly less than fair value principally to enable a NFP to further its objectives, and the receipt of volunteer services, except for:
We need to apply the relevant Australian Accounting Standards when recognising an asset as a grant/donation (AASB 1058, paragraph 8). For example, if the NFP receives:
Changes have been made to the relevant standards so that the asset is recognised at fair value.
This means that ‘peppercorn leases’ (where lease payments are made at below-market rates), will need to be recognised as right-of-use assets at fair value in the statement of financial position.
AASB 1058, paragraph 9 requires that the credit entry is recognised in accordance with other Australian Accounting Standards if / when it meets the criteria to be recognised in accordance with these standards. For example, the credit entry could be recognised as:
Application of judgement is required to determine which ‘bucket’ the credit entry belongs to.
Generally, any excess of the carrying amount of the asset (paragraph 8) over amounts recognised under paragraph 9 are recognised as income immediately in profit or loss. The exception is when financial assets (e.g. cash) are received to acquire or construct a recognisable non-financial asset (e.g. PPE) to be controlled by the entity.
Appendix F has been added to AASB 15 by AASB 2016-8 Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities and includes implementation guidance on identifying contracts with a customer in a not-for-profit context.
In determining whether AASB 15 should be applied to grants:
Appendix F also includes examples to illustrate these principles.
Not necessarily. If the grant is a result of a contract with a customer with enforceable rights, and obligations that are ‘sufficiently specific’, revenue would be recognised in accordance with AASB 15 rather than AASB 1058 (e.g. the grant received by a business to provide a training programme to long-term unemployed would be accounted for in accordance with AASB 15). This may result in more cases of income deferral than we currently see under AASB 1004.
Alternatively, in some cases income will be deferred, with the ‘credit entry’ being recognised as a liability, contribution by owners, a lease liability, or a provision. Refer to Recognising the ‘credit entry’ for more details.
If an NFP receives cash or a financial asset to acquire or construct a non-financial asset (PPE) that the NFP will control, the NFP recognises a liability for the difference between the initial carrying amount of the financial asset received (cash) and the amount recognised under AASB 1058, paragraph 9, being the NFP’s obligation to acquire or construct the non-financial asset.
This liability is then recognised as income as or when the entity satisfies its obligation to purchase or construct the non-financial asset.
Example
Sports NFP receives $1 million cash grant on 30 June 2016 to build a gymnasium for communal use.
By 30 June 2017, it had spent $800,000 on construction and a survey indicated that the gymnasium was 80% complete. Construction was completed three months later on 30 September 2017.
On 30 June 2016, applying AASB 1058, the journal entry would be:
| Dr | Cash | $1 million | ||
| Cr | Liability | $1 million |
The liability represents the NFP’s obligation to acquire or construct the non-financial asset.
On 30 June 2017, the journal entry would be:
| Dr | Liability | $800,000 | ||
| Cr | Income | $800,000 | ||
| Dr | PPE in progress | $800,000 | ||
| Cr | Cash | $800,000 |
On 30 September 2017, the journal entry would be:
| Dr | Liability | $200,000 | ||
| Cr | Income | $200,000 | ||
| Dr | PPE in progress | $200,000 | ||
| Cr | Cash | $200,000 |
If the grant is spent on an item that does not result in a recognisable asset (e.g. amount does not qualify for recognition as an asset under Australian Accounting Standards, so would be expensed immediately), then the ‘credit entry’, $1 million, is recognised as income, and not as a liability. An example of this could be a grant for research where the expenditure does not qualify for recognition as an asset under AASB 138 Intangible Assets.
Local governments, government departments, general government sectors (GGSs) and whole of governments must recognise volunteer services if:
If the fair value of volunteer services received can be reliably measured, other non-government NFPs can choose to recognise these free services as an asset (if relevant asset recognition criteria are met), or as an expense, with an equivalent amount of income.
AASB 1058 applies to annual reporting periods beginning on or after 1 January 2019. Early adoption of this standard is permitted if the entity also applies AASB 15 to the same period. It should be noted that as part of these amendments, AASB 2016-7 Amendments to Australian Accounting Standards – Deferral of AASB 15 for Not-for-Profit Entities also defers the application of AASB 15 by NFPs to 1 January 2019.
The ‘date of initial application’ is the beginning of the first annual period in which the entity first applies this standard.
AASB 1058 is to be applied either:
If the entity applies full retrospective restatement, it need not restate completed contracts or transactions that begin and end within the same annual period, or that are completed contracts or transactions at the beginning of the earliest comparative period (‘opening balance sheet date’), provided it applies this practical expedient to all such contracts.
It should be noted that assets subject to ‘peppercorn leases’ will be subject to the transition requirements of AASB 16, and will therefore need to be measured at fair value in the statement of financial position on transition.