NEWS  |  Leadership

Simplifying Income Recognition for Not-for-Profit Entities

Wednesday, 21st December 2016 at 11:55 am
Wendy Williams, Editor
Financial reporting for not for profits is set to align more closely with economic reality in a bid to help organisations become more effective in explaining their true circumstances to donors.

Wednesday, 21st December 2016
at 11:55 am
Wendy Williams, Editor



Simplifying Income Recognition for Not-for-Profit Entities
Wednesday, 21st December 2016 at 11:55 am

Financial reporting for not for profits is set to align more closely with economic reality in a bid to help organisations become more effective in explaining their true circumstances to donors.

From 2020 revenue from grants and donations will be recognised, after associated performance obligations to provide goods or services have been satisfied, and not immediately upon receipt as usually occurs with current standards.

Australian Accounting Standards Board (AASB) chair Kris Peach said the move followed calls from not-for-profit organisations that the current standards were not properly reflecting their activities.

“The new requirements respond to constituent concerns and are a major step towards financial reporting that better meets the needs of NFP entities and the users of their reports,” Peach said.

“The board has actually had this one on their agenda for a very long time and we put on a concerted push in the last two years, particularly once the international standard on revenue came out, that gave us a new way of thinking about it.

“The changes provide a better platform for NFP entities to communicate their story to their stakeholders.”

Peach said the new standard means if not-for-profit entities have a grant or donation with performance obligations attached they recognise revenue when they “do what [they] said [they] were going to do”.

“So for example, if I gave you a donation to provide five hours of counselling to homeless people what it means is that you wouldn’t recognise revenue until you had actually provided the five hours of counselling to the homeless people, whereas at the moment what would happen is you would recognise the revenue on day one and you wouldn’t spread it,” Peach said.

“So what’s happening is that because they had to recognise revenue on day one and they hadn’t actually incurred the expenses that go with that, when they went to speak to people to give them money what it was showing was that they seemed to have quite a big profit and so then people would say: ‘Well, why do you need money because you look as though you’ve actually got enough.’

“This is a better reflection to show that they haven’t actually earned the money, earned the income yet, they still have to go and do something to earn that income. So when they go and speak to their donors it is showing a much more accurate picture of their financial circumstances.”

As part of the upcoming changes to the standards, more assets will also be recorded on the balance sheet under the new requirements, including leases with significantly below-market terms and conditions.  

This will help entities to better manage the resources they have been provided with and users to have a better understanding of the entity’s dependence on donated assets.  

Currently, only assets acquired by NFP entities at nil or nominal consideration must be recognised at fair value.  

Peach said the new requirements broaden this to assets where entities pay significantly less than fair value, principally to let them further their objectives (ie not trade discounts or distress sales).

“So say if I’m Harvey Norman, you might come to me and say: ‘Look, we are running a big campaign, we’d really like you to donate five mattresses,’ and Harvey Norman says: ‘Ok, well I’m not going to give you them for free but I’m going to give you them for $100 each rather than $500 each,’” Peach said.

“So in that case we would say you would recognise the mattresses at $500 which is the normal price you would have otherwise had to pay and you will recognise that $400 of that is actually effectively a gift to you, and that then depends on whether you have got a commitment to do something with those mattresses otherwise you might get revenue on day one.”

Peach said including leases was “really quite important”.

“A lot of charities get government leases for very little money and so it is very important that they understand what they have been given, also what happens if that for some reason should be taken away, they have to replace the building etc that they have been given access to.”

The new standards will come into effect on 30 June 2020 but can be adopted earlier.

Peach said in response to concerns that the not-for-profit sector has limited resources to implement new requirements, the AASB has provided application guidance to help entities identify enforceable agreements, whether a performance obligation exists, and how to allocate the transaction price to performance obligations.  

“A broad range of examples also illustrate how the new requirements will work in practice,” she said.

“The AASB will release a webcast covering the new requirements early in 2017, as well as further education materials later on.”

The new Standards are:

  • AASB 1058 Income of Not-for-Profit Entities
  • AASB 2016-7 Amendments to Australian Accounting Standards – Deferral of AASB 15 for Not-for-Profit Entities
  • AASB 2016-8 Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities.

For more information see here.

Wendy Williams  |  Editor |  @WendyAnWilliams

Wendy Williams is a journalist specialising in the Not for Profit sector.


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