Compliance with new rules on income of not-for-profit entities, and leases

Darryl Swindells, from HLB Mann Judd Sydney, reflects on how new accounting rules can change how, and when, not for profits recognise income.

We recently held a 3.5 hour seminar/workshop for our NFP community on the new accounting rules that tell you when to recognise income. The seminar/workshop was presented by Carmen Ridley, a member of the Australian Accounting Standards Board, which is responsible for these new accounting standards.

These new rules may significantly change how your organisation recognises income, and when it recognises that income.

If you have any leases, or arrangements similar to leases, the new rules will definitely change your balance sheets, bringing on possibly significant assets and liabilities.

If you have a June year end, these rules apply from 1 July 2019, which is only three months away. If you have a December year end, these rules have been in place since 1 January 2019.

The general feeling of the participants at the seminar/workshop was that boards or other governing bodies were not necessarily aware of the significant amount of work required for each organisation to be able to comply with these new rules.

For the new income accounting standard, an analysis needs to be made of every source of income, putting it through a multistep analysis to be able to determine how and when to recognise income, and the minimum income to be recognised.

For the new leases standard, the first and maybe most difficult job is to obtain information for every lease or similar arrangement that your organisation has. NFP’s are telling us that this is not an easy exercise.

Once that is done, a number of assumptions and judgements need to be made, and these need to be agreed to by the board or other governing body.

Particular things that need to be done, or questions asked, include the following.

For the new income standards:

1. Analyse each item of income.
2. Obtain copies of any agreements in relation to income, including changes to agreements.
3. Understand how to treat each item of income under the new accounting standards – this in itself may require significant judgement.
4. Go through the multistep process for each item of income, to determine how and when to recognise income.
5. Document all of the above.
6. Have it approved by your board or other governing body.
7. Modify your accounting systems to cater for the new method of accounting.

For the new leases standard:

1. Obtain details of each lease, rental agreement, occupation agreement, arrangement etc.
2. Understand the new leases accounting standard.
3. Determine which of these agreements, arrangement etc constitutes a “lease”.
4. Consider whether there are any peppercorn leases in place.
5. Determine your incremental borrowing rate to acquire the asset that is the subject of the lease.
6. Consider variable rental payments, future rent increases, etc.
7. Make a judgement as to whether or not options to extend the lease will be recognised.
8. Determine the present value of the lease liability, and the value of the “right to use” lease asset.
9. Document all of the above.
10. Have it approved by your board or other governing body.
11. Modify your accounting systems to cater for the new method of accounting.
12. Discuss with any lenders whether or not any borrowing covenants will be impacted by the increase in your assets and liabilities, with a view to changing the borrowing agreements, if required.

Generally:

1. Determine what resources your finance team and operational teams need to implement these new standards – your grant agreements and your other arrangements may be dealt with by your non-financial people.
2. Determine what new accounting policies are required – there are choices to be made.
3. Set a timetable for this work.
4. Engage your auditors/advisers as soon as you can.
5. Set aside time at your board or other governing body meetings to drive this process.

HLB Mann Judd people are passionate about the NFP sector – should you wish our assistance please contact us as soon as possible.

About the author: Darryl Swindellsis head of not-for-profits at HLB Mann Judd Australasia.

Contact him on 02 9020 4000.