The already complex accounting landscape for Not-for-Profits, is set to change beginning 1 January 2019, with the Accounting Standards Board new income and revenue recognition requirements that more closely reflects an NFPs economic reality.
Under AASB1058, every arrangement that provides the NFP with economic benefits will need to be assessed to ensure that accounting treatment is correct. The aim is to fix the failings of AASB 1004 Contributions, which did not match income and expenditure – particularly for grants, peppercorn leases and volunteer services. Therefore, AASB 1058 will replace the majority of AASB 1004 Contributions which did not consider the distinctive income characteristics of the NFP sector.
The requirement to fair value the right-of-use asset arising on peppercorn leases is going to be deferred following concerns raised by stakeholders in the NFP sector. This does not mean the leases will not be recognised, if the deferral is approved, the right-of-use asset will be valued based on the value of the lease liability. If the amending standard is approved in time, the AASB is expected to issue the deferral standard on 24 December 2018.
The complexity of these new standards require detailed analysis of arrangements, it’s important NFPs have developed new accounting processes and are transitioning into these new standards.
Some of the requirements of AASB are set to be amended. The proposed amendments have been drafted following concerns raised by stakeholders in the NFP sector. The AASB is currently proposing a deferral of the requirement for NFPs to value the right-of-use asset in peppercorn leases. This does not mean the leases will not be recognised, if the deferral is approved, the right-of-use asset will be valued based on the value of the lease liability.
The changes will see revenue from grants and donations to be recognised when any associated performance obligation to provide goods or services are satisfied, rather than immediately upon receipt as usually occurs with current standards.
Further, NFPs will recognise more assets on the balance sheet, and this should help NFPs better manage the resources they have been provided with and users to have a better understanding of the NFP’s dependence on donated assets.
Currently, only assets acquired by NFPs at nil or nominal consideration are recognised at fair value. AASB 1058 broaden this to assets where entities pay significantly less than fair value, principally to enable them to further their objectives.
AASB1058, coincides with significant changes to revenue accounting. AASB 15 Revenue from contracts with customer (AASB 15) The AASB 15 revenue from contracts with customers will see a move from a ‘transfer of risk and rewards model,’ to a ‘transfer of control model.’
The transition to AASB 1058 and AASB 15 may result in significant changes from the current income recognition requirements and could significantly change the timing of income recognition. Therefore, their application needs to be carefully considered and any impacts identified, for example entity systems and processes that can or must be amended.
How to apply the standards to transactions is dependent on an assessment of the relevant facts and circumstances of the particular type of transaction.
AASB 15 revenue from contracts with customers applies a five-step model which determines the amount of revenue recognition in the reporting period.
Under the changes, all assets less than their fair value will be reported on the balance sheet. The most significant outcome is that Peppercorn leases (leases below market value) will appear on the income statement.
The requirement to apply AASB 1058 to recognise the inflow of resources will also include volunteer services as an asset or expense when the fair value of those services can be measured reliably, and the services would have been purchased if they had not been donated are applicable to local governments, government departments, general government sectors (GGSs) and whole of governments (AASB 1058 paragraph 18).
There are transitional provisions in AASB 1058 and it can be early adopted but only if AASB 15 is also early adopted.
Your NFP should have already identified how it will transition these new requirements as they will require systems and processes to change and require accountability beyond the finance function. It’s also important everyone understands how they will impact your financial statements and communicated to your stakeholders.
If you need any assistance, please contact your local William Buck office.
Update on not-for-profits accounting for Peppercorn leases
More Information can be found here