Accounting Hot Topics for Not-for-profits 8 March 2018
Agenda PwC 2
Agenda for today’s session The new revenue standards 1 (AASB 15 and AASB 1058) AASB 16 Leases 2 3 Other matters and accounting standard change on the horizon 4 Implementation plan of the new standards PwC 3
AASB 15 Revenue from Contracts with Customers AASB 1058 Income for Not-for-profits PwC 4
Overview of the new revenue standards Where does the credit go? Dr. Asset received (fair value) Cr. Contribution by owners Cr. Lease liability Cr. Financial liability Cr. Provision Cr. Revenue/contract liability - AASB 15 Cr. Income - AASB 1058 PwC 5
Overview of the new revenue standards How will income/revenue be recognised? Is the transaction a contract with a customer? No Mix of both Yes • Recognise up front • May need to split Recognise revenue • (except if to transaction into when your construct/ 2 elements, and contractual acquire asset) account for each obligations are element separately met AASB 15 (deferral) AASB 1058 (up front) AASB 15/AASB 1058 PwC 6
AASB 15 Revenue from Contracts with Customers PwC 7
AASB 15 – The five step approach to revenue recognition Core principle Revenue recognised to depict transfer of goods or services Step 1 Ensure legally enforceable contract with customer who receives good/service Identify the separate performance obligations in the contract (i.e., sufficiently specific Step 2 promise) Step 3 Determine the transaction price Allocate the transaction price (between donation and sufficiently specific promises Step 4 consider refundability) Step 5 Recognise revenue when (or as) a performance obligation is satisfied PwC 8
Step 1: Does a contract with a customer exist? • Customer donor who promises the consideration • Customer must receive goods/services or direct to a third party (i.e. can’t retain for own benefit) - transfer or license IP to donor - publish all research for all researchers to use - provide good/service to third party beneficiary PwC 9
Step 1: Enforceable obligations • Enforceable by legal or other means • Examples: - refund obligation - right to enforce specific performance or claim damages - right to take a financial interest in assets subject to agreement - the parties required to agree on alternative uses of resources received - government administrative process exists to enforce agreements • Intention to enforce / prior history of not enforcing is not relevant • Withholding future funding is not deemed enforceable PwC 10
Step 2: ‘Sufficiently specific’ promise • Sufficiently specific to determine when promise is satisfied • Depends on facts & circumstances , but may include: - Nature of type of good/service (should be more specific than charity objectives) - Cost or value of the good/service - Quantity of the good/service - Period of time over which the good/service must be transferred • Requirement to spend within certain time ≠ sufficiently specific PwC 11
Steps 1-2 considerations Example: 2 year grant, spend $X on research for cancer, provide NOT sufficiently specific contract budget reports, return unspent funds, discretionary when/what to publish with customer Example: 2 year grant, spend $X on research for cancer, provide Sufficiently specific budget reports, return unspent funds, mandatory to publish research on contract with customer public website for all to use Sufficiently specific Example: 2 year grant, spend $X on research for cancer, provide contract with budget reports, return unspent funds, transfer/license IP to the donor customer If the transaction is not sufficiently specific, need to assess whether the transaction should be accounted for under AASB 1058 PwC 12
Step 3: Transaction price Transaction price: “Amount of consideration to which entity expects to be entitled in exchange for transferring goods or services.” Interest expense & Highly probable interest income Variable Significant financing consideration component Non-cash Refund obligations consideration Obligation to return Measure at Fair Value unspent funds PwC 13
Step 4: Allocation of consideration • Transaction price is allocated to each performance obligation • Performance obligation represents the amount of consideration to which the entity expects to be entitled to for transferring the promised goods or services. • Contract with a dual purpose of obtaining goods and services and to help the entity achieve it’s objectives • Based on the rebuttable presumption that the transaction price is treated as wholly related to the transfer of goods and services. • The presumption is rebutted where the transaction is partially refunded in the event the entity does not deliver the promised goods or services. • Where the presumption is rebutted, the entity shall disaggregate the transaction price account for the two components separately PwC 14
Step 5: When do you recognise income under AASB 15? Customer receives benefits as performed/ Yes another would not need to re-perform e.g. most services No Create/enhance an asset customer Yes Over Point controls time in time e.g. IP that the donor controls No Does not create asset w/ alternative use AND No Yes Right to payment for work to date e.g. IP/Research PwC 15
AASB 1058 Income for Not-for-Profits PwC 16
Transactions covered by AASB 1058 • AASB 1058 applies to all resources received in order to further an entity’s objectives: Cash Non-financial assets Volunteer services (policy choice if measure reliably) New guidance Donated inventory Assets received at a discount Off-market leases Payments to construct/acquire asset for own use Donation elements in commercial contracts PwC 17
When is income recognised under AASB 1058? Recognise income immediately when you recognise asset, except… • Funds to construct/acquire an asset for own use • If in your control to avoid breach → no liability recognised unless breach has occurred or is expected PwC 18
Funds to construct/acquire an asset for own use Where an entity receives funds (or another financial asset) and: • Entity must use the funds to construct/acquire a specific asset • Entity gets to keep the asset • Agreement is enforceable Revenue must be deferred & recognised when / as the contractual obligations are fulfilled (i.e. asset is constructed / acquired) No matching of income with deprecation expense. PwC 19
Donated inventories Material inventories recognised as income… Practical expedient: Materiality can be assessed at the individual asset level , without reassessing at the portfolio level vs. PwC 20
Examples of AASB 15 and AASB 1058 PwC 21
Government grant – no specific performance obligations Facts: • $2.4M government grant for use within entity’s operations • Refundable if not spent within 3 years, but no other conditions for grant Outcome: • There is no contract with a customer – no sufficiently specific obligation • The grant is income upfront • Liability only arises if funds are unspent after 3 years Journals: Dr Cash $2,400,000 Cr Income $2,400,000 Income at the inception date Dr Expense $xxx Cr Liability $xxx Liability and expense recognised only if a breach occurs PwC 22
Government grant – specific performance obligations Facts: • $2.4M grant, which must be spent providing counselling services for 1,000 hours / week for 52 weeks • Recipient expects to fulfil the conditions of the grant Outcome: • The grant is a contract with the government within the scope of AASB 15 • It is a contractual liability to provide 52,000 hours of counselling services over one year • Revenue must be deferred, and recognised over time as the recipient provides counselling services Journals: Dr Cash $2,400,000 Cr Contract Liability $2,400,000 Income is deferred initially when grant is received Dr Contract liability $xxx Cr Revenue $xxx Revenue recognised as counselling services are provided PwC 23
When does an enforceable obligation arise? Example: Donations made to a charity whose purpose is to build water wells to provide clean drinking water in developing countries Scenario: Outcome: Charity’s Board has internally determined that • No constructive obligation • funds will be used only for building water wells No contract with a customer • in Kenya. The Board has not publicly Income recognised upfront when communicated intention. received • Campaign for fundraising has said donations No enforceable contract with a customer will be used to build wells in Kenya, but the due to discretion over unspent funds • entity has discretion to use unspent funds Income recognised upfront when for other purposes. received • Charity has: There is an enforceable agreement with • Stated externally that funds will only be customers (AASB 15) • used to build wells in Kenya A contract liability is recognised upfront • • Pledged to return unspent funds Revenue is recognised only when • Publicly stated that each donation of $800 specified water wells have been built will construct two water wells in 2018 PwC 24
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