AASB issues fatal flaw draft standard on income of NFPs
The fatal flaw draft of the new accounting standard dealing with the recognition of income for not-for-profit entities (NFPs), AASB 10XX Income of Not-for-Profit Entities, referred to in our September Accounting News article is now available on the Australian Accounting Standards Board web site.
The fatal flaw draft includes:
- Proposed AASB 10XX Income of Not-for-Profit Entities, related application guidance (Appendix B) and Illustrative Examples
- Amendments to AASB 9 Financial Instruments, including additional Australian implementation guidance for NFPs (Appendix C) on non-contractual receivables arising from statutory requirements
- Amendments to AASB 15 Revenue from Contracts with Customers, including additional Australian implementation guidance for NFPs (Appendix F) on identifying whether a contract exists, identifying performance obligations and allocating the transaction price, and
- Illustrative Examples to AASB 15 to assist NFPs in determining whether transactions are in scope of AASB 15 or AASB 10XX.
A ‘fatal flaw’ review process means that the draft standard will only be changed to the extent that the standard is unclear, ambiguous, or results in certain transactions being accounted for in the manner not intended by the standard. It also includes final typographical and internal cross referencing errors to be identified. It does not represent a re-exposure of the standard or a re-examination of the key principles proposed.
What types of transactions?
The proposed standard only applies to transactions where the consideration given to acquire an asset is significantly less than its fair value (in order to enable the NFP to further its objectives), and also to volunteer services received by NFPs.
For assets acquired as part of a distressed sale, or subject to a trade discount, the difference between the fair value of the asset and the consideration is not principally related to furthering the NFP’s objectives. As such, these types of transactions are not covered by this standard.
It is more likely that an asset acquired by a NFP, for consideration less than fair value, is acquired principally to further the NFP’s objectives when those terms and conditions are generally not available to other entities.
Summary of requirements
The main proposals included in the fatal flaw draft of AASB 10XX include:
- Assets within the scope of this standard (i.e. acquired to further the NFP’s objectives) are to be recognised in accordance with the relevant Accounting Standard (e.g. AASB 116 Property, Plant and Equipment, AASB 138 Intangible Assets, AASB 16 Leases, etc.). Changes have been made to these other standards via the addition of ‘Aus’ paragraphs to require initial recognition and measurement at fair value in all cases (currently only recognised at fair value when acquired for no or nominal cost).
- If the credit entry relates to contributions by owners (AASB 1004), revenue (AASB 15), lease liabilities (AASB 16), financial instruments (AASB 9) or provisions (AASB 137), these credits should be recognised and then any excess recognised immediately in profit or loss as income.
- NFPs receiving transfers of cash to acquire or construct a non-financial asset for its own use (e.g. cash given to acquire or construct PPE to identified specifications), will generally recognise a liability initially. Income will be recognised as and when the NFP satisfies the obligations of the transfer.
- Government entities (local governments, government departments, general government sectors (GGSs) and whole of government) must recognise the fair value of volunteer services received if the services would have been purchased had they not been donated.
- Non-government NFPs can choose to recognise volunteer services but are not obliged to.
The AASB is seeking comment on this fatal flaw draft by 21 October 2016. A final standard is expected by the end of the year.
For more information, refer to Chartered Accountants Australia and New Zealand Perspective series article, written by Shaun Steenkamp and Mark Shying of the AASB.