Fatal flaw draft standard ready for income of NFPs
At its August 2016 meeting, the Australian Accounting Standards Board (AASB) also announced that the draft standard on income for NFPs and implementation guidance will be published on its web site sometime during September 2016 for a ‘fatal flaw’ review process.
| 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.
At time of writing, there was no indication from the AASB when a final income standard for NFPs would be available, but the Action Alert from the AASB’s meeting indicated the following tentative decisions that have been taken with regard to the new standard and implementation guidance. These decisions are summarised below.
Asset measurement guidance
The recognition and measurement guidance will not be included in the new income standard for NFPs. Instead, specific Australian guidance (‘Aus’ paragraphs) will be inserted into relevant Australian Accounting Standards dealing with asset measurement, to the effect that where consideration transferred for the asset received is significantly less than the fair value of the asset received, the asset must be measured at fair value as required by AASB 13 Fair Value Measurement. Currently, this only applies where the asset is acquired for no or nominal cost.
The recipient entity will then need to refer to AASB 10XX Income of Not-for-Profit Entities to determine how to account for the difference between the transaction price and the fair value of the asset acquired, i.e. as a contribution by owners, a liability, a performance obligation under AASB 15, or income.
These new requirements will not apply to assets acquired at trade discounts or as part of a distressed sale.
‘Peppercorn leases’ are those with significantly below-market terms and conditions, e.g. $1 per annum rental payments for the local boat clubhouse.
Financed leased assets under AASB 117 Leases and right-of-use assets under AASB 16 Leases are to be measured at fair value.
The lease liability is to be measured at the present value of the lease payments, which will typically be a much lower amount than the fair value of the asset if the lease payments are not on arm’s length terms.
The difference between these two amounts will generally be accounted for as income under AASB 10XX, or in rare cases, as a performance obligation under AASB 15 Revenue from Contracts with Customers.
Detailed transitional guidance will also be included in AASB 16 and for entities early adopting AASB 10XX before 1 January 2019.
This would apply, for example, to charity shops receiving donated clothes.
Such entities will be allowed to assess the materiality of inventory acquired at no cost, either on an individual transaction basis only, or on a portfolio or aggregate basis. This means that some entities may not recognise any inventory on their balance sheet. However, they are encouraged to disclose information about their reliance on unrecognised donated inventories.
Local governments, government departments, general government sectors and whole of governments will recognise volunteer services if the fair value of those services can be measured reliably and the services would have been purchased if they had not been donated.
Other entities will be able to choose to recognise volunteer services as an expense and other income if their fair value can be measured reliably, and if not, will be encouraged to disclose information about their reliance on volunteer services, both recognised and unrecognised.
The scope of AASB 10XX will exclude licences outside the scope of AASB 15. This means that entities will apply AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors to determine an appropriate accounting policy for such licences. This may result in applying the licence provisions of AASB 15 by analogy, or the requirements of AASB 10XX.