NFPs – Accounting for concessionary loans – AASB issues Staff FAQ

Many not-for-profit entities (NFPs) receive long term loan funding on below-market terms, e.g. at below-market interest rates. These loans fall within the scope of AASB 9 Financial Instruments. They also fall within the scope of AASB 1058 Income of Not-for-Profit Entities if they are provided to the NFP principally to enable it to further its objectives.

Which standard do we apply first?

A question has been raised as to which standard is applied first to these concessionary loan transactions, in other words, does one standard take precedence over the other?

AASB Staff FAQ 12 - It doesn’t matter

To answer this question, the Australian Accounting Standards Board (AASB) recently updated its Staff FAQs for Not-for-Profit Entities (FAQ 12). In short, FAQ 12 uses an example to illustrate that regardless of whether AASB 9 or AASB 1058 is applied first, the accounting outcome is the same where an interest-free loan is provided to a NFP to further its objectives. We have summarised this example below.

Fact pattern (extracted from AASB FAQ 12)

An NFP entity receives an interest-free loan of $100,000 from a government agency.

The loan is provided principally to enable the entity to further its objectives.

The $100,000 principal is to be repaid at the end of the five-year term. 

The NFP entity has not had any borrowings before and estimated the prevailing market rate of interest for a similar loan (term, principal repayment at the end, credit risk, currency, etc.) at 5% pa.

At initial recognition, the transaction price of the financial liability for the loan, based on the present value of the future principal repayment, discounted at this estimated market interest rate, is $78,353.

The fair value of the financial liability is assumed to equal the transaction price of the liability, in the absence of any contrary evidence.

Approach 1 – Apply AASB 9 first

The loan arrangement includes two components:

  1. A financial liability owing for the loan (loan component), and
  2. A beneficial component (i.e. the loan is interest-free) because the fair value of the loan ($78,353) is significantly less than the fair value of the loan proceeds ($100,000), principally  to enable the NFP to further its objectives.

AASB 9, paragraph B5.1.1 is applied and the loan component is recognised as follows:

Dr      Cash (financial asset)                               $78,353
Cr      Loan owing (financial liability)                              $78,353

In the absence of any other related amount (credit), the beneficial component is then recognised as income immediately in profit or loss under AASB 1058, paragraph 10:

Dr      Cash                                                        $21,647
Cr      Income                                                                $21,647

Approach 2 – Apply AASB 1058 first

Using this approach, the NFP could determine that the fair value of the financial liability (loan) is significantly less than the fair value of the total proceeds received, and apply AASB 1058 as follows:

Dr      Cash (financial asset)                               $100,0001
Cr      Loan owing (financial liability)                          $78,3532
Cr      Income                                                                $21,6473

Notes:

  1. AASB 1058, paragraph 8
  2. AASB 1058, paragraph 9(d) and AASB 9, paragraphs 5.1.1 and B5.1.1
  3. In the absence of any other related amount (credit) - AASB 1058, paragraph 10.

Summary

Both approaches result in the same accounting outcome, with the net journal entry in both approaches being:

Dr      Cash (financial asset)                               $100,000
Cr      Loan owing (financial liability)                           $78,353
Cr      Income                                                                $21,647

More information

Please refer to the full text of FAQ 12 for more information.

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