There has been a significant amount of publicity recently about the ‘triple threat’ posed to corporate Australia and financial institutions arising from three new accounting standards that will impact financial statements from 1 January 2018. Indeed, BDO continues to highlight this threat in Accountings News articles and our monthly webinars. However, many not-for-profit entities (NFPs) may mistakenly think that ‘these new standards don’t apply to us’ because ‘we don’t have revenue, we don’t have financial instruments, and we don’t have leases’.
In this article we demonstrate why the ‘triple threat’ is a real threat for many not-for-profit entities and it should not be ignored. In fact, for not-for-profit entities, there is actually a ‘quadruple threat’ because there is an additional standard to be considered (AASB 1058) which deals specifically with income recognition, and includes application guidance developed by the AASB for applying IFRS 15 to NFPs.
Besides changes to your net income and assets, significant changes to systems and processes may be required because ‘Excel workarounds’ may not always suffice.
This ‘triple threat’ refers to the new accounting standards dealing with revenue, financial instruments and leases. These are noted below, together with their respective application dates.
|Three new accounting standards||Effective date for corporates – annual reporting periods beginning on or after….||Effective date for NFPs|
|AASB 15 Revenue from Contracts with Customers||1 January 2018||1 January 2019*|
*Together with AASB 1058 Income of Not-for-Profit Entities
|AASB 9 Financial Instruments||1 January 2018||1 January 2018|
|AASB 16 Leases||1 January 2019||1 January 2019|
Note that they all apply on the same date for both for-profit, and not-for-profit entities, except for the new revenue standard, AASB 15, which is delayed 12 months for NFPs. The reason for the delay is to synchronise AASB 15 with the special standard (AASB 1058) dealing with income recognition by NFPs because their requirements are interrelated. AASB 1058 was deferred an extra year because it can be a complex process for NFPs to review all their contracts and income arrangements in order to determine the appropriate accounting standard for income recognition, i.e. AASB 15 or AASB 1058.
Many NFPs think they do not have revenue because they do not have customers. However, in addition to grants, donations and contributions, many NFPs run business enterprises to supplement income, or as part of providing goods or services to clients in need. These are likely to comprise revenue from contracts with customers and therefore the new ‘5 step model’ in AASB 15 must be applied. Depending on the circumstances, this could result in revenue being recognised either earlier or later, and could also result in a change to the quantum of revenue recognised.
Further, income currently recognised as non-reciprocal contributions under AASB 1004 Contributions could instead result in revenue being recognised under AASB 15 where the criteria contained in Appendix F to AASB 15 (introduced by AASB 2016-8 as application guidance for NFPs) are met with respect to there being:
This could occur, for example, where the customer (e.g. a donor) does not receive the goods or services, but instead directs the NFP to provide these to someone else (third party beneficiaries).
Some NFPs think that they can decide on whether to apply AASB 1058 or AASB 15 at a high level. This is not the case, with each ‘income stream’ needing to be evaluated on a contract by contract basis whether AASB 1058 or AASB 15 applies!
In applying these new revenue and income standards, NFPs will need to grapple with determining:
|Which standards to apply – AASB 15 or AASB 1058?|
|Who is the customer when applying AASB 15?||What makes a performance obligation ‘sufficiently specific’?|
(Gateway to AASB 15)
|How to determine fair value of non-cash income?||When should revenue or income be recognised?|
It should be noted that determining whether AASB 15 applies to an income stream (based on the guidance in Appendix F) can be highly judgemental, with the illustrative examples tending to highlight the ‘black and white’ scenarios where income is either clearly income under AASB 1058, or clearly revenue under AASB 15 with sufficiently specific performance obligations.
Please refer to our Accounting News article on AASB 1058 for more information.
NFPs also tend to think that they do not have any financial instruments because they are not entering into hedging arrangements. This is a misconception, with many NFPs having receivables (which will be subject to the new ‘expected loss’ impairment rules) and various types of investments, including unlisted investments which can no longer be measured at cost, and investments of surplus cash in bonds, which in some cases will no longer be measured at amortised cost.
Similar to corporates, larger NFPs may have entered into leases as lessee for office premises and PPE, which historically have been accounted for as operating leases. These leases will need to be capitalised on the balance sheet as right-of-use (ROU) assets in a similar manner to ‘finance leases, and amortised over the lease term. Interest on lease liabilities will be amortised using the effective interest method, resulting in a ‘front-end loaded’ expense being recognised in profit or loss. Depending on the number of leases, this process could create a significant amount of system and process changes, particularly requiring an asset register to record all ROU assets.
Many NFPs occupy premises on $1 a year rentals (‘peppercorn leases’). These ROU assets will be recognised on the balance sheet at fair value. Please refer to our Accounting News article on peppercorn leases for more information.
All NFPs should be undertaking a review of these four new standards to determine whether any systems and process changes are required, and the financial impacts.
As always, BDO is here to help. Please contact your engagement partner or a member of our IFRS Advisory team for assistance.