Income of Not-for-Profit Entities – New Australian Accounting Standard Issued
21 December 2016
On 20 December 2016, the Australian Accounting Standards Board (AASB) issued the highly anticipated new Accounting Standard AASB 1058 Income of Not-for-Profit Entities. This new standard, which applies to annual reporting periods beginning on or after 1 January 2019, represents a landmark development in financial reporting by not-for-profit (NFP) entities.
The standard establishes principles and guidance that apply to:
- Transactions where the consideration to acquire an asset is significantly less than fair value principally to enable an NFP entity to further its objectives
- The receipt of volunteer services.
Various practical examples are contained in the illustrative examples that accompany the new standard.
On initial recognition of an asset received by a NFP entity, any related amounts including contributions by owners, liabilities or revenue, are to be recognised in accordance with other Australian Accounting Standards. This includes the additional new Accounting Standards AASB 15 Revenue from Contracts with Customers (for which the application date has been deferred to 1 January 2019 for NFP entities) and AASB 16 Leases (for which the application date is also 1 January 2019).
The combined operation of AASB 15 and AASB 1058 provides specific guidance for NFP entities on the principles for recognising various forms of income. For example:
- If the consideration given, or to be given, by an NFP entity for an asset acquired is significantly less than the fair value of the asset, then the Standard addresses the accounting for the difference
- When government grants are received under an enforceable agreement, and there are sufficiently specific performance obligations imposed on the NFP, then the components of the grant that relate to those performance obligations would potentially be deferred until the obligations are satisfied
- If the performance obligations are not sufficiently specific, then the NFP is potentially faced with recognition of the grant on receipt
- If an NFP entity acquires the right to use a property by way of lease, and the fair value of the right to use of the property is significantly greater than the consideration to be given (e.g. a peppercorn lease), then the NFP potentially will be required to recognise income for the difference
- Certain government NFP entities will be required to recognise the financial effect of volunteer services where the fair value of the services can be measured reliably, and the services would have been purchased if they had not been donated. This requirement is not mandatory for private sector NFP entities.
Key issues in implementing the new standard, together with other related amendments, will include:
- Determining the fair value of assets acquired, especially where a transaction is on non- commercial terms
- Determining whether contracts for government grants contain sufficiently specific performance obligations to allow deferral of any component of the grants.
In implementing the new requirements, NFP entities will also need to:
- Review all significant income streams to determine the impact on their financial reports
- Consider the need to change accounting policies and internal financial reporting processes
- Consider the impact on reporting to stakeholders regarding the NFP’s financial position and performance
- Ensure proper guidance is provided to boards and audit committees.
New NFP Standard - Aletta Boshoff