Navigating revenue recognition challenges: Financial reporting for NFPs
28 June 2019
Not for profit (NFP) organisations in Australia are about to apply for the first time two new financial reporting standards - AASB15 and AASB1058. These require a new mindset for recognising revenue, and with these standards come a number of challenges for NFPs. To help, BDO recently held a workshop to discuss the difficulties in more detail and offer practical solutions to ensure the new standards don't cause disruption for NFPs. Here are some of the themes that arose from the event.
a) What are AASB15 and AASB1058?
AASB15 introduces a new five-step approach to recognising revenue. If NFPs don't meet the requirements set out in AASB15, they are pushed into the 1058 standard, where they are more likely to have to recognise revenue upfront. Currently NFPs can spread much of their revenue out over a longer period, meaning they can better match it to their expenses. Because of the mismatch that this new standard will introduce in certain situations, many NFPs may find themselves having to explain why revenue or expenses are so high in a particular year - this could cause difficulties when discussing NFP funding.
b) How can Not-for-Profits adhere to the new financial reporting standards?
The first challenge for NFPs comes in determining specific revenue and whether it falls under AASB15 or 1058. There are three key considerations to make at this point:
- Identify whether or not the contract that underlines the revenue item is enforceable.
- Be clear on whether their goods or services are being provided to customers under that contract.
- Determine if there are sufficiently specific service obligations set out in the contract. This point is where many NFPs stumble.
To help navigate which standard a particular revenue stream falls under, NFPs should document for each revenue stream how the 5 steps in AASB15 apply to that revenue stream. If the revenue does fall under AASB15 and the underlying goods or services are provided over a period of time, NFPS will need to consider how they allocate this revenue to the goods or services being delivered.
One particular issue NFPs will face under these standards is where they have previously received funding to acquire a building to use in their service. Previously, NFPs have adopted a number of different approaches to account for this grant income, but under the new standards it must be recognised as income upfront (i.e. over the period of construction of the asset). This means NFPs cannot match the income to the depreciation.
c) The key? Communicate
The key action here will be to communicate. Make sure boards, funding providers, members and other key stakeholders understand the new standards and the impact it may have on revenue and expense reporting. Be sure to talk with your auditors and advisers and ensure they understand how you have applied the changes to your organisation to determine if they agree with your conclusions in relation to each revenue stream.
For more information, reach out to the team at BDO today.