Changes to Accounting Standards on Income for NFPs

New accounting proposals in the Not for Profit sector may result in better matching of income and expenditure than the current standards, according to the Australian Accounting Standards Board.

In releasing the proposals for public discussion, the AASB Chair, Kris Peach said the most significant change to accounting practice proposed by the new Exposure Draft ED 260 is to defer income from grants and donations.

The AASB said this relates to the conditions around the delivery of goods or services regardless of whether the ultimate beneficiary is the grantor or a third party.

“The current standard has been interpreted as requiring income to be recognised immediately if the ultimate beneficiary is not the grantor. For example, under the proposals a charity receiving grants requiring the provision of a certain number of hospital beds would not recognise revenue until the beds were provided, despite the ultimate beneficiary being the patient, rather than the grantor,” Peach said.

Senior Project Manager with AASB, Jim Paul said the aim of the proposed changes is to simplify the existing standards and clear up some of the uncertainty around the treatment of various conditions.

“The focus for NFPs is what have you promised to do and is it enforceable."

(a) donations to a charity with discretion regarding which charitable purposes the donations will be used for; and

(b) grants, or local government rates, specified to be used in a particular future period but without any specification of the nature of the goods or services for which they must be used.

The AASB said the proposals will also require that transactions with a donation element be recognised at fair value.  For example a grant of a peppercorn lease of land for 99 years for a $1 would require the finance lease asset to be recognised at fair value, with corresponding income (unless there are performance conditions attached).

“The proposals provide guidance on how current grant/donation agreements would need to be amended regarding performance obligation conditions to enable better matching of income with expenditure,” Peach said.

“An entity would need to consider its own specific circumstances and service performance objectives before determining whether such amendments would be beneficial.”

Accounting standards expert with Ernst and Young, David Hardidge, commenting on the Aussie Charities and NFPs LinkedIn group, said the proposals may change the way charities recognise income (grants, donations, revenue) from provision of goods and services.

“One of the biggest complaints in relation to the current standard for NFPs is that revenue is recognised when received, and associated expenses are recognised in later reporting periods, leading to volatility in reported results,” Hardidge said.

“While there is likely to be some deferral of revenue from “grants” to be recognised when the associated expenses are incurred, the proposals do NOT reintroduce the “matching” concept.

“The proposals are going to become increasing relevant to many charities and NFP entities as Governments move to a public service commissioning and contestability approach, and well as fee for services, rather than the provision of block grants. Think NDIS service agreements, or Payment by Results.”

He said the proposals are likely to be more complex than current, in particular, dealing with the new concept of “performance obligations”, and potentially separately recognising donation components (e.g. for a fundraising event recognising revenue from the provision of food and beverages separately and at a different time from a donation component).

The AASB said it will conduct an extensive outreach programme on ED 260, including education sessions and roundtables in Brisbane, Canberra, Melbourne and Sydney in June.

The AASB Australian Accounting Standards Board  invites comments on ED 260 Income of Not-for-Profit Entities, which proposes:

(a) guidance to assist not-for-profit entities to apply the principles of AASB 15 Revenue from Contracts with Customers; and

(b) a replacement Standard for AASB 1004 Contributions, including income recognition requirements for donations, grants, taxes and similar transactions.

Comments on the Exposure Draft ED 260 are due by 14 August 2015.

E-mail: standard@aasb.gov.au