A new Australian Accounting Standard, AASB 1058 Income of Not-for-Profit Entities, has recently been announced and will replace the existing Australian Accounting Standard, AASB 1004 Contributions, relating to income recognition requirements of not-for-profit entities.
AASB 1058 Income of Not-for-Profit Entities will take effect from annual periods beginning on, or after, 1 January 2019. Early adoption is permitted if another new Australian Accounting Standard, AASB 15 Revenue from Contracts with Customers, is also applied.
The new standard must be applied retrospectively and entities can choose either a full retrospective transition approach (via the restatement of comparatives) or a modified retrospective transition approach (showing the cumulative effect of initially applying the standard as an adjustment to opening retained earnings).
The current guidance in AASB 1004 Contributions has long been criticised because of the diverse ways in which it can be applied, which may always reflect economic reality.
The new standard is aimed at promoting consistency and better aligning the accounting to the economics of a transaction.
- Not-for-profit entities will now need to determine whether a transaction is a genuine donation (in which case AASB 1058 Income of Not-for-Profit Entities applies) or a contract with a customer (in which case AASB 15 Revenue from Contracts with Customers applies)
- AASB 15 Revenue from Contracts with Customers requires an entity to have an enforceable, sufficiently specific obligation to provide goods or services. Under this standard, income will only be recognised as the obligations under the contract are satisfied
- For any revenue that does not meet the criteria contained within AASB 15 Revenue from Contracts with Customers (for example, general donations), the application of AASB 1058 Income of Not-for-Profit Entities will generally result in revenue being recognised upfront
- Below-market leases will also be required to be recognised via a right-of-use asset at fair value and a liability for the present value of contractual lease payments. Income for the difference between the asset and liability will be recognised either upfront (if the entity has no ongoing obligations) or when (or as) the entity satisfies any obligations attached to its use of the leased asset
- Where a not-for-entity receives a grant to acquire specific assets, it recognises income when the relevant assets are acquired. When a not-for-profit entity receives a grant to construct a building to be controlled by the not-for-profit entity, the funds received are initially recognised as a financial asset (cash) with a corresponding liability (obligation to construct the building). Subsequently, the liability is derecognised as the performance obligation is satisfied (i.e. as the construction of the building is completed)
Aside from the fundamental changes highlighted above, entities also need to be aware of the following consequences:
- In general, most not-for-profit entities will welcome the change as it is likely to result in a greater matching of income and expenses
- The new standard may result in a change of revenue recognition pattern (for example, deferral of revenue) which needs to be considered when budgets are being prepared
- The cost to implement and continue to comply with the new standard could be significant and may require the implementation of new systems and robust processes and controls
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