The Australian Accounting Standards Board (AASB) has proposed changes to the revenue recognition rules for not for profits (NFPs) aimed at helping them to better ‘match’ revenue and expenditure.
The ability to ‘match’ revenue and expenditure is vitally important in the not for profit sector. Where an entity depends on multiple sources of funding; a ‘lumpy’ profit and loss statement can have an impact on donations from individuals, foundations and other donors. After all, if your financial statements show a war chest of government funding with no corresponding expenditure, donors may opt to fund a seemingly ‘less privileged’ organisation.
Under AASB 1004, there are currently two conflicting views to account for government grants, with some entities recognising grant income upfront and others when it is spent.
Exposure Draft ED 260 Income of Not-for-Profit Entities
On the 4th of May 2015 the AASB released Exposure Draft ED 260 designed to provide improved revenue recognition requirements for donations, grants, taxes and similar transactions.
Under ED260, NFPs will be allowed to defer income from grants and donations until the related services are delivered; provided that the conditions attached to the grant are sufficiently specific and the agreement is enforceable. Where there is discretion around how and when the grant is used, the income will continue to be recognised upfront i.e. on receipt of cash.
Consider the following examples.
- The government provides a Healthcare NFP with a $2million grant. The grant agreement states that the funding must be used to operate four immunisation clinics over the next 24 months. Grant monies are refundable to the extent that they are not spent in accordance with the terms of the grant.In accordance with ED 260, the NFP would account for the grant in accordance with AASB 15 Revenue from Contracts with Customers and would be able to spread the recognition of the $2million grant over the 24 month period, recognising revenue as the immunisation services are performed.
- The government provides a Healthcare NFP with a $2million grant. The grant agreement states that the grant must be used in accordance with the NFP’s overall objectives over the next 24 months.In this example, the agreement is not sufficiently specific to allow for a deferral of revenue as under the proposed requirements a time period alone is not sufficient. The NFP may need to recognise the income upfront.
The ED is open for comment until 14 August 2015 and the AASB is planning an extensive outreach programme during the exposure period. This will include education sessions and roundtables in Brisbane, Canberra, Melbourne and Sydney in June.
If your organisation is affected by these issues we would strongly encourage you to provide feedback to the AASB and contact your local William Buck advisor for more comprehensive advice.