Financial reporting considerations for 30 June

At each reporting period, directors and management committees of not-for-profits need to be aware of changes that might affect their financial statements.

While changes for 30 June this year are expected to be minimal, the tornado of change in the next wave of standards approaches.  In its swirl are revenue, leases and financial instruments.

New standards effective at 30 June

The list of accounting standards effective for the first time at 30 June is long, but we do not expect many of them to have an impact on private-sector NFPs.

An overview is provided below.

Accounting standards Our assessment
AASB 14 Regulatory Deferral Accounts / AASB 2014-1 Amendments to Australian Accounting Standards Applicable to entities with rate regulated activities – no impact expected for NFPs.
AASB 1057 Application of Australian Accounting Standards / AASB 2015-9 Amendments to Australian Accounting Standards – Scope and Application paragraphs Standard includes all the application paragraphs for AASB standard – no changes to recognition, measurement or disclosure requirements.
AASB 2014 – 3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations [AASB 1 and AASB 11] Clarifies that if an entity acquires a joint operation that is a business then AASB 3 Business Combinations should be used in determining the appropriate accounting – little, if any impact expected for NFP entities.
AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation Clarifies that revenue-based depreciation methods are not appropriate – no impact expected for NFPs.
AASB 2014-6 Amendments to AASB 116 and AASB 141 for bearer plants Moves bearer plants into the scope of AASB 116 Property, Plant and Equipment from AASB 141 Agriculture.  Allows these assets to be held at cost rather than the fair value – impact for any NFP entities with an agricultural component to their operations.
AASB 2014-9 Equity method in separate financial statements (Amendments to AASB 127) Allows equity accounting to be used in separate (parent) entity financial statements for associates and joint ventures as an alternative to cost or fair value – accounting policy choice available to NFP entities with equity accounted investments that present separate financial statements.
AASB 2015 – 1 Annual improvements (2012 – 2014 cycle) Minor clarifications to several accounting standards – no impact for NFPs.
AASB 2015-2 Disclosure Initiative – Amendment to AASB 101 Minor presentation amendments to financial statements regarding restructuring of the notes – may be used by NFP to de-clutter / restructure financial statements – no changes to recognition, measurement or disclosure requirements.
AASB 2015-5 Investment Entities: Applying the Consolidation Exception Clarifications to the use of the investment-entity concept – no change expected for NFPs.
AASB 2015 – 6 Amendments to Australian Accounting Standards – Extending Related Party Disclosures to Not-for-Profit Public Sector Entities Requires public-sector NFPs to include related-party disclosures in the financial statements – significant disclosure impact for public-sector NFPs.
AASB 2015 -10 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 (Sale or contribution of assets between an investor and its associate or joint venture) Amends the effective date for the amendments to annual-reporting periods beginning on or after 1 January 2018 – no impact for NFPs.
AASB 1056 Superannuation Entities  Provides the accounting requirements for APRA-regulated superannuation entities – no impact for NFPs.

Standards issued not yet effective

The list of standards effective in the future is not quite so long but the impact will be substantial.

Here we highlight the new standards expected to have most effect on NFPs.

Revenue for NFPs

Two new revenue standards for NFPs become effective for annual reporting periods beginning on or after 1 January 2019 (that is, 30 June 2020 year ends). They are AASB 15 Revenue from Customer Contracts and AASB 1058 Income of Not-For-Profits Entities.

While some time off, implementation needs a significant amount of work, including potential amendments to grant agreements.

NFPs should not delay in looking at the impact.

AASB 15 Revenue from Customer Contracts applies to goods and services under a contract with a customer where there are sufficiently specific performance obligations and enforceable rights – the AASB has issued appendix C to AASB 15 (included in AASB 2016 – 8) that will assist NFPs to interpret these requirements.

AASB 15 requires deferral of revenue concerning the transfer of control of promises to customers but grant agreements and other contracts will need to be reviewed to ensure that they meet the sufficiently specific and enforceable criteria as the deferral of grant income is not automatic.

Any peppercorn leases will need to be reviewed and considered as we expect the fair value of the right to use assets granted under lease agreements will be recorded on statements of financial positions with a corresponding entry to revenue/retained earnings (on transition only).  As the lease term progresses, this right to use assets will be depreciated, which may result in some NFPs making a loss due to depreciation charges.

We encourage NFPs to review AASB 15 and begin determining the impact on relevant revenue streams.

AASB 1058 Income of Not-For-Profits Entities will require revenue that falls outside the scope of AASB 15 to be recognised when control is received.  This is most likely to be on receipt of funds as well as dealing with areas such as peppercorn leases and volunteer services.

Leases

AASB 16 Leases is effective at the same time as the revenue standards – annual reporting periods beginning on or after 1 January 2019 (that is, 30 June 2020).

This standard requires most leases held by an NFP to be brought onto the balance sheet (statement of financial position).  The distinction between operating and finance leases will be removed.  If the agreement meets the definition of a lease then it is within the scope of the standard.

There are limited exceptions for short-term leases and low-value assets, however these will not apply to leases of premises, which we expect to be most of the NFP leases.

Income statements will no longer show rental income. Instead, we will see depreciation expense (relating to the right-of-use asset) and interest expense (relating to the lease liability).

The recording of a right-of-use asset (non-current) and lease liability (apportioned between current and non-current) may cause issues for bank covenants and other balance-sheet ratios.  NFPs need to ensure as soon as possible that they have considered these business impacts.

Financial Instruments

AASB 9 Financial Instruments is applicable for annual reporting periods beginning on or after 1 January next year (that is 30 June 2019 year-ends) and contains a few significant changes.

For NFP entities, the impact of AASB 9 should be low.  We anticipate that the biggest change is likely to be the treatment of available-for-sale investments (shares in listed entities held on a long-term basis as part of an investment strategy).  These investments are no longer required to be tested for impairment and their movements in fair value will remain in other comprehensive income as well as any gains or losses on sale.

The change should reduce the time and effort spent on analysing whether an instrument has been subject to a significant or prolonged decline in value.

NFPs will need to consider this change and make the decision about whether to designate the instruments through other comprehensive income. If the designation is not made, instruments will be measured through fair value, which will result in unrealised gains and losses being taken to the result for the year.

NFP entities that might have more complex financial instruments should commence a full review of AASB 9 to assess their impact.

A tip and a reminder

NFP entities need an implementation plan:

  • Governance and management should ensure that progress is monitored against plans and action taken where milestones are not reached
  • Identify systems, processes, and any associated internal control changes needed to produce information required under the new standards, including related disclosures, and
  • Determine the effect on compliance with financial-condition requirements, including thresholds for regulatory reporting.

NFPs have small financial teams and need to consider the transitional arrangements for these standards to obtain the most favourable outcomes.  Work should start soon.

The standards are complex, and NFPs will need to consider whether they have the resources to implement them.  If they don’t, how will they comply?

Remember that each of these standards requires comparatives (and transitional provision apply) and that a third statement of financial position is required for the start of the comparative period.  NFPs, in fact, might have less time than they think.
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