Bursars - what accounting changes are on the horizon that may affect your school?

We are in the middle of a period of significant change in accounting standards.  This article highlights 3 specific issues which will impact upon schools and bursars should begin preparing for.

1. AASB 1058 Income of Not-for-Profit Entities
2. AASB 15 Revenue from Contracts with Customers
3. AASB 16 Leases

1. AASB 1058 Income of Not-for-Profit Entities

Issued in December 2016 AASB 1058 proposes to assist not-for-profit entities to apply the principles of AASB 15 and replace the income recognition requirements in AASB 1004 (thus changing the way in which NFPs account for contributions).  AASB 1058 is effective for reporting periods beginning on or after 1 January 2019 (with early application permitted).

Key changes

We recommend Bursars consider how the following areas are likely to impact them:

  • Assets received below fair value;

  • Transfers received to acquire or construct non-financial assets;

  • Grants received;

  • Leases entered into at below market rates; and

  • Volunteer services

Likely impact on schools

i. Assets received below fair value

Much of the existing focus in accounting standards relates to assets received by the entity at zero or nominal value.  AASB 1058 will require assets[1] which are acquired (including peppercorn leases) at significantly below that asset’s fair value to be measured initially at fair value.  The accounting treatment of the difference between the transaction price and the fair value of the asset will depend on the nature of the transaction.  It may be a contribution by owners, a liability or income (NFPs will need to refer AASB 1058).

ii. Transfers received to acquire or construct non-financial assets

NFP’s often receive a grant to either buy or construct a non-financial asset (such as a building) for their own future use.  Where this grant requires the NFP to refund any unspent funds then it is recorded as a liability until spent.

iii. Grants received

The new standard clarifies the treatment of grants and other contributions received by an entity (other than for non-financial assets discussed above) on the basis of whether those grants have specific and enforceable obligations attached. 

If the grant only specifies the time period for the monies to be spent, then the income would be recognised when the NFP controlled it (usually upon receipt of the cash).
 

iv. Leases entered into at below market rates

Under existing standards leases entered into at below market rates or peppercorn leases are often capitalised at the present value of the payments required under the lease.  Where peppercorn leases are say $1 per annum this results in an insignificant impact to the financial statements.  Under AASB 1058 the right-of-use asset will be measured at the fair value of the asset.  The lease liability will be measured in accordance with AASB 117 or AASB 16 (likely to be lower than the right-of-use asset given the below market lease payments). The difference is likely to be income in most cases.

The fair value of the remaining period on all leases entered into at below market rates must be measured and included as at right of use asset on transition to AASB 1058.

v. Volunteer services

NFPs other than local governments, government departments, general government sectors and whole of governments may elect to recognise volunteer services if their fair value can be measured reliably.

All NFPs are encouraged to disclose information about their reliance on volunteer services whether they are recognised or unrecognised.

What you should do now

We recommend Bursars consider the likely impact and accounting policy changes that will be required under the new standards.  At the very least, new accounting policies are likely to be required for each of the items listed above.

2. AASB 15 Revenue from Contracts with Customers

AASB 15 is effective for reporting periods beginning on or after 1 January 2018 (with early application permitted) for ‘For-profit’ entities.  The effective date for AASB 15 has been deferred by one year for ‘Not-for-profit’ entities to 1 January 2019.

Key changes

AASB 15 replaces all existing revenue requirements within the accounting framework and introduces a new 5 step revenue recognition model:

  • Identify the contract

  • Identify the performance obligations

  • Determine the transaction price

  • Allocate the transaction price to the performance obligations

  • Recognise revenue as each performance obligation is satisfied

Likely impact on schools

Many schools receive non-refundable enrolment fees for prospective future students.  These students may not actually commence at the school until 5-10 years down the track.  The majority of schools currently record this as revenue upon receipt arguing no further obligations are present to fulfil and the fee is non-refundable.
AASB 15.25 states that:

‘Performance obligations do not include activities that an entity must undertake to fulfil a contract unless those activities transfer a good or service to a customer. For example, a services provider may need to perform various administrative tasks to set up a contract. The performance of those tasks does not transfer service to the customer as the tasks are performed.’

Where it is determined that the fee does not relate to the transfer of a promised good or service, the fee may be an advance payment for future goods or services and, therefore, would be recognised as revenue when those future goods or services are provided (possibly over the expected period of the students’ enrolment).

What you should do now

We recommend Bursars consider individual terms and obligations associated with enrolment fee agreements and seek advice on how AASB 15 may change the revenue recognition of these fees.

3. AASB 16 Leases

The International Accounting Standards Board (IASB) issued IFRS 16 Leases on 13 January 2016[2].  Revising the lease accounting requirements was first added to the IASB’s agenda in 2006, since then a number of exposure drafts have been issued and hotly debated.  The IASB estimates that listed companies using International Financial Reporting Standards (IFRSs) or US Generally Accepted Accounting Principles (USGAAP) currently have approximately US$3.3 trillion of lease commitments, of which 85% are operating leases and therefore have no balance sheet impact.

Key changes

Most of the significant changes introduced by AASB 16 impact lessees.  Lessees will now bring to account a right-to-use asset and lease liability onto their balance sheets for all leases[3].  Effectively this means the vast majority of operating leases as defined by the current AASB 117 Leases which currently do not impact the balance sheet will be required to be capitalised on the balance sheet once AASB 16 is adopted. This will increase both assets and liabilities on the entities balance sheet.

Day 1
Dr Right-to-use asset
                Cr lease liability
The impact of IFRS 16 on lessors is expected to be minimal.

Likely impact on schools

The impact on individual schools will depend heavily on what leases they have entered into and what funding and other requirements they have.  Below are some of the most likely impacts:

  • Adoption of AASB 16 will result in an increase of both assets and liabilities on a school’s Balance Sheet.  Bursars should review the commitment note in the annual financial report to establish the likely extent of this change.

  • Ratio’s like debt to equity will be impacted upon as debt increases through the recognition of lease liabilities.

  • AASB 117 resulted in operating lease expenses in the Profit or Loss.  Adoption of AASB 16 will result in a depreciation and interest expense.  This is likely to have 2 impacts:

    • Covenants such as times interest earned will be impacted upon.

    • Where a school reports EBITDA (earnings before interest, tax, depreciation and amortisation) this number is likely to increase.

  • AASB 16 results in higher expenses at the start of the lease and lower expenses towards the end of the lease (compared to a constant expense under ASB 117 for operating leases).  Therefore, depending on whether the majority of leases an individual school has are at the start or end of the of the lease term the Profit or Loss of the school may be lower/higher as a result of adopting AASB 16.

What you should do now

We recommend Bursars commence the following activities to prepare themselves, and the school board, for the adoption of AASB 16:

1. Identify all operating leases your school has entered into.

2. Model the likely impacts of adopting AASB 16 by establishing the present value of the commitments identified in 1. above

3. Consider all banking or other funding covenants.  Is there a clause in the covenants dealing with changes in accounting standards?

4. Begin discussions with any funding bodies identified in 3. above which might be impacted upon by adopting AASB 16.

5. Educate school boards about the possible impact of adopting AASB 16 on both the Profit or Loss and Balance Sheet of the school.

 

 


[1] This doesn’t apply to assets acquired in a distress sale or in normal trade discount situations.  That is, it only applies to asset acquisitions where the discount is principally to enable an NFP entity to further its objectives.

[2] AASB 16 Leases was issued in February 2016 applicable for reporting periods beginning on or after 1 January 2019.

[3] AASB 16 contains an exemption from these requirements for short-term or low value assets.  Typically these are leases of less than 12 months or leases of items such as laptops or phones.