How will IFRS 15 Revenue from Contracts with Customers impact the aged care sector?

The International Accounting Standards Board (IASB) published IFRS 15[1] Revenue from Contracts with Customers in May 2014 effective for reporting periods commencing on or after 1 January 2018 for for-profit entities and 1 January 2019 for not-for-profit entities in Australia.  During December 2016 the Australian Accounting Standards Board also released AASB 1058 Income of not-for-profit Entities effective for the same date as IFRS 15.  There has been considerable debate as to how these two new accounting standards interact with each other and also the likely impacts. 

Aged care businesses operate in both the for-profit (FP) and not-for-profit (NFP) sectors. We recommend those operating in the not-for-profit sector refer to the ‘Simplifying income recognition for not-for-profit entities’ May 2017 with regard to the likely impacts of AASB 1058.
This article highlights key issues entities in the aged care sector may face when adopting IFRS 15. These are:

  1. Government grants for NFP entities
  2. Government Subsidies (ACFI Funding)
  3. Client Fees (Daily Fees etc)
  4. Home care including NDIS payments
  5. Monthly Accommodation Bond Drawdowns
  6. When should variable consideration associated with a contract be recognised

1. Government grants for NFP entities
The interaction between AASB 15 and AASB 1058 now requires entities who receive government grants to decide whether these grants need to be accounted for under AASB 15 or AASB 1058.  To do this they must establish whether the government grants received contain sufficiently specific and enforceable obligations. 

AASB 1058 states:
‘IFRS/AASB 15 applies if the consideration is solely performance obligations under an enforceable contract and sufficiently specific to enable determination as to when the obligations are satisfied’
Since all other government grants will be accounted for under AASB 1058, using different accounting principles, whether a grant contains enforceable and sufficiently specific obligations will be a critical judgement those in the not-for-profit sector must make.
 

Example (based on example 6 in AASB 1058 illustrative examples):

Part A
Healthy Oldies runs an aged care facility in Melbourne.  Healthy Oldies is a NFP organisation and receives a government grant of $2.4 million on 31 May 2020, which is refundable if the money is not spent in the period 1 July 2020 to 30 June 2021.

The agreement does not specify the services that the grant must be used for.
Healthy Oldies analyses the terms of the grant agreement and notes:

  • the agreement is enforceable as the grantor can enforce its rights in the contract to require Healthy Oldies to return the cash of $2.4 million if Healthy Oldies does not spend the amount in the year ending 30 June 2021;
  • the required use of the funds to further the entity's objectives is not sufficiently specific to know when goods or services have been transferred and the obligation satisfied; and
  • the time restriction on use of the funds is not sufficiently specific of itself to create a performance obligation to transfer goods or services to the grantor or a third party so that it can be identified when the obligation is satisfied. When funds have been commingled with other funds, such as general purpose funds, used to fund administrative services as well as those related to the objectives of the entity, it is not possible to reliably determine what transfer of goods or services may have occurred using the specific funds. The time restriction is also not sufficiently specific of itself to create a constructive obligation.

Consequently, Healthy Oldies concludes that the transaction is not a contract with a customer as defined under AASB 15. Because the $2.4 million grant is an asset the entity acquired for no consideration to further its objectives, the grant is within the scope of AASB 1058.

Healthy Oldies recognises income of $2.4 million in accordance with paragraph 10 of AASB 1058 on 31 May 2020 on recognition of the financial asset in accordance with AASB 9.
 
Part B
The government is trying to improve health outcomes in aged care facilities across Australia.  Assume the same facts as part A above except the grant specifies that the funds must be spent providing 24,000 in house doctor visits for the year ending 30 June 2021 to residents of Healthy Oldies.

Based on the facts and circumstances outlined above, on gaining control of the grant of $2.4 million, Healthy Oldies concludes its agreement with the grantor is a contract with a customer as defined in AASB 15.
This is on the basis that:

  • the agreement is enforceable (refer to paragraphs F11–F19 of AASB 15), as the grantor can enforce its rights in the contract to require Healthy Oldies to return the funds if Healthy Oldies does not fulfil the specific performance obligations under the contract (ie by providing the required number of in house doctor visits); and
  • Healthy Oldies’ obligation to provide the specific services (the required number of in house doctor visits in 2020/21) in return for the consideration from the grantor is sufficiently specific to determine when the obligation is satisfied, as it will be clear at the end of the period whether the required number of doctor visits have been provided (refer to paragraph F20 of AASB 15). The services are also provided to third parties and not consumed by Healthy Oldies.

Accounting treatment
In accordance with paragraph 9, the related amount for the $2.4 million is accounted for by Healthy Oldies as a contract liability in accordance with AASB 15 on recognition of the financial asset in accordance with AASB 9.
 
2. Government Subsidies (ACFI Funding)
Whilst in residency, most of the cost of care is covered by subsidy from the Government (Department of Health) in conjunction with Medicare. The amount the government pays depends on the assessment of the needs of each resident with regular updates by the care staff done to maintain up-to-date details. A monthly payment statement & funding advance is remitted to the facility at the start of the month totalling the amount of subsidy received for each resident in the facility. The subsidies are paid in advance to the facility and any adjustments required to the care needs of the residents during the funded month will be adjusted in the following month which will result in an additional payment (if funding was short of actual) or a hold back of a portion of the next month’s advance (if the advance was greater than the actual).

This funding has enforceable and sufficiently specific obligations such that it falls under AASB 15 and not AASB 1058 for both FP and NFP operators.  We do not foresee any major complications in applying AASB 15 to this type of revenue.  Revenue will be recognised as the operator satisfies the obligations under the funding agreement (i.e. provides the care to the resident). 
 
3. Client Fees (Daily Fees etc)
A basic daily fee is used to contribute towards the day-to-day living costs of residents such as meals, cleaning, laundry, heating and cooling. Everyone entering the aged care home is asked to pay this fee. This rate increases on 20 March and 20 September each year in line with changes to the Age Pension, which is communicated to the resident in advance to avoid confusion. The basic daily fee is set by the Government at 85% of the fortnightly pension. The resident fees charged to residents is done so on a monthly basis generally at the start of the month in addition with any income means tested fees, daily accommodation payments etc.
Once again, these fees have enforceable and sufficiently specific obligations such that they fall under AASB 15 and not AASB 1058 for both FP and NFP operators.  Similar to item 2 above, we do not foresee any major complications in applying AASB 15 to this type of revenue.  Revenue will be recognised as the operator satisfies the obligations under the funding agreement (i.e. provides the care to the resident). 
 
4. Home care including NDIS payments
With the increase in home care and the introduction of the NDIS many operators have seen a shift in cash flows from block funding up front to payments in arrears once the service is provided.

NDIS and home care payments have enforceable and sufficiently specific obligations such that they also fall under AASB 15 and not AASB 1058 for both FP and NFP operators.  In order to recognise revenue, the operator must have satisfied the obligations under the agreement (i.e. provided the care to the resident).  So, regardless of whether the payments are received in advance or in arrears of the services being provided they cannot be recognised as revenue until the service is provided. 
 
5. Monthly Accommodation Bond Drawdowns
For residents who first entered care before 1 July 2014 a retention amount is deducted from each residents' bond balance on a monthly basis for a maximum of 5 years (the 5 years is cumulative so it is reduced by each month for which retention amounts are deducted). The amount of monthly deduction is capped pending on the amount of the bond.

Residents entering aged care from 1 July 2014 onwards have the choice of paying a Refundable Accommodation Deposit (RAD) or a Daily Accommodation Payment (DAP). This is an interest-free loan paid to the care facility to cover the cost of the price of the room. The amount determined for payment is means tested and is only refundable when: the person being cared for dies or ceases to be provided with care in the facility.
DAPs will be accounted for under AASB 15 as per section 3 above.  A RAD is recorded as a current liability at face value with no revenue implications under AASB 15.

Retention amounts for those entering care prior to 1 July 2014 are recorded as revenue under AASB 15 when the operator satisfies the obligations under that contract.  Whilst there is some debate whether that occurs over the 5-year period or the expected length of the resident stay we believe operators will recognise revenue in-line with the expected length of the resident as this amount compensates the operator for the cost of providing the room to the resident over this time.
 
6. When should variable consideration associated with a contract be recognised
Where a contract includes a variable element such as outlined in section 1 above then AASB 15 requires one of the following methods to be used to estimate this revenue (depending on which method better predicts the outcome):

  • a probability weighted estimate; or
  • the most likely amount.
Importantly though, AASB 15 restricts how much of this type of revenue is actually recognised.  Variable revenue (such as bonus payments) can only be recognised (AASB15.56):
‘to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved’
In other words, the operator must be very confident they can predict the expected revenue with accuracy before it is permitted to be recognised. 
 
The information contained in this article is for general guidance only and does not represent, nor intend to be, advice.  We recommend that prior to taking any action or making any decision, that you consult with an advisor to ensure that individual circumstances are taken into account.