How will IFRS 15 Revenue from Contracts with Customers impact the not-for-profit 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 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.

Whilst the type of businesses run by the not-for-profit sector are wide and varied this article highlights two key issues not-for-profit entities may face when adopting IFRS 15 (please refer to the ‘Simplifying income recognition for not-for-profit entities’ May 2017 with regard to the likely impacts of AASB 1058).

These are:

  1. Government grants
  2. Identifying performance obligations that are contained within a contract

1. Government grants

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

Beyond depression 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.

Beyond depression 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 Beyond depression to return the cash of $2.4 million if Beyond depression 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, Beyond depression 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 charity acquired for no consideration to further its objectives, the grant is within the scope of AASB 1058.

Beyond depression 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

A town in regional Australia just experienced a catastrophic fire with a significant number of homes in the district burnt down. Assume the same facts as part A above except the grant specifies that the funds must be spent providing crisis counselling services for a given number of hours per week for the entire year ending 30 June 2021 to residents in that town.

Based on the facts and circumstances outlined above, on gaining control of the grant of $2.4 million, Beyond depression 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 Beyond depression to return the funds if Beyond depression does not fulfil the specific performance obligations under the contract (ie by providing the counselling services for the specified number of hours per week for the entire year); and
  • Beyond depression’s obligation to provide the specific services (identified counselling services for a specific number of hours per week in 2020/21 to the victims of the fire) 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 each week whether the specified hours of counselling have been provided (refer to paragraph F20 of AASB 15). The services are also provided to third parties and not consumed by Beyond depression.

Accounting treatment

In accordance with paragraph 9, the related amount for the $2.4 million is accounted for by Beyond depression as a contract liability in accordance with AASB 15 on recognition of the financial asset in accordance with AASB 9.
 

2. Identifying performance obligations that are contained within a contract

Many sporting organisations charge a joining fee for new members. Most of these fees result in no transfer of any good or service to the member (setting the member up on a database is an administrative task only) but rather give a right to the member to renew each year without paying the up-front non-refundable fee again.

This creates what is known as a ‘material right’ for the member in that they can renew each year at a rate well below the overall first year cost (i.e. adding the joining fee and cost of the 1st years’ membership is well above the renewal fees for subsequent years). In these situations, entities will need to estimate the average length of a customer relationship and recognise the revenue associated with the fee over that period. See the example below.

Example:

Windy Dunes is a golf course and charges $10,000 (non-refundable) as an entrance fee to new members. Under existing standards (AASB 118 Revenue), since there is also an annual subscription, Windy Dunes recognises the entrance fee as revenue when received.

Under AASB 15, revenue is only recognised when a distinct good or service is provided. Since it is unlikely the new member receives a benefit from just paying the entrance fee (i.e. the benefit of playing golf arises from paying the annual subscription) the entrance fee is not considered a distinct good or service but rather a material right, so revenue is not recognised when the fee is received.

The entrance fee is allocated over the average period of membership. If the average membership was for 5 years then the entity would record $2,000 per annum in revenue in relation to the entrance fee.

Other fees, such as enrolment fees for schools, may not transfer a material right to the customer. Fees that don’t provide a material right are generally recognised over the first period of the contract (i.e. before the first renewal option).

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.


[1] AASB 15 Revenue from Contracts with Customers in Australia.