How will IFRS 15 Revenue from Contracts with Customers impact the Local Government 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.

This article highlights what the key implications of adopting IFRS 15 are expected to be on the local government sector (please refer to the ‘Simplifying income recognition for Local Government’ with regard to the likely impacts of AASB 1058).

We don’t believe IFRS 15 will have a widespread impact on the local government sector. The key area relates to government grants received and whether they 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 local government sector must make.

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

Part A

Somewhere shire 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.

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

Somewhere shire 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

Somewhere shire 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.

Based on the facts and circumstances outlined above, on gaining control of the grant of $2.4 million, Somewhere shire 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 Somewhere shire to return the funds if Somewhere shire 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
  • Somewhere shire’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 Somewhere shire.

Accounting treatment

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

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.