revenue and income standards for not-for-profit entities ......nov 20, 2018 · not-for-profit...

Not-for-profit entities Implementing the new revenue and income standards

20 November 2018

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Document Classification: KPMG Public

© 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Your facilitators are…

Ben Seumahu

Julie Locke Joe Rinarelli

Kim Heng

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Examples of revenue and income streams —Sales & services—Fees—Hire income—Volunteer services—Peppercorn (below-market) leases—Grants & subsidies—Donations & fundraising —Endowments—Bequests—Capital grants—Sales outside ordinary activities—Certain appropriations – depending on when gain control

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Revenue and income: guidance we have

AASB 15 Revenue from Contracts with Customers

AASB 15 Appendix F: Australian implementation guidance for not-for-profit entities

AASB 1058 Income of Not-for-profit Entities

AASB 15 Appendix G: Australian implementation guidance for not-for-profit public sector licensors

Effective date 1 January 2019

AASB 16 Leases interaction: Potential deferral of fair value

requirement for below-market leases

Agenda When to apply which standard? Implementation challenges, including

interaction with AASB 16 and 9 Transition and disclosures Wrap up

When to apply which standard?

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What to apply: AASB 15 or AASB 1058?Is the service provided to you a volunteer service?

AASB 1058(Income)

Yes

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Do you acquire an asset for which the consideration you provide is significantly less than FV and the asset enables the

entity to further its objectives?

AASB 1058(Income)

Yes

Yes

No

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Does the agreement (contract) contain enforceable rights and obligations?

Does the contract create sufficiently specific performance obligations of you?

AASB 1058(Income)

Yes

Yes

Yes

No

No

No

No

AASB 15Step 1

AASB 15Step 2

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Does the agreement (contract) contain enforceable rights and obligations?

Does the contract create sufficiently specific performance obligations of you?

Is there a material donation element to the contract?

AASB 15 – Revenue is recognised as performance obligations are met

AASB 1058(Income)

Yes

Yes

Yes

Yes

No

No

No

YesNo

Allocate consideration:Transaction: AASB 15Donation: AASB 1058

No

AASB 15Step 1

AASB 15Step 2

AASB 15Step 4

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AASB 1058: Overview (excluding volunteer services)

NoYes

Transaction where consideration to acquire asset is significantly less than fair value principally to enable a NFP entity to further its objectives

AASB 1058 applies Recognise and measure asset in accordance with other AASBs

Recognise related amounts in accordance with other AASBs, e.g.: • contributions by owners (AASB 1004)• revenue/a contract liability under a contract with a customer (AASB 15) • liability to pay for a lease (AASB 16)• a financial instrument (AASB 9) • a provision (AASB 137)

Transfer of financial asset to enable the entity to acquire a non-financial asset controlled by the entity?

Recognise income as entity satisfies obligations under the transfer

Recognise excess of initial carrying amount of asset over related

amounts as income

Reciprocal vs Non-reciprocalX

Implementation challenges

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Applying the new revenue standard to NFPs

Identify the contract(s) with a customer

Identify the performance obligations in the contract

Determine the transaction price

Allocate the transaction price to performance obligations in the contract

Recognise revenue when (or as) the entity satisfies a performance obligation

NFP Implementation Guidance on AASB 15

explains how NFP entities shall apply five

step model and provides illustrative

examples

1

2

3

4

5

Contract enforceability

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Customer:• Customer is the contracting party, but does not have to be recipient of goods or services

‒ E.g. Government can still be customer where directs goods or services to third party beneficiaries

AASB 15 : NFP guidance 1

Identify the contract(s) with a customer1

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Customer:• Customer is the contracting party, but does not have to be recipient of goods or services

‒ E.g. Government can still be customer where directs goods or services to third party beneficiaries

Contract and enforceability:• Contract need not have commercial substance – only economic substance• Arrangement is enforceable if customer has capacity to enforce through legal or “equivalent

means”‒ E.g. MoU, heads of Agreement, Administrative arrangements, statutory provisions

AASB 15 : NFP guidance 1

Identify the contract(s) with a customer1

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Example: Memorandum of understanding (“MOU”) #1

• Clean Water enters into a MOU with a government to manage its clean-water projects

• MOU outlines various activities for which Clean Water will be responsible for

• The government will partially fund the costs of the project

• MOU specifies that it is not legally binding, does not impose a refund obligation on Clean Water, nor refer to other enforceability mechanisms

Clean Water Forever “Clean Water” is an NGO that specialises in assisting governments with implementing water purification projects in communities

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Example: Memorandum of understanding (“MOU”) #1Is there an enforceable contract for the purposes of AASB 15?

Analysis:

• Is there a customer?

• Is there economic substance?

• Is the MOU enforceable?

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Analysis:




Yes, although beneficiaries are community, customer is government

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Analysis:




Yes, partial funding of projects still considered to have “economic substance” for Clean Water


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Analysis:





Absent other information, no intention or mechanism to be considered enforceable


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Example: Memorandum of understanding (“MOU”) #2

• Clean Water enters into a MOU with a government to manage its clean-water projects

• MOU outlines various activities for which Clean Water will be responsible for

• The government will partially fund the costs of the project

• MOU specifies that it is not legally binding, does not impose a refund obligation on Clean Water, nor refer to other enforceability mechanism

Clean Water Forever “Clean Water” is an NGO that specialises in assisting governments with implementing water purification projects in communities

The parties indicated in their discussions their intention to rely upon the MOU. Clean Water commenced providing services under the MOU and has reported for 2 months.

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Analysis:






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Analysis:





Yes, intention of parties is to rely on MOU, and actions by Clean Water support it


Sufficiently specific

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Identify performance obligations

Capable of being distinct

Can the customer benefit from promise on its own or

together with other resources that are readily available?

Distinct within the context of the contract

Is it separately identifiable from other promises in the

contract?

&A promise to transfer to the customer a distinct good or service

2

The unit of account for revenue recognition

Entity assesses the goods or services promised in contract to identify distinct performance obligations

Performance Obligation

Change from current practice

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AASB 15: NFP guidance

NFP has a different specificity of performance obligations requirementPerformance obligation needs to be sufficiently specific to determine when the obligation under the arrangement has been satisfied

Identify the performance obligations in the contract2

Activities need to transfer good or service to the customer

Unspecified goods or services over a particular period not in itself sufficiently specific

Acquittal process could: demonstrate

progress of transferring goods and services

provide evidence of sufficiently specific

2

Judgements regarding goods or services:- Nature or type - Cost or value- Quantity- Period over which transferred

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Example: Intellectual property #1

A research organisation is given $5.2m cash to conduct research. Terms of agreement are:• Provide research in a specified area (food production and climate)• Return all unspent, uncommitted funding on completion of the research• All research remains the property of the research organisation, there is no transfer

to the funding provider• Is an enforceable agreement

Q: Are the performance obligations in the contract sufficiently specific?

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Example: Intellectual property #1


Analysis

• Transfer of goods or services?

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Example: Intellectual property #2A research organisation is given $5.2m cash to conduct research. Terms of agreement are:• Provide research in a specified area (food production and climate)• Return all unspent, uncommitted funding on completion of the research • All intellectual property is provided to the government and research organisation is

required to publish their findings in a scientific journal within five years• Is an enforceable agreement


Analysis• Transfer of goods or services?

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Example: Intellectual property #2Q: Are the performance obligations in the contract sufficiently specific?

Analysis• the nature or type of goods or services• the cost or value of goods or services• the quantity of goods or services• the period over which goods or services must be transferred

Contract likely to be sufficiently specific

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Example: Childcare #1A childcare organisation has been given $10m provide childcare services. Terms of agreement are:• Provide childcare services to low income families• Return all unspent funds after two years• Is an enforceable agreement


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Example: Childcare #1


Analysis•the nature or type of goods or services

•the cost or value of goods or services

•the quantity of goods or services

•the period over which goods or services must be transferred

Services sufficiently specified?

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Example: Childcare #2

• the nature or type of goods or services

• the cost or value of goods or services

• the quantity of goods or services

• the period over which goods or services must be transferred

Services sufficiently specified?

A childcare organisation has been given $10m provide childcare services. Terms of agreement are:• Provide childcare services consisting of 250,000 hours of care in 25 childcare

centres to children aged between 1 and 4 from low income families (as defined)• Return all unspent funds after two years


Analysis

Revenue over-time or at a point-in-time

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Step 5: Recognising revenue over-time

A performance obligation is satisfied over-time if:

Customer simultaneously receives and consumes the benefits as the entity performs

Routine or recurring services, e.g. counselling

services

1 3

5

Change from standard and

current practice

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Customer controls the asset as the entity creates or enhances it


services

E.g. Development of intellectual property

for customer

1 2

OR

5


current practice

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Customer controls the asset as the entity creates or enhances it

Entity’s performance does not create an asset for which the entity has an alternate use and there is a right to payment for performance to date


services

E.g. Development of intellectual property

for customer

E.g. Specific report for customer

1 2 3

OR OR

5


current practice

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Example: Research grant#1

Research Institute receives grant from Kids Health Foundation of $5m: Using technology to improve stroke prevention following cardiac surgery for patients under the age of 12 years

• Grant for 3 years• Refund obligation – unspent or not spent in accordance with agreement • Publish research data on website as obtained (any researcher can use data)• IP from research neither transferred nor licensed to Kids Health Foundation • If terminated by Kids Health Foundation – Right to payment for research completed

to date

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Q: When would Research Institute recognise the revenue for their performance obligations?

Analysis:

• Enforceable?

• Specific performance obligations?

Funds unspent or not spent in accordance with agreement returned

Conduct specific research activities and publish data on a public website

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• Over time as donor simultaneously receives and consumes benefits of research • Donor simultaneously receives and consumes benefits as research data is collected

and available to any replacement researcher

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Research Institute receives grant from Kids Health Foundation of $5m: Using technology to improve stroke prevention following cardiac surgery for patients under the age of 12 years

• Grant for 3 years• Refund obligation – unspent or not spent in accordance with agreement • IP from research neither transferred nor licensed to Kids Health Foundation • Final report on findings received only at end of 3 years• If terminated by Kids Health Foundation – Right to payment for research completed

to date

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Watch this space

Potentially point in time due to no right to performance to date and not publishing of data until final report (need to consider all circumstances)

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Performance obligations and up-front fees 2

Does fee relate to specific goods or

services transferred to customers?

Recognise allocated consideration as revenue on transfer of promised good or

services

Account for as promised good or

services

Yes

45







services

Recognise as revenue when future goods or services are provided


services

Account for as advanced payment for future goods or services

Yes No

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services

Recognise as revenue when future goods or services are provided


services

Account for as advanced payment for future goods or services

Yes No

Over what period?

Consider whether material

right exists

Change from current practice

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Example: Non-refundable up-front fees

Private School Assoc requires a prospective student to pay an enrolment fee in order to accept a position offered at the school. The enrolment fee is paid a year in advance to the student commencing at the school. The enrolment fee is a non-refundable fee of $8,000.

In addition to the enrolment fee, a tuition fee of $10,000 is charged relating to the education being provided during the respective term. The enrolment fee cannot be offset against future tuition fees.

Private School Assoc and the student can cancel the contract with 1 term’s (3 months) notice making this a term-to-term contract.

Q: How should Private School Assoc account for the up-front enrolment fee?

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Example: Non-refundable up-front feesDoes fee relate to specific goods or services transferred to customer?

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Considerations Met?a) Has a good or service been transferred to

customer; and

b) Is customer able to realise benefit from good or service received?

Does entity separately price and sell initial right or activities covered by the up-front fee?

Does fee relate to specific goods or services transferred to customer?

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Considerations Met?a) Has a good or service been transferred to

customer; and

b) Is customer able to realise benefit from good or service received?

Does entity separately price and sell initial right or activities covered by the up-front fee?

Account for up-front fee as advanced payment for future services

Q: But recognised over what period?

Does fee relate to specific goods or services transferred to customer?

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Does non-refundable up-front fee provide customer with a material right?

Recognise with first term tuition fee. First term’s revenue is $18,000.

Recognise over period Private School Assoc expects students to benefit from not

having to pay $8,000 again (potentially remainder of schooling years)

No Yes

Qualitative Factors

• Quality of tuition provided• Tuition and pricing provided by

competitors• Inconvenience of /ability of

customer to change schools

Quantitative Factors

• Compare up-front fee with total transaction price

$18,000 in term one, discount of $8,000 for future terms (44%

discount)

Peppercorn leases: Revenue and income impacts

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Peppercorn leases: Revenue and income impactsAt inception if the lease is at significantly below market terms and conditions to enable to the entity to further its objectives:

54




Right-of-use asset:

Measured at fair value

At inception if the lease is at significantly below market terms and conditions to enable to the entity to further its objectives:

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=Right-of-use asset:


Lease liability calculated as per AASB 16

Amounts recognised in accordance with other

standards

+


Revenue or income

+

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standards

+


Revenue or income

+What is current practice?

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standards

+


Revenue or income

+

What if there are nil lease payments?

Short-term leases

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standards

+


Revenue or income

+

What if there are nil lease payments?

Short-term leases

Potential deferral of FV requirement

Financial instruments: Revenue and income impacts

60



AASB 9: NFP guidanceFinancial instruments, bequests and endowmentsIs AASB 9 applicable?

Consideration

If yes then the grant received is a financial liability and not income

Is the grant received as cash or another

financial instrument?

Does the grant require the cash received to be paid out ?

Does it require the payment of principal and interest to another

party without any goods or services being provided?

&

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Example: Regional Development Foundation

Regional Development Foundation (“Foundation”) has won a contract to administer a $10m regional development fund. Terms of agreement are:• Receipt of $10m upfront• Distribute $10 million (in cash) to projects that meet specific requirements in regional areas• The Foundation is required to identify projects, oversee the funding received and paid to

projects, manage the day-to-day delivery of the project and provide quarterly financial information to the government of funds spent

• If the agreement is breached Foundation is required to return any unspent monies to the government

• The Foundation is able to retain an amount up to 3% of the fund to cover its costs in administering the fund

How should the Foundation account for the contract?

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Example: Regional Development FoundationHow should the Foundation account for the contract?

Is the grant received as cash or another

financial instrument?

Does the grant require the cash received to be paid out ?

Does it require the payment of principal and interest to another

party without any goods or services being provided?

Cash received is a financial liability under AASB 9, consideration for administration services is revenue under AASB 15

Transition and disclosures

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ApproachComparative

periodFirst year of

adoption

Date of equityAdjustment June YEs

AASB 111, 118, 1004

AASB 15,1058

AASB 15, 1058

Retrospective – no practical expedients

Partial retrospective –with practical expedients

Cumulative effect AASB 111, 118, 1004

Cumulative effect approach: entity also needs to disclose revenue amounts that would have been presented under AASB 111, 118 and 1004

1 July 2018

1 July 2018

1 July 2019

Mixedrequirements

AASB 15,1058

AASB 15, 1058

Transition options

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ApproachComparative

periodFirst year of

adoption

Date of equityAdjustment June YEs

AASB 111, 118, 1004

AASB 15,1058

AASB 15, 1058

Retrospective – no practical expedients

Partial retrospective –with practical expedients

Cumulative effect AASB 111, 118, 1004

Cumulative effect approach: entity also needs to disclose revenue amounts that would have been presented under AASB 111, 118 and 1004

1 July 2018

1 July 2018

1 July 2019

Mixedrequirements

AASB 15,1058

AASB 15, 1058

Transition options Practical expedient:Assets acquired for

significantly < fair value before date of initial application not required to be remeasured to

fair value

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Disclosures

Business as usual (ongoing)Transition

Bridging the gapAASB 108 – change in

accounting policy

Standards issued not yet effective –not required for

Tier 2

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Disclosure requirements: AASB 15

Performance obligationsContract balances

Disaggregation of revenue

Significant judgments

Costs to obtain or fulfil a contract

Disclose quantitative and qualitative information to enable users to understand the nature, amount,

timing and uncertainty of revenue and cash flows arising from contracts with customers

Disclosure objective

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Disclosure requirements: AASB 1058

Transfers to enable acquisition or

construction of recognisable non-

financial asset

Non-contractual income arising from

statutory requirements

Disaggregation of income

Significant judgments

Restrictions on use

Disclose quantitative and qualitative information to enable users to understand the effects of volunteer services and other

transactions where an entity acquires an asset for consideration that is significantly less than fair value principally to enable the

entity to further its objectives

Disclosure objective

Wrap up

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Take-aways

Use decision tree to help determine when to apply which standard.1

Review contracts to fully understand facts and circumstances to determine which standard will apply.

Determine whether performance obligations are sufficiently specific and whether they are met over-time or point-in-time.Work through transition options to understand which option to elect and what disclosures will be needed.

2

3

4


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revenue and income standards for not-for-profit entities ......nov 20, 2018 · not-for-profit...

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