Impact of changes in accounting standards on revenue recognition


Significant changes to accounting standards in 2018 and upcoming changes to lease accounting could result in a substantial adjustment from nonprofits, writes Christopher Edwards, director of corporate and audit services at HLB Mann Judd.

In what has been described by many as the most significant change in accounting standards since the adoption of International Financial Reporting Standards in 2005, the way revenue is recognized will change significantly for most entities, including organizations. nonprofit, next year.

CNAC 15 Revenue from contracts with customers (which is based on the international standard IFRS 15) was announced by the Australian Accounting Standards Board (AASB) in May 2015 and, after many years of waiting and several delays, is now in its transition period. AASB 15 replaces the two AASB 118 Income and CNAC 111 Construction contracts.

In addition, the CNAC published AASB 1058 Income of non-profit entities, which contains important changes in how NFPs will account for grants and other forms of income.

Calendar of new standards

Through an amending standard, AASB 2016-7, AASB 15 officially comes into effect for annual periods beginning January 1, 2019, one year after for profit entities, so that entities with a break-even date of December 31 will be the first to be impacted (i.e. the year ends on December 31, 2019).

Entities with a June 30 breakeven date will first be assigned for year-end June 30, 2020. However, since AASB 15 requires preparers to estimate the likely outcome at the start of a contract, the comparative information period will begin for entities whose fiscal year ends in December to January 1, 2018, and will begin on July 1, 2018 for those whose fiscal year ends in June. . A table with a more detailed schedule is shown below.

End of the year June 30th December 31st
Start date July 1, 2019 January 1, 2019
First full year affected June 30, 2020 December 31, 2019
Start of the first comparison July 1, 2018 January 1, 2018

Of course, entities can choose to early adopt, but must early adopt AASB 15 and AASB 1058 simultaneously.

The most significant changes

Essentially, the most significant changes are found within AASB 15, which requires financial information preparers to allocate revenue in accordance with fulfilling contract performance obligations.

This was divided into five stages:

Identify the contract with the client

Determine the performance obligations under the contract

Calculate the total price of the transaction

Allocate the transaction price to each of the performance bonds

Recognize income as each performance obligation has been met

Although each step requires careful consideration, step 1 is particularly important in determining whether a transaction is entered under AASB 15. It is important to note that a contract under this standard can be written, verbal, or implied.

The most important change, if you are concerned, stems from the requirement to record income upon satisfaction of performance conditions. Previously, those who applied AASB 111 Construction contracts recognize revenue in accordance with the estimated percentage of completion method. While this often worked well and “matched” as costs were incurred, there were concerns that the method applied did not exactly match the level of effort required by an entity to generate revenue.

The new standard will require an entity to assess what its performance obligations are under a specific contract, determine the value to be applied to each performance obligation, and then record revenue as it comes. as each is filled. This can lead to a significant increase in the volatility of revenue recognition.

If a transaction is not recorded in AASB 15 for a not-for-profit entity, it is likely recorded in AASB 1058, which will require entities to recognize revenue when it is received.

Consolidation and “unbundling”

AASB 15 requires an entity to combine similar contracts with the same customer and measure them as one for revenue recognition analysis. This “bundling” may result in the aggregation of grants and the overall assessment of performance conditions against total funds received.

Another impact of the new AASB 15 is the requirement to break down contracts into their individual components, or “unbundling”. This is due to the need to separately assess the conditions of performance of a contract. A good example of this, although with respect to a for-profit entity, would be with a mobile phone contract, where the sale of the handset and the provision of the service must now be analyzed and accounted for separately. Unbundling is essential when entities sell the bundled products separately, as well as part of a bundle at a reduced price.

Rental of peppercorns and other purchases at reduced prices

Another interesting change contained in AASB 1058 is the impact of the wording “enters into other transactions when the consideration to acquire an asset is significantly less than the fair value of the asset”. Therefore, for any transaction entered into in which the amount paid is approximately 85% or less of the asset’s fair value, you should consider the implications of this standard.

Most affected will be those with pepper leases, where the fair value of the asset provided must now be recognized, and any difference to the consideration paid is recognized in income.

Volunteer Services

A requirement exists under AASB 1058 to recognize the fair value of volunteer services as revenue in the period in which the service is rendered, but the requirement is limited to the government sector. Other entities may choose to adopt this requirement on a categorical basis, which we believe can occur when boards of directors of NPOs wish to emphasize the benefits provided to the entity.

In order to account for volunteer services, fair value must be measured reliably and the services must have been purchased if they were not otherwise given.

Conclusion

The AASB postponed the adoption of AASB 15 for not-for-profit entities for a further year, which both matches the effective date of AASB 1058 and allowed for some deferment. However, with these significant changes and the upcoming changes in the accounting for leases, it is possible that a substantial amount of adjustment will be required for NFPs.

It is important to note that the combination of AASB 15 and 1058 as they apply to NFPs may result in the recognition of grant income in your results earlier than initially expected, which may affect future conditions. grants or expenses.

We recommend that you chat with a HLB Mann Judd representative to find out whether your entity is likely to be affected and, if so, to what extent. We’re here to help your organization prepare for these changes.

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