Simplifying income recognition for NFP Aged Care operators
On the 28th September 2016 the AASB issued new income recognition requirements for not-for-profit (NFP) entities:
AASB 10XX Income of Not-for-profit Entities; and
AASB 2016-X Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities.
AASB 2016-X will provide NFPs with guidance on how best to apply AASB 15 Revenue from Contracts with Customers. These draft standards are now available for comment as a ‘fatal flaw’ draft until 21 October 2016. The AASB plans to release the final Standards in December 2016 effective for reporting periods beginning on or after 1 January 2019 (with early application permitted). The effective date for AASB 15 has also been deferred by one year from annual reporting periods beginning on or after 1 January 2018 to 1 January 2019.
Key features of AASB 10XX Income of Not-for-profit Entities
We recommend NFP entities consider how the following areas are likely to impact them:
Assets received below fair value;
Transfers received to acquire or construct non-financial assets;
Grants received;
Leases entered into at below market rates; and
Volunteer services
1. Assets received below fair value
Much of the existing focus in accounting standards relates to assets received by the entity at zero or nominal value. AASB 10XX will require assets[2] which are acquired (including peppercorn leases) at significantly below that asset’s fair value to be measured initially at fair value. The accounting treatment of the difference between the transaction price and the fair value of the asset will depend on the nature of the transaction. It may be a contribution by owners, a liability or income (NFPs will need to refer AASB 10XX). Example: For instance, a car with a fair value of $30,000 which is sold to an aged care entity for $10,000 (from a local car dealer so the entity can transport residents to doctors appointments) with no other conditions attached will be recorded as follows on the date of acquisition:
Dr Car
$30,000
Cr Cash
$10,000
Cr Income
$20,000
2. Transfers received to acquire or construct non-financial assets
NFP’s often receive a grant to either buy or construct a non-financial asset (such as a building) for their own future use. Where this grant requires the NFP to refund any unspent funds then it is recorded as a liability until spent. Example: Lifestyle aged care (LAC) were granted $1m to construct a pool to be used and owned by them (the pool must be used to rehabilitate and increase the mobility of residents for the next 15 years or the funds returned). The grant was received in June 2015 and any unspent funds must be returned to the government. LAC have a 30 June year end and spent 600k on the pool during FY 2016 and 400k to complete the pool during FY 2017.
FY 2015
Dr Cash
$1,000,000
Cr Liability
$1,000,000
FY 2016
Dr Building
$600,000
Dr Liability
$600,000
Cr Cash
$600,000
Cr Income
$600,000
FY 2017
Dr Building
$400,000
Dr Liability
$400,000
Cr Cash
$400,000
Cr Income
$400,000
3. Grants received
The new standard clarifies the treatment of grants and other contributions received by an entity (other than for non-financial assets discussed at 2. above) on the basis of whether those grants have specific and enforceable obligations attached. Example: Lifestyle aged care (LAC) were granted $500,000 in May 2015 to fund a new art program for elderly residents for FY 2016. As part of the agreement LAC must provide art classes for at least 50 residents for a minimum of 8 hours per week for the entire year. If LAC fail to spend the money during that period or provide the requisite services, they must return the funds. Since the agreement is enforceable and the services to be provided are specific in nature then this transaction is dealt with under AASB 15 (revenue from a contract with the grantor).
FY 2015
Dr Cash
$500,000
Cr Contract liability
$500,000
FY 2016
Dr Contract liability
$500,000
Dr Expenses
$500,000
Cr Cash
$500,000
Cr Revenue
$500,000
If the grant only specifies the time period for the monies to be spent, then the income would be recognised when the NFP controlled it (usually upon receipt of the cash).
4. Leases entered into at below market rates
Under existing standards leases entered into at below market rates or peppercorn leases are often capitalised at the present value of the payments required under the lease. Where peppercorn leases are say $1 per annum this results in an insignificant impact to the financial statements. Under AASB 10XX the right-of-use asset will be measured at the fair value of the asset. The lease liability will be measured in accordance with AASB 117 or AASB 16 (likely to be lower than the right-of-use asset given the below market lease payments). The difference is likely to be income in most cases. Example: A grant of a lease at below market rates (P.V. of minimum leases payments $10,000) of a building for its useful life would require the finance lease asset to be recognised at the fair value of the building ($100,000), with corresponding income in the year the lease was granted (unless there are performance conditions attached).
Dr Building
$100,000
Cr Cash
$10,000
Cr Income
$90,000
5. Volunteer services
AASB 10XX has two different approaches with regard to volunteer services depending on the type of the NFP. Local governments, government departments, general government sectors and whole of governments must recognise volunteer services where:
they would have been purchased if they had not been donated; and
the fair value of those services can be measured reliably.
Any NFPs may elect to recognise volunteer services if their fair value can be measured reliably. All NFPs are encouraged to disclose information about their reliance on volunteer services whether they are recognised or unrecognised. Example: The aged care facility drives elderly people to shopping centres to assist their independence. Volunteers drive the bus on average 10 hours per week, 50 weeks a year (equivalent bus driver salary $30/hr) the aged care facility chooses to recognise volunteer services.
Dr Employee Exp
$15,000
Cr Income
$15,000
Practical concerns and considerations regarding the new standards
Do the new standards go far enough? Many within the NFP industry would argue that it doesn’t as they wanted to use the matching principle for income received from grants with expenses incurred in relation to these grants. For instance, a $4m grant received to purchase a building will result in a large gain in the year the asset is purchased and significant depreciation expense over the next 20 years. NFP entities then find it hard to explain a significant gain one year (especially when they are asking for funding) followed by losses over the next 20 years. Most NFPs want the matching permitted by AASB 120 which is reserved for for-profit entities only. In responding to criticism on this issue the AASB has said AASB 120 is outdated and likely to be replaced and that the requirements for NFPs are more in line with the conceptual framework. Whilst that may be true it is cold comfort for NFPs fighting for scare $ available to fund their objectives. Another criticism of the new standard relates to the cost Vs benefit of recording items at fair value. A local football club with a peppercorn lease over its oval from the council will be required to establish the fair value of the lease. That may prove difficult given the specific nature of the lease and the auditor (likely performing the audit pro-bono) will need evidence of that fair value. Many argue the costs imposed on NFPs with limited resources will far outweigh any benefit of recording a gain in the year the lease is granted. NFPs other than local governments, government departments, general government sectors and whole of governments can now choose to recognise volunteer services if their fair value can be measured reliably. This choice has many concerned financial reports of NFPs will be less comparable where entities select different options.
Accounting policy changes
We recommend entities consider the accounting policy changes that will be required under the new standards. New policies are likely to be required for each of the items listed above. For more information on how these changes may impact you contact your local Moore Stephens relationship partner or contact your local office on the details over the page.
[1] All references to Aged Care operators in this document are assumed to be NFP.
[2] This doesn’t apply to assets acquired in a distress sale or in normal trade discount situations. That is, it only applies to asset acquisitions where the discount is principally to enable an NFP entity to further its objectives.