New draft rules to make not-for-profits record the fair market value of items such as council peppercorn leases is likely to increase compliance costs and impede the fundraising ability of groups such as local sporting clubs.
The new rules state an entity shall recognise an asset initially at its fair value.
This asset may take the form of a cash grant, a non-financial asset (building or similar) or a right-to-use asset (such as a peppercorn lease).
The entity will then recognise any increases in liabilities, decreases in assets, and revenue ('related amounts') in accordance with other Australian Accounting Standards.
In the case of a peppercorn lease it is likely that the difference between the fair value of the lease and the payments required under the lease (usually only nominal payments) will be recorded as income on day 1.
Debate over new rules
The Australian Accounting Standards Board argues that the new income recognition requirements are clearer and simpler for not-for-profits to understand and will reduce preparation costs and audit effort.
But many not-for-profits, such as local sporting clubs, aged-care facilities, local governments, land councils and disability service providers that we have spoken to are not so sure.
That's because the new requirements will mean that in several areas not-for-profits will have more onerous reporting obligations than listed entities which are likely to:
increase compliance costs through the need to fair value items such as peppercorn leases;
increase audit costs associated with verifying fair value estimations; and
make it more difficult for some not-for-profits to raise funding as they show higher profits associated with fair valuing items such as peppercorn leases.
For instance, a local football club (with revenue exceeding $250,000) entering into a new peppercorn lease over its oval and clubhouse from the council will be required to establish the fair value of the lease.
That may prove difficult and costly given the specific nature of the lease, and the auditor will need evidence of that fair value.
Costly and awkward
Firstly, the club needs to find the cash to pay for a valuation, then once this fair value is established the gain will most likely be recorded in the income statement of the club in the first year of the lease, in its entirety.
This leaves the club in an unenviable situation asking mums and dads to donate money and run sausage sizzles when they are showing what could be a $1 million plus profit in that year.
Most not-for-profits we've spoken to want the same matching of revenue and expenses accorded to for-profit entities in AASB 120 where contributions and other grants are able to offset against the asset acquired or deferred until the expenses incurred as a result of that contribution are recorded in the income statement.
Additionally, peppercorn leases for for-profit entities are usually recorded as the present value of the payments and not the fair value of those leases.
In responding to criticism on this issue, the accounting board has said AASB 120 is outdated and likely to be replaced, and that the new income recognition requirements for not-for-profits are more in line with the conceptual accounting framework which was meant to provide guidance and consistency when developing new accounting standards.
Whilst that may be true, it is cold comfort for not-for-profits fighting for scarce dollars available to fund their objectives.
The board has so far issued draft rules on income recognition standards for not-for-profits and plans to release the final Standards in December 2016 effective for reporting periods beginning on or after 1 January 2019.
David Holland is the National Head of Technical Accounting at Moore Stephens Australia
Read more: http://www.afr.com/business/accounting/new-accounting-standards-could-hit-local-sporting-clubs-for-six-20161017-gs430a#ixzz4NOpsTiEv
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