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28 Sep. 2016

Simplifying income recognition for not-for-profit entities

New income recognition requirements for not-for-profit (NFP) entities are now available for comment as a ‘fatal flaw’ draft.

The new requirements represent a major step towards financial reporting that better meets the needs of NFP entities and the users of their reports.

The reporting of income will more closely reflect the economic reality by providing more opportunity for deferral. Income recognition will depend on whether there is any liability or other performance obligation (a promise to transfer a good or service) related to the cash or grant received.

The other major change is to the measurement requirements for assets. Currently, only assets acquired by NFPs at nil or nominal consideration must be fair valued. The new Standard broadens this to require fair value measurement of assets for which consideration is significantly below that asset’s fair value (including peppercorn leases).  However, this only applies to transactions where the difference between fair value and the consideration is principally to enable an NFP entity to further its objectives (i.e. it doesn’t capture trade discounts and distress sales).

In addition, new NFP-specific guidance for AASB 15 Revenue from Contracts with Customers will assist with identifying a contract with a customer in an NFP context. It also helps entities identify enforceable agreements, how to identify whether a performance obligation exists, and how to allocate the transaction price to performance obligations.

Extensive application guidance and a wide range of examples have been developed to illustrate how the new requirements would work in practice. Significant transitional relief has also been provided, as well as a one year extension of the effective date.

The draft is available for ‘fatal flaw’ comment until 21 October and the final Standard will be released in December 2016. It will be effective from 1 January 2019, with early application permitted.