By Marcelle Chester-Harding, Lawyer
Under the new Australian Accounting Standards Board (AASB) income reporting standard, AASB 1058 Income of Not-For-Profit Entities (AASB 1058), not-for-profits (NFPs) may be required to report volunteer services as income.
Why is there a New Accounting Standard?
The current reporting requirements under AASB 1004 Contributions have been criticised for failing to accurately reflect the economic reality of NFP
transactions that are not contracts. The AASB intends to clarify and simplify NFP reporting requirements in AASB 1058.
Currently, your organisation is required to recognise revenue on ‘day one’. Under AASB 1058, if receipt of an asset comes with performance obligations, you do not have to recognise the revenue until the obligations have been performed and you have incurred the expenses associated with that performance. This will allow NFPs to better communicate their financial position to donors and avoid inflated surpluses or deficits in reports.
What Does AASB 1058 Cover?
AASB 1058 supersedes all current income recognition requirements relating to private sector NFPs, and the majority of income recognition requirements relating to public sector NFPs. ‘Income’ in AASB 1058 addresses income arising from acquisition of assets for consideration that is significantly less than the fair value of the asset when that difference is principally to enable the entity to further its objectives.
AASB 1058 applies to those differences that result in increases in equity, other than those relating to contributions by owners or those accounted for under another standard.
When does AASB 1058 Apply?
AASB 1058 applies when you:
- receive volunteer services; or
- enter into transactions where consideration to acquire an asset is significantly less than the fair value principally to enable the entity to further
AASB 1058 applies to annual reporting periods on or after 1 January 2019. Earlier application is permitted, provided entities also apply AASB 15 Revenue from Contracts with Customers to the same period.
Other transactions caught in the scope of AASB 1058 are transactions where the consideration provided to acquire an asset, is significantly less than the fair value of that asset, or no consideration is provided, and the difference is principally to enable the entity to further its objectives. Potential scenarios include: below market leases (peppercorn leases), organisations receiving cash (or another financial asset) to construct or acquire a nonfinancial asset (e.g. building) for its own use, donated inventories, endowments and bequests.
How do we Recognise and Measure Income?
On initial recognition of an asset, you are required to recognise any related contributions by owners, increases in liabilities, decreases in assets and revenue. These are referred to as ‘related amounts’ in AASB 1058.
Income is determined as the difference between the consideration for an asset and the asset’s fair value, after recognising any other related amounts. NFPs should recognise the excess of the fair value of the volunteer service or asset over the recognised related amounts as income immediately in profit or loss.
Local government, government departments, general government sectors (GGSs) and whole governments are required to recognise volunteer services if:
- they would have been purchased if not provided voluntarily; and
- the fair value of those services can be measured reliably.
Other NFPs may elect to recognise volunteer services received if their fair value can be measured reliably, irrespective of whether you would have purchased those services if not donated.
Under the new standard, private sector NFPs can decide whether to recognise volunteer services as income, but public sector NFPs must recognise volunteer services that fulfil the criteria. This is an existing obligation for public sector NFPs under the current standard. Private sector NFPs should consider whether reporting volunteer services in this way is suitable for their organisations.
The AASB notes some volunteer services, such as professional services, might have readily observable market prices. In these cases, getting a reliable measure of fair value would be relatively straightforward. You are not, however, required to perform an exhaustive search for volunteer services that might meet the recognition criteria in AASB 1058.
The AASB suggest volunteer services that would have been purchased if they were not donated should be readily identifiable from the entity’s operational requirements.
What are our Disclosure Requirements?
The objective of the new disclosure requirements is to enable users of your financial statement to understand the effects of ‘income’ on the financial position, financial performance and cash flows of your organisation.
AASB 1058 provides your organisation discretion as to the level of detail necessary to satisfy the disclosure requirements. An appropriate level of detail should be included so as to make necessary disclosures but not obscure useful information.
AASB 1058 encourages organisations to report their income in relevant categories including:
- grants, bequests and donations of cash, other financial assets and goods;
- recognised volunteer services; and
- for government departments and other public sector entities, appropriation amounts recognised as income, by class of appropriation.
Further, NFPs are encouraged to disclose qualitative information, by major class of transaction, about the nature of the NFPs’ dependence arising from all volunteer services and inventories held but not recognised as assets during the period.
NFPs are encouraged to disclose information about externally imposed restrictions that limit or direct the purpose for which resources controlled by the NFP may be used. Disclosures may be made about the judgements used, whether funds are restricted and/or any of the following:
- assets to be used for specified purposes;
- components of equity divided into restricted and unrestricted amounts; and
- total comprehensive income divided into restricted and unrestricted amounts – either on the face of the statement of profit or loss and other comprehensive income or in the notes.
Under AASB 1058, your organisation’s reporting requirements may have changed or your organisation may be able to better report its income.
You may need to consider some of the following:
- preparation for the new standard and review of current accounting policies;
- the impact on reporting your organisation’s financial position to stakeholders;
- a review of significant income streams;
- when changes will be put in place;
- the provision of proper guidance to your board and audit committees; and
- who is responsible for implementing these changes.
In order to best discern the above, consider the following questions:
- Can the fair value of volunteer services be measured reliably?
- Does the entity elect to recognise volunteer services?
- Is the entity a local government, GGS or whole of government?
- Would the services have been purchased if they have not donated?
From these questions you may be able to determine if your organisation:
- Recognises volunteer services at fair value
- Recognises related amounts in accordance with other Australian Accounting Standards
- Recognises the excess of fair value of services over the related amounts as income.
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