As we all know, the new revenue, leases and financial instruments standards have brought several big changes to 'for-profit' entities in the financial reporting space. Many directors, however, may not be aware that these changes extend to not-for-profit entities. Given many directors sit on the boards of not-for-profits, we've highlighted some of the key changes.
The first area of change is essentially revenue recognition for not-for-profits. There is a new accounting standard for not-for-profits related to contributions. This standard is effective from 1 January 2019 and will help organisations determine whether contributions should be recognised up-front when they are received or deferred until they are used for specified purposes. The AASB introduced this guidance to address concerns that not-for-profits were recognising revenue too early, and also to align not-for-profit accounting to the new revenue recognition for for-profit entities, where it makes sense. This standard says that a contribution can be deferred if there is a legally enforceable contract with the donor and there is sufficient detail in the contract as to how the contribution must be spent. Many organisations prefer to defer contributions until they are spent as intended. However, organisations will need to balance this with the requirement to include specific requirements and restrictions in their contracts.
The second area of change is leases, which is also effective from 1 January 2019. Just like for-profit entities, leases will come on-balance sheet for not-for-profits when the new leases standard takes effect. The right-to-use asset will be recognised on the balance sheet and depreciated. If the lease is not at-market - which often they aren’t - the difference between the asset and any lease liability will be considered a contribution and likely recognised up-front. The key here is that valuation expertise may be needed if an organisation has significant off market contracts which need to be recognised at fair value. This will be a significant change.
The last area of change is financial instruments. This standard is effective now (ie. from 1 January 2018), with the same new standard that applies to for-profit entities also applying to not-for-profit entities. Given not many not-for-profit organisations have significant receivables or hedging relationships, it does not seem like this should be a big area of change. However, it is common for organisations to invest funds prior to them being spent. This standard may impact how organisations account for those financial investments.
Many directors, however, may not be aware that these changes extend to not-for-profit entities.
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