New Accounting Standards - the Impact on Not-for-Profits


The new accounting standards have brought many changes for ‘for profit’ entities. Here’s a snapshot of how NFP entities are impacted

Erin Craike Partner, Capital Markets and Accounting Advisory Services
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Since filming this video, the AASB has decided to propose an amendment to the lease accounting standard which will provide not-for-profits with temporary relief from the requirement to recognise peppercorn (below-market value) leases at fair value.  The AASB intends to resolve the issues arising from fair valuing such leases as part of the fair value measurement project. The Board also acknowledged that the reporting threshold of not-for-profit private sector entities are likely to be revised as a result of the ACNC Legislative Review recommendations and that it is possible that a number of entities may not be required to comply with the requirements in the leasing standard in future. The optional relief will therefore remain in place until valuation guidance has been developed and the reporting requirements for private sector not-for-profits have been finalised. The amendment will go through the normal process for comment prior to being finalised.  

New Accounting Standards - Impact on Not-for-Profits

November Edition, Many Hats: Audit & Risk Insights

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.  

 

What are the changes to the revenue standard?

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.

 

What about the changes to the leases standard?

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.  

 

What about the financial instruments standards?

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.

What are the questions directors should ask management?

  • Does the organisation have sufficient resources and expertise to implement the new standards?
  • What is their timeline and when will they report back to you?
  • For the revenue standard, has management assessed each of their income streams?  Have they reviewed the details of their contracts? Are there impacts and, if so, are there changes we want to make to contracts which would align our financial reporting and commercial objectives?  
  • For the leases standard, does the organisation have an inventory of leases and is valuation expertise needed, particularly where the leases are off-market?
  • Do the accounting changes affect the way your organisation wants to tell its story? If, for example, contributions have to be recognised up front because they don’t meet the requirements for deferral but these funds are clearly committed to a future purpose, you may want to disclose this in your accounts.

November Edition, Many Hats: Audit & Risk Insights

Contact us

Erin Craike

Partner - Capital Markets and Accounting Advisory Services, PwC Australia

Tel: +61 2 8266 2845

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