for Not-for-profits 8 March 2018 Agenda PwC 2 Agenda for todays - - PowerPoint PPT Presentation

Accounting Hot Topics for Not-for-profits

8 March 2018

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Agenda

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Agenda for today’s session

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The new revenue standards (AASB 15 and AASB 1058)

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AASB 16 Leases

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Other matters and accounting standard change on the horizon

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Implementation plan of the new standards

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AASB 15 Revenue from Contracts with Customers AASB 1058 Income for Not-for-profits

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Overview of the new revenue standards

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• Dr. Asset received (fair value)
• Cr. Provision
• Cr. Financial liability
• Cr. Lease liability
• Cr. Revenue/contract liability - AASB 15
• Cr. Contribution by owners
• Cr. Income - AASB 1058

Where does the credit go?

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Overview of the new revenue standards

How will income/revenue be recognised?

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Is the transaction a contract with a customer?

Mix of both

• May need to split

transaction into 2 elements, and account for each element separately No

• Recognise up front

(except if to construct/ acquire asset) Yes

• Recognise revenue

when your contractual

• bligations are

met

AASB 15 (deferral) AASB 1058 (up front) AASB 15/AASB 1058

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AASB 15 Revenue from Contracts with Customers

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AASB 15 – The five step approach to revenue recognition

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Ensure legally enforceable contract with customer who receives good/service Identify the separate performance obligations in the contract (i.e., sufficiently specific promise) Determine the transaction price Allocate the transaction price (between donation and sufficiently specific promises  consider refundability) Recognise revenue when (or as) a performance obligation is satisfied Revenue recognised to depict transfer of goods or services Core principle Step 1 Step 2 Step 3 Step 4 Step 5

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• Customer  donor who promises the consideration
• Customer must receive goods/services or direct to a third party

(i.e. can’t retain for own benefit)

• transfer or license IP to donor
• publish all research for all researchers to use
• provide good/service to third party beneficiary

Step 1: Does a contract with a customer exist?

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Step 1: Enforceable obligations

• Enforceable by legal or other means
• Examples:
• refund obligation
• right to enforce specific performance or claim damages
• right to take a financial interest in assets subject to agreement
• the parties required to agree on alternative uses of resources received
• government administrative process exists to enforce agreements
• Intention to enforce / prior history of not enforcing is not relevant
• Withholding future funding is not deemed enforceable

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Step 2: ‘Sufficiently specific’ promise

• Sufficiently specific to determine when promise is satisfied
• Depends on facts & circumstances, but may include:
• Nature of type of good/service (should be more specific than charity objectives)
• Cost or value of the good/service
• Quantity of the good/service
• Period of time over which the good/service must be transferred
• Requirement to spend within certain time ≠ sufficiently specific

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Steps 1-2 considerations

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Example: 2 year grant, spend $X on research for cancer, provide budget reports, return unspent funds, discretionary when/what to publish NOT sufficiently specific contract with customer Sufficiently specific contract with customer Example: 2 year grant, spend $X on research for cancer, provide budget reports, return unspent funds, mandatory to publish research on public website for all to use Sufficiently specific contract with customer Example: 2 year grant, spend $X on research for cancer, provide budget reports, return unspent funds, transfer/license IP to the donor

If the transaction is not sufficiently specific, need to assess whether the transaction should be accounted for under AASB 1058

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Step 3: Transaction price

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Significant financing component Refund obligations Variable consideration Non-cash consideration

Obligation to return unspent funds Measure at Fair Value Highly probable Interest expense & interest income

Transaction price: “Amount of consideration to which entity expects to be entitled in exchange for transferring goods or services.”

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Step 4: Allocation of consideration

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• Transaction price is allocated to each performance obligation
• Performance obligation represents the amount of consideration to which the entity

expects to be entitled to for transferring the promised goods or services.

• Contract with a dual purpose of obtaining goods and services and to help the entity

achieve it’s objectives

• Based on the rebuttable presumption that the transaction price is treated as wholly

related to the transfer of goods and services.

• The presumption is rebutted where the transaction is partially refunded in the event the

entity does not deliver the promised goods or services.

• Where the presumption is rebutted, the entity shall disaggregate the transaction price

account for the two components separately

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Step 5: When do you recognise income under AASB 15? 15

Customer receives benefits as performed/ another would not need to re-perform e.g. most services Create/enhance an asset customer controls e.g. IP that the donor controls Does not create asset w/alternative use AND Right to payment for work to date e.g. IP/Research

No No

Over time Point in time

Yes Yes Yes No

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AASB 1058 Income for Not-for-Profits

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New guidance

Transactions covered by AASB 1058

• AASB 1058 applies to all resources received in order to further an entity’s
• bjectives:

 Cash  Non-financial assets  Volunteer services (policy choice if measure reliably)  Donated inventory  Assets received at a discount  Off-market leases  Payments to construct/acquire asset for own use  Donation elements in commercial contracts

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When is income recognised under AASB 1058?

Recognise income immediately when you recognise asset, except…

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• Funds to construct/acquire an asset for own use
• If in your control to avoid breach → no liability recognised unless breach has
• ccurred or is expected

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Funds to construct/acquire an asset for own use

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Where an entity receives funds (or another financial asset) and:

• Entity must use the funds to construct/acquire a specific asset
• Entity gets to keep the asset
• Agreement is enforceable

Revenue must be deferred & recognised when / as the contractual obligations are fulfilled (i.e. asset is constructed / acquired) No matching of income with deprecation expense.

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Donated inventories

Material inventories recognised as income… Practical expedient: Materiality can be assessed at the individual asset level, without reassessing at the portfolio level

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vs.

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Examples of AASB 15 and AASB 1058

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Government grant – no specific performance obligations

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Facts:

• $2.4M government grant for use within entity’s operations
• Refundable if not spent within 3 years, but no other conditions for grant

Outcome:

• There is no contract with a customer – no sufficiently specific obligation
• The grant is income upfront
• Liability only arises if funds are unspent after 3 years

Journals: Dr Cash $2,400,000 Cr Income $2,400,000

Income at the inception date Dr Expense $xxx Cr Liability $xxx Liability and expense recognised only if a breach occurs

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Government grant – specific performance obligations

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Facts:

• $2.4M grant, which must be spent providing counselling services for 1,000 hours / week for 52

weeks

• Recipient expects to fulfil the conditions of the grant

Outcome:

• The grant is a contract with the government within the scope of AASB 15
• It is a contractual liability to provide 52,000 hours of counselling services over one year
• Revenue must be deferred, and recognised over time as the recipient provides counselling

services Journals: Dr Cash $2,400,000 Cr Contract Liability $2,400,000 Income is deferred initially when grant is received Dr Contract liability $xxx Cr Revenue $xxx Revenue recognised as counselling services are provided

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When does an enforceable obligation arise?

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Example: Donations made to a charity whose purpose is to build water wells to provide clean drinking water in developing countries

Scenario: Outcome: Charity’s Board has internally determined that funds will be used only for building water wells in Kenya. The Board has not publicly communicated intention.

• No constructive obligation
• No contract with a customer
• Income recognised upfront when

received Campaign for fundraising has said donations will be used to build wells in Kenya, but the entity has discretion to use unspent funds for other purposes.

• No enforceable contract with a customer

due to discretion over unspent funds

• Income recognised upfront when

received Charity has:

• Stated externally that funds will only be

used to build wells in Kenya

• Pledged to return unspent funds
• Publicly stated that each donation of $800

will construct two water wells in 2018

• There is an enforceable agreement with

customers (AASB 15)

• A contract liability is recognised upfront
• Revenue is recognised only when

specified water wells have been built

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Grants to be spent internally

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Example: Entity receives a $2M government grant, with a refund obligation if it is not spent as specified….

Funds must be spent to…. Accounting: … construct an early learning centre, which entity will own Income is recognised as centre is constructed … purchase 16 ICU beds, which the entity will

• wn

Income is recognised when beds are purchased … conduct research on improvements to long-range rainfall prediction models The entity will control the IP, but will not recognise an intangible asset under AASB 138 for the research Income is recognised upfront:

• Funds must be spent in a certain way

BUT don’t relate to a recognised asset, so deferral rule does not apply

• There are no goods or services provided

to a third party (no contract with a customer)

The above do not transfer a good or service to a third party, so are not contracts with customers under AASB 15 .

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Disclosures

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New disclosures under AASB 1058 and AASB 15

• disaggregation of income (eg. grants and volunteer services if recognised)
• timing of when an entity satisfies obligations, unsatisfied obligations
• disclosures about the reliance on donated inventories and volunteer services – optional
• liabilities for unperformed obligations (where you are in breach)
• judgments and estimates
• pening/closing balances of assets received for constructing an asset
• external restrictions (assets/equity) – optional

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Transition

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Full retrospective transition method Prospective transition method Comparatives Restatement of comparatives No restatement of comparatives Impact Cumulative effect of initial application recognised at 1 January 2018 Cumulative effect of initial application recognised at 1 January 2019 No restatement for:

• ‘completed’ contracts under AASB 1004 (elective)
• contracts that begin and end in same annual reporting period (elective)
• assets received < fair value not restated

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AASB 16 – Lease accounting

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Leases project - overview

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Why is there a new standard?

• Improve the quality and

comparability of financial reporting;

• Provide greater

transparency about the leverage and risks;

• Existing lease accounting

is criticised for omitting significant assets and liabilities arising from

• perating leases.

Current treatment for lessees:

• Service contracts off

balance sheet

• Operating leases off

balance sheet

• Finance leases on

balance sheet New standard for lessees:

• Service contracts off balance sheet
• Short term leases (less than 12

months) and low value assets are

• ff balance sheet
• All leases greater than 12 months
• n balance sheet
• Effective date for June reporters is

FY20 (comparatives FY19)

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Why the definition of a lease is more important under AASB 16

Under current accounting rules

Finance leases

On balance sheet

Operating leases Service contracts

Off balance sheet

Under new accounting rules

Finance leases Operating leases

On balance sheet

Service contracts

Off balance sheet

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No

Definition of a lease

Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout period of use? Contract does not contain a lease Is there an identified asset? Who has the right to direct how and for what purpose the asset is used throughout the period of use? Contract contains a lease

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Customer 1.

• perates the asset or

2. has designed the asset?

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Predetermined Customer

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Supplier Yes Yes No Yes No

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What’s changing for lessees?

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New accounting: Balance sheet:

• Lease liability
• Lease Asset

Income statement:

• Interest
• Depreciation

All leases

• n balance sheet

Operating leases

• ff balance sheet

Current accounting: Balance sheet: Nil*

*minimal impact for straight-lining lease payments

Income statement:

• Straight line operating lease expense

Short-term leases (<12 months) and low-value leases (<US$5,000) outside scope.

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1 2 3 4 5 6 7 8 9 10

New lessee expense profile

May introduce volatility to P&L

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$

Years

Cash rents

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1 2 3 4 5 6 7 8 9 10

New lessee expense profile

May introduce volatility to P&L

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$

Years

Cash rents Operating lease expense

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1 2 3 4 5 6 7 8 9 10

New lessee expense profile

May introduce volatility to P&L

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$

Years

New lease expense

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1 2 3 4 5 6 7 8 9 10

New lessee expense profile

May introduce volatility to P&L

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$

Years

Interest Depreciation New lease expense

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New lessee expense profile

“Geography” will change

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Operating leases AASB 117 In scope leases AASB 16

Revenue X X Operating expenses EBITDA Depreciation and amortisation Operating profit Finance cost PBT Depreciation Interest

Single expense

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Initial lease liability Discount rate Lease payments

Initial measurement

Right-of-use asset Lease liability

Restoration provision Lease payments made before or at commencement date Restoration costs Initial direct costs

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Portfolio approach? Incremental borrowing rate Interest rate implicit in the lease

If readily determinable

To calculate the present value of lease payments, you need to determine a discount rate.

If readily determinable. Requires estimation of fair value, residual value and lessor’s initial direct costs. Over a similar term, and with a similar security, for a similar value to the right-of-use asset in a similar economic environment. If you reasonably expect that that it will not have a material effect.

Initial measurement – discount rates

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Initial measurement - Determining the discount rates for lessees

Present value of

Implicit rate in the lease Lease payments Unguaranteed residual = Fair value of underlying asset Lessor‘s initial direct costs Is the rate that makes Lease term Type of asset and level of security Value Economic environment Lessee‘s base rate = Incremental borrowing rate

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Below-market leases

New guidance for application of AASB 16 Leases to below-market leases:

• record the right-of-use (ROU) asset at fair value
• record a liability for the present value of

contractual lease payments in accordance with AASB 16

• record income for the difference between the

asset and liability

• upfront (if the entity has no ongoing obligations),
• r
• when the entity satisfies any obligations in the

scope of AASB 15

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Fair value of ROU asset Present value of lease liability (below- market)

Income

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Below-market leases (cont.)

Indicative profit and loss profile for 5-year lease with lease payments of $1 p.a. and fair value of $100,0000 (assume no further performance obligations):

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• 30

30 60 90 120 1 2 3 4 5 Years $k

Depreciation + Interest Day 1 income

• Value of ROU Asset determined with reference to equivalent lease on commercial

terms

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Transition options

Full retrospective transition method Cumulative catch-up transition method Comparatives Restate prior year as if AASB 16 had always applied. No restatement of comparatives Lease liability Remaining cash flows at historical discount rate Remaining cash flows at transition date ‘incremental borrowing rate’ Requirements Limited practical expedients Various practical expedients Reconcile your operating lease commitments disclosure to the new lease liabilities. Right-of-use asset Calculated as if AASB 16 had always applied Lease by lease decision (“hybrid”)

• Calculated as if AASB 16

had always applied – use

• f hindsight allowed; OR
• at same value as transition

liability Full simplified

• Measured based on

transition liability

Why does this distinction matter?

Other areas

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This graph compares the balance sheet for a lease calculated retrospectively or using simplified transition at year 4.

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Transition options

• 1,000

2,000 3,000 4,000 5,000 6,000 7,000 1 2 3 4 5 6 7 8 9 10

Balance ($) Year

Liability ROU asset - retrospective ROU asset - simplified

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Accounting standard change on the horizon and other areas of change

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AASB 9: Financial Instruments

Key changes

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From 1 January 2018

New principles on how to classify and measure financial assets New expected credit loss model replacing the incurred loss model

Classification & Measurement Expected credit losses

Relaxation of strict hedge accounting rules to more closely align to financial risk management strategies Amendments to AASB 7 introduce new credit risk and hedging disclosures

Hedging Disclosures

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Service performance reporting

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Proposed disclosures (ED 270): Objectives

What an entity aims to achieve through its activities

Inputs

Resources used to provide outputs

Outputs

The goods/services provided to external parties

Outcomes

Impacts on society as a result of outputs

Relationship between the above: Efficiency with which it uses inputs to provide outputs Effectiveness with which its outputs achieve outcomes and objectives

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Next Steps

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Implementation methodology in brief

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Phase 1: Impact assessment Phase 2: Contracts review Phase 3: Analysis and design Phase 4: Implement & embed

• Roll-out of updated

contracts

• Updating and testing IT

processes

• Adjusted processes to all

departments

• Review sample of

contracts to validate preliminary technical accounting issues

• Update preliminary

technical issues log

• Use outputs from

phase 2 to identify key impacts

• Technical analysis of

issues

• Detailed execution

plan

• Undertake discussions

with management to understand key contracts

• Identify preliminary

technical accounting issues

• Preliminary project plan

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Next steps for implementation

Consider your transition strategy Keep stakeholders informed Get a good understanding of your agreements Don’t forget disclosures Don’t wait

1 2 3 4 5

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To have a deeper conversation about these topics please contact:

Margot Le Bars Partner – Accounting advisory p: (03) 8603 5371 e: margot.le.bars@pwc.com Masha Marchev Manager – Accounting advisory p: (03) 8603 0581 e: masha.marchev@pwc.com Grainne O’Halloran Manager – Accounting advisory p: (03) 8603 1412 e: grainne.ohalloran@pwc.com

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