Not-for-profit income: Completed contracts can reduce the transition burden
Not-for-profit income: Completed contracts
Transitioning to the new income and revenue recognition standards as a not-for-profit (NFP) entity has its complexities. One of the more useful practical expedients provided by the standards relates to the concept of completed contracts. Understanding what your completed contracts are in the context of the new standards has the potential to ease the transition burden by reducing the number of contracts that would need to be considered under the new standards.
Practical expedients for completed contracts
A NFP entity can apply the new revenue and income standards in one of two ways, either:
- retrospectively, whereby comparative periods are adjusted to reflect recognising income as if the standard always applied (retrospective approach); or
- retrospectively with the cumulative effect of initially applying the standard recognised directly in equity at the date of initial application (DIA) (cumulative approach).
The completed contracts practical expedient is available under both transition methods.
Under the retrospective approach the NFP does not restate contracts that are completed at the beginning of the first comparative period presented.
Under the cumulative approach, the NFP does not restate contracts that are completed at the DIA.
What is a completed contract?
Under the NFP income standard, AASB 1058 Income of Not-for-Profit Entities, a completed contract is a contract or transaction for which the NFP has recognised all of the income in accordance with AASB 1004 Contributions.
Under the new revenue standard, AASB 15 Revenue from Contracts with Customers, a completed contract is a contract for which the entity has transferred all goods and services identified under AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations.
What does this mean practically?
Consider an NFP entity with a 30 June financial year-end. On 1 October 2018 the NFP received a two-year grant to fund health initiatives – which are seen as furthering the NFP’s objectives. The initiative details are clearly specified – there are detailed requirements for the use of the funds. Funds are repayable if not expended as intended.
AASB 1004 required an assessment of whether the grant was reciprocal or non-reciprocal in nature, which determined when the income was recognised. This assessment would then impact whether or not a completed contract exists as follows.
| Interpretation of AASB 1004 | Non-reciprocal | Reciprocal |
| Method of income recognition | All upfront on 1 October 2018 when cash received | Deferred and recognised when conditions are satisfied, e.g. using a stage of completion method |
| Cumulative approach | ||
| All income recognised at DIA of 1 July 2019 | Yes | No |
| Completed contract | Yes | No |
| Retrospective approach | ||
| All income recognised at beginning of earliest comparative period of 1 July 2018 | No | No |
| Completed contract | No | No |
Where a contract is not a completed contract, the NFP will need to reassess the contract to determine the standard to apply: the NFP income standard or the new revenue standard. This will include assessing whether the contract is enforceable, and if sufficiently specific performance obligations are able to be identified.
Next steps
Have you decided which transition approach you will apply? Have you determined which of your contracts or transactions are completed contracts? If not, start now.
If you wish to discuss this further, or any other aspects of the implementation of NFP income and revenue, please contact your KPMG adviser or the contacts on this page.
17RU-001 Not-for-profit entities: income recognition guidance
The AASB has issued the new standard and implementation guidance for AASB 15 on the recognition and measurement of income for not-for-profit entities.
Revenue and income standards for not-for-profit entities – Webinar
Guidance on implementation of AASB 15 and AASB 1058 revenue and income standards for not-for-profit entities.
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