Not-for-profit income: How should revenue be recognised over time?
Not-for-profit income: Over-time revenue recognition
An objective of the new standards AASB 1058 Income of Not-for-Profit Entities and AASB 15 Revenue from Contracts with Customers is to reduce diversity as to when not-for-profit (NFP) entities recognise revenue. While there has been a lot of attention on whether amounts received (such as grants and other contributions) by a NFP should be reflected as deferred revenue, less attention has been paid to how NFPs recognise such revenue after it is deferred. This lesser known issue, can be complex and require additional consideration as NFPs transition to the new standards.
Are amounts received revenue or contribution income?
A NFP applies AASB 15 to recognise revenue when an agreement is enforceable and contains performance obligations to transfer goods or services that are sufficiently specific to determine when the obligation has been satisfied. An example in the standard is where a charity receives a grant specifying that counselling services be provided (the performance obligation) for a specific number of hours per week for the entire year (sufficiently specific), and there is a refund obligation if those services are not provided (enforceable). For an arrangement that is not within the scope of AASB 15, and not otherwise within the scope of other standards, it would be treated as contribution income under AASB 1058 (for example a cash donation without conditions).
Should revenue be recognised over time?
Assessing if revenue under AASB 15 should be booked over time or recognised only at a point in time may require significant judgement for a NFP. For example, a research grant in the scope of AASB 15 may provide funding for a fixed period (say 5 years). In order for revenue to be booked over time, an assessment is made as to whether the customer (being the grantor) receives the benefit of the research as it occurs, whether the research activities create or enhance an asset of the grantor (such as intellectual property from the research), or whether an asset that does not have an alternative use is created and the NFP has a right to payment for the research performed to date.
Otherwise revenue would be recognised only at a point in time, which may mean no revenue is recognised in the above example until the end of 5 years (this may be the case when the performance obligation is delivery of a finished research project).
What methods should be used to recognise revenue over time?
A number of acceptable methods exist in measuring progress towards the satisfaction of performance obligations, including percentage of completion based on expected costs, hours, milestones. However, these are not accounting policy choices, but must represent the most appropriate measure of how the performance obligation is transferred.
For some situations, this may represent a change in practice – for example for the counselling services example above, measuring progress based on number of hours may be the best measure of performance. For other situations, this may create practical challenges. Continuing the research grant example, determining which methods represents the most appropriate measure of transfer of the underlying performance obligation – be it research hours, milestones (e.g. publication of data), or another measure. The method chosen must be appropriate and can have a significant impact on revenue recognition.
So we’ve seen that assessing how revenue should be recognised over time for a NFP is not as straightforward as straight-lining receipts over the term of an arrangement or even simply recognising based on cost incurred. There are many issues to consider, including:
- Have you assessed whether your arrangements are sufficiently specific and enforceable?
- If you have assessed them to be sufficiently specific and enforceable, do they qualify for over time or a point in time recognition?
- If they qualify for over time recognition, what method will you apply in recognising revenue?
With the standard already effective for both December 2019 and June 2020 year-ends, have you considered the impact of these judgements on your transition adjustments and approach? If not, it’s time to start.
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.
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