Where a not-for-profit (NFP) entity is determining whether or not an arrangement is within the scope of AASB 15 Revenue from Contracts with Customers rather than AASB 1058 Income for Not-for-Profit Entities, it needs to determine both that an arrangement is enforceable and that the conditions in the arrangements are sufficiently specific.
Our October 2019 article – First step of assessing not-for-profits income – highlighted this first key assessment of having an enforceable contract. Once enforceability is determined, to account for the arrangement under AASB 15 the NFP needs to identify the good or service that is transferred and what the related performance obligations are. Performance obligations need to be sufficiently specific to determine when the obligation is satisfied. In many cases this determination requires judgement and will depend on facts and circumstances.
The transfer of goods and services can be quite different for NFP compared to for-profit entities. An important consideration is there needs to be a good or service transferred by the NFP entity to the customer – remember NFPs might be the middle man for the customer in providing the good or service to the beneficiaries. For example, an NFP might enter an agreement and be provided a grant from the local government (customer) to provide mentoring services to indigenous high school students (beneficiary). Mentoring services is the service being transferred and assessed to determine if they are sufficiently specific.
Another example might be the agreement to undertake research. The carrying out of the research includes a number of activities on behalf of the customer, such as conducting surveys or collating data. Such activities do not transfer goods or services to the customer as they are administrative activities and would not be sufficiently specific performance obligations – they are not the purpose for which the funding is given. On the other hand, if a report on the research findings is required to be provided to the customer, the report would be a transfer of a good or service and could also be sufficiently specific.
A donation received by an NFP entity to further its objectives of improving the eating habits of children in primary schools, without any more specificity, in two years is not in itself sufficiently specific. This is because there is inadequate information to identify the goods or services to be provided to improve the eating habits. Also, the criteria for the donation does not provide specifics of when the obligation has to be met. The general passage of time does not in and of itself meet the “sufficiently specific” criterion.
What if our earlier example of the donation received by an NFP entity to further its objectives of improving the eating habits of children in primary schools over a period of two years had included more details? What if the arrangement detailed the donation of $1 million was to be used to run a series of ten healthy eating workshops in 100 primary schools across the State over the period of two years?
The conditions in the agreement clearly specify:
Where not all of the above conditions are included in the agreement, or the conditions are not readily identifiable, judgement is needed to determine if performance obligations are sufficiently specific.
NFP agreements often include an acquittal process to demonstrate to the grantor that funds provided were used in the intended manner. These are standard in research grants or where government provides funding for particular services.
Reporting under an acquittal process can demonstrate delivery of goods or services and is often useful in determining the progress toward satisfaction of a performance obligation, although the acquittal reporting itself would not generally be considered a separate performance obligation. It may also help to determine that the performance obligations are sufficiently specific, but may not be the key determinant.
We are in the first effective financial year of the new income recognition standards. If you are yet to start assessing your agreements, now is the time as it cannot be assumed that sufficiently specific performance obligations exist. Starting the assessment earlier provides you with an opportunity to amend your arrangements such that you are not bound to accounting outcomes that do not match the economics of your arrangements with your grantors.
If you wish to discuss this further, or any other aspects of the implementation of NFP income and revenue standards, please contact your KPMG adviser or the contacts on this page.
Article series about implementation issues we have seen impacting entities when embedding the new revenue standard.