Time ticks down for not-for-profits as new accounting standards come into effect

Not-for-profit managers need to start preparing for new standards that will take effect in January 2019.

The Australian Accounting Standards Board gave not-for-profit (NFP) organisations an extra year to implement new accounting standard AASB15 on revenue recognition, but NFP managers need to be preparing now for this and other new standards that will take effect in January 2019.

New accounting standards AASB 15 and AASB 1058

Some of the changes – particularly in revenue and income recognition – go a long way to address concerns in the sector and will provide a better matching of income and expenses, Eric Passaris FCPA, audit and assurance partner at Grant Thornton, told the CPA Australia National Not-for-profit Conference 2018.

In terms of income recognition it will be important for finance officers to understand what constitutes an enforceable agreement or contract and what constitutes sufficiently specific performance obligations, he said.  Establishing these criteria will determine which is the applicable standard.

Watch the related video: New accounting standards to bring big changes to accounting by NFPs, charities

Enforceable agreements and performance obligations

The starting point will be to establish which of AASB 15 or AASB 1058 should be used.

AASB 15 will apply where there is an enforceable agreement and the performance obligations are sufficiently specific. If AASB 15 does not apply, a not-for-profit will revert to AASB 1058 and recognise income when control of the asset is obtained, for example when funding is received.

Passaris said the new standards should reduce confusion about when to recognise income, which has previously led to the rules being applied inconsistently across the sector.

How not-for-profits should prepare for new accounting standards

Ram Subramanian, policy adviser, reporting, policy and corporate affairs at CPA Australia says entities in the sector need to be asking themselves about how their reporting will be affected by the new standards.

The very nature of the NFP sector, with government grants for services provided over time and donations that may or may not have strings attached, will be affected by application of the incoming standards.

The new standard AASB 16 on leases, for example, will have an impact on NFPs that pay peppercorn rents, something that is relatively common in the sector. They will have to record the lease at its fair value at inception, he says, which could have a significant impact on the income statement.

Subramanian outlines key questions for the sector in the above video.

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