Not-for-profits will need to revise their approach to assessing income following the introduction of new accounting standards.
The changes affect assets and volunteer services received by organisations for much less than "fair value".
The Australian Accounting Standards Board (AASB) - the Federal Government's independent accounting standard-setter - flagged the changes several years ago, and they came into force on January 1.
The new standard is known as AASB 1058 Income of Not-for-Profit Entities and is meant to be read in conjunction with related accounting rules, particularly AASB 15 Revenue from Contracts with Customers.
The AASB said the standard replaces and simplifies a string of previous standards to "more closely reflect the economic reality" for not-for-profits.
The national head of technical accounting at Moore Stephens, David Holland, said charities with revenue of more than $250,000 and not-for-profits reporting to ASIC will need to comply with the new measures. Organisations can check requirements against the Australian Charities and Not-for-profits Commission (ACNC) revenue tests.
Mr Holland said the new standard required a "higher level of professional judgment, which may test the resources and capabilities of some not-for-profits or force them to seek external help".
He predicted enforcement actions against those who did not comply with the new standards.
A fact sheet produced by Moore Stephens suggests NFPs should be aware that the following could affect their income assessments:
- Assets received below fair value
- Transfers received to acquire or construct non-financial assets
- Grants received
- Leases entered into at below market rates
- Volunteer services
Assets must be given a fair value
Until now, accounting standards have seen assets received for either zero or nominal values.
The AASB 1058 standard will mean that those assets - whether vehicles, plant, equipment or buildings (and in some cases, leases) - will need to be recorded at "fair value".
Transfers for non-financial assets must be noted
Under the new regime, any not-for-profit that is granted funds to buy or build a non-financial asset, such as a building, for its own use may need to mark unspent funds as a liability. Usually that would be in the case where funders expected a refund for any unspent monies.
What are your grants obligations?
If your organisation has struck a deal for funds under certain conditions - such as a requirement to be open for certain hours - the amount must be dealt with under the AASB 15 (contract revenue provisions).
Cheap leases recognised as "income"
Not-for-profits that hold peppercorn leases - that is, rent premises for less than market rates -may now choose to measure those rents at fair value, with the extra value recorded as income. An earlier version of the new AASB standard would have seen this measure made obligatory, but amendments late last year mean the standard will continue to allow the old measure as a "temporary option".
Volunteer value recognised
Not-for-profits can now choose to measure the value of volunteers.
Organisations can elect to set a fair value for volunteer work.
Governments of all types affected by the same accounting standard will also be required to measure the value of volunteer work in their own books, in a move aimed at helping to establish the value of volunteers' efforts.
In both cases, the entries will be required/chosen only if the value of the services provided can be reliably measured, such as against market prices.
Why the new reporting method could get tricky
Mr Holland said the reporting period began on January 2019, in line with the start of the new financial year used in most countries overseas, unlike the July-to-June period used in Australia.
He said although the first reports under the standard would be required after June 30, 2020, organisations may also need to use the method in financial statements for the "comparative year" to June 30, 2019.
He said many NFPs already had the new standard on their agendas, but others were simply "looking around at each other and wondering what they should do about it".
He said organisations should ideally have planned how they were going to identify and quantify the impact of the changes by the end of June last year.
He urged all not-for-profits to ensure they were ready for the new standard, particularly to avoid complications with grant funding and to better measure the value of their efforts.
"If you're applying for a grant, you don't want to be caught out with the changing standards."
ACNC says expertise, technology will help in meeting standards
The ACNC's director of reporting and red tape reduction, Mel Yates, said the AASB standards formed the basis of the ACNC's own reporting framework, setting requirements that charities must meet when preparing their financial statements.
He said the standards gave guidance on the treatment of financial transactions for all types of entities to enable a true and fair view of the financial performance and position of a charity to be produced - where financial reports are required.
Mr Yates stressed that "good record keeping is an essential foundation in producing financial reports that meet AASB standards. It is also a legislative requirement under the ACNC Act."
He said not-for-profits can leverage expertise and technology solutions to properly comply with the accounting standards and meet any reporting obligations that charities have to the ACNC or other regulators.
He pointed readers to the ACNC fact sheet dealing specifically with the new accounting standards as well as to the AASB itself for resources to gain a greater understanding of the standards.
How the standards are affecting ICDA members
Those already working to implement the changes include Gold Coast-based Dennis Bothma, who recently won one of ICDA's Future 500 Leaders scholarships to study the Diploma of Business (Governance).
The chief financial officer with the Kalwun Development Corporation is very aware of the financial knowledge gap in some not-for-profits, which he fears may grow with the new AASB standards coming in to play.
"We haven't seen a change this big since the introduction of the GST."
That knowledge gap is the reason he formed the CPA Gold Coast Not for Profit Group, where he remains on the committee, and continues to coordinate professional development.
Mr Bothma said the fact that the standards require big changes in the way organisations report grants and other income will challenge many treasurers.
He suggests not-for-profits first look at AASB 15 to assess whether their revenue is "caught" by the new standard, before using AASB 1058.
He said AASB 15 could affect many funded organisations that receive quarterly payments in advance, such as aged care providers and child protection agencies.
The new standard may require entities to account for monthly outputs, complicating their calculations.
Mr Bothma said that overall, the new standard would benefit the sector by providing greater transparency, stronger financial governance, and a management accounting style that would boost the longevity of community service organisations.
"Those that can move to a more commercial mindset and balance the 'human side' of the equation with the financial side will have a much better chance of long-term success."
He said one common concern from the sector, though, was that the new financial statements were "almost meaningless to the average person", leaving finance managers and treasurers to "decode" financial statements.
He said his organisation and others were eagerly waiting the results of the joint AASB/ACNC financial reporting reforms for charities, and information on how it could affect not-for-profits.
ICDA acknowledges the experts at Moore Stephens for allowing us to summarise aspects of their own help sheet on the new standard for this article.