Mark Francis, Executive Director of Regulatory Services at Queensland’s Department of Housing and Public Works, outlines the implications for community housing providers (CHPs) of the Australian Accounting Standards Board’s new Standard 1058 Income of Not-for-Profit Entities, and revisions to existing standards, when preparing their forward budgets.
The changes will impact income recognition in the CHP sector in that:
• some types of income will not be immediately recognised in the income statement, particularly where there is a performance obligation or other liability
• donations of assets to CHP entities at a discount to their fair value will need to be recognised at current fair market value.
Examples of the above include the income recognition in relation to peppercorn leases, capital grant funding and volunteer services.
Currently leases with significantly below market terms or values are accounted for by measuring both the lease asset and liability at the present value of the minimum lease payments, which is negligible in a peppercorn lease. This understates the lease asset and fails to recognise the donation component.
The new standard will address this by amending AASB 16 Leases to require CHPs to measure assets under a peppercorn lease at fair value on the balance sheet, with the lease liability measured at the present value of the minimum lease payments. The difference between the current fair market value of the asset and the present value of the minimum lease payments will be recorded as income, as it is effectively a donation to the CHP.
This accounting treatment will impact the CHP’s results both initially, due to the non-cash income component elevating its net surplus, and on an ongoing basis due to depreciation on the asset being recognised in the income statement. Also, asset and liability data and the related ratios (such as Return on Assets, Gearing, Debt serviceability, Interest cover, etc.) will be impacted.
Income recognition of capital grant funding
Under the new standard the revenue is recognised when the performance obligation in an agreement is recognised. As such, at the time a capital agreement is entered into, the income received by the CHP will be accounted for as an asset in its balance sheet, with a corresponding liability (the obligation). As the obligation is fulfilled over time and the percentage reflected in the agreement (donation) applied, the liability will diminish. This reduction will be recognised as income (a donation) in the income statement.
Again, the net surplus of the CHP will be impacted in that the capital grant income is spread over the life of the agreement, as opposed to the total funding being recognised as income at the inception of the agreement. Furthermore, asset and liability data and ratios will be affected.
Recognition of volunteer services
Where a CHP receives volunteer services without charge, or for a consideration significantly less than the fair value of those services, it has the option to recognise the volunteer services. The standard encourages, but does not require, disclosure where a CHP is dependent on volunteers (for example, faith-based providers).
Local governments, and the public sector in general should recognise volunteer services as income where the services would have been purchased if they weren’t donated, and where the fair value of the services can be reliably measured.
Should a CHP choose to recognise the volunteer services, and where they do not result in the acquisition of an asset, the donation of services should be recognised as income based on the fair value of a person undertaking the work/service. An equivalent expense should also be recognised. This effectively offsets the income recognised and, as such, will have no impact on the CHP’s financial position.
Note: this is general information and does not take any organisation’s specific situation into account – organisations should seek their own independent professional advice.