New accounting changes are going to impact the community housing sector from January. Is your organisation ready? CHIA talks to ACNC’s Melville Yates about the changes.
CHIA: Community housing providers will be impacted by changes made by the Australian Accounting Standards Board but also the way that they need to account for things like the use of volunteers and peppercorn rent.
Charities must adopt the changes for the annual reporting periods commencing on or after the 1st of January 2019 but can choose to use them earlier if they wish.
To answer any queries the industry may have about ensuring they comply with the new standards, the Community Housing Industry Association has invited Mel Yates, the Director of Reporting and Red Tape Reduction at the Australian Charities and Not-For-Profits Commission to host today’s webinar.
Mel, thanks for your time. Perhaps we could start by summarizing the significance of these changes for the community housing sector.
MY: So essentially there are it can be summarized into three key areas, so one of those key areas relates to peppercorn leases, so traditionally peppercorn leases haven’t necessarily been recorded in financial statements – they need to be under these new standards and really that is designed to capture the value of the right to use a particular asset by a charitable organisation and where they are, if you like, where they’re getting a windfall for want of a better word. So really where they are getting something less than fair value then they need to record the difference as income or revenue, depending on what is appropriate for these circumstances and no one ever needed to do that in the past so …this is quite a significant change for the sector and, if you think about it, not just community housing but if you think about charities in general there are a lot of arrangements where a particular organisation might have the right to use a piece of land. For example, one of the common things is church arrangements or schools so quite often a school might be using a piece of land that belongs to the church and there’s a long-standing established relationship for the school to operate on that land but there might be a peppercorn lease in place where they’re paying, you know, a very small tokenistic amount for the right to use that land.
So those sorts of things now need to be recorded at fair value so it’s a very significant change for the sector.
The second major change is really around the some organizations and I’m assuming community housing is no different to the rest of the charity sector there are sometimes volunteers involved in the operation of charities so under the changes to these standards the volunteer effort can be recorded in the financial statements for the charity where it can be measured fairly and there are a number of other conditions and rules around that but essentially that’s one of the major changes.
So the third change, and this is probably one of the most major for the community housing sector, is where assets are transferred for less than fair value. So I would expect that in the community housing sector obviously housing is a significant asset with significant values. Depending on the providers and the arrangements that are put in place so that would also have a large impact on the sector.
CHIA: So this is obviously a very complex area we can’t cover off on all the questions that people would have today but what would you be saying to people who are responsible for accounts in community
housing organizations – what should they be doing right so right now?
So they really need to be turning their attention to these upcoming changes because unfortunately the time to act is right now. The time to start preparing is well and truly now because of the start date of these and that is 1 January 2019. Working backwards, the comparative financial year starts on 1 January 2018, so charities really need to be thinking about the assets that they have or that they use within their entities at the moment, and they need to start thinking about whether they are paying a fair value for the right to use those assets.
In terms of some of the practical things that we would recommend charities do, they really need to identify any different types of arrangements, so particularly any funding arrangements where there are specific performance obligations attached to those funding arrangements… and get their head around what those funding arrangements are and what they mean.
Also, in terms of reviewing any contracts, making sure that they understand the changes that come with these Accounting Standards; what they mean in practice and starting to think about how these transactions need to be recorded and how this is going to impact their operations.
Obviously peppercorn leases is, as you know, a very large part of this. So they really need to start thinking about any peppercorn leases which are in place. In discussions I’ve had with certain experts in this field, they are suggesting ,or they’ve mentioned that some of their clients are starting to renegotiate leases before they have to account for special leases under these standards because of the complexities involved.
So it’s not a good way to approach by sitting on your hands and not doing anything. Charities really need to be proactive in this space; seeking out guidance, seeking out advice and clarifying their understanding of what this means to them.
And I guess you know one of the most important things for the community housing sector is to engage in a conversation with your accountants and with your auditors….now about what these changes mean and where there are perhaps complexities.
Add to that the Australian Accounting Standards Board are aware of a number of technical issues that charities are starting to grapple with in relation to these changes and they are developing some specific guidance around some of these complex areas so the ACNC, while we are the charity regulator we don’t generally we’re not technical experts in interpreting the accounting standards. We often have dialogue with the Australian Accounting Standards Board to clarify things and make sure that our understanding is correct, but ultimately any questions about the standards themselves they should be going back to the Australian Accounting Standards Board to help feed into the guidance and some of the technical aspects that they were working on at this point in time.
There’s also a number of resources which are available on the AASB website in relation to these accounting standard changes so they’ve done a number of webinars and the like and they’ve also got some technical guidance products which are available for people to utilize and access to help with their understanding.
CHIA: Brilliant Mel, that’s really helpful. I’m sure lots of our members will be taking your advice on that thanks for your time today. We really appreciate it.