INTHEBLACK July 2021 - Magazine - Page 22
F E AT U R E
// R E V E N U E A C C O U N T I N G
“ N O T- F O R - P R O F I T S WA N T A B R E A K- E V E N O R A
S U S TA I N A B L E R E S U LT T H AT ’ S N O T S W I N G S A N D
R O U N D A B O U T S . T H E Y D O N ’ T WA N T T O B O O K A B I G P R O F I T
FROM UPFRONT REVENUE RECOGNITION IN ONE YEAR, AND
T H E N A P P LY E X P E N S E S I N T H E N E X T F I N A N C I A L Y E A R .”
DAVID HARDIDGE FCPA, QUEENSLAND AUDIT OFFICE
“They don’t necessarily have the staff who can spend time
reading 100-page standards.
“If you have a performance obligation, you can possibly
defer revenue. If you don’t have a performance obligation,
you’re in AASB 1058, but the 1058 standard also has rules
on capital grants.
“If you’ve got a capital grant to build an asset, it goes back to
AASB 15 to work out how much of the capital asset that you’ve
built to work out how much revenue you have to recognise.
“This is a further complication, and another part of the
complication, if you have a performance obligation, is a term
called ‘sufficiently specific’.
“Your grant agreement needs to be sufficiently specific
for you to be able to work out how much revenue to defer.
The AASB wasn’t sufficiently specific in explaining what
‘sufficiently specific’ was.
“It applies in a very technical context, and there’s often lots
of discussion and debate in relation to whether a grant has a
performance obligation and if it is ‘sufficiently specific’.”
UNDERSTANDING THE STANDARDS
Andrew Marks FCPA, a director at accounting firm William
Buck in Melbourne, has extensive experience in dealing with
government grants to the NFP sector and ensuring clients
are accounting for the revenue per the accounting standards.
“I think one of the major issues is that a lot of NFP
organisations don’t necessarily know the ins and outs of the
accounting standards, which is completely understandable,”
he explains. “And they like to match the revenue in the same
period as they actually spend the money.
“While I completely understand that they want to do it
that way, that’s not how the standard works, and you’ve got
to take other factors into account.
“That’s probably one of the main challenges we face when
undertaking the audit of NFP organisations – making sure
that, if they do want to book income in advance, that they’re
meeting the requirements under AASB 15.
“AASB 15 allows revenue to be deferred if certain
conditions are met. If they don’t meet the conditions of
AASB 15, they have to go to AASB 1058, which, other
than in very limited circumstances, requires revenue to be
Marks says, generally speaking, NFP organisations like to
progressively recognise revenue if it is part of a multi-year
funding agreement. His job as an auditor is to make sure
they are recognising it in accordance with AASB 15 and
22 ITB July 2021
“The wording of the funding agreement is really critical.
There has to be a contract, but the tricky part is that the
contract has to articulate specifically the performance
obligations that have to be adhered to,” he says.
“When those performance obligations are met, then
you can recognise the income progressively. The key is the
wording of the funding agreement and whether it has these
performance obligations specifically outlined, as opposed to
really being just general in nature.
“If it’s a poorly worded funding agreement, and we can’t
see these performance obligations outlined, then we have
to go to AASB 1058, and that then has to be recognised
straight away as revenue.”
Marks believes the new standards are a lot fairer than
the previously used AASB 1004, but both grant providers
and recipients need to ensure obligations are properly
documented and explained in funding agreements.
“It’s probably one of the biggest issues in the not-for-profit
sector when they’re doing their financial statements,” he says.
COMPLICATIONS IN GOVERNMENT CONTRACTS
Michelle Harrison CPA, principal adviser, accounting
and financial management with the South Australian
Department of Treasury and Finance, says about threequarters of the state government’s income is sourced from
grants or taxes, which are almost exclusively accounted for
under AASB 1058.
The state also generates income from charges for goods
and services, and most of this is comprised of revenue from
contracts with customers.
“We have seen application of AASB 15 largely restricted
to fees for goods and services, as well as licences issued by
the government,” Harrison says.
“At times, it has been challenging to distinguish whether
income should be accounted for under AASB 1058 or
AASB 15. Similar to experiences in the private sector, a clear
understanding of the detail within individual contracts or
agreements is needed to understand when to account for
Harrison points out that perhaps more relevant to the
public and NFP sectors is the need for particular reflection
on the fundamental nature of the agreements.
“Some of the areas that have taken particular thought
to resolve have involved consideration of whether a party
providing consideration is a ‘customer’ or not,” she says. “It is