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Financial Reporting

George Dakis

Upcoming Changes to Contributions and Leasing Standards


Contributions

The Australian Accounting Standards Board (AASB) is currently considering the responses it has received from constituents regarding its proposals in ED 260: Income of Not-for-Profit Entities.

ED 260 contains proposals to replace the requirements in AASB 1004: Contributions, which deals with the accounting for contributions received by not-for-profits (NFPs).

NFPs are recipients of significant contributions, including government grants, appropriations, bequests, gifts, donations and volunteer services. AASB 1004 requires contributions to be recognised by NFPs as income when the NFP controls the transfer. For many NFPs, this means contributions are recognised in full as income when the money is received. Many NFPs, however, have expressed dissatisfaction with these requirements, primarily because they prevent NFPs from deferring the recognition of contributions as income to the reporting period(s) in which the expenses associated with the contributions are recognised. Consequently, AASB 1004 results in the financial performance of NFPs being arguably overstated in the early stages of contribution arrangements and potentially understated over the remaining term.

ED 260 proposes that NFPs account for all of their revenue from contracts with customers in accordance with the principles in AASB 15: Revenue from Contracts with Customers. Consistent with AASB 15, ED 260 proposes that a “defer and match” approach only be applied by NFPs in circumstances where:

  • there is an agreement with another party (such as the grantor) that creates enforceable rights and obligations; and

  • the agreement includes performance obligations – promises by the NFP entity to transfer a good or service to another party (which may or may not be the grantor).

ED 260 proposes the following additional NFP-specific criteria that must be met before a NFP can ‘defer and match’ a grant or other similar inflow:

  • the agreement must enable the customer to enforce specific performance or require the NFP recipient to compensate the customer or impose a sufficiently severe penalty on the NFP for non-performance; and

  • promises under the agreement be stipulated in sufficient detail to determine when the performance obligations are satisfied.

Any grant or other inflow of resources (other than volunteer services and contributions by owners) that fails to meet these criteria would be accounted for consistent with the current approach under AASB 1004.

In response to the proposals in ED 260, the AASB has received more than 30 thirty responses from a range of
constituents, including accounting firms, NFPs, local governments and State and Commonwealth government
bodies. The overwhelming majority of respondents express support for the AASB’s decision to replace the current requirements in AASB 1004. Most respondents, including Moore Stephens, however, disagree with the income recognition proposals in ED 260, primarily because they would fail to facilitate more useful reporting to users of NFP financial statements. A copy of the Moore Stephens response to ED 260
is available from the AASB website http://www.aasb.gov.au

The AASB is currently considering the responses on ED 260 and anticipates issuing a replacement Standard for AASB 1004 around mid-2016.

Leases

The International Accounting Standards Board (IASB) is currently finalising its proposed replacement Standard for IAS 17: Leases. At this stage, the IASB is expected to publish the replacement Standard by the end of 2015. When published, the IASB’s replacement Standard for IAS 17 is also expected to replace AASB 117: Leases.

Consistent with the current requirements under AASB 117, the proposed replacement Standard will require lessors to classify their leases as either:

  • Type A – leases that transfer substantially all of the risks and rewards of ownership; or

  • Type B – leases that do not transfer substantially all of the risks and rewards of ownership.

For Type A leases, the lessor would derecognise the underlying asset and recognise a lease receivable and (if applicable) a residual asset. In addition, Financial Reporting Upcoming Changes to Contributions and Leasing Standards the lessor would potentially recognise a profit (or loss) on sale of the leased asset. For Type B leases, the lessor would continue to recognise the underlying asset and recognise lease payments as income. Accordingly, lessor accounting is not expected to significantly change under the replacement Standard for AASB 117.

A primary focus of the IASB’s deliberations to date on leases has been to establish an accounting model that would facilitate lessees recognising assets and liabilities arising from leases (both operating and finance). The IASB’s anticipated model reflects that, at the start of a lease, the lessee obtains the right to use an asset for a period of time, as well as an obligation to pay for that right. Accordingly, the replacement Standard for AASB 117 will require a lessee to an operating lease other than a “short-term” or a “small asset” lease to recognise a lease asset and lease liability in its statement of financial position. In response to constituents’ concerns regarding cost and complexity, the IASB is expected to relieve lessees from recognising any assets and liabilities for:

  • leases of 12 months or less (short-term leases); and

  • leases of assets valued at $5,000 or less when new (small asset leases).

In addition to the anticipated impact on lessees’ balance sheets, the new requirements are also expected to impact the presentation of operating results by lessees with material operating lease arrangements. Under the replacement Standard for AASB 117, lessees will be required to:

  • Initially measure a:

    • lease liability at the present (excluding variable and most optional payments); and

    • lease asset at the initial amount of the lease liability plus any costs directly related to entering into the lease;

  • over the term of a lease, recognise in profit or loss:

    • amortisation of the lease liability using the effective interest method; and

    • amortisation of the lease asset on (generally) a straightline basis; and 

  • in the cash flow statement, present principal payments within financing activities and interest payments in either operating or financing activities.

  • Consequently, compared to what they currently report under AASB 117 (and holding everything else constant), under the new requirements lessees with material operating leases should expect;

  • lease expenses (interest plus amortisation) will be higher during the earlier stages and lower in the latter stages of the lease term;

  • reported earnings before interest, taxes, depreciation and amortisation (EBITDA) will be higher; and

  • reported cash flows from operating activities will be higher.

Not withstanding that all lessees with material operating lease arrangements will be impacted by the adoption of a new Standard for leases, lessees with loan covenants and/or compensation arrangements tied to EBITDA or other profit or loss measures should be aware that the new lease requirements are coming and be talking to Moore Stephens about how to manage the expected changes.

For more information on how we can help you succeed contact us one of our advisors.

George Dakis
Moore Stephens Victoria 
Director - Audit and Assurance 
gdakis@moorestephens.com.au
+61 3 9608 0106
Level 18, 530 Collins Street
Melbourne VIC 3000

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