Appendix F
Australian implementation guidance for not-for-profit entities

This appendix is an integral part of AASB 15 and has the same authority as other parts of the Standard. The appendix applies only to not-for-profit entities.

Introduction

F1 AASB 15 Revenue from Contracts with Customers incorporates International Financial Reporting Standard IFRS 15 Revenue from Contracts with Customers, issued by the International Accounting Standards Board. Consequently, the text of AASB 15 is generally expressed from the perspective of for-profit entities in the private sector. The AASB has prepared this appendix to explain and illustrate the principles in the Standard from the perspective of not-for-profit entities in the private and public sectors, particularly to address circumstances where a for-profit perspective does not readily translate to a not-for-profit perspective. The appendix does not apply to for-profit entities or affect their application of AASB 15.

F2 AASB 15 provides guidance on the following five elements of a contract with a customer:

(a) identifying a contract (paragraphs 9–21);

(b) identifying performance obligations (paragraphs 22–30);

(d) allocating the transaction price to performance obligations (paragraphs 73–90); and

(e) recognising revenue (paragraphs 31–45).

F3 This appendix should be read in conjunction with the requirements of this Standard.

F4 This appendix provides guidance to assist not-for-profit entities to determine whether particular transactions or other events, or components thereof, are within the scope of this Standard, in particular in relation to identifying a contract and identifying performance obligations. If a transaction is outside the scope of this Standard, the recognition and measurement of income arising from the transaction may instead be specified by another Standard, for example AASB 1058 Income of Not-for-Profit Entities.

Identifying whether a contract with a customer exists

F5 A contract is an agreement between two or more parties that creates enforceable rights and obligations. If a not-for-profit entity’s promise to transfer a good or service is made in an unenforceable arrangement with another party, a contract with a customer does not exist. If a not-for-profit entity’s promise to transfer a good or service in an arrangement with another party fails the ‘sufficiently specific’ criterion discussed in paragraphs F20–F26, a contract with a customer does not exist and the entity shall not treat the promise as a performance obligation in a contract with a customer. Where a contract with a customer does not exist, the not-for-profit entity shall consider whether AASB 1058 is applicable.

Customer

F6 In contracts with customers, the ‘customer’ is the party that promises consideration in exchange for goods or services that are an output of the entity’s ordinary activities. However, in contracts with customers in any sector, the customer might direct that goods or services are to be provided to third-party beneficiaries (including individuals or the community at large) on the customer’s behalf. In these contracts:

(a) the customer remains the party that has contracted with the entity for those goods or services and promises consideration in exchange for those goods or services; and

(b) the provision of goods or services to third-party beneficiaries is a characteristic of the promised transfer of goods or services to the customer.

F7 For example, a not-for-profit entity in the private sector may receive consideration from a government for the specified purpose of providing first-aid training free of charge to members of the community. The government is the customer because it has contracted the entity to provide the first-aid training services. This conclusion is not affected by the fact that the government specifies that those services are to be provided to members of the community.

Contract

F8 In relation to the definition of ‘contract’ in Appendix A, the reference to an ‘agreement’ in that definition shall be read by not-for-profit entities as encompassing an arrangement entered into under the direction of another party (for example, when assets are transferred to an entity with a directive that they be deployed to provide specified services).

F9 Paragraph 10 states that contracts can be written, oral or implied by an entity’s customary business practices. The customary business practices of a not-for-profit entity refer to that entity’s customary practice in performing or conducting its activities.

Enforceable agreement

F10 An inherent feature of a contract with a customer is that the entity makes promises in an agreement that creates enforceable rights and obligations. Paragraphs F11–F18 provide guidance for not-for-profit entities on when an agreement creates enforceable rights and obligations.

F11 An agreement is enforceable when a separate party is able to enforce it through legal or equivalent means. It is not necessary for each promise in the agreement to transfer goods or services to be enforceable by legal or equivalent means, as long as some enforceable obligations of the entity arise from the agreement. For an agreement to be enforceable by a separate party through ‘equivalent means’, the presence of a mechanism outside the legal system that establishes the right of a separate party to oblige the entity to act in a particular way or be subject to consequence is required.

F12 An agreement typically is enforceable by another party through legal or equivalent means if the agreement is in writing and includes sufficiently specific requirements of the parties. Oral agreements also may be enforceable. Enforceability needs to be considered in relation to both the particular terms of an agreement and any additional terms agreed by the parties as a result of further discussions or actions. Examples of terms that result in enforceable agreements include the following:

(a) a refund in cash or kind is required when the agreed specific performance has not occurred;

(b) the customer, or another party acting on its behalf, has a right to enforce specific performance or claim damages;

(c) the customer has the right to take a financial interest in assets purchased or constructed by the entity with resources provided under the agreement;

(d) the parties to the agreement are required to agree on alternative uses of the resources provided under the agreement; and

(e) an administrative process exists to enforce agreements between sovereign States or between a State and another party.

F13 A sufficiently specific, written agreement can be enforceable even if the particular terms do not include refund or other enforcement provisions, since Australian law generally provides remedies of specific performance or damages for breach of an agreement. Agreements that explicitly state they are not intended to be legally binding may nonetheless become enforceable agreements if the parties act in a manner that is inconsistent with the stated intention. Agreements that lack elements of a contract may nonetheless become legally enforceable if there is conduct by one party that causes the other party to act in reliance on such conduct. The enforceability of agreements does not depend on their form. For example, documents such as Memoranda of Understanding, Heads of Agreement and Letters of Intent can constitute legally enforceable agreements; a formal contract is not required.

F14 In respect of not-for-profit entities, enforcement mechanisms may arise from administrative arrangements or statutory provisions. An example of such an enforcement mechanism is a directive given by a Minister or government department to a public sector entity controlled by the government to which the Minister or government department belongs. The ministerial authority to require a transfer of goods or services would be sufficient for an agreement to be enforceable by a separate party through legal or equivalent means.

F15 In relation to paragraph F11, a consequence for failing to transfer promised goods or services could be either a return of consideration or a penalty for non-performance that is sufficiently severe to compel the entity to fulfil its promise to transfer goods or services. In some circumstances, where rights to specific performance are unavailable or unnecessary, the authority to require compensation may be the key determinant of the enforceability of an agreement involving a promise to transfer goods or services. A capacity to impose a severe penalty for non-performance can exist without a capacity to require a return of transferred assets or assets of equivalent value.

F16 Identification of an agreement as being enforceable by another party through legal or equivalent means does not require a history of enforcement of similar agreements by the customer or even an intention of the customer to enforce its rights. A customer might choose not to enforce its rights against an entity. However, that decision is at the customer’s discretion, and does not affect the enforceability of the customer’s rights. Enforceability depends solely on the customer’s capacity to enforce its rights.

F17 In contrast to the factors in paragraph F11, the following circumstances would not, of themselves, cause an agreement involving a promise to transfer goods or services to be enforceable by another party through legal or equivalent means:

(a) a transferor has the capacity to withhold future funding to which the entity is not presently entitled; and

(b) a not-for-profit entity publishes a statement of intent to spend money or consume assets in particular ways. The statement of intent is generally in the nature of a public policy statement, and does not identify parties who could enforce the statement. Such a statement of intent would, of itself, be insufficient to create an enforceable agreement, even if that statement is the subject of budget-to-actual reporting and of other oversight mechanisms to discharge accountability for the raising of funds, expenditure or consumption of assets. This is in contrast to a letter of intent which is typically an agreement between specifically identified parties. See also paragraph Aus26.1 of AASB 137.

F18 In relation to paragraph F17(a), a transferor’s capacity to withhold future funding to which the entity is not presently entitled can be distinguished from circumstances in which a transferor presently holds refund rights, or has the capacity to impose a severe penalty, in the event of the transferee’s non-performance, but might choose to obtain such a refund or impose such a penalty by deducting the amount of the refund or penalty from a future transfer to the entity. For example, a transferor’s capacity to withhold future funding to which the transferee is not presently entitled would differ from circumstances in which a transferor could demand a refund of granted assets in the event of the transferee’s non-performance, regardless of whether it makes any future transfers to the transferee, but chooses for convenience to deduct the refund amount from a future transfer. In this latter case, the transferor could enforce against the entity a promise to provide goods or services.

Commercial substance

F19 Paragraph 9(d) specifies that the Standard applies to a contract with a customer only if (among other criteria) the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract). A contract may have ‘commercial substance’, for the purposes of paragraph 9(d), even if it is entered into by a not-for-profit entity for purposes that, in everyday language, would be considered ‘non-commercial’ (for example, contracts to provide goods or services to members of the community on a subsidised or cost-recovery basis). This is because contracts to provide goods or services without generating a commercial return may nonetheless cause a change in the risk, timing or amount of the not-for-profit entity’s future cash flows. Accordingly, for the purposes of application of the Standard by not-for-profit entities, ‘commercial substance’ shall be read as a reference to economic substance (ie giving rise to substantive rights and obligations).

Identifying whether a performance obligation exists

F20 Paragraphs 22 and 30 of AASB 15 require that to enable an entity to identify the performance obligations that it should account for separately, each promise to transfer goods or services needs to be distinct – individually, or if not individually, as a bundle combined with other promises. The specificity of the promise to transfer goods or services can be quite different in the for-profit and not-for-profit sectors. A necessary condition for identifying a performance obligation of a not-for-profit entity is that the promise is sufficiently specific to be able to determine when the obligation is satisfied. Judgement is necessary to assess whether a promise is sufficiently specific. Such judgement takes into account any conditions specified in the arrangement, whether explicit or implicit, regarding the promised goods or services, including conditions regarding the following aspects:

(a) the nature or type of the goods or services;

(b) the cost or value of the goods or services;

(d) the period over which the goods or services must be transferred.

F21 In the not-for-profit context, a service can include an arrangement whereby one entity undertakes specific activities on behalf of another entity. Activities may include service delivery, research or asset management, among others. However, performance obligations do not include activities that an entity must undertake to fulfil a contract unless those activities transfer a good or service to a customer. For example, research activities undertaken to develop intellectual property that the entity will license to a customer are not themselves a transfer of goods or services to the customer.

F22 Whether a promise is sufficiently specific so as to qualify as a performance obligation is assessed separately for each promise and will depend on the facts and circumstances. No specific number or combination of the conditions noted in paragraph F20 need to be specified in an agreement for the promise to be sufficiently specific. In addition, there may be other conditions that need to be taken into account in applying the judgement above that may indicate the promise is sufficiently specific.

F23 Conditions specified regarding the promised goods or services may be explicit or implicit in an agreement. Paragraph 24 states that the performance obligations identified in a contract with a customer may not be limited to the goods or services that are explicitly stated in that contract. This is because a contract with a customer may also include promises that are implied by an entity’s customary business practices, published policies or specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will transfer a good or service to the customer. A not-for-profit entity may make a statement of intent to spend a transfer in a particular way. As noted in paragraph F17(b), a statement of intent alone is generally not enough to create a performance obligation. Some element of the contract will need to be enforceable and past practice would need to support the customer expectation.

F24 In relation to paragraph F20(d), a condition that a not-for-profit entity must transfer unspecified goods or services within a particular period does not, of itself, meet the ‘sufficiently specific’ criterion. For example, a not-for-profit entity may provide a number of services under its charter such as counselling and housing to disadvantaged youth. Where it receives a transfer to be used for an unspecified purpose over a particular time period, such a promise would not meet the ‘sufficiently specific’ criterion.

F25 Some not-for-profit entities have a single purpose charter, such as to provide counselling services. However, it is unlikely that an entity’s charter or stated objectives would be specific enough to require the recognition of contract liabilities under a contract that provided the entity with a grant for a specified period of time but did not also adequately identify the goods or services to be provided to other parties. Where entities receive a transfer to be used over a particular time period for specified services, such a transfer could meet the ‘sufficiently specific’ criterion. Specifying the services to be provided under the arrangement and the stipulation to use the transferred funds over a particular time period enables a determination of when the services have been provided. However, if the transfer does not specify the period over which the entity must use the funds or the services to be provided (such as the number of counselling sessions), the entity would not meet the ‘sufficiently specific’ criterion because it would be unable to determine when it meets the performance obligations.

F26 An agreement may include a condition that the entity undertakes an acquittal process to demonstrate progress toward transferring goods or services. For example, the terms of an agreement may require the entity to report on progress toward specified outputs or outcomes in an acquittal process. Such an acquittal process may provide evidence of a promise to transfer goods or services that is sufficiently specific, depending on the requirements of the acquittal process and other facts and circumstances. An acquittal process may also enable a determination of progress toward satisfaction of the performance obligation.

F27 Where a contract provides a transfer of a financial asset for an entity to acquire or construct a non-financial asset (eg a building or an intangible asset) that is to be controlled by the entity, the contract does not establish rights and obligations for the transfer of the non-financial asset to the transferor or other parties. Accordingly, the contract is not a contract with a customer, and hence is not accounted for in accordance with AASB 15. Such contracts are instead accounted for in accordance with paragraphs 15–17 of AASB 1058. In this case, the transferor has made an in-substance transfer of the non-financial asset to the entity. The entity would retain control of the non-financial asset and use it in its operations, such as to produce goods or services for transfer to other parties under other contracts. A contract to transfer a financial asset for an entity to acquire or construct a non-financial asset that is to be controlled by the entity may be part of a contract that includes other conditions that give rise to performance obligations that require the entity to transfer goods or services to other entities. Those performance obligations are accounted for under AASB 15.

Allocating the transaction price to performance obligations

F28 A customer may enter into a contract with a not-for-profit entity with a dual purpose of obtaining goods or services and to help the not-for-profit entity achieve its objectives. An entity shall allocate the transaction price to each performance obligation so that the performance obligation allocation depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. This is based on the rebuttable presumption that the transaction price is treated as wholly related to the transfer of promised goods or services.

F29 The presumption is rebutted where the transaction price is partially refundable in the event the entity does not deliver the promised goods or services.

F30 Where the presumption is rebutted, the entity shall disaggregate the transaction price and account for the component that relates to the transfer of promised goods or services in accordance with this Standard. The remainder of the transaction price shall be accounted for in accordance with AASB 1058. Whether the element not related to the performance obligation is material, and therefore needs to be accounted for separately, shall be assessed in relation to the individual contract, without reassessment at an aggregate or portfolio level.

F31 To disaggregate the component that relates to the promised goods or services, the following may be indicative of an element that is not related to the promised goods or services (and more likely to be for the purpose of enabling the not-for-profit entity to further its objectives):

(a) a non-refundable component of the transaction price; and

(b) where the entity has the status of a deductible gift recipient – the donor can claim part of the transaction price as a tax deduction for a donation.

F32 For example, a not-for-profit heritage foundation sells on-line subscriptions that provide access for a year to particular heritage sites (a promised service to each customer) and invites subscribers to, in addition, donate a non-refundable nominated amount to generally assist the foundation in pursuing its mission. Such a donation, which is voluntary for a subscriber, is separately identifiable from the price of the annual subscription. However, if the annual subscription fee and the donation were both refundable if access were not provided for the entire subscription period, the presumption in paragraph F28 could not be rebutted as the transaction price is refundable in full. In that case, the donation amount would not be accounted for separately but would be included in the transaction price that is allocated to the performance obligation to provide membership access. Consequently, the donation amount would be recognised as revenue when (or as) performance obligations under the arrangement are satisfied in accordance with AASB 15. Similarly, if both elements were equally proportionately refundable to acknowledge access already provided during the year, or if neither element were refundable, then no separation is required as the presumption is not rebutted.

Australian illustrative examples for not-for-profit entities

These illustrative examples accompany, but are not part of, AASB 15. They illustrate aspects of the Australian guidance for not-for-profit entities in AASB 15, but are not intended to provide interpretative guidance.

IE1 The following examples portray hypothetical situations. They are intended to illustrate how a not-for-profit entity might apply some of the requirements of AASB 15 Revenue from Contracts with Customers to particular types of transactions, on the basis of the limited facts presented. Although some aspects of the examples might be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying AASB 15.

Identifying performance obligations (paragraphs F20–F27)

IE2 Examples 1 and 2 illustrate the requirements of AASB 15 for identifying whether a transaction or agreement involves a performance obligation in a contract with a customer.

IE3 For a performance obligation to exist, there must be an enforceable agreement with sufficiently specific promises to transfer goods or services to or on behalf of the other party to enable assessment of whether the performance has occurred, ie whether the obligation has been satisfied. Further examples are provided in AASB 1058 of transactions or agreements where the performance obligation is not sufficiently specific.

Example 1—Enforceable agreement

Local Government A (the reporting entity) signed a Memorandum of Understanding (MOU) with a not-for-profit private sector entity. The MOU specifies that it is not legally binding on either of the parties and does not impose a refund obligation on the not-for-profit entity in the event it fails to perform under the terms of the agreement or refer to other enforceability mechanisms. Despite the statement that the MOU is not legally binding, the parties have indicated in their discussions their intention to rely upon it. The not-for-profit entity has commenced providing services under the MOU and has reported to Local Government A on its first two months’ work.

Given the intention of the parties to rely upon the MOU, and the actions of the not-for-profit entity in reliance on the MOU, the MOU is enforceable despite the statement that it is not legally binding and the absence of a refund obligation or other enforcement requirements.

Example 2—Research activities—Transfer of intellectual property

University A receives a cash grant from a donor, Road Safety Authority B, of $1.2 million to undertake research that aims to observe and model traffic flows and patterns through black-spot intersections and to develop proposals for improvements to the road system.

The terms of the grant are:

a period of three years;
the return of funds that are either unspent or not spent in accordance with the agreement;
annual progress reports and a final report are required;
publication of research results in conference presentations and/or scholarly journals; and
the transfer of the intellectual property (IP) rights arising from the research activity to the donor, Authority B.

University A concludes its arrangement with donor B is a contract with a customer as defined in AASB 15. This is on the basis that:

University A’s promise of specified research and transfer of the resulting IP is enforceable as the grant is refundable if the research is not undertaken;
University A identifies that its promise to transfer the IP created through the research to the donor is sufficiently specific to be a performance obligation. The university determines that the research services are required to develop the IP in order to fulfil the contract and therefore do not, of themselves, give rise to a transfer of goods or services to the donor; and
University A determines that the requirements for annual progress reports, a final report and publication of research results are an acquittal process that will assist it to measure its progress towards satisfaction of the performance obligation, rather than a separate performance obligation or obligations.

Accounting treatment

In accordance with AASB 15, University A allocates the cash grant to its identified performance obligation and recognises the financial asset (cash) and a contract liability of $1.2 million on initial recognition.

University A concludes that the performance obligation is satisfied over time as the university’s performance creates or enhances an asset (knowledge – the IP) that the donor controls as the asset is created or enhanced (AASB 15, paragraph 35(b)). Accordingly, the university recognises revenue over time as it satisfies the performance obligation. The university elects to measure its progress towards complete satisfaction of the performance obligation on the basis of an input method, such as labour hours expended.

Example 3—Research activities—Provision of licence to donor

Example 3A – Enforceable agreement, sufficiently specific performance obligation, licence granted to donor (right to access IP)

In this example, the facts of Example 2 apply, except that:

University A retains control of the IP arising from the research, instead of the IP transferring to the donor;
the IP is licensed permanently to donor B at the commencement of the agreement; and
the licence covers the research activities undertaken and the results that arise over the term of the agreement as the IP is developed.

University A concludes its arrangement with donor B is a contract with a customer as defined in AASB 15. This is on the basis that:

University A’s promise of specified research and granting of the licence is enforceable as the grant is refundable if the research is not undertaken;
University A identifies that its promise to grant the licence to the donor is sufficiently specific to be a performance obligation. The university determines that the research services are required to develop the IP in order to fulfil the contract and therefore do not, of themselves, give rise to a transfer of goods or services to the donor; and
University A determines that the requirements for annual progress reports and a final report and publication of research results are an acquittal process that will assist it to measure its progress towards satisfaction of the performance obligation.

Accounting treatment

In accordance with AASB 15, University A allocates the cash grant to its identified performance obligation (granting of the licence to the IP) and recognises the financial asset (cash) and a contract liability of $1.2 million on initial recognition.

University A concludes that the performance obligation is satisfied over time as the licence provides the donor with a right to access the entity’s IP as it exists throughout the licence period (paragraph B58):

the university’s activities significantly affect the IP to which the donor has rights;
the licence exposes the donor to any positive or negative effects of the university’s activities; and
the university’s activities do not result in the transfer of a good or service to the donor as those activities occur.

Accordingly, the university recognises revenue over time as it satisfies the performance obligation. The university elects to measure its progress towards complete satisfaction of the performance obligation on the basis of an input method, such as labour hours expended.

Example 3B – Enforceable agreement, sufficiently specific performance obligation, licence granted to donor (right to use IP)

In this example, the facts of Example 3A apply, except that:

the research aims to observe and model traffic flows and patterns along roads potentially affected by a future freeway development and to develop proposals for the freeway interchanges; and
the IP (as it then exists) is licensed permanently to donor B at the conclusion of the agreement.

University A concludes its arrangement with donor B is a contract with a customer as defined in AASB 15. This is on the basis that:

University A’s promise of specified research and granting of the licence is enforceable as the grant is refundable if the research is not undertaken; and
University A identifies that its promise to grant the licence to the donor is sufficiently specific to be a performance obligation. The university determines that the research services are required to develop the IP in order to fulfil the contract and therefore do not, of themselves, give rise to a transfer of goods or services to the donor.

Accounting treatment

University A concludes that the performance obligation is satisfied at a point in time (the end of the grant period) as the licence provides the donor only with a right to use the entity’s IP as it exists when the licence is granted (paragraph B61). That is, the licence provides the donor with a right to use the university’s IP as it exists at the end of the grant period. The licence does not provide a right to access the university’s IP as the criteria in paragraph B58 are not met.

Accordingly, the university recognises revenue at the conclusion of the agreement, when the licence is granted to the donor.

Example 4—Research activities—Transfer of research findings

Example 4A – Enforceable agreement, sufficiently specific performance obligation, research data only

Research Institute C receives a cash grant from a donor, Marine Sanctuaries Trust M, of $5.3 million to undertake research that aims to track whale migration along the eastern coast of Australia.

The terms of the grant are:

a period of three years;
the return of funds that are either unspent or not spent in accordance with the agreement;
publication of research data on a public website as it is obtained, so that any researchers can use the data;
the IP arising from the research is neither transferred to nor licensed to donor M;
annual progress reports and a final report are required;
Institute C may publish research results in conference presentations and/or scholarly journals, retaining the copyright to such results; and
the institute has an explicit right to payment for the research services completed to date if the agreement is terminated.

Institute C concludes that the arrangement is a contract with a customer as defined in AASB 15 on the basis that:

Institute C’s promise of specified research is enforceable as the grant is refundable if the research is not undertaken;
the institute identifies its promise to undertake the research is sufficiently specific and represents a single performance obligation; and
the undertaking of the research will represent services provided to the donor, as it is a beneficiary of the research even though the research data is publicly available.

Accounting treatment

In accordance with AASB 15, Institute C allocates the cash grant to its identified performance obligation and recognises the financial asset (cash) and a contract liability of $5.3 million on initial recognition.

Institute C concludes that the performance obligation is satisfied over time as the donor simultaneously receives and consumes the benefits of the research services as they are performed (paragraph 35(a)). This is on the grounds that another entity would not need to substantially re-perform the research completed to date by the institute if that other entity were to fulfil the remaining performance obligation to the donor (paragraph B4) as the research data is made public as it is collected, and thus available to any replacement researchers.

Accordingly, the institute recognises revenue over time as it satisfies the performance obligation. The institute elects to measure its progress towards complete satisfaction of the performance obligation on the basis of research data published.

Example 4B – Enforceable agreement, sufficiently specific performance obligation, research data and assessment only

In this example, the facts of Example 4A apply, except that:

the grant requires Research Institute C to prepare interim and final reports analysing the tracking data obtained;
publication of the research data is required at the conclusion of the research, rather than contemporaneously;
the IP arising from the research is neither transferred to nor licensed to donor M; and
the institute is restricted from readily directing the tracking information and analysis for another use of the institute.

Institute C concludes that the arrangement is a contract with a customer as defined in AASB 15, on the same basis as set out in Example 4A.

Accounting treatment

Institute C concludes that the donor does not simultaneously receive and consume the benefits of the research services as they are performed. This is on the grounds that another entity would need to substantially re-perform the research completed to date by the institute if that other entity were to fulfil the remaining performance obligation to the donor. Therefore, paragraph 35(a) is not satisfied.

As the donor does not obtain the IP under the agreement, Institute C determines that its research does not create or enhance an asset that donor M controls as the asset is created or enhanced. Therefore, paragraph 35(b) is not satisfied.

Institute C notes that its research performance does not create an asset with an alternative use to the entity due to the restrictions in the agreement regarding directing the research to another use. Institute C also notes that it has an explicit, enforceable right to payment for performance completed. Therefore, paragraph 35(c) is satisfied.

Accordingly, Institute C concludes that the performance obligation is satisfied over time and recognises revenue over time as it satisfies the performance obligation. The institute elects to measure progress on the basis of the amount it would be entitled to receive for its performance to date, which corresponds with the value of the performance to the customer.

Example 4C – Enforceable agreement, sufficiently specific performance obligation, research data and assessment only

In this example, the facts of Example 4B apply, except that Institute C is able to utilise the research it performs for any other use of the institute. Institute C concludes that the arrangement is a contract with a customer as defined in AASB 15, on the same basis as set out in Example 4A.

Accounting treatment

Institute C concludes that the donor does not simultaneously receive and consume the benefits of the research services as they are performed, on the same basis as set out in Example 4B. Therefore, paragraph 35(a) is not satisfied.

Institute C determines that its research does not create or enhance an asset that donor M controls as the asset is created or enhanced, on the same basis as set out in Example 4B. Therefore, paragraph 35(b) is not satisfied.

Moreover, the institute notes that it is able to utilise the research it performs for any other use it determines. This is on the grounds that the institute has no contractual or practical limitation on its use of the research, including having the ability to sell the research to another customer. Therefore, the institute’s performance does create an asset with an alternative use to the entity, and paragraph 35(c) is not satisfied.

Accordingly, Institute C concludes that the performance obligation is satisfied at a point in time (the end of the grant period) and recognises revenue at the conclusion of the agreement, when it satisfies the performance obligation.

Example 5—Research activities—No contract with a customer

Example 5A – Enforceable agreement, performance obligations not sufficiently specific

University G receives a cash grant from a donor, Medical Research Trust Z, of $2 million to undertake research that aims to identify and validate biomarkers to distinguish malignant cancers from benign tumours.

The terms of the grant are:

a period of two years;
the return of funds that are either unspent or not spent in accordance with the agreement;
semi-annual budget reports that detail how the funds have been spent to date; and
the research results are publicised, when appropriate, in conference presentations and/or published in scholarly journals.

University G notes that the arrangement is enforceable as the grant is refundable if the research is not undertaken. However, University G concludes its arrangement with donor Z is not a contract with a customer as defined in AASB 15. This is on the basis that:

publicising the research results when appropriate is not sufficiently specific to enable University A to identify when it satisfies its obligations because there is no requirement to produce a specified number of publications or deliver a specified number of presentations; and
the budget reports merely provide the grantor an indication of the University’s spending of funds and do not represent a transfer of a benefit to the grantor.

Accordingly, the university concludes that the arrangement is not within the scope of AASB 15. Given that the university acquired cash (the grant funds) for consideration that is significantly less than fair value (there are no performance obligations to recognise) principally to enable it to further its objectives (research), University G concludes that AASB 1058 Income of Not-for-Profit Entities is applicable.

Accounting treatment

University G recognises a financial asset of $2 million for the cash grant received and recognises any related amounts arising under other Australian Accounting Standards in accordance with AASB 1058. Any excess of the financial asset over the related amounts would be recognised as income.

Example 5B – Enforceable agreement, performance obligations not sufficiently specific, individual researcher controls grant funds

In this example, the facts of Example 5A apply, except that:

University G receives the grant funds to administer on behalf of a researcher named in the grant;
the named researcher may direct the use of the funds in accordance with the grant agreement; and
the funding arrangement is tied to the researcher, so that if the researcher moves from University G to another research institution, any unspent grant funds held by the university will be transferred to the other research institution.

University G concludes that the arrangement is not a contract with a customer as defined in AASB 15, on the same basis as set out in Example 5A.

University G notes that it merely administers the grant funds on behalf of the researcher. Accordingly, the university considers the arrangement under the requirements of AASB 9 Financial Instruments, noting it:

receives cash that it administers in accordance with the grant agreement (to which it is a party);
may invest the funds it holds as it considers appropriate, benefiting from any interest received and obliged to reimburse any losses incurred; and
agrees to expend those funds at the direction of the researcher.

Accounting treatment

University G recognises a financial asset of $2 million for the funds received, in accordance with paragraph 3.1.1 of AASB 9. The university then considers whether it has transferred the financial asset to the researcher, but notes that because it may invest the funds as it considers appropriate, the university retains substantially all the risks and rewards of ownership of the funds. Accordingly, the university continues to recognise the grant funds as a financial asset and recognises an equal amount as a financial liability to expend the grant funds at the researcher’s direction, as required by paragraph 3.2.15 of AASB 9.

Allocating the transaction price to performance obligations (paragraphs F28–F32)

IE4 Examples 6 and 7 illustrate the requirements of AASB 15 for accounting for the transaction or agreement, including assessing whether the transaction includes an element not related to performance obligations (eg a donation).

Example 6—Performance obligation, transfer of goods without donation element

Entity A (a not-for-profit entity) sells chocolates in a fundraising drive for a greater margin than a for-profit entity would typically generate by selling chocolates. In addition, buyers of the chocolates are often motivated by the not-for-profit entity’s benevolent aims. The customer is entitled to a full refund of the purchase price if the chocolates were ordered and paid for in advance and either the delivered chocolates were spoiled or Entity A is unable to deliver the chocolates.

Entity A determines there is a contract with a customer accounted for under AASB 15, as there is:

an enforceable contract due to the return obligation; and
a sufficiently specific performance obligation requiring the transfer of the chocolates to the customer, which is satisfied at the time of delivery.

Entity A determines that the presumption in paragraph F28 cannot be rebutted because the transaction price is not partially refundable.

Accounting treatment

Accordingly, the entire consideration received, including the proceeds from the additional profit margin, forms part of the transaction price that is allocated to the performance obligation. There is no element unrelated to the transfer of the chocolates that would require separate accounting.

Example 7—Performance obligation, transfer of goods with donation element

Entity B holds an annual fundraising dinner in its local community. The ticket price is $600 per head, and is partially refundable if the dinner is cancelled, in which case the customer will receive a refund of $300. Based on the menu, the retail price of the dinner at a local restaurant is $200 per ticket. Hosting the dinner also provides patrons (customers) with the benefit of socialising with a wide range of community members (including networking) and the amount of consideration to which Entity B expects to be entitled in exchange for transferring the promised goods or services (the dinner and networking) to the customer is $250.

Entity B determines there is a contract with a customer to be accounted for under AASB 15, as there is:

an enforceable contract due to the return obligation; and
a sufficiently specific performance obligation requiring the provision of the dinner and networking to the customer, which would be satisfied at the point in time when provided.

Entity B determines that the presumption in paragraph F28 is rebutted as there is a partial refund in the event of non-performance. The element not related to the performance obligation is considered material.

Accounting treatment

For each ticket sold, Entity B recognises:

a contract liability of $250, in accordance with AASB 15, which represents the transaction price of the dinner and networking to be provided to the ticketholder. Entity B would recognise this amount as revenue when it provides the dinner event; and
income of $350, in accordance with AASB 1058 – the residual of $350 is a result of a transaction where the consideration provided by the entity ($250) is significantly less than the fair value of the asset (cash of $600) principally to enable Entity B to further its objectives and therefore AASB 1058 applies, with immediate recognition of income.

A refund obligation is recognised only to the extent that the entity does not expect to retain the refundable amount. Entity B therefore does not recognise the refund obligation of $300 unless the dinner is cancelled or is expected to be cancelled. In that case, and subsequent to the initial accounting above, Entity B would then recognise in respect of each ticket:

the reversal of the contract liability of $250 (debit), as settlement is no longer expected;
a reduction in cash of $300 (credit), being the refund to the ticket holder; and
the difference of $50 (debit) is either an expense or a reduction of donation income previously recognised.

This results in a net donation of $300 per ticket, reflecting the net cash received for each ticket after the refund has been made.

Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, AASB 2016-8.

Introduction

BC1 This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in this Standard. It sets out the reasons why the Board developed the Standard, the approach taken to developing the Standard and the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.

The need for change

BC2 Prior to the issue of AASB 15 Revenue from Contracts with Customers, the recognition and measurement requirements for transactions of not-for-profit entities giving rise to income depended on whether the transaction was reciprocal or non-reciprocal in nature. The accounting for income arising from reciprocal transactions was predominantly addressed in AASB 118 Revenue and AASB 111 Construction Contracts. The accounting for income arising from non-reciprocal transactions was addressed in AASB 1004 Contributions.

BC3 The Board observed determining whether a transaction was reciprocal or non-reciprocal in practice was not always straightforward. Entities found it challenging to determine whether approximately equal value had been provided in exchange to the other party or parties to the transfer, and contended that in many instances the immediate recognition of income in a non-reciprocal transaction did not faithfully represent the underlying financial performance of the entity. Constituents noted that identifying reciprocal transactions was difficult and that diverse interpretations existed, with some entities recognising transactions with return obligations and specified performance outcomes as reciprocal transactions and some not. Constituents were also concerned about the income recognition requirements as applied to grants, appropriations and other transfers of assets made on the condition that the not-for-profit entity deliver goods or services to nominated third parties. Constituents also noted difficulties in discussing financial information with grantors/donors when explaining why they needed additional resources when the financial statements indicated no such need because of the immediate income recognition requirement of AASB 1004. Users noted they did not think the financial statements were reflecting the economic reality of the not-for-profit entities’ financial circumstances. Accordingly, the Board decided to undertake a project to conduct a fundamental review of the income recognition requirements applying to not-for-profit entities.

BC4 A as a consequence of its policy on transaction neutrality, the Board gave consideration to International Accounting Standards Board developments in the accounting for revenue; finalised with the issue of IFRS 15 Revenue from Contracts with Customers in May 2014 and noted it needed to determine what, if any, amendments and guidance would be required to enable not-for-profit entities to apply this Standard. In addition, the Board noted the application of the performance obligation approach to revenue recognition adopted in IFRS 15, using a broader concept of customer had the potential to resolve some of the issues noted with AASB 1004. The Board also had regard to the work of the International Public Sector Accounting Standards Board (IPSASB) in developing its income recognition requirements for ‘non-exchange’ transactions.

BC5 The Board’s proposals with respect to the accounting for income of not-for-profit entities finalised in this Standard were exposed for public comment in April 2015 as part of ED 260 Income of Not-for-Profit Entities. In developing ED 260, the Board considered both the feedback received on the immediate predecessor Exposure Draft, ED 180 Income from Non-Exchange Transactions (Taxes and Transfers), and the requirements of AASB 15 Revenue from Contracts with Customers. ED 260 proposed both revisions to the income recognition principles in AASB 1004, and development of guidance and illustrative examples to assist not-for-profit entities in implementing AASB 15.

BC6 As part of its due process on this project, the Board held roundtables in Melbourne, Brisbane, Sydney and Canberra, and discussed the proposals at various forums, workshops and discussion groups. In addition, to help ensure it considered implications of its proposals on entities with different objectives (eg charities, local government), the Board conducted several targeted meetings. The Board received comments on its exposed proposals both formally via 34 submissions on the Exposure Draft, and informally via email, meetings with constituents, presentations to various bodies and social media. About half the respondents to the Exposure Draft explicitly considered that overall, the proposals would result in financial statements that would be useful to users. Other respondents were supportive of the Board’s efforts in this area but considered that the proposals did not fully address the concerns noted in paragraph BC3. Following the consultation period, and after considering constituent comments received, the Board decided to proceed with issuing revised principles for the recognition and measurement of income of not-for-profit entities.

BC7 In response to the feedback received, the Board amended or clarified various proposals in the Exposure Draft as part of issuing the final guidance. As part of its processes in this regard, the Board decided to establish a Project Advisory Panel consisting of preparers and advisors to provide input to the revised proposals. The Board considered that, overall, its decisions on this project did not significantly depart from those exposed in a manner that adversely affects entities applying the Standard. However, in order to satisfy itself that sufficient due process had been undertaken, the Board invited public comment on both a discussion draft before the Board at its August 2016 meeting and a fatal flaw draft – publicised via its weekly newsletter.

BC8 The Board decided to finalise its proposals exposed in ED 260 by:

(a) issuing AASB 1058 to address the accounting for income of not-for-profit entities. The Standard establishes principles for not-for-profit entities that apply to transactions where the consideration to acquire an asset is significantly less than fair value principally to enable a not-for-profit entity to further its objectives, and to the receipt of volunteer services;

(b) issuing AASB 2016-8 Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities to add implementation guidance to AASB 15 and AASB 9 as well as illustrative examples to AASB 15 to assist not-for-profit entities in applying the Standard;

(d) issuing AASB 2016-7 Amendments to Australian Accounting Standards – Deferral of AASB 15 for Not-for-Profit Entities to defer the effective date of AASB 15 for application by not-for-profit entities.

Amendments to AASB 9

Non-contractual receivables arising from statutory requirements

BC9 In ED 260 the Board proposed asset recognition requirements for AASB 1058 that overrode the recognition criteria of other Australian Accounting Standards. Under those proposals entities would have recognised an asset and measured it at fair value in accordance with the proposed requirements and then subsequently measured that asset in accordance with its applicable Standard. In its redeliberations on ED 260 the Board decided not to proceed with the asset recognition requirements it proposed in the ED. Instead, the Board decided to clarify consequential amendments to other Standards that specify the initial measurement requirements for transactions within the scope of AASB 1058.

BC10 As part of its redeliberations the Board observed that entities with statutory receivables, such as from taxes and fines, would not be required to apply AASB 9 to those receivables as they are not financial assets as defined in AASB 132 Financial Instruments: Presentation because there is no contract that provides the entity with the right to future cash flows. However, the Board held the view that the initial fair value measurement requirements of AASB 9 are the most appropriate for the types of receivables under consideration as the economic substance of contractual receivables and receivables arising from statutory requirements is similar at initial recognition and therefore decided to require that AASB 9 be applied for the initial measurement of such receivables. The Board also considered that requiring entities to apply AASB 9 for the initial measurement of non-contractual receivables arising from statutory obligations addressed the uncertainty surrounding the appropriate treatment of those receivables.

BC11 Accordingly, the Board decided to amend AASB 9 to require that non-contractual receivables arising from statutory requirements should initially be measured in accordance with that Standard as if those receivables were financial instruments. The Board considered whether the subsequent measurement requirements of AASB 9 should also apply to statutory receivables; however, the Board noted:

(a) constituent feedback indicating the impact of the subsequent measurement requirements of AASB 9 needs further consideration; and

(b) the International Public Sector Accounting Standards Board (IPSASB) had recently embarked on its Public Sector Specific Financial Instruments project to consider requirements for public sector financial instruments that are not within the scope of IFRS 9 Financial Instruments.

BC12 Accordingly, the Board decided not to require entities to apply the subsequent measurement requirements of AASB 9 to statutory receivables. Instead, the Board decided to monitor the IPSASB’s project and consider the subsequent measurement of statutory receivables in a future project.

BC13 The Board noted that applying AASB 9 only for initial recognition of non-contractual statutory receivables could cause confusion and therefore decided to add guidance to accompany AASB 9.

BC14 The Board decided not to address non-contractual payables at this stage, given the scope of the project is related to income of not-for-profit entities. However, the Board decided to consider non-contractual payables at a future date while monitoring the work of the IPSASB on its public sector specific financial instruments project.

Amendments to AASB 15

BC15 The Board conducted a comprehensive review of AASB 15 to determine where additional not-for-profit guidance might be required. As a result, the Board decided to develop guidance for not-for-profit entities including addressing:

(a) how not-for-profit entities should apply terminology used in AASB 15;

(b) when an agreement with another party creates enforceable rights and obligations; and

(c) how to identify when performance obligations exist, requiring a promise to transfer a good or a service to be specified in sufficient detail to be able to determine when the obligation is satisfied.

BC16 In addition to the guidance mentioned above, the Board also decided to make some amendments to the body of AASB 15:

(a) to require that transfers which enable an entity to acquire or construct a non-financial asset to be controlled by the entity be accounted for in accordance with AASB 1058, not AASB 15; and

(b) to clarify that any contract that is not enforceable or does not contain sufficiently specific performance obligations is not within the scope of AASB 15 for not-for-profit entities.

BC17 The Board observed that not-for-profit entities might receive transfers of financial assets that the entity must use to acquire or construct a non-financial asset that the entity will control. The Board noted various views on the requirements that should apply to these transfers, which could result in divergence in practice. The Board considered that these transfers are an in-substance transfer of the underlying non-financial asset the entity must acquire or construct. Accordingly, the Board decided to specify accounting requirements for these transfers in AASB 1058 and to clearly state that these transfers are not within the scope of AASB 15 for not-for-profit entities.

BC18 The Board noted that paragraph 15 of AASB 15 specifies requirements for contracts with customers that do not meet the criteria in paragraph 9 of AASB 15. For the purposes of the guidance the Board developed to accompany AASB 15 the Board noted, in particular, that some of the criteria in paragraph 9 relate to enforceable agreements and sufficiently specific performance obligations. The Board considered that the requirements of paragraph 15 would create ambiguity in the context of AASB 1058 and the additional guidance the Board developed to accompany AASB 15. Consequently, the Board decided to amend AASB 15 to state that any contract of a not-for-profit entity that is not enforceable or does not contain sufficiently specific performance obligations is not within the scope of AASB 15. Moreover, not-for-profit entities would need to consider whether that contract should be accounted for in accordance with AASB 1058. The Board noted that this amendment would help to avoid confusion and divergence in practice.

Terminology

BC19 Not-for-profit entities often receive assets through grants and other transactions, where those transactions:

(a) are not described as contracts, even though they may be part of agreements that specify the goods or services to be transferred by the recipient of the grant;

(b) are not described as transactions with ‘customers’;

(d) might require a not-for-profit entity to provide benefits to third party beneficiaries when they transfer promised goods or services.

In these circumstances, the party, or parties, that should be regarded as the ‘customers’ might be unclear.

BC20 The Board considered whether to make modifications to some terms in AASB 15 that would be clearer for not-for-profit entities to apply. In developing ED 260 the Board decided to maintain a transaction-neutral approach to any modifications it might consider to AASB 15. In this context, the Board reviewed the definitions of a ‘customer’ and of a ‘contract’ to determine whether a modification was necessary or whether additional not-for-profit guidance would be sufficient.

BC21 The Board concluded that these aspects do not warrant using different terms other than ‘contract’ and ‘customer’ because additional guidance on how those terms apply in a not-for-profit context would provide sufficient direction for entities while maintaining the Board’s transaction-neutral approach. Accordingly, in ED 260 the Board decided to clarify those terms in a not-for-profit entity context. Feedback on ED 260 indicated broad support for the proposed clarifications, and therefore the Board decided to finalise its proposals in that regard.

Customer

BC22 In a contract with a customer, the customer may direct that goods or services are to be provided to third party beneficiaries (whether employees, other individuals or the community at large) on the customer’s behalf. The Board noted the IASB’s considerations in its Basis for Conclusions to IFRS 15, specifically paragraphs BC54 and BC55 where the IASB argued that the definition of a ‘customer’ could extend beyond the parties specifically identified in a contract, thereby potentially satisfying the definition of a ‘customer’ to be in scope of IFRS 15. The Board noted that the IASB’s considerations highlighted in paragraphs BC54 and BC55 concur with the Board’s views. However, the Board noted that while the IASB expressed this view in its Basis for Conclusions to IFRS 15, not-for-profit entities would need more authoritative guidance.

BC23 Consistent with the IASB’s conclusions, the Board acknowledged that identifying the ‘customer’ in a contract may not always be straightforward for not-for-profit entities. For example, the Board noted that not-for-profit entities routinely receive grants where the grantor requires the entity to provide services to unspecified third parties. In all other respects the grant would be within the scope of AASB 15. In this example, it is unclear whether those unspecified third parties could be considered ‘customers’ in the contract or whether the grantor is the customer.

BC24 The Board clarified that in contracts with customers, the customer is usually the party that has contracted with the entity for those goods or services and promises consideration in exchange for those goods or services, regardless of whether there are third party beneficiaries. Although this principle applies to entities in both the for-profit and not-for-profit sectors, the Board decided to add not-for-profit entity clarification of this principle, in view of:

(a) the likely greater prevalence of third party beneficiaries in contracts entered by not-for-profit entities; and

(b) uncertainty about this issue expressed to the Board in its project outreach activities.

Contract

BC25 The Board noted that a ‘contract’ is defined in AASB 15 as “an agreement between two or more parties that creates enforceable rights and obligations” and that paragraph 10 of AASB 15 states that contracts can be written, oral or implied by an entity’s customary business practices. The Board considered that this definition and guidance are sufficiently broad to address the issues noted in paragraph BC19, and should readily be able to be applied by not-for-profit entities. The Board acknowledged, however, that clarification was necessary for not-for-profit entities in relation to some specific aspects of applying the definition.

BC26 The Board observed that not-for-profit entities might require additional guidance to distinguish sufficiently specific performance obligations for the purposes of AASB 15 and constructive obligations for the purposes of AASB 137 Provisions, Contingent Liabilities and Contingent Assets. In particular, the Board considered a range of statements not-for-profit entities make regarding, for example, their purpose or reason for a particular fundraising. The Board noted that some of these statements could give rise to:

(a) sufficiently specific performance obligations;

(b) constructive obligations; or

BC27 The Board decided that the distinguishing characteristics of an arrangement that would result in any of the above outcomes requires further clarification given the broad range of arrangements not-for-profit entities enter into. The additional guidance would assist entities in determining an appropriate accounting treatment that more accurately reflects the effects of the entity’s arrangements on its financial performance.

BC28 Based on feedback to ED 260 indicating uncertainty regarding the determination of enforceability, particularly for documents not specifically identified as contracts, the Board also decided to clarify:

(a) that a ‘contract’, for the purposes of AASB 15, can extend to arrangements such as Memoranda of Understanding, Heads of Agreement and Letters of Intent if those arrangements are enforceable given that not-for-profit entities might not enter arrangements that are explicitly defined as contracts; and

(b) the factors to consider when determining if a contract is enforceable (see paragraphs BC29–BC36).

Enforceable agreements

BC29 The Board noted that obligations can include those that are legal, constructive and economic in nature. AASB 15 states that a contract is an agreement between two or more parties that creates enforceable rights and obligations. The Basis for Conclusions to IFRS 15 paragraph BC32 states that in determining whether a contractual right or obligation is enforceable is a question to be considered within the context of the relevant legal framework (or equivalent framework) that exists to ensure that the parties’ rights and obligations are upheld. In ED 260 the Board decided to propose not-for-profit entity-specific guidance to help entities identify whether an agreement creates enforceable rights and obligations. This is because:

(a) moral obligation and economic compulsion can be seen as the motivation for many of the activities of not-for-profit entities;

(b) some mechanisms for enforcing a not-for-profit entity’s promises to transfer goods or services are unique to entities (typically not-for-profit) in the public sector. For example, Ministerial directives might be employed to compel promised transfers of goods or services by a not-for-profit entity; and

(c) some agreements between different levels of government might rely on a common purpose, without the transferor funding a programme necessarily having the power to enforce the transferee entity’s promises to provide goods or services.

BC30 In developing the Exposure Draft, and in finalising the requirements of this Standard, the Board sought input from legal practitioners on some of the most common characteristics that could make an arrangement enforceable.

BC31 The Board observed that AASB 15 paragraph 10 states that the enforceability of rights and obligations in a contract is a matter of law. In this regard, the Board noted Australian law has a legal mechanism for the resolution of contractual disputes that establish the rights of a separate party, being the judiciary, to oblige the entity to act in a particular way thereby leaving that entity with little, if any, discretion to avoid settling an obligation. For an agreement to be enforceable by equivalent means would require the presence of a mechanism outside of the legal system that establishes the right of a separate party to oblige the entity to act in a particular way thereby leaving that entity with little, if any, discretion to avoid settling an obligation.

BC32 The Board considered that an obligation to return consideration that accompanies a not-for-profit entity’s promise to transfer goods or services would make the agreement enforceable. If a transferor in an agreement presently holds rights to a refund or other compensation in the event of the transferee entity’s non-performance, the transferor might choose to, for convenience, ‘net settle’ by deducting the refund amount from a future transfer. Cancelling future funding to which the entity is presently entitled is a cancellation of a debt owed to the entity and is, in substance, a refund of promised consideration. Therefore, the capacity to cancel future funding to which the entity is presently entitled would make the arrangement enforceable by legal or equivalent means.

BC33 In contrast to the capacity referred to in paragraph BC32, a transferor’s capacity to withhold future funding to which the entity is not presently entitled is substantially different. The ability of a funding provider to withhold future, uncommitted, funding is a source of economic compulsion for the funding recipient. This is because the recipient might be economically compelled to undertake a present activity to secure that future funding. Economic compulsion is not, of itself, a source of enforceability of a promise. In other words, circumstances affecting possible future transactions are not a feature of existing contractual rights and obligations.

BC34 The Board observed that, if economic compulsion were sufficient to make a promise enforceable, a government’s explicit and implicit promises to provide social benefits (such as age pensions, and health and education services) potentially would qualify as enforceable obligations in a wide range of circumstances. Consequently, a government might identify liabilities for benefits for which members of the community have yet to qualify, as the government would be economically compelled to provide the benefits at some point in the future (for example, on an aggregate basis, there is no doubt that of those already born, a significant percentage will survive to qualify for the aged pension and will need to receive various health services). The Board currently considers that identifying liabilities so broadly would not provide useful information about a government’s present financial position, although information about likely future transfers of social benefits would be useful for long-term fiscal sustainability reporting. The Board notes that the IPSASB is presently considering the range of recognition points in its project on accounting for social benefits.

BC35 Feedback to the guidance provided in ED 260 indicated constituents would continue to have difficulty applying the ‘enforceable’ criterion, despite the proposed additional guidance. In considering the feedback received, the Board significantly expanded the ‘enforceability’ guidance to include a range of factors that could potentially result in an enforceable arrangement. The Board clarified that a return obligation is merely an indicator of enforceability, and not the only indicator. The Board also noted that where parties to the arrangement need to mutually agree on any changes to the use to which transferred funds are put, that this constitutes enforceability, as neither party has the ability to unilaterally make decisions regarding the assets transferred. The Board noted, however, that the guidance is general in nature and, while it is intended to be helpful in assisting entities assess the enforceability of arrangements, it does not constitute legal advice. Accordingly, the Board noted that, depending on the complexity of the individual facts and circumstances, entities might still need to obtain specific legal advice in regard to their arrangements.

BC36 The Board also sought feedback from its Project Advisory Panel on the revised guidance on enforceability and observed the feedback was generally positive. The Panel considered the guidance was useful within the confines of not providing specific legal advice. Accordingly, the Board decided to finalise its clarifications by including the additional guidance in the final Standard.

Identifying performance obligations

BC37 The Board noted that a performance obligation in IFRS 15 meets the definition of a liability in the AASB Framework for the Preparation and Presentation of Financial Statements as it requires an outflow of resources in settlement of an obligation. Accordingly, a key aspect of a performance obligation is that there is a transfer of goods or services to another party that is not at the discretion of the provider. In a not-for-profit context the Board determined that due to the prevalence of transfers of assets to not-for-profit entities that further guidance on identifying performance obligations was warranted.

Sufficiently specific requirements

BC38 Some transfers of assets to not-for-profit entities are provided with no, or minimal, terms and conditions regarding how the transferred assets must be used other than that the assets are used for purposes consistent with the entity’s service-delivery objectives as set out in its constitution or enabling legislation (where applicable). For example, a charity may have the discretion to change the goods or services to be provided using donated assets, even when the donations are received in specific-purpose fundraising appeals, to enable the charity to redirect aid to those in greatest need as circumstances change. Some other transfers to not-for-profit entities are provided solely on condition that the funds are to be expended within a specified time period. For these reasons, it can be difficult to distinguish goods or services provided to meet this general requirement from any of the not-for-profit entity’s other goods or services provided.

BC39 The circumstances described in paragraph BC38 are much more prevalent in the not-for-profit sector than the for-profit sector, and may raise issues regarding which terms and conditions attached to assets transferred to a not-for-profit entity give rise to performance obligations. The Board decided to propose a principle in ED 260 that to qualify as a performance obligation, a not-for-profit entity’s enforceable promise to transfer goods or services must be sufficiently specific to allow the entity to determine when the performance obligation is satisfied, as this indicates the transfer of goods or services is not at the discretion of the provider.

BC40 The Board also decided to propose not-for-profit entity guidance:

(a) noting that applying the ‘sufficiently specific’ criterion requires judgement; and

(b) identifying particular conditions to consider in determining whether a promise is ‘sufficiently specific’ to qualify as a performance obligation.

BC41 The Board considered whether to identify particular conditions as essential for treating a promise to transfer a good or a service as ‘sufficiently specific’. The Board concluded that:

(a) no particular condition regarding a promise to provide a good or service would ensure the proposed principle in paragraph BC39 is met; and

(b) prescribing condition(s) that are necessary to make a promise ‘sufficiently specific’ might arbitrarily and unintentionally exclude some performance obligations from being identified as such.

BC42 For example, the Board:

(a) noted that paragraph 26 of AASB 15 states that: “Depending on the contract, promised goods or services may include, but are not limited to … (e) providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis) or of making goods or services available for a customer to use as and when the customer decides”; and

(b) concluded that, if particular aspects of a ‘sufficiently specific’ promise were to be mandatorily present, a not-for-profit entity’s promise to provide a service of standing ready to provide an unspecified good or service might be treated as ‘insufficiently specific’ to qualify as a performance obligation. This outcome would be inconsistent with the Board’s policy of transaction neutrality.

BC43 One of the aspects to consider in assessing whether a promise is ‘sufficiently specific’ to qualify as a performance obligation is a specified period over which promised goods or services must be transferred. In relation to that aspect, the Board concluded that a condition that a transfer of assets to a not-for-profit entity relates to a particular time period does not, of itself, meet the ‘sufficiently specific’ criterion – the nature or type of goods or services to be transferred by that entity over that time period must also be specified. This is because time does not require an outflow of resources embodying economic benefits (the definition of a liability in the AASB Framework for the Preparation and Presentation of Financial Statements requires an outflow of resources in settlement of the obligation). Rather, the Board considers that such a condition is, in substance, an indication that the transferor does not intend to make similar future transfers to the entity for a defined period of time.

BC44 The Board considered whether its view above is consistent with treating as ‘sufficiently specific’ a not-for-profit entity’s promise to provide a service of standing ready to provide an unspecified good or service. The Board concluded that a promise to provide a service of standing ready to provide an unspecified good or service is substantially different from a condition that a transfer of assets to a not-for-profit entity relates to a particular time period, without any other conditions. This is because:

(a) standing ready to transfer a specified underlying good or service (eg to make a good available for a customer to use as and when the customer decides) is, of itself, a specifically identifiable service transferred to the customer, even if the underlying good or service is sometimes difficult to identify; and

(b) promises to use transferred assets consistently with the entity’s general objectives are not promises to transfer a good or a service.

BC45 The Board noted the majority of feedback on ED 260 indicated support for the principle described in paragraph BC39. Some constituents raised concerns about:

(a) linking ‘enforceability’ with ‘sufficiently specific’ for grant arrangements could mean many grants do not fall within the scope of AASB 15;

(b) measuring progress toward satisfying a performance obligation would be difficult in many of the arrangements not-for-profit entities enter into;

(c) how to determine whether goods or services are transferred, and if so how to determine when a transfer occurs. For example, when research is undertaken as part of a research grant, it may be unclear whether, or when, or what type of, a transfer of goods or services occurs; and

(d) determining if a contract is within the scope of AASB 15 if the customer does not receive the promised goods or services because it directs the entity to transfer those goods or services to third parties.

BC46 In regard to research grants, the Board noted that such grants typically:

(a) require the recipient to undertake a specified research activity, usually on the basis of a proposal in the grant application;

(b) require the researcher to publicly publish their research findings, either in a government report, a research journal or a similar format;

(d) may involve the licensing of the intellectual property to the grantor, another entity or the general public.

BC47 The Board observed that the above features of research grants would typically be sufficiently specific but may cause difficulty in measuring progress toward the satisfaction of a performance obligation that is satisfied over time. The Board noted that paragraphs 39–45 of AASB 15 focus on measuring progress toward satisfying a performance obligation with reference to input methods and output methods. The Board observed that either of these methods could be problematic to apply in the context of performing research as required by a research grant. Accordingly, the Board decided to clarify that the undertaking of the research, which may be seen as an activity undertaken on behalf of another party, could constitute a service for the purposes of AASB 15. For example, the Board noted that the transfer of the intellectual property created by the research to the grantor could represent the transfer of a good or service in satisfaction of a performance obligation. The Board also decided to add illustrative examples addressing the application of AASB 15 in the case of research grants, considering issues that might arise when the researcher retains the intellectual property, provides a licence to the grantor or other parties, or provides or publishes research findings, such as the recognition of revenue over time or at a point in time.

BC48 In response to further feedback received on the Exposure Draft, the Board included additional guidance on both ‘enforceability’ and ‘performance obligations’. In particular the Board clarified:

(a) when a grant could be considered as part of an enforceable agreement (such as if a return obligation exists and other circumstances as set out in BC29–BC36) and how to determine whether the requirements of the grant are sufficiently specific;

(b) the effect of time-period conditions on whether a performance obligation exists;

(c) whether a grant made to a ‘single purpose’ entity to be used for its sole purpose constituted a performance obligation; and

(d) the recipient of the transferred goods or services need not be the customer identified in the contract for the contract to be within the scope of AASB 15.

BC49 Consequently, the Board retained in the final Standard the principle that a performance obligation only exists if it is sufficiently specific to enable the entity to determine when it has satisfied that obligation. In response to the feedback on ED 260 the Board finalised its proposals with the additional guidance noted above.

Allocating the transaction price to performance obligations

BC50 A customer may enter into a contract with a not-for-profit entity with a dual purpose of obtaining goods or services and helping the not-for-profit entity achieve its objectives. The Board considered that, to represent faithfully the substantially different components of such a contract of a not-for-profit entity, in principle it is important that the amount of consideration that is not attributable to the goods or services promised by the entity to its customer should be:

(a) measured and disclosed separately from the revenue arising from transferring a good or service to the customer; and

(b) recognised when the entity recognises the transferred asset(s) – which might be a different time from when the entity transfers the promised good or service to the customer.

BC51 Accordingly, the Board proposed in ED 260 to require a separately identifiable “donation” component in a contract with a customer to be accounted for as income immediately. ED 260 proposed that such a component should be identified in a two-step model:

(a) determine whether the customer intended to make a donation to the entity; and

(b) separately identify the component from the goods or services promised in the contract.

BC52 Feedback on the ED 260 model indicated significant concern in relation to implementing the two-step process. The primary concern raised was that assessing the customer’s intent when making the donation would be highly subjective and, for many transactions, such an assessment could not be made due to a lack of evidence. Despite these concerns, the majority of respondents agreed that any “donation” component included in a contract with a customer should be separated from the contract and accounted for in accordance with AASB 1058.

BC53 To address constituent concerns the Board decided to replace the two-step model with a rebuttable presumption. The presumption is that the total transaction price in a contract with a customer is related to the transfer of the promised goods or services. That is, the entire transaction price is presumed to compensate the entity for the goods or services. Where the transaction price is only partially related to the transfer of the promised goods or services the presumption is rebutted and the transaction price split into its component parts.

BC54 The Board noted, however, that requiring entities to rebut the presumption solely based on whether a component of the transaction price is not related to the transfer of promised goods or services might be difficult to apply in practice. The Board considered that such an approach would impose undue cost and effort to require entities to assess the nature of component parts of the transaction price for every contract with a customer. Such a requirement would be particularly difficult in the case of research grants, as discussed in paragraphs BC46 and BC47. To address this concern, the Board decided to require that the presumption be rebutted only when the transaction is partially refundable in the event the entity does not deliver the promised goods or services.

BC55 The Board observed that a partially refundable transaction price usually indicates that some part of the transaction price might not relate to the transfer of the promised goods or services. A non-refundable component of the transaction price might represent a donation or grant to the entity. However, the Board also noted the guidance in paragraphs B48–B51 of AASB 15 which relate to non-refundable upfront fees. That guidance illustrates that in some cases a non-refundable upfront fee could still relate to the transfer of promised goods or services, in which case the non-refundable upfront fee could form part of a performance obligation and be recognised as revenue when the obligation is satisfied. The Board noted that donations very rarely relate to the transfer of promised goods or services and therefore concluded that its guidance attached to AASB 15 does not override the guidance of paragraphs B48–B51.

BC56 The Board noted that the transaction price allocated to a performance obligation should adhere to the allocation objective in paragraph 73 of AASB 15. Moreover, the Board observed the IASB’s discussion on this topic as documented in paragraphs BC270–BC273 of IFRS 15, in particular that any stand-alone selling price estimated using the residual approach should be considered for appropriateness. Where the estimated stand-alone selling price is either nil, or a nominal amount, the entity should consider whether such an outcome is appropriate. Similarly, the Board is of the view that a donation element included in a contract with a customer and allocated to a performance obligation using the residual approach should be considered for appropriateness in the context of the allocation objective. If a donation element is allocated to a performance obligation in this manner it might result in the transaction price being inappropriately overestimated.

BC57 The Board concluded the revised approach addressed constituent feedback on the two-step model it proposed in ED 260. In particular, the rebuttable presumption does not require entities to consider the customer’s intent when entering into a contract with the entity. To help ensure the rebuttable presumption was practicable, the Board sought feedback on this approach from its Project Advisory Panel. The Panel supported the revised approach, and consequently the Board decided to finalise the rebuttable presumption. The presumption ultimately applies the Board’s view exposed in ED 260 that separate components of a contract should be accounted for in accordance with the applicable Standard using the revised guidance.

Materiality

BC58 The Board proposed in ED 260 that an assessment of whether a component not attributable to the goods or services promised by the entity in its contract with a customer is material should be made at a contract level and not reassessed at another unit of account, such as for a portfolio of similar contracts. The Board considered this approach would likely achieve a better balance of costs and benefits than if the materiality of such components were to be assessed at the portfolio level of similar contracts. In its redeliberations, the Board decided to confirm its approach to assessing the materiality of such components within contracts with customers because of the balance between costs and benefits that it provides.

Disclosures

BC59 As part of the Board’s review of AASB 15 it also considered whether not-for-profit entities should be exempted from any disclosure requirements in AASB 15. The Board considered those disclosures in the context of the Tiers of Australian Accounting Standards. Specifically, not-for-profit entities (other than the Australian Government and State, Territory and Local Governments) are not required to comply with Tier 1 reporting requirements in their general purpose financial statements in accordance with AASB 1053 Application of Tiers of Australian Accounting Standards. Those entities may choose to apply Tier 1 reporting requirements but are otherwise required to only comply with Tier 2 reporting requirements in their general purpose financial statements. The Board observed its policy for developing Tier 2 reporting requirements specifically considers the nature and characteristics of not-for-profit entities. Consequently, the Board decided it had already considered any not-for-profit entity-specific disclosure issues in AASB 15 as part of its process for developing Tier 2 reporting requirements for that Standard. Accordingly, the Board decided not to make any amendments to the disclosure requirements in AASB 15 for not-for-profit entities.

Effective date

BC60 The Board proposed in ED 260 that AASB 1058 and this Standard apply when AASB 15 is applied or operative, which is from 1 January 2018. Constituents raised concerns on that proposal, noting (among others):

(a) general uncertainty in the not-for-profit sector about the accounting requirements that would apply given the Board’s work on this project and the various proposals made over the lifetime of the project;

(b) when AASB 1058 is issued not-for-profit entities will need to determine its interaction with AASB 15 and other Australian Accounting Standards. With a proposed effective date of
1 January 2018, not-for-profit entities were concerned that their lead-time to apply the requirements would be significantly less than that provided to for-profit entities to apply AASB 15; and

(c) AASB 1058 permits a greater number of other Australian Accounting Standards to apply to transactions that were previously solely in scope of AASB 1004. Not-for-profit entities commented that they needed further time to understand the interaction of those Standards with their transactions that previously were solely accounted for under AASB 1004.

BC61 The Board agreed with constituents and decided to defer the application date of AASB 1058 by one year to 1 January 2019. In making this decision the Board also considered whether it should defer the application date of AASB 15, including the application guidance in this Standard, by one year for not-for-profit entities. The Board noted that having different application dates for AASB 1058 and AASB 15 would, among other issues:

(a) introduce a period where entities recognise revenue in accordance with AASB 15 and apply AASB 1004 to other transactions outside the scope of AASB 15; and

(b) potentially require entities to re-evaluate their contracts with customers for donation elements when applying AASB 1058 in a later period, thereby lengthening the transition process.

BC62 Consequently, the Board also deferred the application date of AASB 15 to 1 January 2019 for not-for-profit entities. In deferring the application date of AASB 15 the additional guidance for not-for-profit entities will also be deferred. However, the Board decided to retain the ability for entities to apply AASB 15, including the additional guidance for not-for-profit entities in this Standard, and AASB 1058 to an earlier reporting period, so long as they are applied together.

Illustrative examples

BC63 The Board proposed a number of illustrative examples in ED 260 while noting that it was yet to determine where to locate each example; either to accompany AASB 1058 or as part of the guidance to AASB 15. The Board noted it would decide on the location of the respective examples after it had received feedback on the ED.

BC64 When reviewing the feedback on ED 260, the Board noted the majority of concerns were related to the ‘enforceability’ and ‘sufficiently specific’ guidance in the ED. Consequently, the Board agreed that the examples accompanying the guidance should illustrate:

(a) enforceability;

(b) the application of the ‘sufficiently specific’ requirement; and

(c) separating a component not attributable to the goods or services promised by the entity to its customer in a contract with a customer.

BC65 The Board decided to add an example to those accompanying AASB 1058 that illustrates a transaction that includes a contract with a customer. The example is intended to highlight when a transaction could include a contract with a customer and then direct users to the guidance accompanying AASB 15. The Board decided the remaining topics covered by illustrative examples in ED 260 should accompany AASB 1058.

BC66 When the Board developed the requirements in AASB 1058 for transfers of financial assets that enable an entity to acquire or construct a recognisable non-financial asset to be controlled by the entity, the Board initially did not limit the scope of the requirements only to recognisable assets. Upon redeliberating the issue, the Board decided to limit the scope of the requirements to only those non-financial assets that could be recognised under another Australian Accounting Standard once acquired or constructed.

BC67 As a consequence, the Board noted that some research grants would not necessarily be recognised as income over time as the research was performed. Accordingly, the Board decided to develop further illustrative examples to those proposed in ED 260 to assist entities apply the requirements of AASB 15 to research grants.

BC68 In its redeliberations, the Board identified three scenarios that could apply to research grants, depending on the terms and conditions of the grant, where the entity:

(a) is required to transfer the intellectual property it develops to the grantor;

(b) is required to provide a licence to the grantor for the intellectual property it develops; or

BC69 The Board decided to illustrate each of the above scenarios as examples, identifying the effect that various terms and conditions could have on whether revenue arising from the grant is recognised over time, or at a point in time when a performance obligation is satisfied.

Comparison with International Public Sector Accounting Standards

BC70 As part of its deliberations, the Board considered the accounting for income of not-for-profit entities specified by the International Public Sector Accounting Standards Board (IPSASB). The Board noted the following International Public Sector Accounting Standards (IPSAS) specified the accounting in this regard:

(a) IPSAS 9 Revenue from Exchange Transactions;

(b) IPSAS 11 Construction Contracts; and

BC71 The Board observed IPSAS 9 and IPSAS 11 are based on the principles of superseded IAS 18 Revenue (incorporated into AASB 118 Revenue) and IAS 11 Construction Contracts (incorporated into AASB 111 Construction Contracts), rather than those of IFRS 15 Revenue from Contracts with Customers (incorporated into AASB 15). In addition, it noted that IPSAS 23 was issued prior to the issue of IFRS 15. The requirements of IPSAS 23 were therefore not necessarily developed with reference to similar principles to IFRS 15. The Board concluded these IPSASB Standards do not provide an appropriate basis for financial reporting in the Australian environment, particularly because they require different income recognition depending on whether the transaction is an exchange transaction or a non-exchange transaction, and IPSAS 9 and IPSAS 11 adopt a ‘risks and rewards’ approach that is not consistent with the performance obligation approach in IFRS 15.

BC72 The Board further noted the IPSASB is currently developing proposals for the accounting for non-exchange expenses. The IPSASB is also developing a related project on revenue, which uses IFRS 15 as a starting point and looks at the type of modifications that would be required for IFRS 15 to be suitable for application to a wide range of revenue transactions in the public sector. This may result in revisions to, or a replacement of, the existing IPSASB revenue recognition requirements. The IPSASB expects to complete these projects in 2019. The Board noted that it would consider undertaking a project to review the guidance to AASB 15 following the completion of these projects.

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Contents

Preface

Accounting Standard AASB 2016-8

Accounting Standard AASB 2016-8

Objective

Application

Amendments to AASB 9

Amendments to AASB 15

Commencement of the legislative instrument

Australian illustrative examples for not-for-profit entities

Basis for Conclusions

Introduction

Amendments to AASB 9

	Kris Peach
Dated 9 December 2016	Chair – AASB