Income recognition in the
not-for-profit sector
Audit
When to recognise income is a
troublesome issue for not-for-profit
entities
Introduction
Not-for-profit entities in the private sector
are subject to a sector-specific accounting
standard for income from grants,
donations and similar contributions. The
requirements of AASB 1004 Contributions
are substantially different to the recognition
and measurement requirements applied
by for-profit entities in AASB 120
Accounting for Government Grants and
Disclosure of Government Assistance and
AASB 118 Revenue.
AASB 1004 applies when a not-for-profit
entity receives a contribution; otherwise
know as a non-reciprocal transfer.
A non-reciprocal transfer is when an
entity receives an asset (including rights
to assets, services or has liabilities
extinguished) without directly giving
approximately equal value to the other
party or parties to the transfer.
When a reciprocal transfer occurs, income
is recognised in accordance with AASB
118, which usually requires recognition
at the point when goods or services are
delivered.
Reciprocal verses
non-reciprocal
Determining whether a transfer is
reciprocal or non-reciprocal can be
highly judgmental, especially where the
outcomes of a grant or programme are
assessed using non-financial measures.
A non-reciprocal transfer often involves a
three party relationship: a transferee (the
not-for-profit entity), the contributor (or
group of contributors), and a third party
that will benefit from the arrangement.
A common mistake is to conclude
that a transfer is reciprocal because
there are conditions attached to the
arrangement. In order to be reciprocal,
the entity’s obligation is to provide goods
or services directly to the contributors of
approximately equal value to the funds or
contribution received.
Example 1
A not-for-profit entity receives a grant
from a charitable foundation to help
alleviate poverty in its local area. Other
than a general responsibility to spend
the funds on its charitable purposes
for the benefit of those in need, there
are no specific instructions on how
the money should be spent, or what
outcomes should be achieved.
The entity’s obligations are not
provided directly to the charitable
foundation (i.e. the benefits to the
charitable foundation are only nominal).
This is a non-reciprocal transfer – the
contribution is recognised in terms of
AASB 1004.
Audit
Example 2
A not-for-profit entity receives funding
from the Department of Correctional
Services to run the department’s
mental health programme. The entity
delivers mental health services to
prisoners in line with department’s
guidelines at two state prisons.
If the value of the services
provided directly to the department
approximately equals the funding
received, this would be a reciprocal
transfer. Such an exchange for services
would usually include an obligation
to refund some or all of the fees if the
entity is unable to provide the services.
Income is not recognised in terms of
AASB 1004.
Example 3
A not-for-profit charity receives
a grant to implement the health
department’s state-wide vaccination
and screening programme for
children in schools and playgroups.
The funding agreement specifies
that any portion of the grant not
spent on the programme must be
returned.
The existence of a condition attached
to a funding agreement does not, by
itself, create a reciprocal transfer. The
determination is made considering
the value of the services provided
directly to the department of health
together with a consideration of the
obligation to repay funds not spent
for the purpose of the grant. Similar to
Example 2, the terms and conditions
suggests the existence of a reciprocal
transfer.
Income recognition in the not-for-profit sector
Accounting for
contributions
Income arising from contributions in terms
of AASB 1004 is recognised when all of
the following conditions are met:
1. The entity obtains control of the
contribution or the right to receive the
contribution,
2. It is probable that the economic
benefits comprising the contribution
will flow to the entity, and
3. The amount of the contribution can be
reliably measured.
Determining whether control has been
gained can be problematic. It depends on
the terms and conditions related to the
contribution.
Control may be obtained before the actual
receipt of funds, for example when a
binding contract or funding agreement is
signed. In other situations, an entity may
have received the contribution in cash, but
might not obtain control until the funds are
applied for the required purpose.
The timing of the recognition of income
is separate and unrelated to the point
at which expenditure related to that
contribution occurs. For the not-for-profit
sector, the ‘matching’ principle does not
necessarily apply.
Example 4
Example 6
A not-for-profit charity focussed on
assisting the homeless enters into
a funding arrangement for a grant
of $100,000 in order to run a soup
kitchen programme for two years. The
contract specifies that any portion
of the $100,000 not spent on the
programme must be returned to the
sponsoring organisation. At the end of
the first year, the charity has received
the full grant in cash and has paid and
accrued $70,000 in expenses related
to the programme.
A not-for-profit entity runs a chain of
charity shops, for which it receives
donations of second hand goods from
the general public. Some items are
donated directly to members of the
community. If a sale is made, the goods
are usually sold below retail price.
The funding arrangement is a nonreciprocal arrangement for the benefit
of the local community (and not directly
for the sponsoring organisation) –
AASB 1004 is applied. The entity
recognises the full cash receipt, but
only recognises income from the
contribution to the extent of $70,000
(this represents the proportion that it
controls). The remaining $30,000 is
recorded as deferred income (liability).
In other instances, the repayment
condition may be more remote. For
instance, a funding arrangement
may require the repayment of
the grant only if health and safety
requirements prevent the soup kitchen
from continuing. The contribution is
recognised as income in full, and the
principles of AASB137 Provisions,
Contingent Liabilities and Contingent
Assets are applied to the condition.
The amount of the contribution of
goods cannot be reliably measured
when received from the general public.
Therefore, no contribution is recognised.
For those goods that are eventually sold,
the cash is recognised as income at the
point of sale.
Future developments
The IASB is currently in the process of
developing a new accounting standard for
revenue that will replace AASB 118 and
AASB 120. The standard will introduce a
new model where revenue is recognised
when the entity satisfies a ‘performance
obligation’.
The new standard will result in the
replacement of AASB 1004 and is likely
to reduce the inconsistency between
for-profit and not-for-profit entities. An
exposure draft is anticipated in 2014.
Example 5
A medical research charity signs
a funding contract with the state
government. There are no conditions
attaching to the contribution, other than
a general expectation to spend money
in line with the charity’s objectives. The
grant is paid in monthly instalments
over 18 months.
The entity controls the right to receive
the contribution and therefore the full
amount of the grant is recognised as
income when the contract is signed.
Any amount not yet received from the
state government is recognised as a
receivable.
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