Changes to Income Recognition for Independent Schools

Changes to Income Recognition for Independent Schools

Independent member of Nexia International

The Australian Accounting Standards Board (“AASB”) released Exposure Draft 260 – Income of Not-for-profit entities (“ED 260”) in April 2015. ED260 proposes revised methods of accounting for revenue and contributions for Not-for-profit entities based on the principles in AASB 15 Revenue from Contracts with Customers. In particular, it may have a significant impact on the accounting treatment for government grants, donations, bequests and non-refundable deposits.

ASBA, with the help of Nexia Australia, conducted a survey of Independent Schools on the sector’s preferred accounting treatment of various common revenue streams that may be impacted by ED260.

The survey did not ask for respondent’s views on the application of current accounting standards or the proposed new revenue recognition model.

Rather, understanding the sector’s accounting treatment preferences will assist ASBA and Nexia Australia formulate their responses to the AASB’s project.

180 schools responded to the ABSA survey and this report analyses the survey results.

Executive Summary Most operational grants currently received by

The thematic findings from the survey indicated: ■■

A strong preference to recognise operational grants as income in the same periods as the funds are expended, irrespective of any conditions attaching to those grants;

■■

■■

Independent Schools relate to the year they are received and are usually spent within the year. Under the current funding models and payment dates, we do not expect a change to the current accounting treatment for these operational grants under ED 260.

A preference to recognise capital grants and

Capital grants – is there a preference for matching?

appeals as income in the period the grants and

AASB 120 Accounting for Government Grants and

appeals are received, and

Disclosure of Government Assistance is only applicable

A strong preference to recognise donations and

to for-profit entities. That standard requires for-profit

bequests as income in the same periods as the

entities to recognise government grants in profit or loss

funds are expended.

on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. This requirement

Operational grants income – sufficiently specific performance obligations

applies to both operational and capital grants and would

The survey asked three questions on recognising income

For example, a for-profit entity receives a $1m

from an operational grant with varying levels of detail

government grant to construct a building. Under AASB

regarding the performance obligations. The key themes

120, the entity can either defer the grant and recognise

identified were:

the $1m as income over the same period as the building

■■ The overall response to all three questions indicated

is depreciated or the grant can directly offset against

a strong preference for the matching principle (i.e.

the cost of the building; therefore reducing the asset’s

recognising income in the same period as the related

carrying value and future depreciation expense.

expense);

This accounting treatment is not available to Independent

■■ The specification of the period over which a grant relates appeared to be a key determining factor in the preferred treatment by the respondents.

ED 260 proposes that a stipulation of the period over

Schools either under ED 260 or the existing accounting standards. The survey included a question to gauge the sectors’ interest in having the ability to apply the same accounting choices as for-profit entities under AASB 120.

which goods or services must be transferred is not, by

The survey indicated:

itself, considered to be a performance obligation and

■■ The majority (74%) preferred to recognise the capital

is not a reason for deferring income recognition.

■■ Where the period of time was the only grant condition, 93% of respondents preferred deferring the income; ■■ Even where more detail on the purpose of the grants

grant immediately in the profit or loss; ■■ 20% preferred to apply a model similar to AASB 120; and ■■ A number of respondents suggested highlighting the

were included but the period of time condition

effect on the income statement of recognising the

remained, the survey results indicated that the

capital grant as income by separately disclosing the

preferred treatment did not change from the above

capital grant either below the operating profit line

(92%).

(ie, outside the profit and loss statement) or as an

■■ Where the time condition was removed but there was more conditionality regarding the purpose of the grant funding, the majority response (72%) remained the same. However, there was a stronger preference for recognising the income immediately when no time period was specified in the grant (22%).

4

achieve a matching of income with related expenses.

Changes to Income Recognition for Independent Schools

abnormal item within the profit or loss statement.

Bequests and donations

Donation for a 50-year scholarship:

The accounting treatment for bequests and donations is

■■ There was a large majority (78%) who would prefer to

one area of significant complexity under ED 260. As an

defer the funds and recognise them as income over

example, some Independent Schools receive gifts and

the 50-year period of the scholarship;

bequests that impose conditions upon the recipient to maintain the corpus of the donation in perpetuity and to use any investment proceeds that are derived from the corpus for a particular purpose. In the case where

■■ The results of Q6, Q7 and Q8 indicate the sector would prefer different accounting outcomes based on the degree of stipulations attached to bequests/donations.

an arrangement gives rise to perpetual conditions, ED

Bequest – capital preserved:

260 may result in the corpus of the donation never being

■■ The situation proposed a donation where the capital

recognised as income. This is because the performance conditions attaching to that receipt can never be satisfied thereby preventing the recipient to recognise income.

Should this proposal prevail in the final accounting standard, such amounts previously received and accounted for as income may have to be restated from retained earnings to non-current liabilities (unearned income) on transition to the new standard.

The survey asked a number of questions on the sector’s preferred treatment of bequests and donations: Capital appeals: ■■ The survey results were mixed between those who would prefer to recognise donations for capital

would be preserved in perpetuity; ■■ The results where more mixed with 52% of respondents preferring to defer recognition of the donation as income in perpetuity, thereby accepting that the corpus would never be recognised as income; ■■ However, 37% of respondents would still prefer immediate income recognition of that bequest; ■■ The responses indicate that, although the stipulations are important to determine the accounting treatment, a stipulation that can never be satisfied may need to be considered differently.

Non-refundable admission fees

appeals in the profit or loss when received (51%) and

The current practice for non-refundable enrolment or

those who would prefer to only recognise the income

admission fees has been to recognise them as income

when the funds are spent on construction of the

immediately on receipt. However, under the new revenue

buildings (34%).

recognition model, non-refundable up-front fees are

Bequest with no stipulations on how money spent: ■■ The majority (73%) preferred to recognise the bequest immediately in the profit or loss; ■■ There was still a significant minority (24%) who would

only recognised as income where there is a transfer of a promised good or service to the customer at that time.

Otherwise, the receipt is treated as an advance payment for future services and is therefore recognised over that future service period; eg, over the expected period of the

prefer to defer the bequest and recognise the receipt

student’s stay with the School.

as income as the funds were spent.

The survey asked for the preferred treatment of non-

Bequest with very specific stipulations:

refundable admission fees with 94% of respondents

■■ This question proposed a situation where it was highly

or loss.

unlikely that the bequest stipulations would be met; ■■ The majority (70%) preferred to defer the income and recognise the bequest as income as the funds were spent; ■■ There was still a significant minority (24%) who would prefer to recognise the bequest as income in the profit

preferring to recognise the fees immediately in the profit

Next steps Nexia Australia has been appointed to the AASB’s project advisory panel on ED 260 to provide technical input and industry expertise on the project and intends to present the survey results on behalf of the ASBA members

or loss on receipt.

Changes to Income Recognition for Independent Schools

5

Q1

Grant in Advance - time only

SPECIFICATIONS

■■ School

receives a government grant of $2m on 31/12/2015 (i.e. on the last day of the year). The only specification of the grant is that it must be spent in the 2016 year. No amount has been spent at year-end.

■■ The

grant is enforceable by legal or equivalent means.

How should the $2m be treated in the year-end accounts for 31/12/2015?

Recognise $2m as Income in...

Recognise $2m as a Liabili...

Other

0%

10%

20%

30%

40%

50%

Answer Choices

70%

80%

90%

Responses

Recognise $2m as Income in the P&L.

3.87%

7

Recognise $2m as a Liability (Grants Received in Advance).

93.37%

169

Other

2.76%

5

Total

6

60%

Changes to Income Recognition for Independent Schools

181

100%

Q2

Grant in Advance - more detail

SPECIFICATIONS

■■

Same situation as Q1 above; however, the specifications are more detailed and require the funds to be spent in accordance with the School’s overall objective, and the grant money is expended in the 2016 year.

■■

The grant is enforceable by legal or equivalent means.

How should the $2m be treated in the year-end accounts for 31/12/2015?

Recognise $2m as Income in...

Recognise $2m as a Liabili...

Other

0%

10%

20%

30%

40%

50%

Answer Choices

60%

70%

80%

90%

Responses

Recognise $2m as Income in the P&L.

5.52%

10

Recognise $2m as a Liability (Grants Received in Advance).

91.71%

166

Other

2.76%

5

Total

100%

181

Changes to Income Recognition for Independent Schools

7

Q3

Grant in Advance - Time Only

SPECIFICATIONS

■■

Same situation as Q1 above; however, the specifications are more detailed and require the funds to be spent on teaching staff for primary school children, but no time period is specified

■■

The grant is enforceable by legal or equivalent means.

How should the $2m be treated in the year-end accounts for 31/12/2015?

Recognise $2m as Income in...

Recognise $2m as a Liabili...

Other

0%

10%

20%

30%

40%

50%

Answer Choices

70%

80%

90%

Responses

Recognise $2m as Income in the P&L.

22.35%

40

Recognise $2m as a Liability (Grants Received in Advance) and recognise the income as it is spent on teaching staff for primary school children.

72.07%

129

Other

5.59%

10

Total

8

60%

Changes to Income Recognition for Independent Schools

179

100%

Q4

Capital Grants

SPECIFICATIONS

■■

chool receives a capital grant of $2m to build a school building in January 2016.

S

By December 2016, the building is complete and the $2m spent on the building has been capitalised as Property, Plant & Equipment.

■■

The grant is enforceable by legal or equivalent means.

How should the $2m be treated in the year-end accounts for 31/12/2015?

Recognise $2m as Income in...

Recognise $2m as a reducti...

Recognise $2m as Deferred...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

70%

80%

90%

Responses

Recognise $2m as Income in the P&L.

73.89%

133

Recognise $2m as a reduction in the cost of the building. No amount recognised in the P&L. Depreciation reduced in future periods.

8.89%

16

Recognise $2m as Deferred Income (Liability) and recognise the income over the same period the asset is depreciated.

10.00%

18

Other

7.22%

13

Total

100%

180

Changes to Income Recognition for Independent Schools

9

Q5

Donations - Capital Appeal

STIPULATIONN

■■

chool raises $1m in donations for a school building through a capital appeal S campaign.

■■

T he campaign clearly explained that the purpose for raising money was to help fund the school building.

How should the $1m be treated?

Recognise $1m as Income in...

Recognise $1m as Deferred...

Recognise $1m as Deferred...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

80%

90%

Responses

Recognise $1m as Income in the P&L - i.e. recognise the donations when cash is received.

51.67%

93

Recognise $1m as Deferred Income (Liability) and recognise as Income when the $1m has been spent on the building.

34.44%

62

Recognise $1m as Deferred Income (Liability) and recognise as Income (or reduced Depreciation Expense) over the same period the Asset is depreciated.

5.56%

10

Other

8.33%

15

Total

10

70%

Changes to Income Recognition for Independent Schools

180

100%

Q6

Bequests or Donations

NO STIPULATIONS

â– â–

chool receives a bequest of $1m on the death of an old student. There are no S stipulations attached to the bequest, only that the funds are used by the school.

How should the $1m be treated?

Recognise $1m as Income in...

Recognise $1m as Deferred...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

70%

80%

90%

Responses

Recognise $1m as Income in the P&L i.e. recognise the bequest when cash is received.

72.78%

131

Recognise $1m as Deferred Income (Liability) and recognise as Income when the bequest funds are spent.

23.89%

43

Other

3.33%

6

Total

100%

180

Changes to Income Recognition for Independent Schools

11

Q7

Bequest - Scholarship

STIPULATION

â– â–

School receives a bequest of $1m on the death of an old student. The bequest stipulates that the funds must be spent on providing scholarships to French Horn players. The school has had only one French Horn player in the last 20 years.

How should the $1m be treated?

Recognise $1m as Income in...

Recognise $1m as Deferred...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

80%

90%

Responses

Recognise $1m as Income in the P&L - i.e. recognise the donations when cash is received.

23.89%

43

Recognise $1m as Deferred Income (Liability) and recognise as Income as the funds are spent on scholarships for French Horn players.

70.00%

126

Other

6.11%

11

Total

12

70%

Changes to Income Recognition for Independent Schools

180

100%

Q8

Donation - 50 Year Scholarship

STIPULATION

â– â–

chool receives a donation of $20m. The donation stipulates that the funds must S be spent on providing scholarships to the children of ex-students over the next 50 years.

How should the $20m be treated?

Recognise $20m as Income in...

Recognise $20m as Deferred...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

70%

80%

90%

Responses

Recognise $20m as Income in the P&L i.e. recognise the donation when cash received.

14.44%

26

Recognise $20m as Deferred Income (Liability) and recognise as Income as funds are spent on scholarships.

78.33%

141

Other

7.22%

13

Total

100%

180

Changes to Income Recognition for Independent Schools

13

Q9

Bequest - Capital Preserved Scholarship

STIPULATION

â– â–

School receives a bequest of$10m on the death of an old student. The bequest stipulates that the $10m must be invested and any income earned must be used to provide scholarships to the children of ex-students.

How should the $10m be treated?

Recognise $10m as Income in...

Recognise $10m as Deferred...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

80%

90%

Responses

ise $10m as Income in the P&L i.e. recognise the bequest when cash received.

37.22%

67

Recognise $10m as Deferred Income (Liability) - the $10m will never be recognised as income.

52.22%

94

Other

10.56%

19

Total

14

70%

Changes to Income Recognition for Independent Schools

180

100%

Q10

Admission Fees Non-Refundable

SPECIFICATIONS

■■

School receives an adminission fee of $3,000 per student.

■■

The admission fee is non-refundable.

How should the admission fee be treated in the year it is received?

Recognise $3 000 as Incom...

Recognise $3 000 initiall...

Other

0%

10%

20%

30%

40%

50%

60%

Answer Choices

70%

80%

90%

Responses

Recognise $3,000 as Income in the P&L i.e. recognise the nonrefundable admission fee when cash received.

93.89%

169

Recognise $3,000 initially as a Liability and subsequently unwind the Liability to Revenue evenly over the expected period of the student’s stay.

4.44%

8

Other

1.67%

3

Total

100%

180

Changes to Income Recognition for Independent Schools

15

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