AASB 15 Revenue from Contracts with Customers

AASB 15, AASB 16 & AASB 1058Practical workshopHow to get your NFP organisation ready for the new Accounting StandardsNFP Conference - 14 March 2019

AASB 15 Revenue from Contracts with Customers

Introduction to Session 1 In this session about AASB 15 we will address: • Discuss the 5 step model for revenue recognition and measurement • Explore the issues of implementing AASB 15 as applicable to NFP’s • Work through illustrative examples • Discuss the key considerations when implementing AAS15 • Deal with your questions

AASB 15: Overview Why was AASB 15 released? AASB 15 changes revenue recognition from the current “transfer of risks and rewards” model under AASB 118 to a “transfer of control” model. A contract may end up being accounted for partially as a revenue transaction within the scope of AASB 15, and partially in another standard (e.g. AASB 1058). What is the effective date for AASB 15? Effective for annual reporting periods beginning on or after 1 January 2019 i.e. 31 December 2019 or 30 June 2020

AASB 15 – Revenue/ Income Streams Examples of Revenue and Income Streams for NFP’s • Government Grants & Subsidies • Capital Grants • Philanthropic Grants • Sales of Goods • Fees for Service • Hire Income • Volunteer Services for Public NFPs • Peppercorn or Below-market Leases • Donations & Fundraising • Bequests & Endowments

AASB 15 & AASB 1058

AASB 15 – 5 Step Model What is the 5 Step Model for Revenue Recognition & Measurement? • Identify the Enforceable Contract with a Customer • Identify all the Distinct Performance Obligations/ Sufficiently Specific Promises in the Contract • Determine the Transaction Price • Allocate the Transaction Price to the identified Performance Obligations in the Contract • Recognise revenue when or as each distinct performance obligations is satisfied over time or at point in time

AASB 1058: Contract Criteria Criteria for Applying AASB 1058

AASB 15 – Step 1 Step 1: Identify the enforceable contract with a customer An entity shall apply AASB 15 to a contract only if the counterparty to the contract is a customer. A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. In NFPs this goods/ services normally provided to third party beneficiaries under direction of another party (“customer”). A contract is an agreement between two or more parties that creates enforceable rights and obligations.

AASB 15 – Step 1 (Cont.) A contract is an agreement between parties that creates enforceable rights and obligations, enforceability depends solely on the customer’s capacity to enforce its rights. Some common examples of terms that would result in enforceable agreements are: • a refund in cash or kind is required when the agreed specific performance has not occurred; • the customer, or another party acting on its behalf, has a right to enforce specific performance or claim damages; or • the customer has the right to take a financial interest in assets purchased or constructed by the entity with resources provided under the agreement.

AASB 15 – Step 1 (Cont.) A contract may, but does not have to be a formal written document. It can be verbal or implied, taking into account customary forms. It has to be legally effective. The terms of the contract may exist in multiple places, including in applicable legislation. Usually, each contract is accounted for separately. However, applying substance over form, it may be necessary to either combine multiple contracts which are effectively one.

AASB 15 – Step 1 (Cont.) AASB 15 requires all these criteria below for a contract to exist: • The parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; • you can identify can identify each party’s rights regarding the goods or services to be transferred; • you can identify can identify the payment terms for the goods or services to be transferred; • The contract has commercial or economic substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and • it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. If each party has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party (or parties) → no contract for the purposes of AASB 15

AASB 15 – Step 1 (Cont.) What happens if the contract does not meet these criteria? • Entity receives consideration from the customer • Are there no remaining obligations to transfer goods or services to the customer and has all, or substantially all, of the consideration promised by the customer been received and is it non‐refundable? • Has the contract been terminated and is the consideration received from the customer non‐refundable? 2. Recognise as Revenue 3. Recognise a Liability at the amount of consideration received, if applicable

AASB 15 – Step 2 Step 2: Identify the performance obligations (sufficiently specific promise) in the contract Performance obligations represent each distinct or specific requirement (promise) to provide goods or services. A good or service is distinct if the customer can benefit from the good or service: • on its own; or • together with other resources that are readily available to the customer; and • the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

AASB 15 – Step 2 (Cont.) Performance obligations are identified at the inception of the contract, and are accounted for separately. Performance obligations do not include activities undertaken to fulfil a contract unless they transfer a good or service. In cases 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. An acquittal process may provide evidence of a promise that is sufficiently specific.

AASB 15 – Step 3 Step 3: Determine the transaction price Transaction price is the amount of consideration to which entity expects to be entitled in exchange for goods or services. This introduces the need to factor in expected non‐recovery of consideration entitlements at inception and recognise an amount lower than the face value of the transaction. Under AASB 118, a higher revenue amount might have been recognised with a provision for doubtful debts recognised in a later accounting period. Variable Consideration • Amount of consideration can vary because of discounts, donations, concessions, incentives, etc. • Estimate using Expected Value or Most Likely Amount to extent it is highly probable a significant reversal of revenue will not occur when uncertainty is resolved.

AASB 15 – Step 3 (Cont.) Transaction price is the amount of consideration to which entity expects to be entitled in exchange for goods or services. Existence of significant financing component • Adjust consideration if timing provides customer or entity with significant benefit of financing • Practical expedient – no adjustment if the period between consideration and transfer of good and service is one year or less Non-Cash Consideration (NFP’s) • Measure at fair value • If fair value cannot be estimated, measure consideration indirectly by reference to stand‐alone selling price of the goods or services transferred.

AASB 15 – Step 4 Step 4: Allocate the transaction price to the performance obligations If there is more than one distinct performance obligation in a contract, the total transaction price is allocated to each one based on the relative stand‐alone selling price of each performance obligation. The best evidence of stand‐alone selling price is the price at which the good or service is sold separately by the entity. However, if that price is not directly observable, an estimate is required taking a range of applicable factors into account, such as market conditions, entity‐specific factors and information about the customer or class of customer.

AASB 15 – Step 4 (Cont.) Step 4: Allocate the transaction price to the performance obligations The estimate could be made on an ‘adjusted market assessment approach’, for example identifying the price of a similar good or service the customer could obtain elsewhere, or an ‘expected cost plus approach’ using a cost estimate for the entity to satisfy the performance obligation with a normal margin added. If any item represents a distinct good or service, it is not accounted for with no transaction price, even if it is identified in the contract as something that is free or a bonus.

AASB 15 – Step 4 (Cont.) Step 4: Allocate the transaction price to the performance obligations Rebuttable presumption, where dual purpose exists of obtaining goods or services AND helping a NFP entity achieve its objectives, that price wholly relates to goods/services. Presumption rebutted where price is partially refundable in event NFP entity does not deliver goods or services, i.e. fundraising tickets consisting of donation and dinner. Where presumption rebutted, disaggregate transaction price into transfer of promised goods or services under AASB 15 and contribution under AASB 1058.

AASB 15 – Step 5 Step 5: Recognise revenue as each distinct performance obligations is satisfied An entity recognises revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). A performance obligation may be satisfied at: • a point in time (typically for promises to transfer goods to a customer); or • over time (typically for promises to transfer services to a customer).

AASB 15 – Step 5 (Cont.) Point in time recognition occurs when there is a transfer of control to the customer (previously the focus was on the transfer of risk and rewards of ownership). Over time recognition requires evidence of continuous transfer of control. To be over time, meet any of these 3 criteria: • Customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; • The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or • The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date

AASB 15 – Step 5 (Cont.) Step 5 Measuring performance over time e.g. replacing percentage of completion Output Methods – revenue based of the value transferred to the customer – Surveys of work performed – Goods Units produced – Service Units delivered – Contract milestones Input methods – revenue based on the entity’s efforts to satisfy the performance obligation – Costs incurred – Staff Labour hours used – Client service hours used

AASB 15 – Implementation Issues What is the key issues for NFPs with implementing AASB 15? • Identifying the enforceable contract with the customer? • Is the performance obligations sufficiently specific? • Do you recognise revenue over time or at point in time? • How to account for non-refundable up-front fees?

AASB 15 – Implementation Issues What is the key issues for NFPs with implementing AASB 15? • Identifying the enforceable contract with the customer? Customer Customer is the contracting party, but does not have to be recipient of goods or services E.g. Government can still be customer where directs goods or services to third party beneficiaries Contract and enforceability Contract need not have commercial substance –only economic substance Arrangement is enforceable if customer has capacity to enforce through legal or “equivalent means” E.g. MoU, heads of Agreement, Administrative arrangements, statutory provisions.

AASB 15 – Example 1 Example 1 - Identifying the enforceable contract with the customer – Memo of Understanding Green Wind Power “Green Power” is an NFP that specialises in assisting the Government with implementing renewable energy projects in rural communities. • Green Power enters into a MOU with the Government to manage its renewable energy projects. • MOU outlines various activities for which Green Power will be responsible for. • The Government will partially fund the costs of the projects. • MOU specifies that it is not legally binding, does not impose a refund obligation on Green Power, nor refer to other enforceability mechanisms.

AASB 15 – Example 1 (Cont.) Example 1 - Identifying the enforceable contract with the customer – Memo of Understanding Is there an enforceable contract for the purposes of AASB 15? • Is there a customer? Yes - The Government is the customer, even though the beneficiaries are the rural communities. • Is there economic substance? Yes, partial funding of projects still considered to have “economic substance” for Green Power. • Is the MOU enforceable? No - Absent other information, no intention or mechanism to be considered enforceable

AASB 15 – Example 2 Example 2 - Identifying the enforceable contract with the customer – Memo of Understanding Green Wind Power “Green Power” is an NFP that specialises in assisting the Government with implementing renewable energy projects in rural communities. • Green Power enters into a MOU with the Government to manage its renewable energy projects. • MOU outlines various activities for which Green Power will be responsible for. • The Government will partially fund the costs of the projects. • MOU specifies that it is not legally binding, does not impose a refund obligation on Green Power, nor refer to other enforceability mechanisms. • The parties indicated in their discussions their intention to rely upon the MOU. Green Power commenced providing services under the MOU and has reported for 2 months.

AASB 15 – Example 2 (Cont.) Example 2 - Identifying the enforceable contract with the customer – Memo of Understanding Is there an enforceable contract for the purposes of AASB 15? • Is there a customer? Yes - The Government is the customer, even though the beneficiaries are the rural communities. • Is there economic substance? Yes, partial funding of projects still considered to have “economic substance” for Green Power. • Is the MOU enforceable? Yes, intention of parties is to rely on MOU, and actions by Green Power support it.

AASB 15 – Implementation Issues What is the key issues for NFPs with implementing AASB 15? • Is the performance obligations sufficiently specific? A promise to transfer to the customer a distinct good or service. Performance obligations do not include activities undertaken to fulfil a contract unless they transfer a good or service Is it separately identifiable from other promises in the contract? Performance obligation needs to be sufficiently specific to determine when the obligation under the arrangement has been satisfied. The performance obligations in the contract are sufficiently specific e.g. funding to deliver 1000 childcare hours to children under 4 years of age from low socio-economic families vs funding to deliver childcare to low socio-economic families, which most of the families are.

AASB 15 – Implementation Issues What is the key issues for NFPs with implementing AASB 15? • Is the performance obligations sufficiently specific? (Continued) Judgement is to be applied when determining whether a promise is ‘sufficiently specific’ or not. All sufficiently specific requirements would typically include the following: • The nature or type of goods or services • The cost or value of goods or services • The quantity of goods or services, and • The period of time over which the goods or services must be transferred. Each promise/ performance obligation is assessed separately to determine if it is ‘sufficiently specific’ enough to qualify as a performance obligation, but does not have to meet all the above requirements. Sufficiently specific requirements are crucial with respect as to whether income recognition must be deferred until delivery of the associated goods or services.

AASB 15 – Example 3 Example 3 - Is the performance obligations sufficiently specific – Research IP University of Tasmania (UT) is given $4m cash to conduct research by the Tasmanian State Government . The terms of agreement are: • UT to conduct research in a specified area (agricultural food production and impact of climate change). • UT must return all unspent, uncommitted funding on completion of the research. • All research results and outcomes remain the property of the University, there is no transfer to the Tasmanian State Government. • The agreement is an enforceable agreement

AASB 15 – Example 3 (Cont.) Example 3 - Is the performance obligations sufficiently specific – Research IP Are the performance obligations in the contract sufficiently specific? • Were there a transfer of goods or services to the customer No – University of Tasmania did not transfer the rights to the research intellectual property to the Tasmanian State Government.

AASB 15 – Example 4 Example 4 - Is the performance obligations sufficiently specific – Research IP University of Tasmania (UT) is given $4m cash to conduct research by the Tasmanian State Government . The terms of agreement are: • UT to conduct research in a specified area (agricultural food production and impact of climate change). • UT must return all unspent, uncommitted funding on completion of the research. • All research results and outcomes is provided to the Tasmanian State Government and UT is required to publish their findings in a scientific journal within five years. • The agreement is an enforceable agreement

AASB 15 – Example 4 (Cont.) Example 4 - Is the performance obligations sufficiently specific – Research IP Are the performance obligations in the contract sufficiently specific? • Were there a transfer of goods or services to the customer Yes – University of Tasmania transferred the rights to the research intellectual property to the Tasmanian State Government.

AASB 15 – Implementation Issues What is the key issues for NFPs with implementing AASB 15? 3. Do you recognise revenue over time or at point in time? • Point in time recognition occurs when there is a transfer of control to the customer – no strings attached philanthropic grant, etc. b. Over time recognition requires evidence of continuous transfer of control. To be over time, meet any of these 3 criteria: • Customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs – routine or recurring services, e.g. counselling services; • The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced – development of program or IP for customer; or • The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date – engaged to prepare aspecific report for customer.

AASB 15 – Implementation Issues What is the key issues for NFPs with implementing AASB 15? • How to account for non-refundable up-front fees? • Does the non-refundable up-front fee relate to specific goods or services transferred to customer? No • Account for non-refundable up-front fee as advanced payment for future services, but when do you recognise the income? • Does the non-refundable up-front fee provide the customer with a material right? No – Recognise immediately as revenue Yes – Recognise over period of expected benefit to the customer

AASB 15: Example 5 (Cont.) Example 5 – Delayed Recognition of Non-Refundable Upfront Fees • Sports Club membership non-refundable joining fee $4,000 • Annual membership fee is $2,000 • 2 free hires per year of meeting rooms in first 24 months (normally $500 a day) • Average length of membership 10 years

AASB 15: Example 5 (Cont.) Example 5 – Delayed Recognition of Non-Refundable Upfront Fees $24,000 x 24/26 = $22,154 $2,000 x 2/26 = $1,846

AASB 15: Example 6 Example 6 – Other Grants Received • Adult Reading Program funded by State Government through a contract signed by both parties • Covers funding from 1 July 2019 to 30 June 2020 • Services must be: • delivered within a defined region • publicised through Councils and local media • made available to any applicant assessed as eligible (criteria named) • Unspent money, failure to meet conditions – repay State Government • First instalment $200,000 received 26 June 2019/ Remaining funds $800,000 received in 2019/20

AASB 15: Example 6 (Cont.) Example 6 – Other Grants Received

AASB 15: Example 7 Example 7 – Other Grants Received – Scenario 2 • Adult Reading Program funded by State Government through a contract signed by both parties • Covers funding from 1 July 2019 to 30 June 2020 • Money is to be applied to support the service agency provided it continues with its objectives • Agency has a stated objective of improving adult literacy • Failure to spend money requires refund of monies • First instalment $200,000 received 26 June 2019/ Remaining funds $800,000 received in 2019/20

AASB 15: Example 7 (Cont.) Example 7 – Other Grants Received – Scenario 2

AASB 15: Example 8 Example 8A – Government Contract with Customer A charity is contracted to operate dwellings for the homeless, including providing counselling and other services to inhabitants. The charity receives $15m on 15 June 2020 to provide counselling services to inhabitants for a specified number of hours/week. The funds must be refunded if not spent prior to 30 June 2021. Example 8B – Government Contract with Customer A charity is contracted to operate dwellings for the homeless, including providing counselling and other services to inhabitants. The charity receives $15m on 15 June 2020 to be spent on the charity’s overall objectives. The funds must be refunded if not spent prior to 30 June 2021.

AASB 15: Example 8 (Cont.) Example 8A – Government Contract with Customer The charity would account for the $15m payment in accordance with AASB 15 as there is an enforceable contract (i.e. they must refund the money if services are not provided) and the agreement is sufficiently specific as to the nature of the services to be provided and the time period in which the services must be performed. A contract liability for $15m would be recognised on receipt and the revenue would be recognised when promised services are performed. Example 8B – Government Contract with Customer While this contract creates enforceable rights, the agreement does not contain a sufficiently specific promise to the customer. A time period restriction in and of itself is not sufficient. The charity would likely recognise income immediately on obtaining control of the donation.

AASB 15: Example 9 Example 9A – Memberships & Donations A museum (NFP) sells memberships that provide access to its facilities for a year (performance obligation). In addition, the museum invites its members to donate a voluntary, non-refundable amount to assist the museum with its community education objectives. Such a donation is separately identifiable from the price of the annual membership. Neither the membership nor the donation is refundable. Example 9B – Memberships & Donations Same facts as above, however, the membership is pro rata refundable if the member wants to cancel partway through the year.

AASB 15: Example 9 (Cont.) Example 9 – Memberships & Donations Scenario A If neither of the amounts are refundable, the total consideration (transaction price) is allocated to the performance obligation to provide membership access and is treated wholly within AASB 15 as a revenue transaction. The donated amount is not separately accounted for. Scenario B Where the annual membership is refundable if access is not provided for the entire year, while the donation is not, the donated amount is accounted for separately in accordance with AASB 1058. AASB 15 includes a rebuttable presumption that the transaction price is treated as being wholly related to the transfer of promised goods or services. This presumption is rebutted when a portion of the transaction price is refundable if the goods/services are not delivered/performed.

AASB 15: TRANSITION METHODS Transition methods – choice between: 1. Full Retrospective Application • Recalculate all contracts at earliest comparative date • Restate comparatives (31/12/18 in 31/12/19 accounts / 30/06/2019 in 30/06/2020 accounts) • Adjustment ‐ change to opening balances 1/1/18 or 1/7/18 • May use optional practical expedients

AASB 15: TRANSITION METHODS 2. Cumulative Catch-up Approach If you opt to use the cumulative catch-up approach: • Comparatives not restated • Change 2019 opening balances in 31/12/19 accounts or in 30/06/2020 accounts • Apply to all open contracts at 1/1/19 or 1/7/19

AASB 15: KEY CONSIDERATIONS Key Considerations on how AASB 15 impacts on your organisation: • Identify the different types of revenue arrangements & income streams. • Review and understand the underlying contract for each revenue arrangement. • Determine whether performance obligations/promises are sufficiently specific. • Determine whether performance obligations will be met over-time or point-in-time. • Determine whether you will apply AASB 15, AASB 1058 or both for each revenue contract. • Document your judgements, decisions and choices for each revenue arrangement.

AASB 15 Revenue from Contracts with Customers