The new revenue recognition standard AASB 15 “Revenue from Contracts with Customers” will impact both for-profit and not-for profit entities. The standard will present a challenge for adoption across the health and care sectors, particularly in instances of long term service contracts and public body reciprocal funding arrangements.
The core principle of AASB 15 is to recognise revenue received under a contract when the goods or services have been actually delivered to customers. As the title of AASB 15 suggests, an entity shall only apply AASB 15 to a contract 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.
We have summarised below a 5-Step Model to Apply the Core Principles of the standard.
An entity recognizes revenue in accordance with the core principle by applying the following steps:
Currently, AASB 15 applies to annual reporting periods beginning on or after 1 January 2018.
For health and care not-for-profit entities, in April 2015, the Australian Accounting Standards Board (AASB) issued an exposure draft ED 260 Income of Not-for-Profit Entities which proposes:
• guidance to assist not-for-profit entities to apply the principles of AASB 15 Revenue from Contracts with Customers, and
• a replacement of the income recognition requirements in AASB 1004 Contributions.
This new standard essentially means revenue is recognised when a product or service is delivered, rather than when it has been contracted. If a not-for-profit entity’s transaction is outside the scope of AASB 15, such an inflow would be accounted for in accordance with the proposed Income of Not-for-Profit Entities either as other income, a liability (for example, a refund liability) or a contribution by owners.
Other income would arise when the not-for-profit entity recognises an inflow of an asset initially measured at an amount exceeding the initial carrying amount of any resulting liability to that entity (including a contract liability to a customer), provided that the inflow is not a contribution by owners. Recognition of the inflow would generally occur when the not-for-profit entity obtains control of the promised or transferred asset. This problematic concept (that is, ‘control of an asset’), which is also included in the current AASB 1004, is addressed in ED 260.
For more information about how the new standard affects you, contact Mark Harrison, Partner, Pitcher Partners