Income Standards for NFP entities: does AASB 1058 really help with matching principle?

It has been nearly three years since the new income stands AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of NFP Entities came into force for Australian public sector. As part of post-implementation review and feedback received from stakeholders, AASB staff recently presented two on-line education sessions aimed at providing some guidance in application of these two standards by not-for-profit entities. One session was held on 2 March 2023, and, due to high demand, another similar one was performed on 23 March 2022. We participated on a 23rd March session. For those who could not attend, slide packs and some other interesting records can be found on this link >> AASB webinar: Income of not-for-profit entities: AASB 15 and AASB 1058 – AASB staff education session.

One of the reasons for the above initiative from AASB was diversity in practice of income recognition, confusion about concept of deferral of income by non-accountant specialists, unclear illustrative examples, especially in regard to application of AASB 1058.

As we know, sustainable operation of local councils largely depends on continuous provision of grants and contributions from higher tiers of Australian government. As a result, the AASB 1058 is the standard which plays a critical role in councils’ financial reporting. As well as AASB 15, the AASB 1058 aimed to facilitate matching principles when it comes to recognition of income and associated expenses.

However, there are still some unresolved issues related to application of this principle when it comes to grants. As we know AASB 1058 requires deferral of capital grant income until performance obligation for construction or purchase of an asset is fulfilled. However, the other non-capital grants are left behind. In fact, the accounting for those grants remained pretty much the same as under previous AASB 1004 Contributions.

One of the questions raised during the 23rd March session was as follows.

“Imagine an example.

If funds are given to construct/purchase specific assets which will be controlled by a NFP and the contract is enforceable – then this is AASB 1058 (asset exemption) with the unspent money recognized as a liability (similar to contract liability under AASB 15) (assume project is for more than one year). However, in case of the same scenario, but if funds are given to perform specific works on repairing an entity’s controlled specific assets (i.e. the expenditure will not be capitalized to assets or added to existing assets) – then all funds received should be recognized as income in the year one under AASB 1058? Even if there are unspent funds in the end of year one. Is this correct?”

The answer from AASB staff was that “yes, there should be no deferral of income at all in the second scenario”.

In other words, if a council received an enforceable grant which would require to perform specific works for a specified period of time on a council’s asset (for example, maintenance or repair of a council road), then the whole grant is recognized in full without any deferral.

To conclude, we see two big problems here. First, the matching principle is not working in full scope. Well, capital grants are deferred but they do not affect councils’ operational performance ratio. The operational grants, on the other hand, (unless they fall under AASB 15) do not follow matching principle at all. Second, we do not see any conceptual difference for the purposes of income recognition between capital and operational grants in a situation when both of them are enforceable and specific. However, only capital grants were “lucky” to fall under “performance obligation” method of accounting.