Volunteering Tasmania hosted 3 state-wide workshops in June 2018 to help organisations understand changes to the Australian Accounting Standard (AASB1058) for Not-for-Profit (NFP) entities that involve volunteers in the delivery of their services.
Volunteering Tasmania provides you with the information below as a snapshot summary of the information presented by Alison Flakemore, a Senior Partner of accounting firm Crowe Horwath.
It is advisable to discuss these changes and how they may affect your organisation with the relevant person within your organisation; and seek professional advice from your accountant/auditor.
WHAT ARE THE CHANGES?
Basically the changes relate to:
- Better matching income with expenditure
- Recognising income when receiving something for significantly less than its fair value mainly to enable organisations to further its objectives
Additionally to this are changes to the lease standard:
- “Right-of-use” asset will be treated as a financial lease – so these will be included as an asset (with the need to depreciate) as well as a liability (need to determine borrowing rate to calculate present value)
There are also changes to Volunteer Services:
- The need to measure reliably – volunteers will need to “clock” on and off
- Determine fair value of their services contributed
- Would the services be purchased if they were not donated?
- Currently, whether to include this is optional, however not for the public sector where it is compulsory to report on this.
And changes to Grant reporting:
- Received by entity to further its objectives
- Needs to be “sufficiently specific performance of obligations” and enforceable
- If this is the case then can defer income to match when expenses incurred, otherwise must recognise income on the receipt of the grant.
DO THE STANDARDS APPLY TO YOU?
It is recommended to treat all Accounting Standards as though they apply to your organisation.
Refer to the Associations and Incorporation Act 1964 and discuss with your accountant, auditor or finance team.
Your starting point is checking if they are relevant to your organisation.
While reading the summary of these changes, have in mind:
- What does it mean for your organisation?
- What do you need to do?
SNAPSHOT OF THE CHANGES:
The changes will impact the way Organisations currently report on the following:
- Grant Funding reporting
- Volunteer Services recognition
- Revenue from contracts/clients
Finance Lease: Is when you lease an asset i.e. photocopiers, phones, and buildings – so you are financing an asset purchase for a period of time – giving you ownership rights during this time.
Operating Lease: treated as rent, you are available to use that asset for the duration of the time within agreement.
The changes will be treating all leases as finance leases.
Meaning, the nature of how expense is recognised in a profit and loss (P&L) will change.
It will be now recognised as depreciation on the ‘right-of-use’ asset and an interest charge on the lease liability. This charge will be calculated using the effective interest method which will mean gradual reduction of interest expense over the lease term.
There are exemptions for low value items ($5,000 or less) – you are encouraged to know what these are and combined value if multiple items, for example, mobile phones, wireless internet devices.
An exemption also exists for leases of less than 12 months where no purchase option exists.
Peppercorn leases will also change in how they are disclosed.
A peppercorn lease is where an asset (building, property, facility) is under an agreement of use for generally 99 years at significantly less value than market rate. For example, $1 per year for 99 years.
The new standard will make not-for-profit organisations recognise these values within reporting as value in right-to-use the asset and not the value of the building/land/facility.
Your revenue will reflect the increased income in reporting this figure, showing extra value provided. This may deteriorate the overall bottom line.
The key message is to identify the leases you have currently and start articulating future impacts they may have. Understand what these are and how they are being disclosed.
GRANT FUNDING REPORTING
Currently, grants funding reporting can be flexible in aligning with funding agreements and the deliverables in when the money component is reflected in your financial reporting. Meaning Grants can be reported in whole when received or flexible.
The changes will see grant funding now needing to be reported within financials as true to date, or reflecting the income portion at the time of which the expense has been incurred (progressively with funding agreement milestones/timeline).
The introduction of recognition of measurements with grant funding will assist complying with the new standards.
VOLUNTEER SERVICES RECOGNITION
Recognising the value of a volunteer per hour for the services they are contributing and reflecting this in your financial reporting.
Determine the value of your volunteers by calculating the following:
VOLUNTEER HOURS x RATE VALUE = VALUE OF VOLUNTEER CONTRIBUTION
Reflecting a value for your volunteer time as ‘income’ and reflecting the expense your organisation could face if were to provide these services with paid workers.
Currently this is optional for organisations, eventually it is unknown if this will be enforced, or remain the organisations choice. For the public sector this is compulsory to include in reporting.
This adds value to your organisation in other areas, signifying the contribution of value donated.
If electing to do this, your organisation needs to identify all volunteers (including voluntary Boards) when doing this.
REVENUE FROM CONTRACTS/CLIENTS
Financial reporting will be reflective of milestones at which the expense is incurred alongside the revenue being received on a transactional basis.
Example: AGED CARE
An ongoing funding agreement for delivery of aged care services has contractual obligations on key deliverables of the service. Rather than starting with the total funding at the start within reporting, going forward you will report this in real time meaning the income will be included in reporting at the time of the expense being incurred.
For example; a client needs travel from A to B, the expenditure for the service is incurred, and therefore the income figure is then reflected in reporting from the funding agreement.
WHERE TO FROM HERE?
This next 12 months is the time to get ready! Be proactive with these changes, not reactive!
Anything you can do to seek further advice – do it!
Start practising these new standard changes now, this will assist when the new standard comes into effect in 2019/20 (dependent on your organisations financial year).
There will be added costs to organisations in complying with the new standards. Whilst in the optional phase (now), start weighing-up for your organisation the cost of implementation verses the benefit.
Talk to your accountant, auditor, finance team – they are the ones having to approve of depreciation rates and values!
Most annual financial reports (overview not full cash flow details) are public records, organisations, particularly NFPs are cross referencing other organisations to see trends.
Volunteering Tasmania welcomes your questions your organisation may have regarding this information on the changes, and we will consult with Alison Flakemore at Crowe Horwath to supply a response.