Appendix B (AASB 1058_12-16_COMPmar20_07-21)

This appendix is an integral part of the Standard.  It describes the application of paragraphs 1–41.

The following flowcharts summarise the main requirements of this Standard to assist in its application.

Chart 1 – Transactions other than Volunteer Services

Chart 2 – Volunteer Services

This Standard provides guidance for transactions where on initial recognition of an asset the consideration for that asset was significantly less than fair value principally to enable the entity to further its objectives, and for volunteer services.  Examples include:

(a)                cash and other assets received from grants, bequests or donations;

(b)                receipts of appropriations by government departments and other public sector entities;

(c)                receipts of taxes, rates or fines; and

(d)                assets acquired for nominal or low amounts.

Where an asset is acquired for consideration that is significantly less than fair value but that difference is not principally related to furthering the entity’s objectives, the transaction is not within the scope of this Standard.  Examples of such transactions include:

(a)                distress sales; and

(b)                trade discounts.

When assessing whether the consideration for an asset is less than fair value principally to enable the entity to further its objectives, the entity may consider whether another entity could have obtained the asset under the same terms and conditions.  If those terms and conditions are generally not available to other entities of the same class/nature, it is more likely that the difference between the consideration for the asset and the fair value of the asset acquired is principally for enabling the entity to further its objectives.  For example, trade discounts available to all not-for-profit entities, but not to for-profit entities, are not considered principally to further the specific not-for-profit entity’s objectives.

Where the consideration provided under a transaction solely involves performance obligations recognised in accordance with AASB 15, the asset is not acquired for consideration that is significantly less than fair value.  Therefore, the transaction is not within the scope of this Standard.

Transfers with consideration significantly less than fair value primarily to enable a not-for-profit entity to further its objectives may be called grants, bequests, donations or appropriations and are usually made voluntarily.  Such transfers could be in the form of cash or another financial asset, goods, or volunteer services, and may or may not be made with restrictions or conditions on their use.  Transactions may include elements with consideration that is significantly less than fair value primarily to enable the not-for-profit entity to further its objectives and other elements with consideration at fair value.  For example, a donation by a customer may be present in a contract in which a customer promises consideration in exchange for goods or services (eg a fundraising dinner).

Volunteer services are services transferred by individuals or other entities without charge or for consideration significantly less than the fair value of those services.  Whether such services (when recognised in accordance with paragraphs 18 and 19) are recognised as an asset or an expense depends on the entity’s determination whether it is probable that economic benefits will flow to the entity beyond the current accounting period.  In many instances, the economic benefits of volunteer services will be consumed as the services are acquired.  In some cases, the volunteer services will contribute to the development of an asset and be included in the carrying amount of that asset.

Entities may be recipients of volunteer services under voluntary or compulsory schemes operated in the public interest, for example:

(a)                technical assistance from other governments or international organisations;

(b)                persons convicted of offences who are required to perform community service for the entity;

(c)                hospitals receiving the services of volunteers;

(d)                schools receiving voluntary services from parents as teachers’ aides or as board members; and

(e)                local governments receiving the services of volunteer firefighters.

Entities may also be recipients of volunteer professional services that support their broader activities.  For example, charities and religious organisations may receive free professional accounting or legal services.

Government appropriations, which establish the authority to spend money for particular purposes, are a form of a transfer made voluntarily as the government is not compelled to make particular payments of amounts appropriated.

Taxes, rates and fines are forms of transfers made compulsorily.

An entity recognises related contributions by owners, liabilities and revenue (‘related amounts’) on initial recognition of an asset in accordance with another Australian Accounting Standard where the consideration for that asset is significantly less than fair value principally to further the entity’s objectives.

Any income recognised in accordance with paragraph 10 is strictly the residual of the difference between the fair value of the asset recognised and the consideration for that asset, after deducting any other related amounts described in paragraph 9.  However, income is not recognised under paragraph 10 where another Standard addresses the accounting for the difference, such as the “day one gain/loss” requirements in AASB 9.

An entity typically has the ability, through its own actions, to avoid the circumstances that would give rise to a breach of conditions or requirements in an agreement necessitating a return of funds received.  In such cases, liabilities recognised in accordance with other Standards do not include refund obligations that apply in the event of a breach, unless the breach has occurred or is expected to occur.  For example, a grant agreement may require the funds provided to an entity to be spent only in a particular period, failing which repayment to the grantor will be required.  As the entity has the discretion whether to spend funds received in advance of the specified period, a refund liability is not recognised unless the entity breaches the condition or a breach is expected.

An entity that receives a financial asset, such as cash, in a transfer to enable the entity to acquire or construct a recognisable non-financial asset to be controlled by the entity shall apply the requirements of AASB 9 to that financial asset.  The acquisition or construction of the non-financial asset is accounted for separately to the transfer of the financial asset, in accordance with other Standards.  If the non-financial asset is not permitted to be recognised by another Standard (eg knowledge or intellectual property developed through research, which cannot be recognised as an asset in accordance with AASB 138), paragraphs 15–17 do not apply.  The key criterion is that the recognisable non-financial asset will be under the control of the entity (ie for its own use) – it will not be transferred to the transferor or other parties.  Therefore, the transfer of the financial asset (or the relevant part) to the entity does not occur under a contract with a customer and is not subject to AASB 15.  However, the recognisable non-financial asset could increase the entity’s ability or capacity to provide goods or services to other parties pursuant to other transactions, which are separate to the transfer that enabled the entity to acquire or construct the non-financial asset for its own use.

On initial recognition of the financial asset, the entity recognises the requirement to acquire or construct the recognisable non-financial asset as an obligation and considers whether there are other conditions that give rise to performance obligations that require the entity to transfer goods or services to other entities (which are accounted for under AASB 15).  The obligation to acquire or construct the non-financial asset is accounted for similarly to a performance obligation under AASB 15.  For each obligation, the entity shall determine whether the obligation would be satisfied over time or at a point in time.  If an entity does not satisfy an obligation over time, the obligation would be satisfied at a point in time.

An entity shall apply a single method of measuring progress for each obligation satisfied over time and the entity shall apply that method consistently to similar obligations and in similar circumstances.  At the end of each reporting period, an entity shall remeasure its progress towards complete satisfaction of each obligation that is satisfied over time, and shall recognise income over time on that basis.

An endowment is a transfer of an asset to an entity for the ongoing support of the entity’s objectives, and may (but not necessarily) be made as part of a bequest.  An endowment may be made for the perpetual benefit of the entity in that the transfer is made with a requirement for the principal to be preserved, and only income earned on investment activity to be available for use in furthering the entity’s objectives.

An endowment may include conditions pertaining to investment of the principal and the purpose to which investment income must be applied.  For example, an endowment made to a university may be made on condition that the principal is invested and the investment income used for annual scholarships.  An entity shall consider whether the conditions of the transfer give rise to any related contribution by owners, liabilities or revenue that is recognised at the same time as the entity recognises an asset.  For example, an entity may determine the conditions give rise to a financial liability within the scope of AASB 9 for the obligation to provide a financial asset into the future, or a contract liability within the scope of AASB 15 for unperformed performance obligations relating to the transfer of goods or services under the terms of the endowment.

A bequest is a transfer made according to the provisions of a deceased person’s will.  Whether the initial recognition of bequeathed items as assets in accordance with another Standard simultaneously gives rise to the recognition of income will depend on whether the entity recognises a liability, or other related amounts, as a result of the bequest.  For example, the terms of a bequest may establish a contract between an entity and the estate that is within the scope of AASB 15 and give rise to a contract liability.

When an entity recognises an asset in accordance with another Australian Accounting Standard for consideration that is significantly less than fair value principally to enable the entity to further its objectives, the entity applies paragraph 9 to recognise any related amounts.  When applying that paragraph, an entity considers whether a provision should be recognised in accordance with AASB 137 for a constructive obligation.

Critical to recognising a provision for a constructive obligation, an entity must demonstrate that its published policies, past practices or current statements are sufficiently specific to raise a valid expectation on the part of other parties that the entity will discharge its responsibilities under those policies, practices or statements.  Determining whether an entity’s policies, practices or statements are sufficiently specific to create such an expectation among other parties is a matter of judgement.  However, it is unlikely that an entity’s charter or stated objectives would satisfy the definition of a constructive obligation.

An established pattern of past practices might also create a valid expectation among other parties that the entity will continue to adhere to those practices in the future.  While entities might establish a general pattern for utilising assets received, they often do not adhere to those patterns to such a degree as to create a valid expectation among other parties.

Contractual terms (implicit or explicit), legislation or another operation of the law might create a legal non-financial obligation for an entity.  In these circumstances an entity applies AASB 137 to recognise a provision, if any, arising from those legal obligations.

Provisions might arise from terms included in a lease, such as an obligation to return or restore the leased asset in its original condition.  Paragraphs 24 and 25 of AASB 16 provide guidance on accounting for an obligation to maintain, or restore, assets to conditions specified in a lease.  Where such an obligation exists, the obligation is also accounted for in accordance with AASB 137.

The nature of parliamentary appropriations, and the circumstances that give rise to a government department’s recognition of such appropriations, can vary across different jurisdictions in Australia, and may vary for different types of appropriations within a particular jurisdiction.  Similarly, the nature and content of appropriation legislation, the manner in which government departments’ activities are funded, and the mechanisms by which parliament and the government ensure that the government departments’ use of public funds is appropriate and consistent with government priorities as sanctioned by parliament, can change over time.  Accordingly, the extent to which amounts appropriated for a government department’s use are recognised as income of a particular reporting period is determined by reference to the characteristics of the appropriation process and the circumstances in which the government department recognises appropriated amounts.

For example, the parliamentary appropriation process currently adopted in some jurisdictions in Australia is such that the government departments do not gain control of funds appropriated for their use until obligations are incurred or expenditures are made by the government department.  In these jurisdictions, appropriations recognised as income are in the nature of a recovery of costs incurred for the acquisition of goods and services or for amounts otherwise expended.

Taxes, rates and fines do not give rise to a contract liability or revenue recognised in accordance with AASB 15, even when they are raised in respect of specific goods or services.  This is because the entity does not promise to provide goods or services in an agreement that creates obligations enforceable against the entity by legal or equivalent means.

Taxes, rates and fines are not contributions by owners acting in their capacity as owners.

Amounts of tax relief that enter directly into the calculation of a taxpayer’s tax liability (including tax allowances, exemptions and deductions, and ‘non-payable tax credits’) are treated as reductions in income (ie foregone income), rather than expenses.  A ‘non-payable tax credit’ is a tax credit limited to the amount of the taxpayer’s tax liability for the period.  An example of tax relief that enters directly into the calculation of a taxpayer’s tax liability is where taxpayers are permitted tax deductions for self-education expenses.  These types of concessions are available only to taxpayers.  If an entity (including a natural person) does not pay tax, it cannot access the concession.

In contrast, a payable tax credit is a tax credit that is not limited to the amount of the taxpayer’s tax liability for the period; that is, any excess of the tax credit over the tax liability for the period would be payable to the taxpayer.  Such tax credits might be payable to taxpayers as part of a programme in which the same amount of benefit is paid to taxpayers and non-taxpayers alike (the latter being payable exclusively in the form of a cash benefit).  For example, a government may use the tax system as a convenient method of paying benefits to taxpayers, which would otherwise be paid using another payment method, such as writing a cheque, directly depositing the amount in a taxpayer’s bank account, or settling another account on behalf of the taxpayer.  For example, a government may pay part of an individual’s health insurance premiums, to encourage the uptake of such insurance, either by reducing the individual’s tax liability (by providing payable tax credits), making a payment by cheque or by paying an amount directly to the insurer.  In these cases, the amount is payable irrespective of whether the individual pays taxes.  Consequently, this amount is an expense of the government and is recognised separately from its tax income.  Tax income is measured gross of any expenses incurred by granting payable tax credits.

A not-for-profit entity that makes an accounting policy choice to recognise volunteer services under paragraph 19 shall only change its accounting policy if the change meets the criteria in AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors (paragraph 14). That is, an entity can change an accounting policy only if the change:

(a)                is required by an Australian Accounting Standard; or

(b)                results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.