Appendix F (AASB15_12-14_COMPdec22_01-23)

AASB 15 Revenue from Contracts with Customers incorporates International Financial Reporting Standard IFRS 15 Revenue from Contracts with Customers, issued by the International Accounting Standards Board. Consequently, the text of AASB 15 is generally expressed from the perspective of for-profit entities in the private sector. The AASB has prepared this appendix to explain and illustrate the principles in the Standard from the perspective of not-for-profit entities in the private and public sectors, particularly to address circumstances where a for-profit perspective does not readily translate to a not-for-profit perspective. The appendix does not apply to for-profit entities or affect their application of AASB 15.

AASB 15 provides guidance on the following five elements of a contract with a customer:

(a)            identifying a contract (paragraphs 9–21);

(b)            identifying performance obligations (paragraphs 22–30);

(c)            determining the transaction price (paragraphs 46–72);

(d)            allocating the transaction price to performance obligations (paragraphs 73–90); and

(e)            recognising revenue (paragraphs 31–45).

This appendix should be read in conjunction with the requirements of this Standard.

This appendix provides guidance to assist not-for-profit entities to determine whether particular transactions or other events, or components thereof, are within the scope of this Standard, in particular in relation to identifying a contract and identifying performance obligations. If a transaction is outside the scope of this Standard, the recognition and measurement of income arising from the transaction may instead be specified by another Standard, for example AASB 1058 Income of Not-for-Profit Entities.

A contract is an agreement between two or more parties that creates enforceable rights and obligations. If a not-for-profit entity’s promise to transfer a good or service is made in an unenforceable arrangement with another party, a contract with a customer does not exist. If a not-for-profit entity’s promise to transfer a good or service in an arrangement with another party fails the ‘sufficiently specific’ criterion discussed in paragraphs F20–F26, a contract with a customer does not exist and the entity shall not treat the promise as a performance obligation in a contract with a customer. Where a contract with a customer does not exist, the not-for-profit entity shall consider whether AASB 1058 is applicable.

In contracts with customers, the ‘customer’ is the party that promises consideration in exchange for goods or services that are an output of the entity’s ordinary activities. However, in contracts with customers in any sector, the customer might direct that goods or services are to be provided to third-party beneficiaries (including individuals or the community at large) on the customer’s behalf. In these contracts:

(a)            the customer remains the party that has contracted with the entity for those goods or services and promises consideration in exchange for those goods or services; and

(b)            the provision of goods or services to third-party beneficiaries is a characteristic of the promised transfer of goods or services to the customer.

For example, a not-for-profit entity in the private sector may receive consideration from a government for the specified purpose of providing first-aid training free of charge to members of the community. The government is the customer because it has contracted the entity to provide the first-aid training services. This conclusion is not affected by the fact that the government specifies that those services are to be provided to members of the community.

In relation to the definition of ‘contract’ in Appendix A, the reference to an ‘agreement’ in that definition shall be read by not-for-profit entities as encompassing an arrangement entered into under the direction of another party (for example, when assets are transferred to an entity with a directive that they be deployed to provide specified services).

Paragraph 10 states that contracts can be written, oral or implied by an entity’s customary business practices. The customary business practices of a not-for-profit entity refer to that entity’s customary practice in performing or conducting its activities.

An inherent feature of a contract with a customer is that the entity makes promises in an agreement that creates enforceable rights and obligations. Paragraphs F11–F18 provide guidance for not-for-profit entities on when an agreement creates enforceable rights and obligations.

An agreement is enforceable when a separate party is able to enforce it through legal or equivalent means. It is not necessary for each promise in the agreement to transfer goods or services to be enforceable by legal or equivalent means, as long as some enforceable obligations of the entity arise from the agreement. For an agreement to be enforceable by a separate party through ‘equivalent means’, the presence of a mechanism outside the legal system that establishes the right of a separate party to oblige the entity to act in a particular way or be subject to consequence is required.

An agreement typically is enforceable by another party through legal or equivalent means if the agreement is in writing and includes sufficiently specific requirements of the parties. Oral agreements also may be enforceable. Enforceability needs to be considered in relation to both the particular terms of an agreement and any additional terms agreed by the parties as a result of further discussions or actions. Examples of terms that result in enforceable agreements include the following:

(a)            a refund in cash or kind is required when the agreed specific performance has not occurred;

(b)            the customer, or another party acting on its behalf, has a right to enforce specific performance or claim damages;

(c)            the customer has the right to take a financial interest in assets purchased or constructed by the entity with resources provided under the agreement;

(d)            the parties to the agreement are required to agree on alternative uses of the resources provided under the agreement; and

(e)            an administrative process exists to enforce agreements between sovereign States or between a State and another party.

A sufficiently specific, written agreement can be enforceable even if the particular terms do not include refund or other enforcement provisions, since Australian law generally provides remedies of specific performance or damages for breach of an agreement. Agreements that explicitly state they are not intended to be legally binding may nonetheless become enforceable agreements if the parties act in a manner that is inconsistent with the stated intention. Agreements that lack elements of a contract may nonetheless become legally enforceable if there is conduct by one party that causes the other party to act in reliance on such conduct. The enforceability of agreements does not depend on their form. For example, documents such as Memoranda of Understanding, Heads of Agreement and Letters of Intent can constitute legally enforceable agreements; a formal contract is not required.

In respect of not-for-profit entities, enforcement mechanisms may arise from administrative arrangements or statutory provisions. An example of such an enforcement mechanism is a directive given by a Minister or government department to a public sector entity controlled by the government to which the Minister or government department belongs. The ministerial authority to require a transfer of goods or services would be sufficient for an agreement to be enforceable by a separate party through legal or equivalent means.

In relation to paragraph F11, a consequence for failing to transfer promised goods or services could be either a return of consideration or a penalty for non-performance that is sufficiently severe to compel the entity to fulfil its promise to transfer goods or services. In some circumstances, where rights to specific performance are unavailable or unnecessary, the authority to require compensation may be the key determinant of the enforceability of an agreement involving a promise to transfer goods or services. A capacity to impose a severe penalty for non-performance can exist without a capacity to require a return of transferred assets or assets of equivalent value.

Identification of an agreement as being enforceable by another party through legal or equivalent means does not require a history of enforcement of similar agreements by the customer or even an intention of the customer to enforce its rights. A customer might choose not to enforce its rights against an entity. However, that decision is at the customer’s discretion, and does not affect the enforceability of the customer’s rights. Enforceability depends solely on the customer’s capacity to enforce its rights.

In contrast to the factors in paragraph F11, the following circumstances would not, of themselves, cause an agreement involving a promise to transfer goods or services to be enforceable by another party through legal or equivalent means:

(a)            a transferor has the capacity to withhold future funding to which the entity is not presently entitled; and

(b)            a not-for-profit entity publishes a statement of intent to spend money or consume assets in particular ways. The statement of intent is generally in the nature of a public policy statement, and does not identify parties who could enforce the statement. Such a statement of intent would, of itself, be insufficient to create an enforceable agreement, even if that statement is the subject of budget-to-actual reporting and of other oversight mechanisms to discharge accountability for the raising of funds, expenditure or consumption of assets. This is in contrast to a letter of intent which is typically an agreement between specifically identified parties. See also paragraph Aus26.1 of AASB 137.

In relation to paragraph F17(a), a transferor’s capacity to withhold future funding to which the entity is not presently entitled can be distinguished from circumstances in which a transferor presently holds refund rights, or has the capacity to impose a severe penalty, in the event of the transferee’s non-performance, but might choose to obtain such a refund or impose such a penalty by deducting the amount of the refund or penalty from a future transfer to the entity. For example, a transferor’s capacity to withhold future funding to which the transferee is not presently entitled would differ from circumstances in which a transferor could demand a refund of granted assets in the event of the transferee’s non-performance, regardless of whether it makes any future transfers to the transferee, but chooses for convenience to deduct the refund amount from a future transfer. In this latter case, the transferor could enforce against the entity a promise to provide goods or services.

Paragraph 9(d) specifies that the Standard applies to a contract with a customer only if (among other criteria) the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract). A contract may have ‘commercial substance’, for the purposes of paragraph 9(d), even if it is entered into by a not-for-profit entity for purposes that, in everyday language, would be considered ‘non-commercial’ (for example, contracts to provide goods or services to members of the community on a subsidised or cost-recovery basis). This is because contracts to provide goods or services without generating a commercial return may nonetheless cause a change in the risk, timing or amount of the not-for-profit entity’s future cash flows. Accordingly, for the purposes of application of the Standard by not-for-profit entities, ‘commercial substance’ shall be read as a reference to economic substance (ie giving rise to substantive rights and obligations).

Paragraphs 22 and 30 of AASB 15 require that to enable an entity to identify the performance obligations that it should account for separately, each promise to transfer goods or services needs to be distinct – individually, or if not individually, as a bundle combined with other promises. The specificity of the promise to transfer goods or services can be quite different in the for-profit and not-for-profit sectors. A necessary condition for identifying a performance obligation of a not-for-profit entity is that the promise is sufficiently specific to be able to determine when the obligation is satisfied. Judgement is necessary to assess whether a promise is sufficiently specific. Such judgement takes into account any conditions specified in the arrangement, whether explicit or implicit, regarding the promised goods or services, including conditions regarding the following aspects:

(a)            the nature or type of the goods or services;

(b)            the cost or value of the goods or services;

(c)            the quantity of the goods or services; and

(d)            the period over which the goods or services must be transferred.

In the not-for-profit context, a service can include an arrangement whereby one entity undertakes specific activities on behalf of another entity. Activities may include service delivery, research or asset management, among others. However, performance obligations do not include activities that an entity must undertake to fulfil a contract unless those activities transfer a good or service to a customer. For example, research activities undertaken to develop intellectual property that the entity will license to a customer are not themselves a transfer of goods or services to the customer.

Whether a promise is sufficiently specific so as to qualify as a performance obligation is assessed separately for each promise and will depend on the facts and circumstances. No specific number or combination of the conditions noted in paragraph F20 need to be specified in an agreement for the promise to be sufficiently specific. In addition, there may be other conditions that need to be taken into account in applying the judgement above that may indicate the promise is sufficiently specific.

Conditions specified regarding the promised goods or services may be explicit or implicit in an agreement. Paragraph 24 states that the performance obligations identified in a contract with a customer may not be limited to the goods or services that are explicitly stated in that contract. This is because a contract with a customer may also include promises that are implied by an entity’s customary business practices, published policies or specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will transfer a good or service to the customer. A not-for-profit entity may make a statement of intent to spend a transfer in a particular way. As noted in paragraph F17(b), a statement of intent alone is generally not enough to create a performance obligation. Some element of the contract will need to be enforceable and past practice would need to support the customer expectation.

In relation to paragraph F20(d), a condition that a not-for-profit entity must transfer unspecified goods or services within a particular period does not, of itself, meet the ‘sufficiently specific’ criterion. For example, a not-for-profit entity may provide a number of services under its charter such as counselling and housing to disadvantaged youth. Where it receives a transfer to be used for an unspecified purpose over a particular time period, such a promise would not meet the ‘sufficiently specific’ criterion.

Some not-for-profit entities have a single purpose charter, such as to provide counselling services. However, it is unlikely that an entity’s charter or stated objectives would be specific enough to require the recognition of contract liabilities under a contract that provided the entity with a grant for a specified period of time but did not also adequately identify the goods or services to be provided to other parties. 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. Specifying the services to be provided under the arrangement and the stipulation to use the transferred funds over a particular time period enables a determination of when the services have been provided. However, if the transfer does not specify the period over which the entity must use the funds or the services to be provided (such as the number of counselling sessions), the entity would not meet the ‘sufficiently specific’ criterion because it would be unable to determine when it meets the performance obligations.

An agreement may include a condition that the entity undertakes an acquittal process to demonstrate progress toward transferring goods or services. For example, the terms of an agreement may require the entity to report on progress toward specified outputs or outcomes in an acquittal process. Such an acquittal process may provide evidence of a promise to transfer goods or services that is sufficiently specific, depending on the requirements of the acquittal process and other facts and circumstances. An acquittal process may also enable a determination of progress toward satisfaction of the performance obligation.

Where a contract provides a transfer of a financial asset for an entity to acquire or construct a non-financial asset (eg a building or an intangible asset) that is to be controlled by the entity, the contract does not establish rights and obligations for the transfer of the non-financial asset to the transferor or other parties. Accordingly, the contract is not a contract with a customer, and hence is not accounted for in accordance with AASB 15. Such contracts are instead accounted for in accordance with paragraphs 15–17 of AASB 1058. In this case, the transferor has made an in-substance transfer of the non-financial asset to the entity. The entity would retain control of the non-financial asset and use it in its operations, such as to produce goods or services for transfer to other parties under other contracts. A contract to transfer a financial asset for an entity to acquire or construct a non-financial asset that is to be controlled by the entity may be part of a contract that includes other conditions that give rise to performance obligations that require the entity to transfer goods or services to other entities. Those performance obligations are accounted for under AASB 15.

A customer may enter into a contract with a not-for-profit entity with a dual purpose of obtaining goods or services and to help the not-for-profit entity achieve its objectives. An entity shall allocate the transaction price to each performance obligation so that the performance obligation allocation depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. This is based on the rebuttable presumption that the transaction price is treated as wholly related to the transfer of promised goods or services.

The presumption is rebutted where the transaction price is partially refundable in the event the entity does not deliver the promised goods or services.

Where the presumption is rebutted, the entity shall disaggregate the transaction price and account for the component that relates to the transfer of promised goods or services in accordance with this Standard. The remainder of the transaction price shall be accounted for in accordance with AASB 1058. Whether the element not related to the performance obligation is material, and therefore needs to be accounted for separately, shall be assessed in relation to the individual contract, without reassessment at an aggregate or portfolio level.

To disaggregate the component that relates to the promised goods or services, the following may be indicative of an element that is not related to the promised goods or services (and more likely to be for the purpose of enabling the not-for-profit entity to further its objectives):

(a)            a non-refundable component of the transaction price; and

(b)            where the entity has the status of a deductible gift recipient – the donor can claim part of the transaction price as a tax deduction for a donation.

For example, a not-for-profit heritage foundation sells on-line subscriptions that provide access for a year to particular heritage sites (a promised service to each customer) and invites subscribers to, in addition, donate a non-refundable nominated amount to generally assist the foundation in pursuing its mission. Such a donation, which is voluntary for a subscriber, is separately identifiable from the price of the annual subscription. However, if the annual subscription fee and the donation were both refundable if access were not provided for the entire subscription period, the presumption in paragraph F28 could not be rebutted as the transaction price is refundable in full. In that case, the donation amount would not be accounted for separately but would be included in the transaction price that is allocated to the performance obligation to provide membership access. Consequently, the donation amount would be recognised as revenue when (or as) performance obligations under the arrangement are satisfied in accordance with AASB 15. Similarly, if both elements were equally proportionately refundable to acknowledge access already provided during the year, or if neither element were refundable, then no separation is required as the presumption is not rebutted.