31May 20X6 Debit Credit

31 May 20X6 Debit Credit Cash 2,400,000 Income 2,400,000 Example 6B – Enforceable agreement, sufficiently specific performance obligations and restrictions on timing of expenditure This example contains the following additional facts relating to Charity B:  Charity B’s charter states its purpose is to provide counselling to victims of violence and emergency accommodation to the homeless; and  Charity B has an agreement with the grantor that specifies the grant must be spent providing crisis counselling services for a given number of hours per week for the entire year ending 30 June 20X7. Charity B expects to fulfil its promise to provide the counselling services. Based on the facts and circumstances outlined above, on gaining control of the grant of $2.4 million, Charity B determines that the grant agreement does not give rise to related amounts of the following types:  a contribution by owners, as the government does not have an ownership interest in Charity B;  a financial liability within the scope of AASB 9, as there is no unconditional obligation to repay the grant and the conditions requiring repayment of the grant are under the control of Charity B; and  a provision within the scope of AASB 137, as the agreement provides legal obligations and there are no other sufficiently specific constructive obligations to consider. Charity B concludes its agreement with the grantor is a contract with a customer as defined in AASB 15. This is on the basis that:  the agreement is enforceable (refer to paragraphs F11–F19 of AASB 15), as the grantor can enforce its rights in the contract to require Charity B to return the funds if Charity B does not fulfil the specific performance obligations under the contract (ie by providing the counselling services for the specified number of hours per week for the entire year); and  Charity B’s obligation to provide the specific services (identified counselling services for a specific number of hours per week in 20X6/X7 to victims of violence) in return for the consideration from the grantor is sufficiently specific to determine when the obligation is satisfied, as it will be clear at the end of each week whether the specified hours of counselling have been provided (refer to paragraph F20 of AASB 15). The services are also provided to third parties and not consumed by Charity B. In accordance with paragraph 9, the related amount for the $2.4 million is accounted for by Charity B as a contract liability in accordance with AASB 15 on recognition of the financial asset in accordance with AASB 9. The journal entry for the initial recognition is: 31 May 20X6 Debit Credit Cash 2,400,000 Contract liability 2,400,000 Example 7—Donations, management intent and discretionary use Charity C’s publicly stated objective is to build water wells to provide clean drinking water in developing countries. Charity C received 200 donations of $800 each. The donors indicated the donations are to be used for the purpose of building water wells. The above fact pattern applies to Examples 7A–7D, described below. Example 7A – Pledges In this example, the facts in Example 7 apply, except the 200 donations of $800 each are pledged by donors to Charity C in a telethon, and no cash has yet been received by Charity C. Charity C determines it does not control the future economic benefits associated with pledged amounts before receipt of the cash, as it does not have an enforceable right to require the donors to meet their pledge. Accordingly, the charity does not recognise an asset until the requirements of AASB 9 are satisfied. No journal entry is required. Example 7B – Management intent, no legal or constructive obligations In this example, the facts in Example 7 apply, except the Board of Charity C determined at a board meeting that funds raised from the public appeal from which the donated funds arose are to be used only for building water wells in Kenya. The Board has not publicly communicated this intention and its public statements are limited to those that appear in the Example 7 fact pattern above. Charity C determines:  the $160,000 in donations is an asset the charity acquired for no consideration to further the objectives of the charity. Accordingly, the donation is within the scope of AASB 1058; and  it controls a financial asset ($160,000) within the scope of AASB 9. Based on the facts and circumstances, on gaining control of the donations, Charity C determines that the donations do not give rise to related amounts of the following types:  a contribution by owners, as the donors do not have an ownership interest in Charity C, or if they are owners, the donations were not made in their capacity as owners;  a lease liability as defined in AASB 16, as the agreement Charity C enters into with the donors with respect to the donations is not a lease, and does not contain a lease;  a financial liability within the scope of AASB 9, as there is no obligation to provide cash or another financial asset to other parties; and  a provision within the scope of AASB 137, as the agreement provides legal obligations and there are no other constructive obligations to consider – there is no constructive obligation as past practice indicates water wells have been built in a number of different developing countries and the possible obligation to build water wells is not sufficiently specific to know when those funds received have been spent on water wells, or whether they have been spent on other purposes. Charity C assesses whether it has any related amounts in the form of revenue from a contract with a customer in accordance with AASB 15. Charity C determines its arrangement with donors is not an enforceable agreement in accordance with paragraph 10 of AASB 15 as there is no return obligation, and although management intends to spend the monies to build wells in a particular country, there is no public statement that would establish an enforceable contractual arrangement. The Board noting that the donation is to be spent on water wells is not sufficiently specific to enable enforcement of the contract, and there is no return obligation if not spent on water wells. Accordingly, Charity C recognises the donations as income when it gains control of the donated cash, in accordance with AASB 1058. The journal entry for the initial recognition (in aggregate) is: Voluntary disclosure of restrictions Although not an enforceable performance obligation, Charity C determines the donor expectations that the donations are intended to be used for the purpose of building water wells represents a restriction that is externally imposed on the donations. Consequently, Charity C elects to disclose the following information regarding the externally imposed restrictions on the donations by dividing total comprehensive income into restricted and unrestricted amounts in the statement of profit or loss and other comprehensive income in accordance with paragraph 37 of AASB 1058. Summary of Statement of Profit and Loss and Other Comprehensive Income of Charity C $ Donation income – restricted 160,000 Donation income – unrestricted 230,000 Other revenue 10,000 Total revenue 400,000 Total expenses 220,000 Total comprehensive income 180,000 Total comprehensive income – restricted 160,000 Total comprehensive income – unrestricted 20,000 Charity C also elects to disclose restricted funds in the statement of financial position by presenting restricted and unrestricted components of retained profits. Example 7C – Not enforceable and for discretionary use In this example, the facts in Example 7 apply, except Charity C collected the donations as part of a campaign to raise funds for building water wells in Kenya. However, Charity C indicated that any funds not required would be spent on other purposes in Kenya. Subsequently, Charity C suspended the construction of the water wells due to a disease outbreak in Kenya and redirected some of the donations received for the construction of the water wells to emergency food and medical supplies for the affected people in that country. Consistent with Example 7B, Charity C determines it controls a financial asset within the scope of AASB 9 and does not have a related contribution by owners, lease liability, financial liability or provision, as specified in another Australian Accounting Standard. Consistent with Example 7B, Charity C assesses whether it has any related amounts in the form of revenue from a contract with a customer in accordance with AASB 15. Charity C’s promise to transfer goods or services related to the donations is not an enforceable arrangement with the donors. Charity C has the discretion to direct the use of the donated money, provided the use is consistent with the overall objectives of the charity, and the donors would not have recourse against Charity C for redirecting the donations. Consequently, Charity C does not have a contract with a customer as defined under AASB 15. Accordingly, Charity C recognises the donations as income when it gains control of the donated cash, in accordance with AASB 1058. The journal entry for the initial recognition (in aggregate) is: Example 7D – Enforceable and sufficiently specific performance obligation At the public launch of Charity C’s appeal for donations, Charity C:  reaffirmed its 20-year history of building water wells in Kenya, with the funds raised for building water wells having been used only for that purpose and in that country. This has been the established practice despite its disclaimer that donated money may be used for other aid activities in response to changing circumstances;  publicly reinforced its commitment that the funds raised through this appeal are to be used only in respect of building wells in the identified country;  pledged to return the donated funds if Charity C is unable or not required to spend the funds to build wells in Kenya. This is despite the disclaimer that Charity C can redirect the funds to other aid activities in response to changing circumstances; and  publicly stated that each donation of $800 will construct two water wells. (The cost of well construction can vary from that, depending on any problems faced and efficiencies achieved.) Consistent with Examples 7B and 7C, Charity C determines it controls a financial asset within the scope of AASB 9 and does not have a related contribution by owners, lease liability, financial liability or provision, as specified in another Australian Accounting Standard. In contrast to Examples 7B and 7C, Charity C determines that the donations arise under contracts with customers, as defined under AASB 15. This is because:  the expectations raised through the commitment to refund unspent funds makes the agreements enforceable; and  the public statements it has made and its long-standing practices, which create a valid expectation that the funds will be spent on the task of building wells in the identified country, are sufficiently specific as Charity C has committed that each donation of $800 will construct two water wells. Charity C recognises each donation as a contract liability in accordance with AASB 15, when it gains control of the donated cash. Income is not recognised in respect of a donation until the specified two water wells have been built. The journal entries for the accounting (aggregating the journal entries for individual donations) are: Initial recognition (aggregate) Contract liability 160,000 Wells built (aggregate) Contract liability 160,000 Expenses – construction of 400 wells 153,000 Cash 153,000 Example 8—Multi-year cash grant The Local Government enters into an agreement with the State Government in the form of a Memorandum of Understanding (MOU)[\[1\]](#_ftn1) to receive a multi-year cash grant of $90,000 from the State Government, which is received in full on 24 June 20X0. The grant is to fund education programs over three years commencing 1 July 20X0, with the objective of increasing the literacy of students of a specific rural area. The fact pattern and analysis applies to Examples 8A–8C, described below. Example 8A – Enforceable, no sufficiently specific performance obligation  the MOU does not specify the activities the grant must be used for, other than an education program to increase literacy in a particular area; and  the State Government can enforce the repayment of the grant if the entity does not apply the funds to relevant education programs. The Local Government determines:  the $90,000 grant is an asset the Local Government acquired to further the objectives of the Local Government; and  it controls a financial asset ($90,000) within the scope of AASB 9. Based on the facts and circumstances, on gaining control of the grant, the Local Government determines that there are no related amounts under paragraph 9 of AASB 1058 as the grant does not give rise to:  a contribution by owners, as the State Government does not control the Local Government;  a contract with a customer within the scope of AASB 15. The agreement is enforceable as the grantor can enforce its rights in the contract to require the Local Government to return the funds if the Local Government does not undertake relevant programs. However, the Local Government’s performance obligation to provide relevant education programs is not sufficiently specific to be able to determine when the obligation is satisfied.  a financial liability within the scope of AASB 9, as there is no obligation to provide cash or another financial asset to other parties; or  a provision within the scope of AASB 137, as the agreement does not set out specific constructive obligations. The Local Government concludes that the grant is an asset acquired for consideration that is significantly less than the fair value of the grant principally to further its objectives, and so the grant is within the scope of AASB 1058. The Local Government determines that there are no related amounts to recognise under the MOU and so recognises the grant as income in accordance with paragraph 10 of AASB 1058 on 24 June 20X0. The journal entry for the accounting is: