UK-Irish GAAP update part 2

Read our guide to revenue accounting and special considerations for non-profits

Section 1

Overview: motive and the accounting solution for accounting for revenue

For-profit accounting has an underlying focus on the capability of an entity to generate cash flows with the primary purpose of providing a financial return to the providers of risk capital.  

In the operating context of for-profits, revenue recognition is important to the calculation of gross and net profit and the timing of revenue recognition is important to ensure fair representation with criteria that are sufficiently robust to act as a safeguard against potential abuses through early or inappropriate revenue recognition. Similar contextual issues may arise for non-profits that are trading to generate cash flows with potential abuses in manipulating the timing of income (revenue) recognition to allow for a more sympathetic portrayal of the entity’s financial position.

In the case of non-profits, including charities, not all transactions that give rise to cash flows (income) for non-profits are contractual. Also not all contractual obligations are carried out at market value with goods or services in some cases being supplied to the customer at below market or for nominal consideration in order to further a social purpose for the public benefit. If this is true then the accounting should reflect this and draw a distinction between contractual transactions at market value and below market value.

Section 2

Proposal: modify the accounting approach for non-exchange transactions

The author proposes modifying the approach to lease accounting by non-profits leasing assets for operational purposes where the generation of cash flows is of secondary importance or is incidental to the delivery of public benefit.

The proposed solution, referred to as a ‘modified revenue approach’, would add PBE paragraphs to section 23 of FRS 102 with the emphasis being on identifying and disclosing the nature of income/ revenue derived from transactions entered into for the public benefit where the definition of ‘customer’ as defined by IFRS 15 cannot apply. This recognises that, where the funder is not the same as the beneficiary, the substance and motive for these transactions is qualitatively different in nature from exchange transactions arising from-profit trading on commercial terms.


IFRS 15 criteria for revenue recognition

Potential corollary non-profits non-contractual transactions for public benefit



Identify the contract - five features:

A customer relationship where five elements are present:

  1. Contract exists
  2. Identifiable rights and obligations involve both parties
  3. Payment terms
  4. Commercial substance
  5. Probable settlement


In the context of non-profits the customer definition may often simply not be met by the beneficiary.

  1. Where a third party funds eg a donor then no contract exists but a form of agreement or notification may exist
  2. Rights and obligations can be identified
  3. Payment terms can be identified
  4. Although ‘commercial substance’ in a for-profit context may be missing the arrangement does involve cash flows
  5. Settlement is probable but may be subject to conditions of entitlement or restrictions as to allowed use



In the context of non-profits, for example charities, there is often no customer relationship as defined by IFRS 15 because the beneficiary is not financing the activity at all.


In some instances the payment made by the beneficiary is at nominal or below market rate and this is for reasons other than a trading inducement or trade discount and so the test of commercial substance arguably is not met.


In regard to the probability of settlement, IFRS 15 notes: ‘an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due’. In the context of many non-profits, for example charities, the fulfilment of conditions, for example delivering a certain level of benefit to beneficiaries, or restrictions, for example only applying the funds to assist a certain group of beneficiaries or to assist in meeting  particular need, will have to be within the control of the recipient for settlement to occur.





Combination of contracts

The concept of a package of agreed activities or deliverables could apply

The research evidence from the UK is that donors want to know the difference their funding makes and the specification of deliverables and performance can be found in agreements and solicitation statements

Contract modifications

Agreements may similarly allow for agreed variations

In respect of fundraising appeals the ability to vary the use of funds may be limited or require intervention by the courts or by the regulator (where the law grants a power)

Performance obligations

Although not contractual, some grant agreements may specify expected deliverables, the fulfilment of which is necessary to receive funding

Unlike a contract where payment is usually on performance, grants or donations may be received in advance of performance with fulfilment being monitored post settlement. Agreements may provide for repayment of grant/ non-renewal/ break clause in the event of non-performance


IFRS 15 holds that: ‘An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset’. In the case of a separation of funder and beneficiary although the funder can monitor delivery to the beneficiary it does obtain control.

In terms of IFRS 15 this requirement might never be met where the beneficiary who receives the deliverable is not the funder and so the beneficiary is not a ‘customer’ as defined by IFRS 15.


The approach also requires adaptation to note where there is the separation of beneficiary and funder to reflect the terms of any grant agreement to identify the nature of the link between performance and funding which may not be by item and be assessed in arrears and also to reframe satisfaction based on delivery to the beneficiary in this case which might not necessarily mean control has passed. Examples where control might not pass include open public access to an amenity or preservation of a heritage asset or an environment.


Recognise as revenue the amount of the transaction price…that is allocated to that performance obligation.


The attribution to revenue to a deliverable is possible where a donor/ funder makes that link in an agreement.


Obligations may need broader definition to take in amenities and preservation of heritage assets and similar where availability for access or maintenance of an environment or plant or breed rather than items of delivery applies.

Determining transaction price

Where payment is nominal or below market rate this link can be made. Otherwise, the attribution to revenue to a deliverable is possible where a donor/ funder makes that link in an agreement.

Although estimating the variable element of consideration could apply this would be where an agreement makes provision for it. Where monitoring of the grant is post event the adjustment for variable consideration (refunds) would need to consider to what extent the agreement provides for this or in the case of fundraising appeals charity law requires it and a  refund is not avoidable (for example by application to a  court)

Derivation of a significant financing component: ‘an entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer’

The recipient if paid in arrears for delivery may be affected by the time value of money.

Deriving financing elements in for-profit trading is of interest to investors looking at the underlying value of sales, the return on capital and the implicit cost to working capital of funds tied up in extended credit arrangements. There is no research evidence in regard to the interests of non-profit donors and funders that these considerations apply and so discounting is perhaps a complex irrelevance. Were it a relevant consideration then if more than one reporting period lies between delivery and settlement, the impact of inflation on the purchasing power of money to the recipient of a grant could be relevant.

Allocate the transaction price to each performance obligation

The attribution to revenue to a deliverable is possible where a donor/ funder makes that link in an agreement.

In those instances where payment made by the beneficiary is at nominal or below market rate allocation should be possible as there is an item price.

Changes in the transaction price

The variation to revenue is possible where a donor/ funder makes that link in an agreement and that provision is triggered.

In those instances where payment made by the beneficiary is at nominal or below market rate identification of changes to price should be possible as there is an item price

Contract costs

Differentiating costs recoverable from a particular contract from other costs incurred in contracting

The approach to defining contract would need to be broadened to cover seeking grants and donations where the terms provide for, or solely relate to, costs that are recoverable.

The context would be differentiating costs relating to a specific grant funded activity from costs that arise in generally seeking grants and costs involved in fundraising to solicit donations that are of a similarly general character, for example a  general appeal or to solicit donations.


Expenses or cost not specifically recoverable would be expensed so for example a  grant to fund an activity which is not based on reimbursing costs would be recognised independently of the costs incurred and the costs incurred would be expenses as they arise

Costs to fulfil a contract

Cost attribution between direct and indirect costs of an activity, shared costs (those that are attributable to one or more activity) and support costs (overheads) is a practice common between for-profit and non-profit sectors.

The relating of costs to a contract is integral to IFRS 15 since (paragraph 45) refers to recoverable costs as an option: ‘In some circumstances (for example, in the early stages of a contract), an entity may not be able to reasonably measure the outcome of a performance obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation. In those circumstances, the entity shall recognise revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation.’ Similarly an asset can be recognised for costs that are recoverable under a contract. However, the context differs in non-profits seeking donations and grants since these are not contractual arrangements.

Amortisation and impairment

IFRS paragraph 91 states: ‘An entity shall recognise as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs’ and this asset is then amortised over the contract period (with impairment reviews)

Although acquiring assets to undertake contract work may apply where there is a customer relationship, this is not the case for assets funded by a donor which serve the needs of beneficiaries. The term of any grant is not a guide to the life of the asset and its value in use as an asset may be unrelated to economic phenomena of sales and trading. Such functional assets are better considered Plant, Property and Equipment (IAS16) or fall out of scope of IFDRS altogether eg heritage assets



The distinction between receivable revenue and advance payment which is deferred can equally apply to grant agreements subject to conditions.


Similarly the notions of an asset where the not-for-profit has an existing asset, such as stock, or operates a facility to provide goods for which it seeks funding or services to the public benefit and a liability where unfulfilled conditions are not within the control of the entity equally apply.

Although the notion of ‘performance’ can apply, it has a different characteristic to contractual performance. In the context of not-for-profits performance may be fulfilling the purpose of a fundraising appeal, for example purchasing equipment or meeting conditions to receive grant funding for a  project.


In the context of grants and fundraising, the notion of an onerous contract or contractual penalties would not apply.



With amendment, the disclosures could equally apply to non-profits

The amendment would substitute grant funders for customers, the context for judgements would be any unfulfilled grant conditions, and the assets would be those deployed for grant funded activities.

Income (revenue) recognition where no contract exists – non-exchange transactions

IFRS 15 includes the requirement for ‘commercial substance’ in the criteria for recognition but does not define this term. The meaning is perhaps presumed since the standard is wholly contract focused. If exchange transactions are at the centre of the standard then it follows that non-exchange transactions, typical of non-profits, have not been considered in its approach, definition, measurement or methodology. Therefore simply applying IFRS 15 to non-contractual income would be misconceived and so an alternative approach is needed.

The current Charities SORP has three general criteria for income recognition (paragraph 5.8) which are also applied to non-exchange transactions such as grants (paragraph 5.10). These criteria are:

  • Entitlement – control over the rights or either access to economic benefits has passed to the charity
  • Probable – it is more likely than not that the economic benefits associated with the transaction or gift will flow to the charity
  • Measurement – the monetary value or amount of the income can be measured reliably and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

These criteria are drawn from the extant FRS 102 paragraphs 23.10 (goods) and 23.14 (services) which are directly taken from section 23 of the extant IFRS for SMEs. Although the term ‘entitlement’ is not used, the definition in the SORP frames it in terms of control over the rights or other access to economic benefits (paragraph 5.8) and reference is made in FRS 102  to transfer of risk and rewards to the buyer as one of the criteria for the seller to recognise income. Also the example given in section 23 of the IFRS for SMEs (paragraph 23.13) refers to transfer of legal title.

This model has worked well as the criteria of entitlement, reliable measurement and probable settlement are sufficiently broad to translate well to non-profits. IFRS 15 though, with its specific focus on contracts, brings a change in emphasis. The proposal is to include in section 23 of FRS 102 public benefit entity (PBE) specific revenue recognition criteria based on the current Charities SORP. This would entail FRS 102 having two sets of criteria, one for contractual transactions at commercial value and one for non-contractual transactions including transactions lacking commercial substance carried out for public benefit (sales at nominal or below market price to for the public benefit).

The proposed new criteria are for FRS 102:

For those entities that are public benefit entities and carrying out transactions for the public benefit that do not have commercial substance, the following criteria for revenue recognition for these transactions must be met:

  • Entitlement – control over the rights or other access to economic benefits has passed to the PBE and, where applicable, the fulfilment of any performance obligations where these are specified in the terms of an approved agreement, contract or terms of a fundraising appeal
  • Probable – it is more likely than not that the economic benefits associated with the transaction or gift will flow to the PBE with the probability of settlement of contractual consideration subject to a consideration of the customer’s ability and intention to pay that amount of consideration when it is due
  • Measurement – the monetary value or amount of the income can be measured reliably and the costs incurred for the transaction and the costs to complete the transaction can be measured.

Taking the charities as a starting point, the proposed changes to FRS 102 would be PBE specific. There is no definition of contract income in the current FRS 102. Taking the existing SORP glossary definition of contract income a definition of revenue from contract income would be included with a reference to ‘commercial substance’ in the glossary of FRS 102:

‘Revenue from contract income is revenue received by an entity for the purpose of providing goods or services under the terms of a legal contract which has commercial substance and is subject to a legally binding contract for that supply of goods or services’.

In addition, the term ‘commercial substance’ would be defined as:

‘Commercial substance is the undertaking of an activity or the performance of a contract in order to make a market rate of return on the sale of goods and services before the granting of any discretionary relief such as a bursary or discount’.

It is noted that an activity for the public benefit may have commercial substance where the activity involves trading and payment terms are not at nominal value or below the market rate and so the term commercial substance cannot be made exclusive to for-profit transactions.

The previous analysis has demonstrated that there is a mismatch between the framing of IFRS 15 and non-exchange transactions. Although there are benefits in aligning as far as appropriate with IFRS 15, since this framework is the one taught to the accounting profession and will be the one with which providers of capital will be most familiar, the context of non-exchange transactions means that its straight application would be potentially misleading and lead the user to mistakenly assume that non-profit activities are identical in nature to for-profit activities.

About the author

Nigel Davies FCCA was until January 2022 Joint Chair of the Charities SORP Committee and of the SORP-making body responsible for the development of the Charities SORP.