The recognition of revenue seems like a straightforward proposition for schools. Parents pay the tuition fees and the school recognises the income when the service has been provided. Fees are also paid to enrol a child or put a child’s name on the waiting list. Currently these fee are recognised immediately as revenue. However, this is about to change with the introduction of a new revenue standard – AASB 15 Revenue from Contracts with Customers.
The first year that schools with a December year end will be reporting under AASB 15 is 31 December 2018. Do not be fooled into thinking that you still have a few years to consider the standard though, as it is a retrospective standard. This means that when the December 2018 financials are prepared, the prior year comparatives need to be adjusted to represent the position as if this standard had always been applicable.
The process and how it applies to schools’ performance obligations
Under AASB 15, a 5 step process has been introduced; 1) identify the contract with customer, 2) identify the separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognise revenue when a performance obligation is satisfied. The issues for schools centre on the identification of the performance obligations.
If we apply this to a school’s situation, the recognition of the tuition fees will remain the same. The customer is easily identifiable as the parents, the performance obligation is to provide education and classes to the students. The transaction price is set via a price list and is only allocated over the one service. Therefore the tuition fees are recognised when the service is provided.
What about non-refundable school fees?
Now, if we look at the other non-refundable fees charged such as enrolment fees and waiting list fees, the issue is, what is the performance obligation?
An enrolment deposit is paid to enable the student to be enrolled in the school. Based on the standard, the performance obligation is not satisfied when the student is first enrolled; it would be for the life of the enrolment. This means the obligation is not satisfied until the student no longer needs to be enrolled.
The waiting list deposits are similar in nature. However, the obligation is to provide a service in the future, being the opportunity to gain a place at the school. The obligation is not satisfied until this happens or the student no longer wishes to be on the waiting list. The revenue is only recognised upon enrolment or the name is removed from the waiting list. This means waiting list fees may take up to 18 years to be recognised. Parents may pay a waiting list deposit upon the birth of a child; however they may never take up the option of enrolling in that particular school.
So what does this mean for schools now?
A record of non-refundable fees will need to be kept from the 1st January 2017 to provide a comparative figure for the December 2018 financial statements. Revenue under this scenario would be recognised at a later date ie currently this is recognised on enrolment or upon payment of the waiting list fees.
As a specialist in the education sector, Accru keeps up to date with changes affecting schools. Please contact us if you need advice.
By Hazel Masters, Accru Melbourne