Document ID: chunk:federal_register_of_legislation:F2023C00402:reg:97:p8
Version: federal_register_of_legislation:F2023C00402
Segment Type: reg
Provision Reference: reg 97 (pt 8/56)
Character Range: 280351–283734

of:

          (a)                    the likely greater prevalence of third party beneficiaries in contracts entered by not-for-profit entities; and

          (a)                    uncertainty about this issue expressed to the Board in its project outreach activities.

Contract
     BC25            The Board noted that a 'contract' is defined in AASB 15 as "an agreement between two or more parties that creates enforceable rights and obligations" and that paragraph 10 of AASB 15 states that contracts can be written, oral or implied by an entity's customary business practices.  The Board considered that this definition and guidance are sufficiently broad to address the issues noted in paragraph BC19, and should readily be able to be applied by not-for-profit entities.  The Board acknowledged, however, that clarification was necessary for not-for-profit entities in relation to some specific aspects of applying the definition.

     BC26            The Board observed that not-for-profit entities might require additional guidance to distinguish sufficiently specific performance obligations for the purposes of AASB 15 and constructive obligations for the purposes of AASB 137 Provisions, Contingent Liabilities and Contingent Assets.  In particular, the Board considered a range of statements not-for-profit entities make regarding, for example, their purpose or reason for a particular fundraising.  The Board noted that some of these statements could give rise to:

          (a)                    sufficiently specific performance obligations;

          (b)                   constructive obligations; or

          (c)                    the immediate recognition of income.

     BC27            The Board decided that the distinguishing characteristics of an arrangement that would result in any of the above outcomes requires further clarification given the broad range of arrangements not-for-profit entities enter into.  The additional guidance would assist entities in determining an appropriate accounting treatment that more accurately reflects the effects of the entity's arrangements on its financial performance.

     BC28            Based on feedback to ED 260 indicating uncertainty regarding the determination of enforceability, particularly for documents not specifically identified as contracts, the Board also decided to clarify:

          (a)                    that a 'contract', for the purposes of AASB 15, can extend to arrangements such as Memoranda of Understanding, Heads of Agreement and Letters of Intent if those arrangements are enforceable given that not-for-profit entities might not enter arrangements that are explicitly defined as contracts; and

          (b)                   the factors to consider when determining if a contract is enforceable (see paragraphs BC29–BC36).

Enforceable agreements
     BC29            The Board noted that obligations can include those that are legal, constructive and economic in nature.  AASB 15 states that a contract is an agreement between two or more parties that creates enforceable rights and obligations.  The Basis for Conclusions to IFRS 15 paragraph BC32 states that in determining whether a contractual right or obligation is enforceable is a question to be considered within the context of the relevant legal framework (or equivalent framework) that exists to ensure that the