The way most organizations recognize revenue under U.S. Generally Accepted Accounting Principles (GAAP) was set to change this year due to a Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09. Below we dive into what this means for not-for-profits going forward.
What does this mean for my organization?
For traditional, charitable type not-for-profits, the good news is that pure donations and contributions are considered voluntary and nonreciprocal, or “non-exchange”, and these types of revenues do not fall under the new standard. The standard also provides for some exemptions beyond typical donations. For example, lease and insurance contracts as well as investment income are excluded from the scope of the standard.
What is subject to the new standard?
In contract to the “non-exchange” revenues described above, An exchange transaction occurs when there is a reciprocal transfer between two entities; one of the entities acquires assets or satisfies liabilities by surrendering other assets or services or incurring other obligations. These types of revenues must be evaluated to determine if they are considered “contracts with customers” and are subject to the new standard. Some examples may include, but are not limited to:
- Memberships
- Subscriptions
- Sales of Products and Services
- Royalties
- Conferences and Seminars
- Tuition
- Advertising
- Licensing
How should these revenues be recognized?
Once an exchange transaction has been identified to be a contract with a customer, the Organization should follow a 5-step model set forth in the standard for recognizing these revenues:
Step 1 – Identify the contract with the following criteria:
- approval and commitment of the parties
- identification of the rights of parties
- identification of payment terms
- contact has commercial substance, and
- it is probable the entity will collect consideration to which it will be entitled in exchange for goods/services
Step 2 – Identify the performance obligation and determine if there are multiple performance obligations. Performance obligations are distinct if it is capable of being distinct, customer can benefit from the good or service on its own or together with other resources, and it is distinct within the context of the contract, or the promise is separately stated.
Step 3 – Determine the transaction price
Step 4 – Allocate the transaction price to the performance obligation in the contract
Step 5 – Recognize revenue when (or as) the entity satisfies a performance obligation
What about grants?
We love grants, but truth be told, the accounting for grants often presents a challenge. For years there has been a large divergence in practice among organizations and their accountants on the treatment of grants. In 2018, FASB issued ASU No. 2018-08 to help organizations determine the proper treatment of grants. This standard provides clarifying guidance to evaluate whether a resource provider receives value in return for the resources transferred. Organizations should understand the impact of this ASU when evaluating its grants for applicability of ASC 606.
The world of revenue recognition is complicated. The Anders Not-for-Profit Group can help you navigate the evolving regulations so you can always stay in compliance. Contact an Anders advisor below to learn more.
