In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-19, Revenue from Contracts with Customers (“the standard”). The standard is effective for annual reporting periods beginning after December 15, 2018. This means January 1, 2019 for calendar year ends. For a nonprofit with a June 30th year end, the standard will be effective July 1, 2019.
The goal of the new revenue recognition model is improved comparability of revenue recognition across all industries and between entities. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will not affect contributions and investment income.
Effect on Grants and Contracts
After the issuance of the standard, concerns were raised regarding characterizing grants and similar contracts with government agencies and others as reciprocal transactions (exchanges) or nonreciprocal transactions (contributions) and distinguishing between conditions and restrictions for nonreciprocal transactions. To improve and clarify the standard, FASB issued ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made (“the ASU”). The ASU clarifies how an entity determines whether a resource provider (ex: private foundation, government agency) is participating in an exchange transaction by evaluating if the resource provider is receiving commensurate value in return for the resources transferred. The following clarifications were also made:
- A resource provider is not synonymous with the general public. Indirect benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.
- Execution of a resource provider’s mission or the positive sentiment from acting as a donor would not constitute commensurate value received by a resource provider for purposes of determining whether a transfer of assets is a contribution or an exchange.
Examples of an exchange of commensurate value include when the goods or services provided directly benefit the resource provider or are for its own use and the resource provider obtains proprietary rights or other privileges (ex: patents, copyrights, or advance and exclusive knowledge of research outcomes).
If it is determined that no commensurate value was received by the resource provider, the Organization should then determine if a conditional contribution exists. If either of the following are true, this indicates a conditional contribution:
- Have conditions been placed on the resources provided?
- Is there a barrier that the Organization must overcome to be entitled to the resources or does a right of return or release of assets promised exist should the NFP fail to overcome the barrier?
This determination is important because of the difference in financial reporting for conditional vs. unconditional contributions. Conditional contributions are not recognized until the conditions have been substantially met or explicitly waived by the donor. If assets are transferred before then a liability is recognized. Unconditional contributions are recognized immediately and classified as net assets with or without donor restrictions. Thus, after determining the presence of conditions, the existence of donor-imposed restrictions, if any, is the final key point to consider.
The impact on each nonprofit organization will differ depending on various factors such as the transaction, its complexity, and the industry in which the entity operates. There is a possibility that the standard may not result in any changes in regards to the amount and timing of revenue recognition for your organization. However, it is important that you look now at your revenue streams to determine if changes are necessary.
What You Should Do to Prepare
To determine if any changes in regards to revenue recognition need to be made, it is important to be proactive and begin analyzing the overall effect of this standard on your organization.
1. Read the standard and consider attending related training courses.
2. Assign someone within your organization to become an expert and lead your staff in implementing the standard.
3. Compile a list of all revenue streams of your organization. Examples include: Memberships, sponsorships, grants, investment income, contributions, retail sales, educational services fees, tuition, fee for service.
4. Determine whether the revenue stream is within the scope of the standard. If identified as being included within the scope of the standard, apply the five-step approach outlined in the standard. For more information regarding this five-step approach, please see our Revenue Recognition Standard Guide for Not-for-Profit Organizations located at https://hawkinsashcpas.com/not-for-profit-revenue-recognition-standard/
5. If after the five-step approach it is determined that a change in revenue reporting is needed, consider the materiality of the amounts. Small amounts may not have a material impact on the financial statements and may not require an adjustment.
6.If it is determined that a change is needed consider the impact on the following:
- Revenue recognition processing within your accounting system
- Financial reporting processes and internal controls
- Technology updates or enhancements to current accounting and financial reporting
- Internal financial reporting
- Audited financial statements
- Forecasts and budgeting
- Debt covenants
- Terms in any written or oral contracts
7.Communicate any changes to the users of your financial statements and internal staff involved in the preparation of the financial statements, and provide any additional training needed.
Article written by: Brittany Leonard, CPA