Not-For-Profit Entities and the New Revenue Recognition Standard
Financial Accounting Standards Board (FASB) issued the Accounting Standards Update 2014-09 – Revenue from Contracts with Customers in May 2014, which has rewritten the rules for revenue recognition for nonprofits. A new framework will now be applied in determining when and how an entity recognizes revenue in its customer contracts. For most nonprofits, the current effective date for these new rules is for years beginning after December 15, 2018.
Some of the industry guidance found in subtopic 958-605, Not-for-Profit Entities – Revenue Recognition, will remain in effect; mainly the portions associated with contributions. With limited exceptions, all revenue generated through exchange transactions (“contracts with customers”) will be subject to the new standard. These contracts with customers commonly come from such sources as membership fees, sales of products and services, naming rights, sponsorships and special events. These transactions often include a contribution element that complicates implementation of the new standard. The contribution and exchange component will need to be separated.
A New Framework Based on a Core Principle
As a part of the new rules, FASB has defined a core principle for recognizing revenue. It states that revenue should only be recorded when you transfer goods to your customer at an agreed-upon price.
FASB also included five steps to achieve this core principle before you can determine how to recognize revenue from your customers:
Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
All nonprofits will see an increase in disclosures surrounding transactions. For each year presented, your organization must provide qualitative and quantitative information on contracts, the significant judgments (and changes in those judgments) made in applying the standard, and any assets or liabilities recognized related to costs to obtain or fulfill the contract.
The American Institute of CPAs has released a Revenue Recognition – Audit and Accounting Guide that at its conclusion will have 16 industry updates. Currently, the Not-for-Profit Entities Revenue Recognition Task Force has included some implementation guidance and is still working on finalizing other.