Financial Accounting Standards Board issues simplified revenue recognition guidance effective for annual reporting periods after December 15, 2018.
How will this standard affect your nonprofit organization?
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) issued new guidance on revenue recognition, with the goal of developing a single standard for accounting principles generally accepted in the United States of America (“GAAP”) and International Financial Reporting Standards (“IFRS”), as well as eliminate industry-specific guidance. The FASB issued Accounting Standards Update (“ASU”) 2014-09 (Topic 606), which affects public, private and nonprofit entities that enter into revenue contracts. There are certain revenue contracts that do not fall within the scope of the standard; these include leases, financial instruments and contributions. Nonprofit organizations frequently engage in exchange transactions that fall under the new standard. Exchange transactions may include government grants and contracts, membership dues, sales of goods and tuition.
Judgement is frequently a factor in distinguishing between a contribution and an exchange transaction. Fortunately, the Form 990 already requires organizations to split the “contribution” and “exchange transaction elements” for tax reporting purposes. For example, an association that includes a newsletter as a component of dues, reports the fair market value of the newsletter and the contribution as separate components on the Form 990, while for GAAP purposes, total dues are reported as a single revenue stream. It may not be as easy to differentiate the components of other exchange transactions and the rules of reciprocity should be considered as part of the analysis. A distinguishing factor between a non-reciprocal (contribution) and a reciprocal (exchange) transaction is whether the beneficiary of the payment has received goods or services that are equal in value to the funds transferred.
How does the new standard impact how nonprofits account for government grants and contracts? According to the FASB, there are currently inconsistencies in application of accounting for exchange transactions that causes concern. Government contracts are not straightforward and are currently reported as contributions, exchange transactions or both. Each government contract needs to be analyzed individually to see if it falls under the new standard. For example, if a grant received from a local government requires that the organization provide counseling services to a community affected by a natural disaster, then a reciprocal transaction has occurred. The organization is acting as a third party service provider and is performing an obligation on behalf of the agency. This transaction would then require adoption of the new revenue standard. Applying the same example, but the contract provides that the grant be used by the organization to set up a program for counseling services in the community, then the funds received would be considered a contribution and not fall under the new standard. The Joint Transition Resource Group is working with the FASB and IASB to provide clarification on certain implementation issues, including government contracts and whether they should be treated as exchange transactions or contributions.
ASU 2014-09 (Topic 606) was updated on August 12, 2015, deferring the effective date of the new revenue recognition standards by one year, making them effective for years beginning after December 15, 2018 for most nonpublic entities, including nonprofits, with early adoption permitted subsequent to periods beginning after December 15, 2016. The standard will need to be applied to each year presented within the financial statements and will require additional disclosures. Although it may seem implementation of the standard is a long way off, organizations need to start evaluating whether any of these changes will impact their revenue recognition and accounting system processes, as current information available may not be sufficient to apply the standard correctly and timely. Additionally, as mentioned in the July 2015 Nonprofit Advisor, the FASB is proposing changes to not-for-profit financial reporting in the coming year, and the combination of revenue recognition changes coupled with financial reporting changes may overwhelm some nonprofit organizations if they do not prepare, or don’t have sufficient resources available to implement the changes.
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