The new revenue recognition guidance, issued by the Financial Accounting Standards Board, takes effect for fiscal years beginning December 15, 2018. This exclusive Nonprofit Advisor provides critical background information and actionable steps to prepare your organization for the steadily approaching deadline.
In May 2014, FASB and the International Accounting Standards Board (“IASB”) issued guidance on revenue recognition in an effort to develop a single standard for accounting principles generally accepted in the United States of America (“GAAP”) and International Financial Reporting Standards (“IFRS”). This streamlining is also meant to eliminate industry-specific guidance.
As with any new standard, nonprofits must analyze whether the standard has an impact on their financial reporting standards in order to stay compliant.
Implementation begins with evaluating revenue streams within your organization and categorize them to see which are subject to Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The standard will need to be applied to each year presented within the financial statements and will require additional disclosures.
Although contributions are a revenue stream that does not fall within the scope of ASU 2014-09, contributions that include exchange transactions require additional judgement to separate the exchange portion (reciprocal) and contribution (non-reciprocal) components of the transaction. To reiterate the reciprocal component of the transaction falls within the cope of ASU 2014-09 while the nonreciprocal component is considered a contribution. Exchange transactions may be combined with grants, membership dues, naming opportunities, donor status and in-kind donations. In instances where bifurcation of a transaction is required, the guidance recommends initial allocations to be determined based on the fair value of the exchange portion with the remainder of the donation amount to be reported as a contribution.
An example of a reciprocal transaction is tuition and housing revenue for educational institutions. Under the current GAAP standards, tuition is an exchange transaction recognized as revenue over the term which the services are provided. Funds received in excess of services provided are recorded as deferred revenue. ASU 2014-09 implementation requires deferred revenue (the "contract liability") to be recognized dependening upon when tuition payments are due.
Subscription and membership dues
Subscription and membership dues generally fall under the definition of an exchange transaction and if coupled with a donation would require bifurcation under ASU 2014-09. For membership dues, useful indicators to determine bifurcation include: intent of the dues payments, extent of benefits received by members, nonprofit's service efforts, duration of benefits, refundability of dues received, and the qualifications for the membership. Membership dues would be considered a contribution if the benefits and services are provided to the general public; versus providing specific benefits and services to members, which is an exchange transaction. Once the fair value of the exchange transaction portion (transaction price) has been determined, revenue would be recognized under ASU 2014-09 whenever the service is rendered (performance obligation). For example, if the benefit received is a monthly subscription, the allocated transaction price would be recognized over the period of the subscription.
Distinguishing whether a government grant or contract is a contribution or an exchange transaction presents a challenge. Current GAAP treatment for these types of contracts varies in practice. Many nonprofits treat government grants as exchange transactions, because they have a contract to provide certain services. To illustrate, if a nonprofit acts as a third party service provider and delivers services to the general public on behalf of a government agency, the nonprofit is a subcontractor hired to complete a service on behalf of the government agency. Since the general public ultimately receives the indirect benefit of the service provided (asset transferred), the governmental entity did not receive any benefit and made a contribution to the nonprofit.
In June 2018, the FASB issued guidance ASU 2018-08 Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made (Topic 958) ("ASU 2018-01") to provide guidance to entities in determining whether a transfer of assets is an exchange transaction or contribution, as well as determining whether a contribution is conditional. ASU 2018-08 was issued in response to nonprofits’ concerns relating to accounting for government grants and similar contracts. The updated definition of an exchange transaction specifies that for a reciprocal transfer to occur, each party in the transaction receives and sacrifices equal value. A resource provider (donor) receiving indirect value by providing a benefit to society (transfer of assets to the general public) is not considered of equal value and therefore falls under the definition of a contribution. These updated definitions under ASU 2018-08 also include the criteria for identifying conditional contributions (funds to be used for a specific purpose), versus a contract with a customer where ASU 2014-09 would apply. For the industry 2018-08 rather than 2014-09 will likely apply to government contracts. Note that ASU 2018-08 is effective at the same time as ASU 2014-09 with early application permitted.
For more information or assistance, contact Sylvia Mazur at email@example.com or your Friedman LLP representative.