Steven Kutsuflakis, CPA, Partner

Here’s What Your Nonprofit Needs to Know About New Revenue Recognition

FASB’s Revenue Recognition Standards significantly affected revenue recognition practices for most organizations. The changes, while apparent for many, were not so for many nonprofits. In response to the standard’s ambiguity, FASB issued ASU 2018-08, which clarified the gray areas around revenue accounting for nonprofit grants and contributions. Many are still scratching their heads, wondering how the new standards will affect their accounting practices. The answer is – dramatically. We have put together the following highlights to help address some of the uncertainty around the new revenue recognition.

  • If your nonprofit engages in both contribution and exchange transactions, you need to be aware of the implementation dates for both standards. While their timelines are pretty similar, there are a few deviations.
Nonprofit that has issued, or is a conduit debt obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market All Other Nonprofits
Implementation Dates for ASU 2018-08Resource Recipient TransactionsResource Recipient Transactions
ASU 2018-08 (Topic 958-605) adoption dates applicable to transactions in which a nonprofit acts as a resource provider are delayed one year beyond adoption dates application to transactions in which a nonprofit acts as a resource recipient.    Annual periods beginning after June 15, 2018, including interim periods within those annual periods. Annual periods beginning after December 15, 2018 and interim periods within annual periods after December 15, 2019.
Resource Recipient ProvidersResource Recipient Providers
Annual periods beginning after December 15, 2018, including interim periods within those annual periods. Annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 31, 2020.
Implementation Dates for ASU 2014-09 (Topic 606)Annual periods beginning after December 15, 2017, including interim periods within those annual periods.Annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019

*Early adoption is permitted; see ASUs

  • Revenue streams that come from an exchange will follow the guidance under ASU 2014-09, while nonexchange revenue streams will follow the guidance under ASU 2018-08.
  • In the case of grants and similar contracts with government agencies, unless the resource provider receives matching value from the resource recipient, the transaction is probably best classified as a contribution. The ASU outlined several examples of indirect benefits that do not constitute commensurate value:
    • Indirect benefit(s) received by the public.
    • Indirect benefit(s) received by a resource provider, i.e., societal benefit is not direct commensurate value.
    • Furthering a resource provider’s mission or positive sentiment from acting as a donor.
  • The new exchange transaction standard requires nonprofits to follow five steps before recording contract revenue.
  1. Identify contracts with the customer
    • It is important to note that not all revenue sources will fall under this model. Before you approach the first step, determine if the transaction is genuinely an “exchange transaction.” In order for the model to apply, the revenue must result from a contract where there is an exchange of goods and services. Examine your contributions, grants, and sponsorships carefully. If your transaction has elements of both contribution and exchange, the revenue will need to be separated and follow the appropriate guidance for each. The professionals in our office can help you review ASC 606 for nonprofits. FASB released an ASU update to clarify the scope of eligibility.
  2. Identify separate performance obligations within the contract
    • When a nonprofit makes separate and distinct promises within their contract, they must be recorded as such.
  3. Determine the transaction price
    • Ensure the value of your contract aligns with the transaction price. Any amount above this threshold must be accounted for outside of ASC 606.
  4. Allocate the transaction price to the performance obligations
    • If your contract includes a single performance obligation, this can be a simple step. Under this step, you must allocate the transaction price among the performance obligations. If the value is not clear, and you need to make a judgment on the standalone price of a performance obligation, be sure to record your reasoning in the notes to the financials.
  5. Recognize revenue when, or as, the performance obligation is satisfied
    • Record revenue in real-time, as your contract indicates. Some contracts fulfill promises at one point in time, while others fulfill over a period of time.
  • The new exchange transactions standard also requires specific disclosures on financial statements. For instance, FASB now requires qualitative transition disclosures to account for the nature and reason for the change in accounting method. Nonprofits will also need to disclose quantitative changes, like when contracts become nonrefundable. The scope of disclosure changes can be discussed further with your accounting professional.

These complexities will force many nonprofits to examine their processes with a renewed goal of structure and simplification. Nonprofits already face many challenges in recognizing their revenue. This issuance of two new revenue recognition standards adds another layer of complexity. It is no secret that accurate financial statements are critical to the success and future of your organization. As the compliance deadline quickly approaches, we encourage you to review your revenue streams with a professional that can assess your conditions with a trained and critical eye.

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