Get ready for the new revenue recognition rules
- July 25, 2018
- Posted by: Hood & Strong
- Category: Uncategorized
The new accounting rules for recognizing revenue will take effect for most not-for-profits at the beginning of their next fiscal year. While the total revenue recognized over time won’t change, you should understand how the timing and information you must share will — and how you can prepare.
Nonprofits with public bond issues have already been required to implement the new rules.
What’s it all about?
The Financial Accounting Standards Board’s (FASB’s) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), lays out five steps organizations that follow U.S. Generally Accepted Accounting Principles (GAAP) must take to recognize revenue:
- Identify the contract with a customer. The rules generally apply to each contract that an organization has with a customer.
- Identify the performance obligations under the contract. If a contract contains more than one performance obligation (that is, a good or service the organization promises to provide), it can account for each separately only if each promised good or service is 1) distinct or 2) a series of distinct but substantially similar goods or services.
- Determine the transaction price. The organization must determine the amount it expects to receive in exchange for transferring promised goods or services to the customer.
- Allocate the transaction price to the performance obligations under the contract. The organization will typically allocate the transaction price to each performance obligation based on the relative “standalone selling price” of each distinct good or service promised.
- Recognize revenue as performance obligations are satisfied. The organization must recognize revenue when it satisfies a performance obligation by transferring the promised good or service to a customer. The amount recognized is the amount allocated to that performance obligation. When a performance obligation is satisfied over time, as opposed to a single point in time, the organization must recognize revenue over time.
The new rules also require disclosures of both quantitative and qualitative information about the organization’s contracts with customers, significant judgments and assets recognized from the costs to obtain or fulfill a contract. Significant judgments requiring disclosure include those surrounding the price and timing of the satisfaction of performance obligations.
What about nonprofit revenues?
ASU 2014-09 generally applies to “reciprocal transactions,” in which each party receives and sacrifices something of approximately equal value. Contributions to a nonprofit are received as a nonreciprocal transfer, though, so they don’t fall within the scope of these rules. (See “Guidance on contributions is coming” for more information.)
But you might receive several other types of revenue that are covered, including:
- Membership dues,
- Sales of products and services,
- Conference and seminar fees,
- Licenses and royalties,
- Sponsorships, and
- Special events.
The payment structure of some transactions could complicate the fourth revenue recognition step — allocating the transaction price.
For example, membership dues may include a contribution, as well as a variety of membership benefits the organization will provide at different points in time. You would need to separate out the contribution component, and only recognize the revenues associated with the benefits when the good or service is transferred to the member. Compliance with ASU 2014-09 will thus call for more estimates and greater judgment than currently required.
Nonprofits must apply the new rules to annual reporting periods starting after December 15, 2018. With the effective date looming near, you need to take several steps to prepare now.
For example, you’ll need to assess your accounting policies, processes and controls to ensure that you capture any additional information required to comply with the rules. You also should determine whether you have employees qualified to make the requisite estimates and judgments. And you may need to meet with lenders to renegotiate any loan covenants affected by revenue.