Revenue Recognition for Nonprofits

Posted on Wednesday, December 13, 2017

The Financial Accounting Standards Board (FASB) has issued new accounting standards for recognizing revenue, ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).

Why?

Currently different industries use different accounting for similar transactions under generally accepted accounting principles (GAAP).  The new standard aims to clarify these and improve comparability with the core principle of “recognizing revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

Who?

The new standard is applicable to any entity (including nonprofit organizations) that enters into a contract with customers to transfer goods or services or other nonfinancial assets unless those contracts are within the scope of other standards.  Contracts included in other standards include leases, insurance contracts, certain financial instruments, guarantees and certain nonmonetary exchanges between entities in the same line of business.

When?

The new standard goes into effect for private companies and nonprofit organizations for annual periods beginning after December 15, 2018 (2019 for calendar year-ends and 2020 for fiscal year-ends).

How?

Organizations need to recognize revenue under the new standard using a five step process as follows.

1. Identify the contract with a customer.

Contracts can be written, or implied but in order for a contract to exist all of the following must be met.

• It has commercial substance; the amount, timing or risk of future cash flows is expected to change as a result of the contract.
• It has been approved by both parties.  This can be done either in writing or orally.
• The payment terms must be identifiable.
• Each party’s rights to goods or services must be identifiable.
• It is probable that the organization will collect substantially all of the consideration for the exchange of the goods or services.

A contract does not exist if each party has the unilateral right to terminate an unperformed contract without compensating the other party.

2. Identify the performance obligations (promise) in the contract.

A performance obligation is a promise with a customer to transfer either a distinct good or service, or a series of distinct goods or services that are substantially the same and that are transferred in the same pattern.

3. Determine the transaction price.

The transaction price is the amount of consideration expected to be entitled to for providing the promised goods or services.  The price may be fixed, variable or both.

4. Allocate the transaction price to the performance obligations in the contract.

The transaction price needs to be allocated to each performance obligation, or distinct good or service, to reflect the amount of consideration expected to be received for transferring the promised goods or services.

5. Recognize revenue when (or as) the reporting organization satisfies a performance obligation.

Revenue should be recognized when the organization satisfies a performance obligation.  The performance obligation is satisfied when the promised goods or services are transferred to the customer (when the customer takes control).  This may occur at a point in time or over a period of time.

What does this mean for nonprofits?

For nonprofit organizations, the transfer of resources can be accomplished through a  variety of methods including contributions and exchange transactions.  Depending on how the transfer occurs dictates how revenue is recorded.  Nonprofits need to review each revenue source to determine if they should follow ASU 2014-09 to determine when to record the revenue.  Some common nonprofit revenue streams are discussed below and if the new standard applies.

Contributions – Since no benefits are provided in return, it is not covered by ASU 2014-09.

In-kind contribution of goods or services – Since no benefits are provided in return, it is not covered by ASU 2014-09.

Government grants – Grants may be considered a contribution and excluded from ASU 2014-09 or a contract and included under ASU 2014-09 depending on whether the purpose of the grant is to provide a service for the direct public benefit or serve the direct and immediate need of a governmental unit.

Event sponsorship – If the public recognition and accompanying rights and privileges result in only nominal value to the sponsor, the payment is considered a contribution and no contract exists.  Therefore ASU 2014-09 does not apply.

Special event tickets – The amount paid normally includes both an exchange portion for a dinner received and a contribution portion for the amount paid in excess of the fair value of the dinner.  The contribution portion is not covered by ASU 2014-09; however, since the exchange portion is a reciprocal transaction, it is considered a contract and falls under ASU 2014-09.

Membership dues – If the members receive something of value in return for their dues, such as a quarterly professional journal, a contract exists for the exchange portion of the dues which falls under the new standard.  However, if members receive benefits of only a token or nominal value, the dues are considered contributions and do not fall under ASU 2014-09.

Program fees (tuition, counseling fees, admissions, etc.) – A contract exists between the nonprofit and those utilizing the program for a fee.  The nonprofit provides a service in return for payment, both parties receive something of equal value. Therefore ASU 2017-09 does apply.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

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