A Recap of Revenue Recognition for Tax-exempt Entities
Sikich
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Jan 30 2020
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3 min read
Times can be trying for not-for-profits (NFPs) applying FASB Accounting Standards Codification (ASC) 606, Revenue for Contracts with Customers. As these standards keep changing, it becomes ever more difficult to understand whether you are or aren’t in compliance. Our NFP leaders explain the two new accounting standards that are effective in 2020 to hopefully make life a little easier for NFP organizations.
NEW ACCOUNTING STANDARD: FASB ASU 2014-09
The new FASB ASU 2014-09, Revenue from Contracts with Customers, nullifies its predecessor, replacing it with a new approach to determining an entity’s revenue recognition policies. Now, this standard wants NFP entities to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.1
What Counts Under the New Revenue Recognition Standard?
Here is a list of some of what does fall under the new revenue recognition standard:
Program revenue
Grants that are exchange transactions
Product Sales
Special fundraising event revenue
Tuition revenue
Membership dues
What is Excluded from the New Revenue Recognition Standard?
There are some exceptions in that not all revenue streams count. Here is a list of revenue streams that do not fall under these revenue recognition rules:
Contributions
Nonreciprocal transfers including in-kind gifts
Event sponsorships that are more contributions than a showcase of the sponsor’s product or service
Insurance contracts
Investment income
Rent revenue
Split-interest agreements
How to Apply the New Standard to Your Revenue
FASB ASU 2014-09 outlines a five-step process for recognizing revenue from exchange transactions: 1
Identify the contract with the customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the contract.
Recognize revenue when (or as) the NFP entity satisfies a performance obligation.
NEW ACCOUNTING STANDARD: FASB ASU 2018-08
The new FASB ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made standard is meant to help entities determine if transactions should be defined as contributions (conditional or unconditional) or exchange transactions.
How Do I Determine if a Transaction is a Contribution or Exchange Transaction?
ASU 2018-08 clarifies how an organization determines whether a resource provider (i.e., the provider of the grant—a foundation or government agency) is receiving commensurate value in return for the grant. If the resource provider does receive comparable (commensurate) value from the grant recipient (the not-for-profit), then the transaction is an exchange transaction and would follow the guidance under ASU 2014-09 (FASB ASC Topic 606). If no commensurate value is received by the grant maker, the transfer is a contribution.
Is a Contribution Conditional or Unconditional?
Conditional: An agreement contains some kind of barrier that must be overcome and a right of return of assets (for a cash/property grant) or right to release a promisor’s obligation (for a pledge). 2
Unconditional: When the barrier (the condition) has been overcome. 2
Note: Conditional gifts/grants should not be confused with donor-imposed restrictions. A donor restriction on a contribution contains a stipulation on how or when the assets should be used. It does not specify a barrier that must be overcome before the recipient is entitled to the assets. 1
This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.
About the Author
Sikich
Sikich is a global company specializing in technology-enabled professional services. With more than 1,900 employees, Sikich draws on a diverse portfolio of technology solutions to deliver transformative digital strategies and is comprised of one of the largest CPA firms in the United States. From corporations and not-for-profits to state and local governments and federal agencies, Sikich clients utilize a broad spectrum of services* and products to help them improve performance and achieve long-term, strategic goals.
*Securities offered through Sikich Corporate Finance LLC, member FINRA/SIPC. Investment advisory services offered through Sikich Financial, an SEC Registered Investment Advisor.
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