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
For more information or to receive help understanding the new revenue recognition standards, please contact our Not-for-Profit service providers.
References
1ASU 2014-09
2ASU 2018-08
