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Wednesday, August 26, 2015

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5 Things Nonprofits Should Know About the New Revenue Recognition Standards


The rules surrounding revenue recognition in the United States can be tricky. Retailers account for revenue one way, manufacturers another way and nonprofits still another. In fact, there are currently more than 200 industry-specific standards on the books.

In order to bring some consistency to the process, the Financial Accounting Standard Board (FASB) and International Accounting Standards Board (IASB) are working to develop a new common revenue recognition standard. To that end, FASB and the IASB have issued a joint accounting standards update, Revenue from Contracts with Customers. These standards are designed to help both nonprofit and for-profit entities recognize revenue in a manner that better depicts the underlying economics of a transaction.

In the nonprofit world, the new accounting standards focus on recognizing the revenue an organization receives from “exchange transactions” — transactions in which you provide a product or service in exchange for a fee or revenue. Some common examples would be program service revenues generated from a concert or clinical services, tuition and housing revenue, as well as royalties and licensing. Ditto for subscriptions or sponsorships. In many cases, government grants also are categorized as exchange transactions.

5 Steps to Follow
The new standards create a five-step process for recognizing revenue. The process starts with an analysis of the contract as follows:

  1. Identify the contract with a customer. Determine whether it is indeed probable that you will collect consideration from the customer for the goods and services transferred.
  2. Identify the performance obligations in the contract. Classify as a performance obligation each promise to transfer to the customer distinct goods or services (or a bundle of distinct goods and services).
  3. Determine the transaction price. Quantify the amount of consideration you expect to be entitled to in exchange for transferring goods or services to a customer.
  4. Allocate the transaction price. Apportion the transaction price to each separate performance obligation in an amount that depicts the consideration to which you expect to be entitled in exchange for satisfying each of those performance obligations.
  5. Recognize revenue when (or as) each performance obligation is satisfied. It could also be that the performance obligations are satisfied over time (e.g., a membership privilege that extends over a year).

Ultimately, nonprofit organizations will need to implement processes for accumulating information and analyzing terms and agreements to determine the proper accounting for each type of exchange transaction.

For example, under the current standards, revenue related to a cost-reimbursement government contract is generally recognized on the books as expenses are incurred. Under the new revenue recognition standards, nonprofits would have to identify any performance obligations included in the contract and then allocate the transaction price among those identified performance obligations. A determination would have to be made of when and how the performance obligations were satisfied in order to determine timing of revenue recognition.

Effective Date
The new accounting standards kick in for annual reporting periods beginning after December 15, 2018, but nonprofits may begin early adoption in fiscal years beginning after December 15, 2016. In the meantime, you may continue to use your existing revenue recognition methods. Nonprofits can transition to the new standard either retrospectively (that is, to restate prior periods for a consistent basis of accounting and presentation) or by making a cumulative-effect adjustment as of the date of adoption.

Steps to Take Now
The new disclosure requirements are extensive and will require changes to financial systems and processes to collect the necessary data. To prepare, consider taking these steps now:

  1. Make an early assessment of the potential impact of the standard on the organization’s accounting and information systems.
  2. Identify the types of exchange transactions your organization is party to.
  3. Identify a point-person or task force to study the new standard.
  4. Compare the new requirements to the current requirements.
  5. Consider how the new requirements may impact other areas of your organization.

Questions? Contact our office today for guidance on the new recognition standards – and help preparing your nonprofit for full compliance.

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