After several years of stability in the accounting standards for nonprofit organizations, the new FASB standards need to be addressed soon on several different issues. Most of the preparation has focused on ASU 2016-14 Presentation of Financial Statements, which is effective for years beginning after Dec.15, 2017. Some organizations have not yet begun to consider the standards of ASU 2014-09, Revenue from Contracts with Customers, which will be effective for most nonprofit entities for periods beginning after December 15, 2018, except for certain entities who have conduit debt which is not a private placement that have earlier adoption requirements.
While contributions are not covered under the new standard, current standards for contribution recognition, including recognition and valuation of pledges and restriction of use for gifts still need to be carefully implemented and documented. Investment income, a significant source of revenue for some nonprofits, is also not covered by the new standard.
In June 2018 FASB issued ASU 2018-08 Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, which provides additional guidance on determining whether a transaction is a contribution or exchange transaction as well as distinguishing between an unconditional or conditional contribution. It will be effective for most entities beginning after December 15, 2019 with early adoption permitted.
Most organizations will be affected by the new revenue recognition requirements of ASU2014-09 even though nonprofits have not traditionally thought of their constituents as “customers”. Depending upon the nature of the entity and the variety of income sources, your organization should be taking steps now to be sure you are ready to implement the standard as smoothly as possible.
The first step would be to identify revenues that meet the definition “…inflows…from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing and major activities”. These are exchange transactions with a contract, implicit or implied to provide something with value for goods or services. Some such transactions may be clearly identifiable as meeting the revenue definition, such as tuition payments at a college, or not meeting the definition, such as a contribution to mental health organization that does not provide any potential benefit to the donor.
Many revenue sources, though, may have elements of both a contribution and an exchange transaction. Some organizations, for example, may include such things as a subscription to a professional publication, passes to a museum, use of athletic facilities, or discounts on purchases from a gift shop for those who contribute or as part of membership fees. The components of these transactions need to be identified and separated in order to determine the appropriate timing of recognition of each element.
Grants from government or private sources also need to be carefully understood to determine if they have one or more performance obligations which must be met or if they are a voluntary non-reciprocal transaction. Generally, cost-reimbursable grants will continue to be accounted for as they have traditionally been under existing guidance, revenue is recognized as allowable expenses are incurred.
If your organization has not already begun to prepare for implementation of the standard, you should begin considering it as soon as possible. It takes time and effort to gather the information needed to be ready to implement the standard. Nonprofits, like those in the commercial sector, may find they have to make sensitive judgments about classification and estimates of value of various components of revenue.
Organizations need to first identify whether the revenue is a contribution or an exchange transaction. If it does not qualify as a contribution, there are five steps that FASB has identified that must be performed before determining when revenue is recorded. The core principle is that revenue is only recorded when goods (or services) are transferred for an agreed-upon price.
Each organization must:
ASU2018-08 provides two elements to consider in making the distinction between a contribution and an exchange transaction:
A research grant, for example, could be a contribution or an exchange transaction, depending upon its terms and each grant will need to be analyzed individually.
The nonprofit community encompasses such a wide variety of size, focus and mission, that general guidance is very difficult to provide. Every entity is unique. Some organizations will have very few changes in how revenue is recognized and others may require substantial changes in timing or revenue recognition, requiring system changes and additional data collection and analysis. Organizations such as NACUBO and other national industry membership groups can be helpful in exchanging information on implementation strategies and identifying potential areas of concern.
A contract is defined as “an agreement between two or more parties that creates enforceable rights and obligations”. The standard contains additional guidance regarding multiple contracts and contract modifications.
If the transaction meets the contract definition, the performance obligation(s) need to be identified. Where there are promises in a contract to deliver more than one good or service, they must be accounted for separately if they are distinct within the context of the contract and if the customer can benefit either on its own or together with our resources.
Once these obligations have been identified, if the consideration is variable, the transaction price may be required by estimating either the expected value or the most-likely amount to be realized. If there are separate performance obligations, the transaction price would be allocated to each.
Only after this analysis has been completed are you ready to determine when the performance obligation(s) are satisfied, and accordingly, when revenue is recognized under the standard.
Transactions that might seem similar at first, could result in markedly different recognition treatment once they are individually analyzed. For example, let’s take two nonprofit organizations, one an animal shelter and the other a professional membership organization. Both provide a monthly newsletter to their “members”. In the case of the animal shelter, the “membership” does not provide any reciprocal benefit, it is really a contribution and the newsletter is provided free to anyone who asked for it (and many others on a mailing list). Absent any other factors, the transaction would be recorded as a contribution.
The professional membership organization however has a contract to provide various services to their members over the period, one of which is the monthly publication which is also sold to non-members for an annual subscription price of $100. If the dues are $350 annually, the performance obligations would be distinct and $100 would be allocated to subscription revenue and $250 to membership services.
Timing of the distinct revenue recognition might in this instance be the same, on each month over a 12 month period.
The standards will also require additional disclosures about the accounting policies, and in certain cases, specifics about the elements and basis for estimation of allocations, including both qualitative and quantitative information “to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts”.
For transactions which have been determined to be contributions through the previous analysis, there is new guidance as to whether a contribution is considered conditional or unconditional. Conditional contributions must have:
Again, each grant or contribution will need to be individually analyzed in order to determine the appropriate revenue recognition to apply.
The objective of the new FASB standards is to enhance the usefulness of financial statements through greater comparability and meaningful disclosures. Transition to the new standards will be complicated and implementation will require significant time and effort. UHY LLP can work with your management team to provide assistance in contract analysis and information gathering to help with of the standard.