By Richard W. Lewis, CPA, CFE, Partner, Assurance Practice Leader
By Richard W. Lewis, CPA, CFE, Business Assurance & Advisory Services Partner | Not-for-Profit Team Leader
Understanding the Impact of ASC 606 (Revenue Recognition) for Not-For-Profit Organizations
Accounting professionals have been learning and sharing the Financial Accounting Standard Board’s (FASB) new revenue recognition model since May 2014, when Accounting Standard Update 2016-14, Revenue from Contracts with Customers (Topic 606) was issued (ASC 606). The new guidance provides a framework for addressing revenue recognition issues and replaces almost all pre-existing revenue recognition guidance in generally accepted accounting principles (GAAP) with the intention of improved comparability of revenue recognition practices across entities, industries, and jurisdictions. As a result, all companies and organizations, including not-for-profit organizations, have to evaluate the impact of the new revenue recognition model on their operations and activities to determine if changes are required to comply with its requirements.
The new revenue recognition model is principles based and follows a five step process. Those steps are as follows:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when (or as) each performance obligations is satisfied
While these steps may appear simple when listed as above, there are complexities within each step that need to be evaluated. The FASB has included within ASC 606 extensive guidance by step, and approximately 70 examples that are based on transactions in a variety of industries.
To this point, we have described the process that all companies and organizations must follow once they have determined that a contract with a customer exists.
For not-for-profit organizations, there is an additional step that must be performed before step 1 above. That step is essentially performed to determine if a revenue source is within the scope of ASC 606, meaning is it considered a contract with a customer?
Many not-for-profit organizations rely heavily on contributions and grants to fund their mission. There is good news in that the FASB has specifically scoped out contributions and grants from ASC 606. Due to the nature of these revenue streams, they are considered non-reciprocal transactions and there is no customer. The sources of contributions and grants give with the intention that the benefit will be to the general public versus any one individual or company. The revenue recognition criteria for contributions and grants is included in ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This clarifying guidance was issued by the FASB in June 2018 in response to some of the confusion in applicability of ASC 606.
The question is once a not-for-profit organization carves out of its contributions and grants, what might be left? The answer to that question is “it depends on the type and mission of the not-for-profit organization”, which is one of the fascinating characteristics of the not-for-profit industry as its members are all so different. In general, what’s left will include some combination of the following:
- Tuition
- Fees
- Membership dues
- Gift shop or merchandise sales
- Special event income
Each of these revenue streams and any others that are reciprocal in nature, meaning received in a transaction where both parties are receiving benefit, will need to be evaluated under ASC 606. Consideration can be given to materiality and to whether the earning process is completed in a single year that falls within the not-for-profit organization’s fiscal year, which can help reduce the effort on the evaluation process. One key implementation issue affecting not-for-profit organizations is that certain transactions will require bifurcation between an exchange transaction and a contribution because they have elements of both (for example, membership dues or special events). Once a good inventory of revenue streams is prepared, the five step process above should be applied to each revenue stream to determine if a change to recognizing revenue is required.
New qualitative and quantitative disclosure requirements will include the not-for profit’s contracts with its customers, significant judgments made in applying the revenue recognition guidance to those contracts, and information about any assets recognized for contract costs.
Effective Dates
While the effective dates for the new guidance were staggered and delayed, they are now upon us. Many public entities have already implemented ASC 606, and nonpublic entities are required to implement ASC 606 in their first annual reporting period beginning after December 15, 2018. Companies in the private sector should be well on their way to assessing how the new guidance will affect their revenue recognition policies and disclosures, developing an implementation plan and completing that implementation plan. This is particularly true for companies that plan on electing the full retrospective transition method and companies that have multi-year contract terms with their customers. Not-for-profit organizations with a fiscal year end other than December 31 will benefit from having the opportunity to learn from those with a December 31 fiscal year end.
For not-for-profit organizations, the extent of the impact from adopting ASC 606 will vary based on contract terms and the segment within the not-for-profit industry in which an organization operates. For some, there may be no change to the amount and timing of revenue recognition. For others, there could be significant changes. For all, the not-for-profit industry experts at Keiter are here to help with the process to whatever extent is needed.
Questions on revenue recognition for your not-for-profit? Contact your Keiter representative or Email | Call: 804.747.0000
Additional Accounting and Tax Resources for Not-for-Profit Organizations
About the Author
Richard W. Lewis, CPA, CFE, Partner, Assurance Practice Leader
Richard is a Partner at Keiter and has over 15 years of accounting and auditing experience in both corporate and public accounting. He provides audit and assurance services to tax-exempt organizations such as foundations, religious entities, private schools, associations, and voluntary health and welfare organizations. Richard leads the Firm’s Not-for-Profit team.
More Insights from Richard W. LewisThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
