Talking about the changes to revenue recognition and contribution accounting is one thing, but implementing it can be another chore entirely for not-for-profit organizations.
Changes in ASC Topic 606, Revenue from Contracts with Customers move accounting for certain types of revenue from a rules-based to a principles-based approach. But organizations will also have to walk through a contribution decision-making tree to determine whether their particular transaction qualifies as a contribution subject to the updates to ASC Topic 958, Not-for-Profit Entities or if the transaction will follow the revenue recognition guidance.
To help conceptualize how the updates in ASC Topic 606, Revenue from Contracts with Customers and ASC Topic 958, Not-for-Profits, affect your organization, we have compiled some examples to showcase the guidance in application. The following may help illustrate how the new accounting principles affect common arrangements your organization may encounter.
Accounting for Membership Dues
Not-for-profit organizations that collect membership fees will generally account for the fees they collect as transactions under ASC Topic 606.
Illustrative Example
A membership organization has annual dues of $500. In return, members receive the right to participate in monthly activities that include educational opportunities, advocacy efforts, and a quarterly professional journal.
The membership organization accounts for the membership fees by first identifying the existence of the contract and the goods and services provided by the contract. It determines in Step 2 that the membership services and quarterly journal subscription represent separate performance obligations. The organization determines in Step 3 that the transaction price is $500. In Step 4, it concludes the transaction price should be allocated based on standalone selling prices as $400 for membership services, and $100 to the quarterly subscription. In Step 5, the organization determines it will recognize the revenue from those two performance obligations differently.
Timing of Revenue Recognition
The membership fees will be recognized over 12 months (the length of the membership benefit) while the revenue for the journal subscription will be subdivided and recognized at a point in time, after each quarterly mailing of the professional journal.
Event Sponsorships
Event sponsorships may be accounted for under ASC Topic 958, the revenue recognition for contribution and grants decision-making tree will help in to determine whether the arrangement is a transaction or a contribution.
Illustrative Example
A trade association permits a resource provider to sponsor an event for the trade association’s members. The resource provider’s logo is shown at the event.
In its analysis, the trade association considers all the facts and circumstances involved in the arrangement, including whether the resource provider is an individual or corporation; the length of time that the sponsor is using the trade association’s logo; and the control the trade association has over the name and logo. If the trade association determines that the sponsorship provides nominal value to the sponsor, the trade association is not providing something of commensurate value to the sponsor. The trade association accounts for the arrangement as a nonreciprocal transaction.
Timing of Revenue Recognition
Revenue is recognized in accordance with the contribution guidance and recognize the contribution in the appropriate asset class.
Federal Grant
The contribution guidance released in the Financial Accounting Standards Board’s Accounting Standards Update 2018-08 (ASU 2018-08) brought much-needed clarity to accounting for grants and the timing of revenue recognition. Not-for-profits will use the ASU 2018-08 decision-making tree for all grants and contributions.
Illustrative Example
A not-for-profit receives a federal grant and as part of the agreement, it agrees to adhere to the rules and regulations established by the Federal Office of Management and Budget (OMB), and submit a summary of program outcomes to the federal agency. Any unused resources are forfeited, and the not-for-profit must refund any disallowed cost that it draws down. The not-for-profit retains the right to all program outcomes.
Under the contribution guidance, the not-for-profit’s federal grant qualifies as a nonexchange transaction. The not-for-profit concludes its grant is conditional because of the OMB requirements and federal agency restrictions on how the grant is used.
Timing of Revenue Recognition
The not-for-profit recognizes revenue from the grant when the conditions of the agreement are met.
Corporate Grants
To account for corporate grants, not-for-profits would also use the ASU 2018-08 revenue recognition for contribution and grants decision-making tree.
Illustrative Example
A public charity that works with schools to improve special education programming receives a $100,000 grant from a corporate foundation. The grant will fund research on intellectual disabilities. It includes a right of return, a statement that approval must be obtained from the corporate foundation for any deviation in spending from the general budget, and a requirement that at the end of a grant period, the public charity must file a report with the corporate foundation that explains how it spent grant assets.
The public charity concludes the grant is an unconditional contribution because the corporate foundation is not receiving goods or services of commensurate value for its grant to the public charity.
Timing of Revenue Recognition
The public charity recognizes revenue in the appropriate net asset class. In this case, the contribution would be classified as a donor-restricted asset.
Work Ahead
Time is running out for not-for-profit organizations to adopt their accounting changes. Regardless of whether your organization follows a calendar or a fiscal-year end, the best time to complete adoption efforts is by the end of 2019, when accountants who understand the nuances of the accounting standard are generally more available to assist with specific types of implementation questions. For more information about how the nuances of revenue recognition and contribution accounting affect your organization, contact us.
Published on December 20, 2019