All entities that have contracts with customers will be affected by the new revenue recognition standard, including not-for-profit organizations.
The Financial Accounting Standards Board (FASB)'s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) creates a five-step revenue recognition model that replaces a rules-based approach with a principles-based approach. The changes are wide-ranging and will have more of an impact on commercial entities than the nonprofit sector, and not-for-profit organizations will have some exceptions to following the new standard. Contributions, for example, are scoped out of the changes. Nevertheless, other provisions of the new guidance could be of interest and should be considered carefully.
Basics of the Standard
Revenue recognition changes take effect for the 2018 calendar year for public entities, and for annual periods for all other entities in the 2019 calendar year and interim periods in the 2020 calendar year. Early adoption is permitted as early as the 2017 calendar year, which was the original public entity effective date of the standard.
Not-for-profits with direct or conduit debt that is traded on a public exchange will be considered "public" for purposes of adopting the standard. Public not-for-profits will be required to adopt for their June 30, 2019, year-ends, including interim periods within the year of adoption. All other not-for-profits will be required to adopt for their June 30, 2020, year-ends, and interim periods in the fiscal year ending June 30, 2021.
Because the standard affects a large portion of contracts entered into each year, implementation is expected to be challenging. The FASB created a Transition Resource Group (TRG) to assist in the rollout and provide feedback on where adoption issues may arise. Suggestions from the TRG led the FASB to make several post-issuance updates to ASU 2014-09, including delaying the start of its implementation from 2017 to 2018 and clarifying how to identify performance obligations and how to account for licensing arrangements.
The AICPA has also created a nonprofit-specific revenue recognition task force to assist with evaluating the impact of revenue recognition on not-for-profit organizations. Between the AICPA and the TRG, additional interpretative guidance may be coming that could affect how not-for-profits adopt and apply the standard.
Government Grants and Contracts
During a December 2016 meeting, the FASB discussed how the new standard may impact not-for-profit accounting for government grants and contracts.
There has been long-standing diversity in practice in how not-for-profits classify grants and contracts, particularly those received from government entities. The FASB will be evaluating guidance for how not-for-profits should distinguish between grants and contracts that are nonreciprocal transactions (i.e., contributions and therefore out of scope of revenue recognition) and those that should be accounted for as reciprocal transactions (exchanges).
Following the meeting, the FASB decided to refine guidance in ASC Subtopic 958-605, Not-for-Profit-Entities—Revenue Recognition, to clarify what is in scope of the Subtopic guidance.
Potential improvements could include reexamining the indicators in ASC Subtopic 958-605 that not-for-profits use to determine whether something is a contribution or an exchange transaction. Currently, not-for-profits consider intent, method of delivery, method of determining payment, and whether there are penalties for nonperformance when determining whether a contribution or exchange exists. Changes could further emphasize direct, commensurate benefit to the entity providing the funds. For example, language might be included to clarify a government grant does not constitute a direct benefit to the government if it benefits the public or furthers a nonprofit's mission. Such a grant would not be reciprocal and therefore could be considered a contribution out-of-scope of revenue recognition.
Changes may also come to the definition of a contribution to be clear if contributions can include donations, gifts and grants. If changes to the definition of a contribution are made, entities would likely need to evaluate their definition of contributions and may need to change the classification of certain grants.
Distinguishing between conditional and unconditional contributions was the second issue identified by the FASB. Nonreciprocal transactions may have terms and conditions attached to them, and those conditions could affect revenue recognition treatment.
Some potential changes to conditional and unconditional contributions could include clarifying key definitions of a donor condition versus a donor restriction and, potentially, the concepts of "uncertainty" and "remote." The FASB might also provide illustrative examples of transactions where there has traditionally been diversity in practice.
No decisions were reached during the meeting, but FASB staff will be looking at whether to define contributions as conditional if there is an explicit right of return involved and a substantive barrier that must be overcome to avoid the right of return.
Other Areas to Monitor
The AICPA's revenue recognition task force identified tuition and housing as a potential implementation issue for revenue recognition and is considering how not-for-profit entities should interpret and apply the five-step revenue recognition model to those transactions. The task force is expected to specifically address how to determine the transaction price and when to recognize revenue for tuition and housing in an upcoming guide for revenue recognition. Membership dues are also among the issues the ACIPA is exploring.
Get Started Early
Although much of the attention on revenue recognition has been in the commercial sector, not-for-profit organizations should be examining their operations closely for the types of contracts that may be impacted. They should also keep an eye out for the FASB's decisions on government grants and contracts to determine if reclassification of grants may be needed.
An advisor experienced with the new standard may be able to assist in implementing changes. For more information about how revenue recognition adoption could affect your organization, please contact us.
Published on February 27, 2017