Update published on June 5, 2020: FASB issued Accounting Standards Update (ASU) 2020-05, Revenue from Contracts with Customers (ASC 606) and Leases (ASC 842) Effective Dates for Certain Entities, as part of its efforts to support and assist stakeholders as they cope with the many challenges and hardships related to the COVID-19 pandemic.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This standard, as edited by subsequent amendments, is effective for public entities, including NFPs that are conduit debt obligors, for reporting periods beginning after December 15, 2017. For all other entities, including all other NFPs, the standard is effective for reporting periods beginning after December 15, 2018.
The standard does not apply to contributions received by NFPs, but it does apply to exchange transactions, which are relevant to most NFPs to some extent. Some transactions contain elements of both contributions and exchange transactions, and will require special consideration to determine the proper accounting treatment. Examples of transactions that contain at least some exchange element include tuition and housing revenue, government grants, membership dues, advertising, subscriptions, sponsorships, special events, royalties and licensing revenues.
The core principle of this new guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
The standard prescribes a five-step process to achieve this principle:
- 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 in the contract
- Recognize revenue when or as the entity satisfies a performance obligation
The American Institute of Certified Public Accountants has established a Not-for-Profit Entities Revenue Recognition Task Force, which is charged with developing revenue recognition implementation issues that will provide helpful hints and illustrative examples for how to apply the new standard. Some of the issues being addressed by the Task Force include tuition and housing revenue, grants, subscriptions and membership dues, and the bifurcation of transactions between contribution and exchange transactions. We will keep you informed of developments from this Task Force.
In the meantime, we encourage organizations to begin working on implementation issues by:
- Assigning individuals to be responsible for understanding and implementing the standard;
- Compiling a detailed list of organizational revenues;
- Beginning to apply the five-step process to each revenue stream involving exchange transactions
- Determining the potential effects on contract language and accounting systems and processes.