Non-Profits Are You Ready for New FASB Standard Revenue Recognition Rules?
posted Jun 26, 2018 by Lauren Amaral, CPA in the Mission Matters Blog
There is a lot of talk of these new revenue recognition standards and how they will affect for-profit corporations and businesses, but how will Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers affect non-profit organizations?
ASU 2014-09 highlights the importance of whether grants and contracts are included in the scope of the ASU and if these contracts are considered to be reciprocal or nonreciprocal:
- If the transaction is nonreciprocal then it should follow the current contribution guidance.
- If the transaction is reciprocal, it would fall under the scope of the new ASU.
What is the current procedure?
Currently, similar grants and contracts are accounted for as nonreciprocal transactions (often conditional) by some nonprofits and as reciprocal transactions (exchange transactions) by other nonprofits. ASU 2014-09 has placed renewed focus on the issue due to the elimination of limited exchange transaction guidance in FASB ASC 958-605 and additional disclosure requirements that do not seem relevant to these types of transactions.
What is a contribution vs. an exchange?
|Contribution Transaction||Exchange Transaction|
|You are not penalized for non-performance||You are penalized for non-performance|
|The contributor determines the amount of the payment||The amount of payment is determined by the value of the quantity of assets provided|
|Assertion that the asset is being solicited as a contribution||Assertion that you are seeking resources in exchange for specified benefits|
|The non-profit asserts the delivery method for the payment||The resource providers asserts the method of delivery for the payment|
Has FASB addressed the difficulty in distinguishing between these two?
Yes. For this reason, on August 3, 2017, the FASB issued a proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The due date for comment letters ended on November 1, 2017. A final ASU is expected in the second quarter of 2018.
More about Topic 958
The proposed ASU would help organizations determine if transactions should be accounted for as a contribution or an exchange transaction. Organizations would accomplish this by using clarifying guidance to evaluate whether a resource provider is receiving value in return for the resources transferred.
The ASU also includes an improved framework for determining whether a contribution is conditional or not, and to better distinguish between donor-imposed conditions and donor-imposed restrictions. In the meantime as we await final guidance non-profits should start the implementation process sooner rather than later to determine how this will impact your organization.
Some of the areas that may have an impact on your nonprofit include the following:
- Estimates and Assumptions - Management may be required to make more estimates and use more judgments.
- Covenants - A discussion with your lenders may be needed to revise debt covenants that may be tied to accounts impacted by the new guidance, such as revenues or liabilities.
- Review Contract Terms - A change to standard contract terms may be warranted if current terms do not result in the desired accounting treatment.
- Policies and Procedures - Management may need to revise documented processes and internal controls.
- Updates to Software - Enhancements and updates to existing accounting and financial reporting software may be required, to allow for the capture of the necessary inputs for proper revenue accounting, including the ability to track contract liabilities for performance obligations that have not yet been satisfied.
The standard has different effective dates depending on the type of non-profit:
- For non-profits that have issued or are a conduit bond obligor for securities traded, listed, or quoted on an exchange or an over-the-counter market, the standard takes effect in annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within that reporting period.
- For all other non-profits, the standard takes effect in annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2019.
Questions? Contact me or any member of our Not-for-Profit Services Team.