Organizations across many industries are changing their processes to prepare for the Financial Accounting Standard Board’s (FASB’s) new revenue recognition standard. Amidst all of the discussion and information about the revenue recognition changes are questions such as, “Do the changes impact not-for-profit entities? If so, when and how?”
The first part of the answer is very direct: The revised standards do apply to not-for-profit entities, and the rules become effective in annual periods ending after December 15, 2019. The more complicated portion of the question is how the standards apply. (Note: While the new standard also impacts required disclosures, this article will focus on timing of recording revenue.)
Contracts with Nonprofit Revenue Recognition
The new standard directly excludes the following contracts with customers, as these are directly addressed in other sections of accounting standards:
- insurance contracts,
- debt and equity securities,
- liabilities and debt,
- financial instruments,
- transfer and servicing rights, and
- nonmonetary exchanges.
Contributions, which are a very typical not-for-profit revenue source, are not directly excluded in the standards. However, based on the definition of revenue in the revised standards, contributions are excluded since they are both voluntary and provided without any expectation of goods or services to be provided to the donor (i.e., they are nonreciprocal).
The remaining typical contracts a not-for-profit entity may have with a customer or donor that will need to be analyzed for new treatment under the standard include the following:
- products and services,
- royalty agreements,
- conferences and seminars,
- licensing, and
- federal and state grants and contracts.
Organizations will need to identify the pieces of the contracts that have contribution components, multiple performance obligations, and extended time periods of service requirements. Revenue will then be recorded as the not-for-profit entity satisfies performance obligations during the time period in which services are provided.
A Deeper Understanding of Federal and State Grants and Contracts
An example of how these changes might impact not-for-profits can be seen in the area of federal and state grants and contracts. Under current accounting standards, revenue related to cost-reimbursement government contracts is generally recognized as allowable expenses are incurred. The new standard will require consideration of, among other things, the:
- identification of the performance obligations included in the contract,
- allocation of the transaction price of the identified performance obligations, and
- determination of when and how the performance obligations are satisfied in order to decide the timing of the recognition of revenue.
However, it is important to point out that standard-setters continue to discuss the issue of what happens when the not-for-profit entity is engaging in a reciprocal transaction (i.e., exchange) versus a nonreciprocal transaction (i.e., contribution) – as well as the complexity of making the correct determination. The accounting treatment for an exchange transaction will be under the new guidance, and the treatment for a contribution is unchanged from current guidance.
Don’t Let Nonprofit Revenue Recognition Preparations Leave You Underwater
Standard-setters and practitioners continue to deliberate industry-specific issues. However, now is the time to review your revenue streams, identify arrangements with contracts in place, and determine if any components will need to be recorded differently in the future. For more of our revenue recognition news and resources, text REVREC to 66866 or visit revrectools.com. Additionally, contact us if you have any questions specific to your nonprofit’s needs.