In May 2014, as the result of many years of jointly working to develop a common revenue recognition standard, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their much-anticipated converged standard on revenue recognition. FASB issued Accounting Standards Update (ASU) No. 2014-09 and the IASB issued International Financial Reporting Standard (IFRS) 15, both titled, Revenue from Contracts with Customers. With only some minor differences, the FASB and IASB guidance represent a single, global, principles-based revenue recognition model. As a nonprofit organization, or someone who services the nonprofit community, you may be wondering how these rules will affect you.
First, it is important to point out that these new rules are solely for contracts. Accordingly, the new rules are not expected to change the accounting for pledges receivable, most contributions, split interest agreements, financial instruments, etc. This new set of rules will primarily apply to what are known as exchange transactions in nonprofit accounting.
Exchange transactions are reciprocal transfers between two parties; one of the parties acquires assets or services, or satisfies liabilities, by giving up other assets or services, or incurring other obligations to the other party. For nonprofit organizations, exchange transactions that give rise to revenues typically involve an organization’s efforts to provide specified benefits (goods or services) to its members, clients, customers, or other beneficiaries for a fee. Exchange transactions that give rise to expenses or assets generally relate to purchases of goods or services for the organization’s activities.
The core principle of this new guidance is that revenue should be recognized to depict the transfer of 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 steps to apply this core principle are:
- Identify the contract
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognize revenue when each performance obligation is satisfied
In general, it is expected that nonprofits affected will be those organizations that have typical fee-for-service transactions, contracts with customers, sponsorships, conferences, memberships, tuition relationships, licensing, royalty/affinity agree-ments, federal and state grants and contracts, and other exchange transactions throughout the year.
In August, 2015, the FASB Board issued an ASU that deferred the effective date of this new revenue recognition standard by one year. This ASU will require public organizations, including nonprofits who meet the criteria to be considered public entities, to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Nonpublic organizations (such as nonprofits) will apply the new revenue standard to annual reporting periods beginning after December 15, 2018. As a result, June 30, 2020 would be the first fiscal year affected for a typical June fiscal year-end nonprofit.
The extent of the impact on an entity will differ depending on various factors such as the transaction, its complexity, and the industry in which the entity operates. In some cases, there may be no change to the amount and timing of revenue recognition. In other cases, there will be changes, and those changes could be significant. As the implementation date approaches, organizations need to take steps to evaluate the impact of the new guidance on its operations. The AICPA is currently developing various industry-specific guidance for release, which will assist organizations in implementation of this new standard. The nonprofit industry guide is expected to be released no later than the first quarter of 2016.
There is much more to come on these new requirements, and more application information specific to non-profit organizations is expected to be released as the implementation dates draw closer. We look forward to keeping you up to date on the latest developments as they unfold.
For questions or more information, please contact Michael Barloewen at firstname.lastname@example.org or toll free at 844.4WINDES (844.494.6337).