Background on the New Standard
After a long period of relative stability, nonprofit organizations find themselves in the position of implementing several new pieces of accounting guidance over a short period of time. It began with the recent implementation of the new OMB Uniform Guidance rules and continues with the eventual adoption of the new nonprofit financial statement update, the new leases update, and new rules relevant to revenue recognition.
Unlike the updates to nonprofit financial statement reporting and the OMB Uniform Guidance rules, the new rules for leases and revenue were not specifically written with nonprofit organizations in mind. While the treatment of operating leases is not likely to be very different in a nonprofit or a for-profit business, the same is not true about revenue recognition. Nonprofits have several unique types of revenue recognition that are prevalent in their industry and many observers were left wondering, upon review of the released revenue recognition standard, how exactly it applied to nonprofits. In recent months, more and more guidance has been coming out from the AICPA and others that provide guidance to nonprofit organizations evaluating the impact of the new standard, and it is now clear that the standard only applies to what are known as exchange transactions.
The most typical types of nonprofit revenue that appear to be within the standard include membership dues, tuition and fees, licenses and royalties, and government grants and contracts. Basically, anything considered, in nonprofit terminology, an exchange transaction would be included. The new guidance calls for contracts like these to be evaluated by using the following steps to apply the core principles of the standard:
- Identify the contract
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when (or as) a performance obligation is satisfied
Practical Implementation Steps to Consider
The AICPA recently released some guidance on how an organization might go about implementing the standard. They include the following:
- Read the standard and all relevant commentary from audit firms and attend related CPE
- Assign individual staff members to become subject matter experts on specific revenue categories or by section to lead a group of staff to understand and implement the new standard
- Compile a list of all organizational revenues that might fall under the standard (excludes contributions and investment income) such as membership dues, royalties, advertising revenue, sponsorship revenue, federal, state or private grants, retail sales, fees, pass-through funds, tuition, fees for services, etc.
- Develop and document a position paper on each revenue stream by documenting current process; support your position with facts; document your conclusion on how to recognize revenue; review with your external auditor and finalize the new policy
- Consider discussing issues with similar organizations within your industry
- If a change is required, is it material? If not, document, discuss the impact with your auditors. Perhaps no actual change will be necessary and prior recognition methodology can continue.
- If a change is required, consider whether related contracts need to be updated, changes need to be made to monthly annual close process and internal financial reporting and forecast and budget processes
- Communicate changes to the CFO, board, audit/finance committee, senior staff, auditors, key stakeholders, etc.
- Determine requirements to retrospectively adopt the new standard or prepare comparative financial statements
- Develop a plan for staff training
The new standard applies to organizations with fiscal year ends beginning after December 15, 2018, so there is still ample time for organizations to evaluate the impact on their operations. In addition, more and more examples that apply to nonprofits are being released and can be used to evaluate the new standard. If you have a revenue stream that you are unsure how to analyze under the above process, feel free to reach out to me and I may be able to assist or provide you with some relevant examples released by the AICPA.
For questions or more information, please contact Michael Barloewen at firstname.lastname@example.org or toll free at 844.4WINDES.