The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently issued a joint new accounting standards update, Revenue from Contracts with Customers, which will apply broadly across industries and to many types of customer arrangements. One of the goals of this new standard is to remove the highly segmented, industry-specific revenue recognition guidance that currently exists and adopt a more principles-based standard that will be applied consistently regardless of industry. You can find a description of some of the basics of this new revenue recognition standard and key points in planning for the transition here.
Who does this impact, and how?
This new revenue recognition standard applies to contracts with customers and, therefore, will apply to exchange transactions of not-for-profit organizations. The implementation of the new standard will be complicated by the numerous types of exchange transactions not-for-profit organizations can be involved in, for example, fee for service arrangements, membership dues, special events, tuition, grants, government contracts, or sales of goods.
At a minimum, not-for-profit organizations with exchange transactions will have to implement processes to accumulate information and analyze transaction terms and agreements to determine the proper accounting for each type of exchange transaction. There are also substantial new disclosure requirements which will require accumulation of required information. Lastly, and perhaps most importantly, adoption of this guidance may result in a change in the timing of when revenue is recognized — and the change could have an impact that ranges from minor to very significant depending on the types of exchange transactions and the terms of those transactions. For example, let’s consider the timing of revenue recognition for cost-reimbursement government contracts that have been determined to be exchange transactions:
Under current accounting standards, revenue related to exchange-type cost-reimbursement government contracts is generally recognized as allowable expenses are incurred. Whereas, the new standard will require consideration of, among other things, identification of the performance obligation(s) included in the contract, an allocation of the transaction price among the identified performance obligations, and a determination of when and how performance obligations are satisfied in order to determine the timing of the recognition of revenue.
These same types of complications (and others) may exist with membership dues, grants and other types of arrangements. It will be necessary to evaluate all types of exchange transactions against the five-step approach in the new standard:
- Identify the contract(s) with the 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.
Several potential implementation issues for not-for-profit organizations have been identified. The FASB Not-for-Profit Advisory Committee (NAC) has discussed potential implementation issues including self-pay patient revenue, multiple pay arrangements, whether contributions should be explicitly excluded from the scope of the standard, the lack of guidance for government grants if the governmental entity does not meet the definition of a customer, and uncertainty as to how to account for collaborative arrangements, which have been excluded from the scope of the standard. Separately, the American Institute of Certified Public Accountants (AICPA) has formed the Not-for-Profit Entities Revenue Recognition Task Force to focus on industry-specific implementation issues. The task force has currently identified several potential implementation issues including tuition discounts, impact of the new standard on contribution revenue (if any), government grants with deliverables, government grants – best efforts, sponsorships, membership dues, royalties, and licensing.
Although the new standard does not appear to affect the current accounting guidance for contributions or the guidance for distinguishing between contributions and exchange transactions, both the NAC and AICPA task force have identified potential implementation issues related to contributions. Not-for-profit organizations should keep abreast of the industry activities related to implementation issues.
What should you do now?
Some not-for-profit organizations may be able to implement the standard with less effort than others. Some may find implementation to be complex and time consuming; therefore, it is important for all not-for-profit organizations to make an early assessment of the potential impact of the standard on the organization’s accounting and information systems.
The new revenue recognition guidance will be effective for not-for-profit organizations that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market for annual reporting periods beginning after December 15, 2016. It will be effective for all other not-for-profit organizations for annual reporting periods beginning after December 15, 2017. How an organization chooses to adopt the standard will dictate the years for which previous financial information will need to be restated.
Now is the time to begin considering how this new guidance will affect your organization and to begin designing any necessary changes to your processes and procedures to accumulate the information needed. Some first steps in this process include:
- Identifying the types of exchange transactions your organization is party to.
- Identifying a point-person or task force to study the new standard to determine the accounting and disclosure requirements for each type of exchange transaction.
- Comparing the new requirements to the current requirements, then considering the potential differences and how those differences will impact the timing of revenue recognition and information that will be needed to properly account for and disclose each type of exchange transaction.
- Considering how the new requirements may impact other areas of your organization, such as employee compensation arrangements, based on financial results and calculation of debt covenants.
Your Plante Moran advisor can help you evaluate the application of this guidance to your organization and answer any questions along the way as you implement steps to adopt this significant accounting and reporting change.