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By Andy Gorham, CPA, HoganTaylor Assurance Senior Manager

In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606).  ASC 606 applies to any entity that enters into contracts with customers to transfer goods or service. For most nonprofits, the new guidance is effective for annual reporting periods beginning after December 15, 2018.

Certain specific transactions are excluded, including leases, insurance contracts, financial instruments, and contributions.

Examples of revenue that could be impacted by the standard include:

  • membership dues
  • sponsorships
  • special events
  • federal and state grants
  • tuition, and
  • fee for service arrangements.

The fundamental principle of ASC 606 is that an entity only recognizes revenue (from a contract with a customer) as/when it satisfies each performance obligation under the contact. A new “five step” model for revenue recognition relating to contracts with customers has been developed.

  1. Identify the contract
  2. Identify separate performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue as each performance obligation is satisfied.

Each step includes certain concepts and judgments that will have an impact on the revenue recognition process. Additionally, disclosures in financial statements will be greatly expanded “to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.” (ASC 606-10-50-1)

To address complexities with the new standard, FASB has issued several clarifying ASUs, and the AICPA formed 16 industry task forces to help resolve issues. The Not-for-Profit Entities Revenue Recognition Task Force has issued finalized guidance on

  • Tuition and Housing Revenue – includes considerations needed to determine the transaction price and when to recognize revenue for tuition and housing.
  • Contributions – clarifies that contributions are excluded from the scope of ASC 606.
  • Bifurcation of Transactions Between Contribution and Exchange Components – clarifies that amendments from ASU 2014-09 do not affect the method to bifurcate transactions received that are in part a contribution and in part an exchange transaction.

As of the date of this article, the following issues were still in process for the NFP Revenue Recognition Task Force:

  • Grants – The FASB has issued an exposure draft (ED) of a proposed ASU to clarify how to characterize grants and similar contracts as contributions or as exchange transactions. The deadline for sending comments about the ED was November 1, 2017.
  • Subscriptions and Membership Dues This accounting implementation issue discusses how nonprofit organizations should account for membership dues, lifetime membership dues, subscription revenue, and lifetime subscriptions. The implementation issue has been submitted to the AICPA Revenue Recognition Working Group for further consideration.

Changes may be necessary to an organization’s current processes and information systems to capture the appropriate data for documentation, calculation and disclosure. The new standard will require planning, and involvement of multiple parties to facilitate a successful adoption.

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