Not-for-Profit Revenue Recognition for Exchange Transactions to Change – January 03, 2017 by Adam Schultz

Revenue recognition, arguably one of the most difficult areas in terms of interpreting not-for-profit accounting guidance, is about to get a major overhaul. However, much of the difficulty and judgment that currently exist aren’t going anywhere.
Revenue recognition is an area that often trips up not-for-profit accounting and finance staff, particularly the need to differentiate between contributions and exchange transactions. A new, expansive revenue recognition standard is being crafted and will be implemented within the next few years, but the new guidance only covers how revenue is recognized for exchange transactions. So the key step of determining whether an award is a contribution or an exchange transaction will not change.
In current not-for-profit accounting guidance, the key step in recording revenue is often recognizing whether an award is:

  • A contribution — a non-reciprocal transaction in which revenue is recorded up front rather than over the term of the award), or

  • An exchange transaction (often called a grant) — a reciprocal transaction where both parties are deemed to benefit and the revenue is recognized over the term of the award.

Many factors will continue to help determine if the award is an exchange transaction and thus has “commercial substance.” The transaction is likely an exchange transaction if the resource provider:

  • Receives anything in exchange,

  • Retains certain rights over the exchanged assets,

  • Specifies how to conduct the activity,

  • Is able to penalize or demand return for nonperformance, or

  • Requires delivery to related or closely connected parties, the transaction is likely an exchange transaction.

If an award is deemed to be an exchange transaction under the current criteria discussed above, then in the future it will be subject to new revenue recognition standards. The Financial Accounting Standards Board (FASB) has issued ASU 2014-09 Revenue from Contracts with Customers, as well as a large number of ancillary and supporting publications, covering how contract revenue is to be recognized across all industries. While certain transactions are exempted, including not-for-profit contributions (discussed above), all others are subject to the new guidance, including not-for-profit grants and exchange transactions. The recognition process under ASU 2014-09 is broken down into a five step process for all revenue transactions. Those steps are as follows:

  1. Identify the contract

  2. Identify separate performance obligations

  3. Determine the transaction price

  4. Allocate the transaction price to performance obligations

  5. Recognize revenue as or when each performance obligation is satisfied

Some elements of this five-step process will be easier than others when it comes to the not-for-profit industry. For example, many award agreements from foundations and public entities specifically spell out what the programs and outcomes need to be, so identifying performance obligations will often be an easier aspect of the process. Allocation of contract price among different performance obligations often involves determining a standalone selling price, so certain programmatic elements that are not funded or performed separately will require judgment and analysis to determine a standalone value and allocate the entire transaction price.
One helpful note is that several industry-specific task forces were created to offer guidance and produce additional content. The not-for-profit industry is one of those with its own task force. The FASB and American Institute of CPAs (AICPA) have a number of general and industry-specific publications to help entities prepare for implementation of this new standard. The effective date of the standard for not-for-profit entities is periods beginning after December 15, 2018, meaning that the first periods subject to the new guidance will be 2019 calendar-year periods.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.