Nonprofit organizations required to file financial statements are no different than any other when it comes to complying with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers by January 1, 2019, and ASU No. 2016-02 Leases by January 1, 2020. While the deadlines are the same as other entities, there are some nuances for nonprofits to consider in preparing for both of these significant new standards.
Of the most significance to the nonprofit industry is the fact that contributions will not fall under the new revenue recognition standard. In addition, ASU 2018-08, issued on June 21, 2018, leads many nonprofits to classify certain grants as conditional contributions, thereby removing these contracts from the new standard’s reach.
Nonprofits must, however, focus their attention on the new revenue recognition standard if they receive revenue under contracts other than contributions. This includes any type of fee-for-service arrangements, including:
In addition, revenue recognition for tuition and fee revenue, particularly for higher education institutions, will be significantly impacted.
When an organization receives these types of revenue, the new standard promulgates the use of a five-step process to determine proper recognition:
Management should identify all the revenue streams of the organization, determine how the new five-step process will apply, and identify information and data needs.
Your organization should be developing an implementation plan for the new revenue recognition standard. First, become familiar with the standard, including the available implementation guidance, and seek out related training. Next, develop an overall adoption plan:
Your board should be working with management and external auditors to understand revenue streams and key changes, and evaluate the impact on financial statements and debt covenants.
Read more on Revenue Recognition:
New Revenue Recognition Affects Nonprofits, Too!
New Revenue Recognition Standard for Contracts with Customers: Why It Matters Now
A Timeline to Help Your Business Prepare for the New Revenue Recognition Standard for Contracts with Customers
The new lease standard will add operating lease obligations to the statement of financial position and could make a significant difference in the numbers your organization is reporting. Although initial implementation will require some level of effort, the ongoing costs of providing the information are expected to be consistent with the costs of complying with existing GAAP, according to FASB.
Under the new lease standard, a lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. A lessee should recognize the assets and liabilities that arise from leases.
For leases with 12-month terms or less, an accounting policy election can be made to not recognize lease assets or liabilities. Also, there is a practical expedient that allows lessees to account for non-lease components (common area maintenance charges) with lease components. Recognition of related-party leases should be applied based on legally enforceable terms.
Your organizations should be developing an implementation plan for the new lease standard, including:
As with the new revenue recognition standard, your board should work with management and external auditors to evaluate the impact the new lease standard has on financial statements and debt covenants.
Read more on the Lease Standard:
Don’t Underestimate the New Leases Standard: How To Be Ready
New Accounting Standard Changes Lease Reporting on Financial Statements
Please contact a member of your service team, or contact Tina Dzik at tdzik@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.