You are likely aware of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. But did you know that nonprofit organizations will be affected, too?
Of the most significance to the nonprofit industry is that contributions will not fall under this standard. In addition, there is a proposed ASU (expected to be issued in 2018) that will lead 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 guidance if they receive revenue under contracts other than contributions and grants. This includes any type of fee-for-service arrangements, including:
- Health care, and
- Management and construction fees.
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:
- Identify the contract
- Identify separate performance obligations
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognize revenue as or when each performance obligation is satisfied
Membership Fees and Nonrefundable Fees
If your nonprofit organization charges a nonrefundable fee at inception of a membership that is separate from a monthly membership fee, currently you may be recognizing those nonrefundable fees immediately (upon receipt) as opposed to over the duration of the membership. Under the new standard, the nonprofit organization must assess whether the nonrefundable fee relates to a promised good or service. In many cases the promised good or service is the membership received, and in this case, the new guidance says that the nonrefundable fee would be recognized over the membership period. The revenue recognition period could extend beyond the initial membership period if the nonprofit grants customers an option to renew the contract. In summary, nonprofit entities that have these types of fee arrangements may find they are deferring revenue over a longer period of time when applying the new five-step revenue recognition process.
Some nonprofits’ revenue streams include variable consideration. This includes organizations with price concessions (such as in healthcare entities), incentives, performance bonuses (which is often seen in construction) and returns.
Typically under U.S. Generally Accepted Accounting Principles (GAAP), nonprofit organizations will not recognize variable consideration until the performance condition that gives rise to the variable consideration has been completely satisfied. However, under the new standard, variable consideration should be estimated and recognized throughout the life of a contract. The variable consideration should only be included to the extent it is probable that a significant reversal will not occur when the uncertainty is resolved. For example, if you are a nonprofit organization that receives developer fees during construction of a building, many times there will likely be a portion of the developer fees that are variable. The nonprofit organization may be able to accelerate revenue recognition of the variable fees if it is probable that they will be received under the new five-step revenue recognition process.
Nonprofit organizations will need to comply with the new revenue recognition standard by January 1, 2019. But now is the time to begin assessing contracts that will fall under this standard and whether any changes in revenue recognition will result from its implementation. A project plan may need to be developed to address changes to your accounting system, internal controls, and policies and procedures. Also consider revisiting your contracts to determine whether any revisions should be made to provide additional support for your revenue recognition transactions. Being proactive will help provide a smooth implementation in all areas of your nonprofit affected by this new standard.
Read more on the new standard in “A Timeline to Help Your Business Prepare for the New Revenue Recognition Standard for Contracts with Customers.”
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.