FASB’s Revenue Recognition for Not-for-Profits Effective December 31, 2019

Jill S. G. Palmeter, CPA, Principal (Aug, 2018)

Most of us are steeped in the implementation guidance for the new Financial Accounting Standards Board (FASB) reporting standard update beginning with December 31, 2018 year-ends, but right on its heels a year later for most not-for-profit (NFP) organizations is ASU 2014-09.  It is the hope of the FASB that there will be improved comparability of revenue recognition across all NFP industries and between entities when it becomes effective for December 31, 2019 year-ends and beyond.  Although this new revenue recognition standard focuses more on contracts with customers, its application to NFP organizations actually necessitated the formation of a FASB Revenue Recognition NFP Task Force to address certain areas specific to NFPs.

As a recap, ASU 2014-09 depicts revenue recognition as the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services.  For NFPs, contracts with customers commonly come from sources such as membership dues, sales of goods/services, tuition, naming rights, royalty agreements, sponsorships and special events.  A complicating factor is that these transactions often include a contribution element and contributions were scoped out of this ASU, remaining unrestricted or restricted, unconditional or conditional, with no changes to their recognition methodology.  Separating the contract component from the contribution component will require judgement.

Steps in applying this new principle would be:

  • Identify the contract with the customer
  • Identify the performance obligations
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations
  • Recognize revenue when (or as) a performance obligation is satisfied

Additional clarification was also needed for areas like government grants and contracts.  Should they be accounted for as contributions (non-reciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities or as exchange (reciprocal) transactions subject to other guidance?  To that end, FASB issued ASU 2018-09: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made on June 21, 2018.  This new ASU will help NFPs evaluate each grant/contract and correctly record the associated revenue.

Key areas in this evaluation process are:

  • Who benefits from the conditions associated with the resources received?  If it is the general public (non-reciprocal) then contribution guidance is followed, but if it is instead a direct benefit to the government/grantor (reciprocal) then exchange transaction guidance applies. 
  • For non-reciprocal transactions (contributions), the next step is to determine if conditions have been placed on the resources provided.  Is there a right of return?  A barrier for the NFP to overcome?  If so, these conditional contributions are recognized as liabilities or not recognized at all until the conditions are met/barriers are overcome.  At that point the contributions are recognized as unconditional and classified as net assets with or without donor restrictions.

This new ASU may seem a bit overwhelming, but it should also provide improved comparability of revenue recognition across all NFPs.  Please reach out to your advisor at Dermody, Burke & Brown if you have any questions.

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The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.