What Nonprofits Need to Know About Revenue Recognition

What Nonprofits Need to Know About Rev Rec

With ASC 606 – the Financial Accounting Standards Board’s (FASB) new revenue recognition standard – set to go into effect for most nonprofits in 2019, now is the time to get organized and ensure adequate time is allocated for compliance.

What Is the New Revenue Recognition Standard?

In order to standardize how and when businesses – including public, private and nonprofit – recognize revenue, FASB and the International Accounting Standards Board (IASB) opted to issue a new principle to ensure various revenue streams are accounted for and reported in a consistent manner. For nonprofit organizations, these revenue streams typically fall into one of two categories: contributions and exchange transactions.

A contribution is defined as an unconditional, voluntary and nonreciprocal transfer of assets. These typically include transfers of cash, services, or nonmonetary assets. Essentially, contributions are donations or grants given with no expected reciprocation or intended benefit for the donor.

Exchange transactions, unlike contributions, occur when goods or services are purchased from one entity or individual by another, and each party benefits on a seemingly equal level. Through an exchange transaction, each party exchanges something of relatively equal value, whether it be cash, services or another monetary or nonmonetary asset.

How Does the New Standard Impact Nonprofits?

FASB’s new revenue recognition standard only applies to revenue from exchange transactions. Contributions do not fall under the purview of the new standard and should generally be reported during the period in which they are received.

Exchange transactions – and in many cases, grants – are subject to the standard’s five-step framework for compliance:

  1. Identify the contract (or contracts) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocation the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) you satisfy a performance obligation.

What Steps Should Nonprofits Take to Comply?

Understanding the full breadth of the new standard requires time and diligence on the part of nonprofits and their advisors. At a high level, here’s how organizations should embark on their efforts to comply:

  1. Review the new revenue recognition standard with your accounting firm to ensure all provisions are clearly understood and implemented within future accounting practices.
  2. Catalog your organization’s current revenue streams to identify contributions, exchange transactions, and transactions that may straddle both areas.
  3. If possible, review existing contracts to determine if they require changes to contract language to meet new standards and more closely relate to defined performance obligations.
  4. Meet with tax and financial advisors to understand how changes to revenue recognition will impact tax filing and other reporting requirements.
  5. Review and revise accounting systems and internal controls to align to the new revenue recognition standards.

As of February 2018, FASB is in the exposure draft redeliberations phase regarding changes to revenue recognition of grants for nonprofits. With broad standards set to take effect for most nonprofits beginning with reporting periods after December 15, 2018, it’s critical that organizations take the time now to ensure compliance. If you would like to speak with a member of the MFA team to assess your nonprofit’s unique requirements as they relate to the new revenue recognition standard, please reach out to us.

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Michael Piessens

Michael Piessens

CPA, CMA, CFM
Partner

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