The implementation of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, is officially here (after a one year optional delay granted by FASB. In addition, there is another revenue recognition standard that will have an impact on not-for-profits specifically. The FASB issued ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made (Topic 958-605). If your organization is one that engages in both contribution and exchange transactions, continue reading to learn about potential impacts!
How should your organization determine how revenue will be recognized under the new revenue recognition rules?
You will need to examine your contracts with customers and other revenue sources. After this, you will need to determine if your revenue stream is exchange vs. non-exchange revenues.
- If it is an exchange revenue, your organization should follow the guidance for ASU 2014-09.
- If it is a non-exchange revenue, your organization should follow the guidance for ASU 2018-08.
In the instance that a transaction contains elements of both contribution and exchange, the revenue should be divided with each element of the transaction following the appropriate guidance.
ASU 2014-09 establishes a new model for all entities, including not-for-profits, for recognizing revenue arising from contracts with customers. It also eliminates previous differences scattered throughout the Accounting Standards Codification. The new model consists of a five-step process:
- Identify the contract(s) with the customer.
- Identify separate performance obligations within the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue when, or as, the performance obligation is satisfied.
This model allows for revenue recognition that depicts the transfers of promised goods or services to customers. It also intends to reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. We recommend that you re-examine your contracts with customers. You want to be certain that they recognize the related revenues in accordance with this new standard.
ASU 2018-08 clarifies and refines existing guidance that helps explain the scope of contributions. Accounting for government grants and contracts is a revenue area that has caused great difficulty to understand. Under current guidance, there is diversity in practice when determining if the revenue is a contribution or exchange.
ASU 2018-08 clarifies that in the case of grants and similar contracts with government agencies, the transaction is most likely a contribution. It should be noted that this is the case unless the resource provider receives equivalent value from the resource recipient.
After you have determined that your revenue source is a contribution transaction, what is next? You will need to distinguish between conditional and unconditional contributions. Revenue will be recognized as the conditions are met for conditional contributions.
For questions about these ASUs, consult a Certified Public Accountant (CPA).