As we all know by now, the Financial Accounting Standards Board (FASB) has spent the last two decades working towards converging standards with the International Accounting Standards Board (IASB). While a number of projects have been completed—and several more are on the horizon—one of the most significant accomplishments to date has been the issuance of ASU 2014-09, Revenue from Contracts with Customers. This ASU established a new Accounting Standards Codification Topic (606) and eliminated a substantial portion of all previously issued revenue recognition guidance.
As painful as it’s been to re-learn guidance that’s been in use for most of our careers, Topic 606 does, in fact, simplify revenue recognition in a number of ways. Most significantly, instead of memorizing industry-based rules, we’re all now operating off of a core set of accounting principles built around the new five-step approach.
While there have been numerous revenue recognition guides released and countless white papers, webinars, and blog posts about revenue recognition in general, we wanted to take a different approach. Instead of assuming that you’ve read every ASU in detail, we’ve compiled a basic roadmap of sorts to assist in navigating the double-digit revenue-related ASUs that have been released to date. Below, you’ll find the more significant ASUs followed by a short explanation of how each may relate to your Non-Profit Entity (NPE).
1) ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
This is the first of the 606-related ASUs. It establishes Topic 606 as the hub for revenue recognition resulting from contracts with customers, supersedes the old Topic 605, Revenue Recognition, supersedes most industry-specific revenue recognition guidance, and establishes the five-step revenue recognition model. Unless your NPE only receives basic donations of cash or other assets, you should understand the five-step model and the types of transactions that fall within the scope of Topic 606. At a minimum, this will allow you to reach out to your CPA for guidance on next steps.
2) ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
After some entities began to realize and report the significance of the time requirements that were needed to successfully transition their processes and systems over to the new 606 guidance, the FASB issued this standard to delay the implementation of ASU 2014-09 by one year. For most NPEs, Topic 606 adoption will now be required for annual reporting periods beginning after December 15, 2018. So, if you have a December 31st year end, Topic 606 guidance will need to be adopted in your December 31, 2019 financial statements, which you are likely preparing now or in the near future. However, if you have, let’s say, a June 30th year end, you still have a little time as Topic 606 would first need to appear in your June 30, 2020 financial statements.
3) ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
As far as revenue recognition guidance goes for NPEs, this is likely the most significant. This ASU primarily sets the criteria for determining whether a transaction should be considered an exchange transaction or a contribution. If a transaction is considered to be an exchange transaction, Topic 606, or other applicable standards, take over. The guiding line here is whether or not a donor, grantor, or another resource provider (collectively, “resource provider”), is receiving “commensurate value” in return for their donation, grant, or other provision of resources.
This ASU offers further explanation of commensurate value by stating that:
- The resource provider is not synonymous with the general public. The idea here is that a benefit received by the public is not equivalent to a benefit being received by the resource provider.
- Execution of the resource provider’s mission or positive sentiment received from acting as a donor does not equate to commensurate value. That is, if a resource provider issues a grant to your NPE, the accomplishment of their mission or their receipt of “good vibes” doesn’t mean that they received comparable value.
As stated in this ASU’s Summary, this update “likely will result in more grants and contracts being accounted for as contributions or conditional contributions than observed in practice under current guidance.”
Moving on from the exchange v. contribution discussion, once the transaction has been determined to be a contribution, ASU 2018-08 adds the requirement that an entity must determine whether that contribution is conditional. If a contribution is determined to be unconditional, it should be recognized immediately, whereas conditional contributions aren’t recognized until the condition or conditions are substantially met (become unconditional).
The adoption timing for this guidance aligns with the requirement prescribed in ASU 2015-14, noted in #2 above.
4) Honorable Mentions
While the three ASUs above are the primary considerations for most NPEs, we recommend that every entity become somewhat familiar with the following additional ASUs:
- ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). If your NPE engages in any pass-through type transactions, or anything that might warrant a principal v. agent consideration, you’ll want to spend time perusing this ASU as well.
- ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU affects the guidance for licensing. If your NPE happens to transact on held intellectual property (trademarks, patents, etc.), the guidance in this ASU separates licensing recognition into two basic categories that have wholly different recognition methodologies.
- ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. Depending on the nature of your NPE, this ASU could affect how certain amounts collected from customers are treated (taxes) as well as clarifies certain collectability criteria.
While we believe that the six standards above encompass a majority of the revenue recognition related ASUs relevant to an NPE, we must acknowledge that every NPE will likely have their own unique set of facts and circumstances, and that these can change quickly. Having both a “deep” understanding of these topics relating directly to your business and a basic “wide” understanding of all revenue recognition guidance will put you in a great position to avoid being blind-sided by an auditor’s adjustment or some last-minute crunch to figure out the accounting on a one-time transaction.
If the evaluation of your NPE’s transactions is becoming overly burdensome, or if you’re looking for assistance in determining the correct accounting treatment for your grants, donations, etc., PMB can help ease the pain. Reach out to us anytime.