June 01, 2018
There has been a lot of discussion over the past few years about revenue recognition, and by now, everyone has heard about FASB Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and its effect on revenue recognition of exchange transactions. But did you know that nonprofits must prepare to adopt and implement two new revenue recognition standards, not just the one that has been receiving most of the attention? FASB issued the ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (Topic 958-605) on June 21,2018. Because most nonprofits engage in both contribution and exchange transactions, both new standards will affect how nonprofits record and report revenue.
The chart below shows the final implementation dates for ASU 2014-09 (Topic 606) and the proposed implementation dates for ASU 2018-08 (Topic 958-605). The implementation dates are similar between the two standards but are not identical in all cases.
After implementation of these two new standards, nonprofits will apply Topic 958-605 to all contribution transactions, and Topic 606 to all exchange transactions. Transactions that have elements of both contribution and exchange will be bifurcated, with each element being recorded in accordance with the applicable Topic.
ASU 2018 – 208 (Topic 605)
ASU 2018-08 seeks to address longstanding difficulty and diversity in practice among nonprofits in two key areas:
ASU 2018-08 clarifies that, in the case of grants and similar contracts with government agencies and others, unless the resource provider receives commensurate value from the resource recipient, the transaction is most likely a contribution, not an exchange transaction.
ASU 2018-08 provides examples of indirect benefits that do not constitute commensurate value, but that have caused confusion in the past:
ASU 2018-08 goes on to clarify and simplify the determination of when a contribution is conditional, establishing that, for a donor-imposed condition to exist, it must have both:
Many federal awards currently are treated as exchange transactions. Under the new guidance, many, if not most federal awards, will be treated as conditional contributions. The end result generally will be the same, with expenditures of federal awards recognized in accordance with grant provisions and applicable cost principles constituting satisfaction of the conditions.
The new guidance eliminates the need to consider whether the likelihood of not satisfying a donor-imposed condition is remote. Trivial or purely administrative conditions are not considered to be barriers. Donors and donees will need to consider whether stipulations in grant agreements, such as objectives and milestones, are measurable performance barriers or simply guidelines and mutually-agreed-upon goals. For a right of return to exist, it must be evident from the gift agreement or another document referred to in the gift agreement; its existence cannot simply be implied.
ASU 2014 – 09 (Topic 606)
ASU 2014-09 establishes a new model for all entities, nonprofits included, for recognizing revenue arising from contracts with customers (exchange transactions), and eliminates previous differences scattered throughout the Accounting Standards Codification. The new model consists of a five-step process as follows:
The objective of the new model is to recognize revenue to depict the transfers 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 goods or services. Nonprofits will need to re-examine their contracts with customers to be sure they recognize the related revenues in accordance with this new standard. All program-related products or services for which a fee is charged, and all other sales of any goods or services, whether program-related or not, are subject to the new standard.
Eide Bailly can assist you with all aspects of your organization’s implementation of these new standards. Please contact a member of your Eide Bailly team today or one of our nonprofit professionals for help.