The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, on May 28, 2014. Additional Updates on this topic have followed:
Update 2015-14-Deferral of the Effective Date
Update 2016-08-Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
Update 2016-10-Identifying Performance Obligations and Licensing
Update 2016-11-Narrow-scope Improvements and Expedients
The revenue recognition standard focuses on contracts with customers (there are exceptions for leases, insurance contracts, most financial instruments, and guarantees [other than product or service warranties] as set forth in the standards). The standard uses a principle-based approach for determining revenue recognition. Under the standard, performance obligations are identified for each contract. The identified transaction price is allocated to each separate performance obligation, and revenue is recognized as (or when) the entity satisfies a performance obligation.
Additional Potential Implementation Issues
Along with the implementation issues identified and addressed in this ASU, the AICPA’s Not-for-Profit Entities Revenue Recognition Task Force has identified a list of additional potential implementation issues including:
- Tuition and housing revenue (including discounts)
- Subscriptions and membership dues
- Bifurcation of transactions between contribution and exchange components (i.e. transactions that are part contribution and part exchange, such as membership dues, sponsorships, naming opportunities and donor status transactions)
Contributions are not in the scope of the new standard.
What Your Organization Should be Doing Now
- Become familiar with the new standard and updates, and discuss this new standard with your board and your accounting advisors.
- Identify your organization’s different types of exchange transactions and evaluate if there are differences between current accounting policies and practices and the new standard, and how those identified differences may impact your financial statements.
- Determine if modifications to systems, processes and internal controls are needed as a result of the new criteria.
- Consider how the new requirements may impact other areas of your organization such as employee compensation arrangements that are based on financial results and calculation of debt covenants.
When does the new Standard become effective?
The new revenue recognition guidance will be effective for non-profits that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market for annual reporting periods beginning after December 15, 2016. It will be effective for all other not-for-profit organizations for annual reporting periods beginning after December 15, 2017. The effective date and transition requirements for updates subsequent to 2015-04 are the same as the effective date and transition requirements of Update 2014-09, Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date which defers the effective date of Update 2014-09 by one year.
Do you have questions regarding this Update? Please contact us to explore the implications for your organization.
Please note this summary is not meant to substitute for reading the updates in their entirety.