Tips to ensure organizations understand the new standard and effectively adopt it.

If you run a not-for-profit organization, you may be asking how the Accounting Standards Update (ASU) No. 2014-09 revenue recognition standard will impact your non-profit. Here are three tips on how to help you ensure adoption of the new accounting standard is successfully implemented. 

What Not-for-Profits Need to Know about the Five-Step Process

Understand the five-step process under the new standard to recognize revenue. Ensuring the five-step process is understood, including which revenue streams are scoped out of the new standard specifically for not-for-profit organizations and what steps are most time consuming, will facilitate a smooth transition.

The five steps under the new standard are as follows:

  1. Identify the contract with a customer
  2. Identify performance obligation(s) in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligation in the contract
  5. Recognize revenue when the organization satisfies a performance obligation

The new standard is much more principals-based and at times requires the application of professional judgment compared to the previous rules-based standard with the goal of providing a more uniform and consistent approach to recognizing revenue across all industries. Certain revenue streams for not-for-profit specific organizations are excluded from the new standard. These include investment income, donor contributions, and financial contracts, among others.

Donor contributions, a major source of revenue for not-for-profit organizations, are excluded from this new standard, as they are voluntary and considered nonreciprocal. Organizations should continue to account for donor contributions under existing guidance specific to donor contributions and other sources of revenue excluded from the new standard under the previous historical revenue recognition guidance. Understanding which revenue streams are excluded from the new standard will help you focus your time on where your organization is most impacted.

The most time-consuming steps within the new standard are the identification of performance obligations in a contract and an allocation of the transaction price. Performance obligations could be satisfied ratably over a period of time or at a specific point in time. Gaining an understanding of the nuances of the new standard will help focus your time on where your organization is most impacted and help ensure a smooth transition.

Your Not-for-Profit Should Compile a Listing of All Revenue Streams

Compile a listing of all revenue streams of your organization for further analysis. From this listing, identify which revenue streams are excluded from the new standard and which revenue streams will require a more detailed analysis under the new five-step model. Contracts with customers should be evaluated according to the five-step model, in particular, what your organization’s performance obligation is and if the transaction price needs to be allocated over time or at a point in time as a performance obligation is satisfied, which may require professional judgment by management.

Be mindful of variable consideration, such as discounts, rebates, or price concessions, among others, when evaluating the transaction price. The transaction price should be the amount of consideration (fixed or variable) that your organization expects to receive in exchange for transferring the promised goods or services to a customer. In instances where performance obligations are satisfied over a period of time, organizations should allocate the transaction price, net of any variable consideration, over the life of the contract and recognize a portion of the transaction price as each performance obligation is satisfied. In instances where a single performance obligation is satisfied under a contract with a customer, the amount of revenue recognized should be the transaction price, less any variable consideration.

Under the new revenue recognition standard, timing differences may result in the recognition of revenue earlier compared to the previous standard due to the new standard being more principals-based and dependent on the identification and satisfaction of performance obligations. Compile a listing of all revenue streams that require a more detailed analysis under the new five-step model and evaluate key components of the new standard such as identification of performance obligations and variable consideration.

Evaluate Your Not-for-Profits Current Practices and Reporting

Evaluate current business practices and internal financial reporting. Consider the impact of this new standard from multiple viewpoints of the organization. Depending on the severity of impact under this new standard, you may need to discuss with your lender the possibility of revising financial ratio requirements under current debt covenant requirements. Management should review current standard contract terms and language if the contract terms are ambiguous or do not result in the desired accounting treatment under the new revenue recognition standard. You may be required to use professional judgment or make estimates during the application of the new five-step revenue recognition model, which should be documented with any supporting facts to validate estimates made. Keep a close eye on how the new revenue recognition standard could impact current business practices and internal financial reporting.

Having a clear understanding of the new revenue recognition standard, the nuances and where the most time-consuming parts of the standard are, and how it may impact day to day operations of your not for profit organization will set you up for success in the long run.

Chris Floyd is a Manager in LBMC’s Audit Department. He can be reached at cfloyd@lbmc.com.