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:
- Identify the contract with a customer
- Identify performance obligation(s) in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligation in the contract
- 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.