Accounting standards can be confusing. The Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, raised concerns about which not-for-profit transactions were covered by the new rules. Its 2018 follow-up, ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, supplied some answers.
Any changes to accounting for revenues required by either of these pronouncements took effect for years beginning after December 15, 2018, for annual reporting (unless your organization is a conduit bond obligor, in which case the rules are effective for years beginning after June 15, 2018). Some organizations still have questions about how the new standards apply to their revenues.
Recognize exchange transactions
The new revenue recognition rules cover only exchange transactions (also known as reciprocal transactions), not contributions (non-reciprocal transactions). An exchange transaction happens when each party receives and forfeits something of approximately equal value.
Not-for-profit organizations might generate several types of revenue considered exchange transactions, including:
- Membership dues;
- Sales of goods and services;
- Conference and seminar fees;
- Licenses and royalties;
- Sponsorships; and
- Special events.
For multicomponent transactions — such as membership dues that comprise both a contribution and fees for membership benefits — you must separate the contribution and recognize the other revenue under ASU 2014-09's rules.
Certain grants also could qualify as an exchange transaction. For example, a grant that reimburses expenses based on the number of meals the organization delivers to its clients might qualify as a contract to provide goods or services. A research and development grant could be deemed an exchange transaction if the grantor retains intellectual property rights in the work product.
ASU 2014-09 lays out five steps that organizations following U.S. Generally Accepted Accounting Principles (GAAP) must take to recognize revenue from exchange transactions. The standard does not change the total revenue you recognize from such transactions. However, it may change the timing of such recognition and will almost certainly require fuller disclosures.
We know ASU 2014-09 does not apply to contributions, but what exactly constitutes a contribution? Not-for-profits have struggled with this question regarding grants or similar contracts.
According to ASU 2018-08, to determine the proper treatment for such an arrangement, you must evaluate whether the grantor or other party to the contract receives commensurate value for the assets it transfers to your organization. If so, the arrangement is an exchange transaction and covered by ASU 2014-09. (Note that indirect benefit to the public does not count toward commensurate value received — the benefit must go to the grantor or other party.)
If the grantor does not receive equal value, determine whether the asset transfer is a payment from a third-party payer, for an existing exchange between you and an identified customer (for example, a Medicare payment) covered by other accounting guidance. If not, the transaction is likely a contribution.
The new contributions standard also requires you to determine whether a contribution is conditional. Generally, a conditional contribution includes:
- A barrier the organization must overcome to receive the contribution — for example, a matching requirement or restrictions on allowable expenses; and
- Either a right of return of the transferred assets or a right of release of the promisor's obligation to transfer assets.
Under ASU 2018-08, you will recognize unconditional contributions when received or pledged. Conditional contributions are not recognized until you overcome the barriers.
The new revenue recognition and contributions rules are extensive and complicated. Your CPA can help you decipher them and follow the provisions that apply to your organization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.