If your nonprofit organization receives revenue from contracts with customers, you need to know about Accounting Standard Update 2014-09. ASU 2014-09, Revenue from Contracts with Customers (Topic 606), will be effective for non-public entities with annual reporting periods beginning on or after December 15, 2019.
This new revenue recognition standard affects all entities that enter into contracts with customers to transfer goods, services, or nonfinancial assets under those contracts. In a nutshell, this ASU is supposed to provide more robust reporting and the ability to compare revenue recognition across entities that may operate in the same industry. It is also supposed to simplify the preparation of financial statements, but many accountants may not agree with that – especially during the first year of implementation. ASU 2014-09 has been ominously looming over the heads of accountants since it was issued way back in May 2014, but now that the date of implementation has finally arrived, what does this mean for nonprofit organizations?
The idea behind ASU 2014-09 is that revenue should be recognized at the time when control over the goods/services is transferred to the customer. A five-step model that has been developed to help determine exactly when and how to recognize revenue from contracts with customers. Accountants will be asking these five clarifying questions to properly implement this standard:
Determine if you have a contract. Does your agreement with the customer contain a promise to transfer goods and/or services?
Determine the individual performance obligations of the contract. In short, the term “performance obligations” refers to the distinct promises as a result of the contract. What are you giving for what you are receiving?
Determine the price of the transaction. What is the customer entitled to as a result of your exchange transaction?
Determine the cost of each performance obligation. What portion of the transaction price should be allocated to each individual performance obligation?
Recognize the revenue. How should you decide when you earn the revenue?
Consider the following example of a nonprofit membership association. Let’s say your organization offers an annual membership at a cost of $100 a year. Each person who purchases a membership is receives a monthly journal and a ticket to your annual conference in November. How do you recognize that $100 in revenue? Let’s refer to our five-step model:
Do you have a contract? You sure do! Your organization is offering goods or services in exchange for money from the other party. This is considered an exchange transaction.
What are the performance obligations? You have two items attached to the cost of the membership – a monthly journal and a ticket to your conference.
What is the transaction price? The annual membership costs $100.
What is the cost of each performance obligation? Remember from Step 2, your performance obligations are the monthly journal and the conference ticket. The journal, if sold separately, would cost $5 per monthly issue, and a stand-alone conference ticket would cost $40.
When do you recognize the revenue? The initial membership purchase would be considered a liability to your organization, which you will “earn” when the performance obligations are fulfilled. Each month when your member receives their journal, your organization would recognize $5 as revenue. When your conference is held in November, your organization would recognize $40 as revenue. In this way, over the course of the year, you will eventually recognize the full $100 membership fee.
Of course, this is an oversimplified example, and there are many other considerations to ASU 2014-09 that may be a little trickier for you to determine in real-life situations. For questions about revenue recognition, please refer to the full language of the ASU, or seek the advice of a nonprofit accounting professional.
