During 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. The new standard is effective for non-public companies for years beginning after December 15, 2018 (i.e., calendar year 2019 or fiscal years ending in 2020).
The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve the core principle, an entity should follow a five step process:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when or as the entity satisfies a performance obligation
Many nonprofit organizations paid little attention to ASU 2014-09, because management believes their support is from contributions, grants from foundations and government agencies, membership dues, subscriptions, tuition, etc. — not from providing goods and services under contracts with customers.
The FASB, however has clarified that, while contributions are exempt from the new revenue recognition rules, part or all of other support often involve contracts with customers as discussed in ASU 2014-09. Accordingly, nonprofit entities will have to understand and implement the new revenue standards where applicable for each of their sources of support.
To help nonprofit organizations and their auditors in this task, the AICPA has updated its Revenue Recognition Audit & Accounting Guide to discuss implementation issues that nonprofits may encounter in implementing ASU 2014-09. For example, membership dues where the members receive few or no benefits of substance for supporting the organization must be evaluated to see if they are really contributions subject to recognition as such when the member promises to pay the dues, rather than recognized as dues revenue over the membership period.
In other situations, dues may involve a combination of one or more exchange transactions subject to ASU 2014-09. For example, the member paying dues may be entitled to a magazine subscription, free or discounted attendance at conferences, seminars, or other benefits. The Guide provides guidance and examples of how dues can be evaluated to determine the value received by the member and thus the recognition of revenue from the dues contracts with those members.
With respect to contracts and grants from government agencies and foundations, the FASB has issued ASU 2018-08 to clarify the scope and guidance for contributions received. This is effective for calendar year 2019 financial statements and those for fiscal year 2019-2020 and thereafter to coincide with the effective date of ASU 2014-09.
In short, the FASB has answered the questions many accountants have struggled with: does the government give contributions to nonprofits? The FASB answer is yes!
Government grants and foundation grants may be contributions, or they may be exchange transactions, depending on the individual facts and circumstances of the grant. So, each grant should be evaluated by nonprofit management to determine whether it is a contribution subject to guidance in ASU 2018-08 or a customer contract subject to ASU 2014-09.
We have discussed in more detail both ASU 2014-09 and ASU 2018-08 in several previously issued articles which can be found on our website www.rubino.com.
Robert N. Gray is a shareholder with Rubino & Company and oversees the quality control of our assurance and attestation practice. If you have questions on this or any other matter, please do not hesitate to contact any of the shareholders at Rubino & Company.