Revenue Recognition for Not-For-Profit Entities
By Kristin Clayton, CPA
We have posted several video blogs regarding the changes to revenue recognition over the past year. I hope you have had a chance to watch these videos explaining the 5-step process and how they impact various industries. This will be a significant change for all types of entities. It is important to note that for Not-for-Profit entities there is a step that must be taken before using the new 5-step revenue recognition process.
Revenue for Not-for-Profit entities often includes both contributions and exchange transactions. This determination is important because contributions are scoped out of the new revenue recognition guidance and instead follow the Not-for-Profit specific rules for revenue recognition. Exchange transactions, in which the other party receives commensurate value, will need to follow the new revenue recognition 5-step process mentioned above.
Accounting Standards Update 2018-08 provides clarity to the accounting guidance for determining whether a transaction is a contribution or exchange transaction. The guidance is effective for years beginning after December 15, 2018 (calendar years ending December 31, 2019 and fiscal years ending in 2020). This is to allow it to align with the revenue recognition guidance so that Not-for-Profit entities may make the changes concurrently as they are interdependent.
To determine which guidance your entity should follow you need to determine if the revenue was a contribution or exchange transaction. In an exchange transaction, the resource provider (government agency, foundation, corporation, individual, etc.) receives equal value in return for the cash or non-cash asset received. They type of resource provider does not factor into this determination, rather the terms of the agreement are what is important. Commensurate value does not include benefits received by the general public (often the case with government grants), execution of the providers mission (often the case with foundation grants), or the positive feeling someone may receive by donating (often the case with individual or corporate donors).
Examples of exchange transactions could include tuition for school or child care, membership dues (or a portion of those dues if value received by entity is more than value returned to member), or fees for a service provided. Grants from government agencies, foundations, and corporations are quite often determined to be contributions, however, it is important to review the terms of those agreements in making that determination.
We are always available to help review grant agreements and assist you in making these determinations as the new guidance may change how you have previously categorized grant funds or other amounts received.
Kristin Clayton, CPA | Senior Manager