Revenue Recognition for Not-for-Profit Entities
By Kristin Clayton, CPA
Revenue recognition timing is being determined by a new 5-step revenue recognition model due to a new accounting standard for Revenue from Contracts with Customers. Previously the effective date for this new standard was years ending after December 15, 2019, however, because of the pandemic this effective date could be delayed for one year. As a result, many not-for-profit entities will be implementing this new standard for the first time for their fiscal year ending in 2021. This will be a significant change for all types of entities (not-for-profits are not the only industry impacted). 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 was effective for years beginning after December 15, 2018 (calendar years ending December 31, 2019 and fiscal years ending in 2020). This guidance was not delayed because of the pandemic as it was determined that the guidance was useful in evaluating the government grants and other funding is provided in response to the pandemic.
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. The 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 the value received by the entity is more than the value returned to member), or fees for a service provided. These types of transactions will follow the new 5-step model to determine when revenue is recognized, and this may differ from how it has been reported in the past. 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 | Assurance Director