The intent of the Financial Accounting Standards Board’s (FASB) Revenue Recognition Standard is to develop a single, principle based revenue standard for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards. The Revenue Recognition Standard (Standard) aims to improve accounting for contracts with customers by providing a framework to address revenue issues as they arise, thereby increasing compatibility across industries and capital markets. This Standard is applicable for all contracts with customers except lease contracts, insurance contracts, financial instruments, guarantees, and non-monetary exchanges in the same line of business to facilitate sales to customers.
The core principle of the Standard is to depict the transfer of promised 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 Apply the Core Principle the Following Five Steps Are Needed:
- Identify the contract(s) with the customer.
- Identify the performance obligations.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when/or as a performance obligation is satisfied.
What are Potential Application Considerations for Non-Profits?
- Contributions (Out of Scope)
- Bifurcation
- Membership Dues
- Tuition and Fees
- Licenses and Royalties
- Governmental Grants and Contracts
What are Non-Profits Required to Disclose in their Financial Reporting?
- Disaggregation of Revenue: Qualitative and quantitative disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors.
- Information About Contract Balances: Opening and closing balances, amount of revenue recognized from contract liabilities, and explanation of significant changes in contract balances.
- Remaining Performance Obligations: Transaction price allocated to remaining performance obligations and quantitative or qualitative explanation of when amounts will be recognized as revenue.
- Interim Requirements: Quantitative Disclosures.
Practical Steps for Implementation
- Read the standard, blogs/articles on the matter, attended related trainings, and read publications from the Transition Resource Group.
- Assign individual staff at your organization to become subject matter experts on specific revenue categories or by section to lead a group of staff to understand and implement the new standard. Include relevant staff outside of accounting: internal audit, legal, etc.
- Compile a list of all organizational revenues including:
- Membership Dues
- Royalties
- Advertising Revenue
- Sponsorship Revenue
- Federal, State, or Private Grants
- Investment Income
- Contributions
- Retail Sales
- Educational Service Fees
- Pass-Through Funds
- Tuition
- Fee for Service
- Refunds
- Miscellaneous
- For-Profit Affiliate Revenues
Evaluate the changes from current GAAP to the new revenue
recognition standard and evaluate the impact on how your organization accounts
for existing revenue streams and the results to the organization’s financial
statements. In addition, evaluate how
the standard will affect operational and performance metrics, contracts,
compensation plans, accounting policies, internal control and tax matters. Document your conclusions on how to recognize revenue
per each revenue stream. Review your
conclusions with Maher Duessel or your external auditor to ensure your approach
to implementing the new revenue recognition standard and any changes in
accounting for revenue recognition are documented completely and accurately. If a change is required,
is it material? If no, document, discuss the impact with Maher Duessel or your
external audit firm, and continue with the prior recognition methodology.If a change in recognition is required, consider the following: How will the organization retrospectively adopt the new revenue recognition standard? How will the organization track the accounting differences for periods that require restatement? Are changes in verbiage needed for new related contracts? Determine whether any technology changes will need to be implemented within the accounting or supporting systems. How will the organization track the accounting differences for periods that require restatement?Are changes in verbiage needed for new related contracts?Determine whether any technology changes will need to be implemented within the accounting or supporting systems. What is the potential impact to?
- Monthly annual financial close
processes - Internal financial reporting
- Audited financial statements
- Forecast and budget processes
- Dashboard goals
Develop a plan for staff training.Communicate changes to the CFO, Board, Audit/Finance
Committee, senior staff, key programmatic stakeholders, auditors, internal
auditors, contract signers, banks, bondholders, etc.
Keep abreast of changes and ongoing updates. There has been three new ASUs issued already
in 2016:
- ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent (Reporting Revenue Gross versus Net)
- ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing
- ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients
As a reminder, the Standard is effective for public entities for
fiscal years beginning after December 15, 2017, and earlier adoption as of the
original effective date (fiscal years beginning after December 15, 2016) is
permitted. Nonpublic organizations
should apply the new revenue standard to interim reporting periods within
annual reporting periods beginning after December 15, 2019. Do you have questions regarding the implementation of the Revenue Recognition Update? Please contact dconte@md-cpas.com to explore the implications for your organization.