In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09 Revenue from Contracts with Customers, which presents a single, global, principles-based revenue recognition model.
And, in August 2015, it issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which extended the effective date for all entities by one year. This change required public business entities, certain not-for-profit entities, and certain employee benefit plans to apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
All other entities should apply the guidance in ASU No. 2014-09 to annual reporting periods beginning after December 15, 2018 (calendar year 2019 and year ending June 30, 2020), and interim reporting periods within annual reporting periods beginning after December 15, 2019. Earlier application is permitted for all entities only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The new revenue recognition model replaces virtually all existing revenue recognition guidance and affects all entities—public, private, and not-for-profit—that enter into contracts with customers to transfer goods or services or enter into contracts to transfer nonfinancial assets. Unless those contracts are within the scope of other standards (such as for leases, financial instruments, or insurance contracts), the impact of the new rules must be considered.
The extent of the impact on an entity will differ depending on factors including the transaction, its complexity, and the industry in which the entity operates. In some cases, there may be no change to the amount and timing of revenue recognition. In other cases, there will be changes which could be significant.
The industries most affected will include telecommunications, aerospace, construction, real estate, and software.
New qualitative and quantitative disclosure requirements about revenue and contracts with customers will have an impact on almost all entities.
Impact on Not-For-Profits
The AICPA Not-for-Profit Revenue Recognition Task Force (NFP RRTF) has indicated a number of issues that could affect exempt organizations upon implementation of this standard:
- Contributions are excluded from the standard because a donor is not considered a customer as defined in the ASU.
- Certain transactions will require bifurcation between an exchange transaction and a contribution. For example, membership dues or special events (for example, golf outings) may have elements of an exchange transaction and a contribution. Generally, the organization will determine the exchange component of the transaction under the new revenue recognition standard and apply contribution accounting to the remainder.
- An area of continuing discussion in applying this new standard is accounting for private and government grants. Depending on the facts and circumstances, under the terms of some grant agreements, the government or other grantor may not be considered a customer because it is not receiving something of approximately equal value in return for the grant funds, but rather its constituents or society as a whole receive the respective value. Due to the new definitions related to revenue, NFPs implementing this standard may need to reevaluate their classification of grants between exchange transactions and contributions. Those grants that previously fit the criteria of exchange transactions may better align with the definition of conditional contribution than that of a contract with a customer.
On August 3, 2017, the FASB issued an exposure draft to clarify and improve the scope and the accounting guidance for contributions received and contributions made.
The amendment would assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) distinguishing between conditional contributions and unconditional contributions.
This is of particular interest to entities which receive government grants and similar contracts with resource providers as noted above.