Think the New Revenue Recognition Accounting Standard, ASC 606, Won't Apply to your Nonprofit? Think Again.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers, (ASC 606). The ASC 606 establishes the core principle that “an entity must recognize revenue in a manner that represents the entity’s transfer of goods and services to customers, as promised, measured at the amount that reflects the consideration the entity expects to receive from the exchange.” 

Certain types of revenue streams have been scoped out of the update since the financial accounting standards provide guidance for certain contracts addressed elsewhere in the Accounting Standards Codification (ASC).

To note, the ASC 606 excludes the following contracts from the scope of the new guidelines:
Leases Guarantees
Insurance contracts Derivatives
Receivables Financial instruments
Debt and equity securities Transfer and servicing rights
Liabilities and debt Nonmonetary exchanges

Contributions received from donors are not specifically scoped out of the ASC 606. However, the standard defines revenue as “inflows or other enhancement of assets of an entity or the settlement of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing and major activities.” In other words, revenue is a reciprocal transfer between parties in which the parties are expecting to exchange similar value.  On the other hand, a contribution is defined as “an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.” Since a contribution is both voluntary and nonreciprocal, it is scoped out of ASC 606 by definition.

Still, some nonprofit revenue streams that would be considered revenue from contracts with a customer may fall within the purview of the ASC. Nonprofits should evaluate whether the following contracts are subject to the ASC 606:
Memberships Conferences and seminars
Subscriptions Tuition
Products and services Advertising
Royalty agreements Licensing
Sponsorship Federal and state grants and contracts

Steps to Prepare for the New Standard and Implementation Considerations  

To make sure that they are adequately prepared for implementation of the ASC 606, nonprofits should consider taking the following proactive steps:
  • Inventory all current revenue streams and evaluate whether there are differences between current practices and the new standard. Organizations should also consider the potential effect of these differences in their financial statements.
  • Evaluate whether there are differences between their current practices and the new standard regarding how contract modifications are addressed.
  • Consider whether revenue will be recognized over time or at a point in time based on both the new criteria and specific guidance for licenses. Systems, processes and controls may need to be updated as a result of the new criteria and any changes in the timing of revenue recognition.
  • Historically, many nonprofits have not tracked costs to acquire a contract, namely because they have been expensed as incurred. The new standard will require these costs to be capitalized.  To maintain compliance with the new standard, nonprofits will need to consider what resources and process changes it might need to accumulate such costs.
  • Identify data gaps between what is presently available and what will be needed for the required disclosures in the new standard. Nonprofits may want to consider preparing mock-up financial statements to understand the impact of the new standard, as well.
For more information on the new revenue recognition accounting standard for your nonprofit organization, visit BDO’s Revenue Recognition Resource Center. Which issues are on your organization’s radar as it prepares to implement the new revenue recognition accounting standard?