New Revenue Recognition: What Does My Nonprofit Need to Know?

Given the absence of explicitly applicable recognition requirements under current GAAP, the museum might choose to make no entry for the free January admission and instead disclose this decision as an accounting policy. The contract liability that arises for each of the performance obligations in the membership agreement means that the museum reports comparatively higher total liabilities in its statement of financial position at the 2021 year-end. This result could impact loan covenants or other agreements tied to the https://business-accounting.net/ museum’s financial statements. Transactions involving a specified third party may present a challenge for nonprofits in determining if the transaction is reciprocal or nonreciprocal. Nonprofits must use judgment to make the determination based on review of the substance of the contract or grant agreements. In general, if a contract or grant is made by a donor on behalf of an identified customer for an existing exchange transaction, the contract or grant is simply a third-party payment to the exchange transaction.

The ‘benefit to society’ clarification will shift how many nonprofits have accounted for government grants – previously recorded as exchange transactions, will transition to contributions with or without conditions. Government grants are classified as contributions if they are charitable with benefits to the general public. Examples include grants that provide goods and services to children or senior citizens. Payments from government agencies, however, are classified as exchange transactions when connected to specific services such as Pell grants or Medicaid services tied to specific people.

Implementation of the new standard

DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. The FASB staff will continue to monitor implementation of the revenue standard and provide updates to the Board on any emerging issues identified. As the PIR of the revenue standard progresses, the Board and its staff may identify areas of improvement that could result in future standard setting. Application of the five steps illustrated above requires a critical assessment of the specific facts and circumstances of an entity’s arrangement with its customer.

• A donor-imposed condition must have both a barrier to overcomeanda right of return of assets transferred or right of release of a promisor’s obligation to transfer assets.
• Full revenue recognition implementation issues will be posted below for informal comments after review by the AICPA Financial Reporting Executive Committee .
• The grant requires Veterans United to provide training to at least 1,000 qualified veterans.
• The scale of change that the new revenue standard brings will create many opportunities for auditors to offer advice and insight.
• However, the amendments in the Update apply to all organizations that receive or make contributions of cash and other assets, including business enterprises.
• The rest of the ticket price above and beyond the value of the event is a contribution.
• Refer to the Nonprofit Revenue Recognition Decision Process chart above to assist in your determination.

If a transaction is determined to be a contribution, the next step under ASC 958 is to determine if it is conditional. The recognition of contribution revenue depends on if the contribution is conditional or unconditional.

Get revenue recognition right at not-for-profits

For more information, see Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics. Step 2 – Identify the performance obligation and determine if there are multiple performance obligations. Performance obligations are distinct if it is capable of being distinct, customer can benefit from the good or service on its own or together with other resources, and it is distinct within the context of the contract, or the promise is separately stated. Conditional indicates that that there is some uncertainty about whether or not the organization will actually receive the contribution (i.e. a performance-related barrier) and whether or not they will get to keep it (i.e. a right of return).

• The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by AAFCPAs to the user.
• You just aren’t supposed to recognize the income until you’ve satisfied the condition such as raising the matching funds.
• Ordinarily, this would just be an intention, not an unconditional promise, and the revenue would not be recorded.
• Even under current GAAP, but especially under the new standard, financial statement effects are highly sensitive to judgments and estimates, and other interpretations could lead to different results.

Based on the feedback of entities and practitioners that have already adopted the new revenue standard, Step 2 has been the most challenging and the step requiring the highest degree of judgment and assumptions. A performance obligation is a promise to deliver a distinct good or service to a customer. Under fee-for-service contracts, the nonprofit entity earns revenue from their customer (i.e., the government agency) and most likely will record the revenue under Topic 606. An example of this transaction is funding provided by the Department of Health and Human Services for Medicare-related services to the elderly or individuals with a disability. Transactions falling into a grey area between exchange transactions and contributions are called combo transactions. An example would be a special event or raffle where part of the ticket’s cost pays for the good or service, and part is a contribution to the organization. The way revenue is recognized in this case is to assign part of the ticket as a contribution and the other part as an exchange transaction.

What do I need to know about revenue recognition for nonprofits?

Because the guidelines in the grant agreement were not required to be met to be entitled to the funding, the agreement does not contain a barrier to overcome. Students First should recognize the entire $100,000 New Revenue Recognition Not for Profit as a donor- restricted contribution upon receipt of the funds. A benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider.

• An auditor may conclude that matters such as these need explicit mention in the letter of management representations.
• Nonprofits receive contributions, also known as gifts, grants or donations.
• However, just because these rules have been around for a few years doesn’t mean everyone fully understands them.
• This ability to determine the beneficiary of gift funds received is called variance power.
• Determining commensurate value often requires judgment by the preparer and not a bright-line test.
• Government grants or programs that result in work where ownership rights go to the government are exchange transactions.