The new accounting standard for revenue recognition went into effect at the end of 2018 giving nonprofits an additional year to get ready. Many nonprofits believe that the standard only effects for profit entities; however, the new standards may significantly impact how you account for your grants, memberships, and contributions! Many restricted and outcome-driven contributions will now be treated similarly to contractual revenue.
Identifying Impacted Contribution Forms
To determine how the new standard will affect you, the organization must first understand the various classifications of revenue streams: reciprocal or non-reciprocal and conditional versus unconditional.
Non-reciprocal, conditional based contributions are the primary focus of this article. Determining how and when to recognize these transactions is critical to compliance. The first step to revenue recognition is determining if the transaction is reciprocal or non-reciprocal.
Reciprocal or Non-reciprocal
The new guidance provides a more robust framework for determining the difference between reciprocal and non-reciprocal transactions. Reciprocal transactions typically exist in exchange transactions for goods or services, while non-reciprocal contributions do not transfer goods, services, or assets.
The following list provides classification indicators:
Reciprocal Transaction Indicator
- Expressed intent asserted by both the recipient and the resource provider is to exchange resources for goods and services that are of commensurate value
- Both the recipient and the resource provider agree on the amount of assets transferred in exchange for goods and services that are of commensurate value
- Exchanges of commensurate value typically include contractual provisions for economic forfeiture beyond the amount of assets transferred by the resource provider to penalize the recipient for nonperformance.
- If the resource provider has full discretion in determining the amount of the transferred assets
- The penalties assessed on the recipient for failure to comply with the terms of the agreement are limited to the delivery of assets provided
- The recipient solicits assets from the resource provider without the intent of exchanging goods or services of comparable value.
A few important notes regarding non-reciprocal contributions:
- A resource provider (including a private foundation, a donor, a government agency or other organization) is not synonymous with the public. Indirect benefits received by the public by means of transferred assets is not equivalent to receiving value by the provided resources. An example is a government entity contracting with a counseling agency to provide mental health services. The revenue related to these services are considered non-reciprocal.
- Execution of resource provider’s mission or positive sentiment from acting as a donor would not constitute value received by the resource provider
If a contribution or agreement is classified as non-reciprocal, the organization must also decide if the contribution is conditional or unconditional to determine the final recognition of the grant.
Conditional vs Unconditional
The nonprofit must determine whether a contribution is conditional on the basis of whether a grant, donation, or contract includes any of the following:
- A barrier that must be overcome
- A right of return of assets transferred or a right of release of the funding organization’s obligation to transfer asset
The ASU also further lists indicators to assess whether the contribution has barriers. These indicators are:
- The inclusion of a measurable performance-related barrier or other measurable barrier
- Whether a stipulation is related to the purpose of the agreement
- The extent to which a stipulation limits discretion by the recipient on the conduct of activity
If any one of these indicators are met, the transaction is considered conditional and should be recorded through the five-step reporting process below. If a non-reciprocal contribution is considered unconditional, the organization should record the contribution in accordance with historical practices.
An important note to make is that restricted contributions do not necessarily indicate a conditional contribution. All indicators above should be considered in the process of recognizing revenue.
The Five-Step Reporting Process
Before your nonprofit can record non-reciprocal, conditional contributions you must follow the five step model in the new revenue recognition model:
- Identify the contract or grant with the customer or funder
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price among the performance obligations
- Recognize revenue when (or as) the performance obligations are satisfied
Most nonprofits are experiencing significant investments in time and resources to navigate and implement the new standard. Consider working with your nonprofit accounting firm to implement a multi-pronged approach to tackling the new standard effectively. With EAB Solutions an implementation strategy typically includes the following:
- All-hands meeting with the applicable senior leadership to discuss how to tackle the new guidance and ensure the organization is familiar with the changes
- Conduct a thorough audit of all revenue streams and determine which transactions need to be reviewed on a contract-by-contract basis in accordance with the five step model
- Establish a full or modified retrospective adoption method that will have minimal financial implications and work with the board and management on communication
- Determine what changes in controls, systems, and processes are needed and update your procedures accordingly. Train and educate staff on the changes
- Determine the changes to financial statements and relevant disclosure requirements for your nonprofit and how amounts will be accumulated
Your nonprofit should start the implementation process immediately to ensure you’re in compliance and help determine how this will impact your organization. Contact EAB for a free consultation to see how we can help.