Many not for profit (NFP) organizations will become subject to the new revenue recognition standard. NFPs will need to meet these new requirements for annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. Prior to implementation, NFPs must assess their contracts to determine which contracts, if any, the new standard will be applicable for. Only those contracts that are between the NFP and a customer for the provision of goods and services will be effected. Possible contracts include, but are not limited to, memberships, subscriptions, products and services, royalty agreements, sponsorships, conferences, tuition, advertising, licensing, along with federal and state grant contracts. It is important to note contributions do not apply under the new revenue recognition standard because contributions are both voluntary and nonreciprocal.
Once contracts are identified to be applicable, the NFPs can begin recognizing revenue under the new standard. Revenue can easily be recognized by following a five step process: (1) identify contracts that are with customers; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) each performance obligation is satisfied.
Although some entities might have minimal changes in the amount or timing of recognized revenue, almost all entities will have expanded disclosure requirements. Therefore, it is important for all NFPs to assess the information that is currently available and develop a plan to address the additional required financial data needed to fulfill the disclosure requirements. It would be in the organization’s best interest to discuss the plan with board members, who should also make themselves familiar with the new standard, so they are aware of how the organization is going to approach the new standard. When developing the plan, the organization should focus on the following areas:
- technical accounting application and implementation
- development of relevant accounting policies
- changes to internal control systems
- IT and data needs
- compliance with disclosure requirements
- transition calculations (including transition method choice)
- educational requirements of accounting personnel
- educational requirements of other groups (management, board of directors, sales force, and tax department)
- consideration of impacts to other contracts (debt covenant requirements)
- consideration of tax impacts.
After researching, evaluating contracts, and implementing a plan to address the expanded disclosure requirements, some NFPs might feel that their accounting results are not going to change significantly under the new standard. However, it is imperative that organizations understand that the changes might not be obvious until they are applying the standard to actual contracts and transactions. Therefore, it is never too early to begin researching and thinking about the new revenue recognition standard to ensure your organization is prepared as the current effective date approaches.