The New Nonprofit Revenue Recognition Standards | Spire Group, PC
Updated Financial Accounting Standards Board (FASB) revenue recognition guidelines will go into effect for most nonprofits beginning December 15, 2018. These new standards will require nonprofits to adjust their accounting procedures for certain transactions with their customers.
FASB’s updated standards deal with reciprocal or “exchange” transactions, where both parties give and receive something of value. These additional rules do not apply to regular (nonreciprocal) contributions, revenues from which nonprofits should recognize at the time of the donation. The board’s latest guidance (Accounting Standard Update 2018-08) issued in June provides nonprofits with more clarity for determining whether transactions are reciprocal or nonreciprocal, and in which financial period to recognize the revenue.
Most nonprofits will need to start following these new accounting standards for exchange transactions for reporting periods starting on after December 15, 2018.
Determine the Transaction Type
To determine whether a transaction is reciprocal, a nonprofit should consider who the customer is, what service is being provided, the costs associated with each element of the transaction, and at what point the service obligation has been satisfied. Reciprocal transactions typically involve the nonprofit seeking resources in exchange for some type of benefit. Examples include tickets for a fundraising dinner, or gifts of a set value in exchange for a donation of a certain amount.
Once a transaction is identified as reciprocal, the nonprofit should carefully track and document all performance obligations and separately price each aspect of the transaction.
It’s also possible that a transaction could include both reciprocal and nonreciprocal (contribution) elements. In those cases, the nonprofit should break out the regular contributions and apply the additional reciprocal transaction standards to the remaining portions.
Know When to Report Revenue from Conditional Contributions
In addition, the latest FASB rules clarify when nonprofits should recognize revenue from conditional contributions, where certain parameters must be met before the contribution is received.
With a regular contribution, the revenue is recognized immediately upon receipt. For accounting purposes, conditional contributions are recognized as a liability on the balance sheet until those conditions have been met; at that point, the revenue recognized.
Regular contributions can include some restrictions, such as a pledge to issue a donation without any performance requirements attached. Conditional contributions require the recipient to meet a certain condition or complete a task to receive the funds, with the revenue recognized in the period in which the task is completed.
Nonprofit managers should keep staff updated about any additional responsibilities associated with revenue recognition rule compliance. They should also review and update contract language to reflect these new rules and consider updating accounting software to handle the new reporting requirements.
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