By Micki Siner, CPA, Von Lehman CPA and Advisory Form
The Financial Accounting Standards Board’s release of the new revenue recognition standard will change how many organizations, including nonprofits, recognize revenue on their financial statements. If your nonprofit organization is entering into an exchange transaction (referred to in the new standard as “contracts with customers”), you will be subject to the new revenue recognition standard. For nonprofits, this revenue commonly comes from membership dues, sales of products and services, sponsorships and special events. The new standard will require entities to apply a five-step approach:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize the revenue when (or as) the entity satisfies a performance obligation.
As an example, let’s say your organization charges a member a fee (your contract with the customer) of $300 (the transaction price). Included in that membership dues is a quarterly publication, a donation to the organization’s Foundation, and membership benefits such as access to the members’ only website, invitations to meetings/luncheons, etc. (performance obligations in the contract). The organization will now need to allocate the $300 transaction price to the performance obligations in the contract. For purposes of this example, we will say the quarterly publications are allocated a price of $100 ($25 per publication) and the Foundation’s donation is $50. This leaves $150 for membership benefits. If at the end of the organization’s fiscal/calendar year, you have only issued one quarterly publication and the member still has 8 months of their membership benefits remaining, the organization will need to record $175 of deferred revenue ($75 for the remaining quarterly publications and $100 of remaining membership benefits). The $50 donation to the Foundation is recognized when the dues are paid as the accounting for contributions is not affected with this new standard.
So as you can see, for some organizations, adopting this new standard is going to be a challenge. For organizations on a calendar year basis, the new standard will take effect on 1/1/2019. For fiscal year organizations, the new standard will take effect beginning with their 2019-2020 fiscal year.
For those who are interested in learning more about these changes and their impact on your association, ISAE’s partner VonLehman CPA & Advisory Firm we will be sponsoring a free presentation, including lunch, at their offices in Indianapolis on November 29th. Please use the link below for more information and to register for this FREE event! You are also encouraged to consult with your organization’s CPA or financial advisor to ensure you have a clear understanding about these changes that are only two months away!Register for VonLehman’s FREE educational event on this topic today!