A Primer for Nonprofit Organizations on the FASB’s New Revenue Recognition Accounting Standard
Many nonprofit (NFP) financial executives are struggling with the changes posed by the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, (Topic 606) and how this will impact their organizations. Their concerns are primarily around which of their revenue streams this new standard will apply to, how to apply the standard and when the standard will take effect.
Five key takeaways that NFP organizations should understand about the new revenue recognition standard are as follows:
- Converges with International Accounting Standards: The new standard is the result of a convergence effort between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), and it took the two standard setting bodies over 10 years to develop the final standard. The end result is the removal of numerous inconsistencies between the FASB and IASB revenue recognition standards, which currently make up the accounting principles that are generally accepted both in the United States and globally. However, challenges remain as the constituents of each standard setter work through implementation questions.
- Principle-Based Focus: One of the biggest changes is the move from rules-based accounting to a principle-based focus. Most of the rules-based standards currently used will be gone once this new standard takes effect. The core principle of the new standard focuses on the contract between the NFP and its customers for the provision of goods or services, and more specifically, the rights and obligations between the two parties (a reciprocal transaction).
- Not All Revenue Sources Are Impacted: The new standard will impact just about every organization—and some more than others. That said, it won’t impact all revenue sources. For example, many NFP organizations receive a significant portion of their revenue from contributions and investment income. Both of these revenue sources are not impacted by the new standard.
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