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New Revenue Recognition Requirements for Non-Profit Organizations

The accounting world is abuzz lately with the finalization of the revenue recognition rules that will change the way many companies and organizations account for contracts under GAAP.  FASB ASC 606, Revenue from Contracts with Customers, was issued in May 2014, and is a single, principle-based revenue standard that replaces all U.S. GAAP and IFRS guidance.  As a non-profit organization, you may be wondering how and when these new rules will impact you.

First, it is important to point out that these new rules are for contracts.  Accordingly, the new rules are not expected to change the accounting for pledges receivable, most contributions, split interest agreements, financial instruments, etc.  This new set of rules will primarily apply to exchange transactions for non-profit organizations.

The core principle of this guidance is that revenue should be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The steps to apply this core principle are:

1.  Identify the contract
2.  Identify the separate performance obligations
3.  Determine the transaction price
4.  Allocate the transaction price to performance obligations
5.  Recognize revenue when each performance obligation is satisfied

The effective date of this guidance for non-public entities is for annual reporting periods beginning after December 15, 2017.  Early adoption is permitted for non-public entities only, but no earlier than periods beginning after December 15, 2016.  The guidance is required to be applied retrospectively either through a full restatement of comparative balances, a modified retrospective application with practical expedients, or a cumulative effect of change at adoption date.

There is much more to come on these new requirements, and more application information specific to non-profit organizations is expected to be released as the implementation dates draw closer.  In general, it is expected that non-profits affected will be those organizatoins which have typical fee-for-service transactions, contracts with customers, sponsorships, conferences, memberships, tuition relationships, licensing, royalty/affinity agreements, and other exchange transactions throughout the year.

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