Over the past year or so, we’ve made it a point in this space to analyze the new revenue recognition standards from various vantage points. The goal of the converged revenue recognition guidelines announced last year was a more common revenue recognition standard, factoring in the various way entities account for revenue. Today, we visit the nonprofit world. A recent article published in Mondaq, titled “5 Things Nonprofits Should Know About the New Revenue Recognition Standards,” hits upon some key points, relayed here:
- In the world of nonprofits, the new accounting standards focus on recognizing revenue an organization receives from “exchange transactions.” These are transactions in which a product or service is provided in exchange for a fee or revenue. Examples of this include revenue generated by a concert, housing revenue, royalties and licensing. Subscriptions and sponsorships and, in many cases, government grants are also considered exchange transactions.
- Nonprofit firms should factor in the time and planning necessary to implement processes for gathering information to determine proper accounting for each type of exchange transaction under the new five-step-process by which each and every contract must be analyzed. An example provided in the article is revenue related to a cost-reimbursement government contract which, under current guidance, is recognized as expenses are incurred. Under the new standards, nonprofits would have to identify any performance obligations included in the contract and then allocate transaction price among those identified performance obligations. The timing of revenue recognition will now be tied to the determination of when and how the performance obligations were satisfied.
- Though the new rules don’t officially kick in until annual reporting periods after December 15, 2018, nonprofits can begin early adoption in fiscal years beginning after December 15, 2016. That’s not a lot of time to line everything up, when you think about it.
Steps to take now to properly understand and address the likely changes to your financial systems and processes, as outlined in the article:
- Do an early assessment of impact of the standard on your company’s accounting and information systems.
- Identify the types of exchange transactions associated with your company.
- Denote a task force to study the new standard.
- Compare the new and current requirements.
- Consider how the new requirements could impact other areas of your organization.
For a detailed overview of the changes in revenue recognition guidance, you may want to check out this webinar we did with our partners RGP.