Accounting for Nonprofits Update: Implications of Revenue Recognition changes

Here’s an update from the world of accounting for nonprofits on FASB Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), perhaps the most comprehensive set of changes to accounting principles ever released by the organization. These changes in revenue recognition impact almost every company in the United States applying GAAP. In fact, any company with tax compliance requirements should consider themselves affected by Topic 606.

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Effective Date

If you handle accounting for nonprofits, you need to know the effective dates. These are the dates by which you should begin applying the changes in revenue recognition. The current dates are as follows:

  • December 15, 2017: Public entitles, certain not for profits, and certain employee benefits plans.
  • December 15, 2018: All other entities.
  • Interim periods in fiscal years after December 15, 2019, will impact other entities.

Improving Transparency and Clarity

FASB launched these recommendations after lengthy consideration, considering feedback from many quarters in the world of accounting for nonprofits and for profits. The goals of Topic 606 are to improve transparency, clarity, and usefulness of reported accounting information.

The goals include the desire to:

  • Streamline statement preparation
  • Reduce essential guidance
  • Offer a more robust revenue framework
  • Improve comparability across entities
  • Remove inconsistencies
  • Fix and remove weaknesses in prior revenue standards

These sweeping changes were well received by most accountants, but as the date for implementation draws nearer, there are some concerns being voiced.

Over time, industry-specific revenue reporting nuances and eccentricities crept into accounting, until the actual revenue reporting became complex and difficult for people outside of the accounting world to understand. The new standard seeks to streamline reporting so that all industries report along similar lines.

Questions and More Questions

Those responsible at nonprofits for implementing Topic 606’s guidelines have voiced several important questions related to implementation.

FASB has, to date, released four sets of clarifications:

  1. ASU No. 2016-08, addressing principal versus agent considerations;
  2. ASU No. 2016-10, identifying performance obligations and licensing;
  3. ASU No. 2016-12, a clarification of narrow scope improvements and practical expedients (directed at items such as the reporting of noncash consideration, contract modification and completed contracts at transition, collectability matters, and other concerns); and
  4. ASU No. 2016-20, 13 specific corrections and/or improvements on an array of issues, including loan guarantees, contract costs—impairment testing, and provision for losses on construction-type and production-type contracts.

People responsible for accounting for nonprofits are encouraged to follow the FASB’s updates online in case additional clarification is released before the first date arrives.

Revenue Recognition and Accounting for Nonprofits

Revenue recognition is one of the biggest areas impacted by Topic 606. The new guidelines request that nonprofits recognize revenue when they reasonably expect to receive it. This may impact donations, such as donations made in wills or trusts bequeathed to a nonprofit. In the past, it was up to the nonprofit to decide when they chose to recognize the revenue. Now, FASB recommends as part of GAAP, that nonprofits only recognize the revenue when they have a reasonable chance of receiving it.

Let’s assume that someone leaves $100,000 in their will to the local animal shelter, a nonprofit organization. The animal shelter should wait until the will is in probate and the executor announces all debts have been settled and there is $100,00 left to give to the shelter before recording it.

Accounting for Nonprofits and Tax Implications: Call Beck & Company

Beck & Company is a Washington D.C. area nonprofit accounting firm with a team of expert auditors, accountants, and advisors available to help nonprofits of all sizes. We provide a variety of consulting and accounting services to help you improve operations and efficiency. For more information, please contact us at 703-834-0776 x 8001.