ASC 606 is a principles-based approach to revenue recognition as opposed to the rules-based standards previously used and is not as “black and white” as the former standards. Based on the industry’s current interpretations of ASC 606 application to CIRAs, we’ve defined the following five steps for recognizing revenue. However, as this process continues to be defined, nuances of revenue recognition for CIRAs may morph. The following 5 steps are outlined by ASC 606 to be followed with respect to revenue recognition:
The services provided by the CIRA to its members and the payment of assessments by the members to the CIRA are exchange transactions, having a commercial substance which are subject to ASC 606. The ASC provides a practical expedient that allows a portfolio of contracts to be combined and accounted for as a single contract if this would not yield a materially different result than if the ASC was applied to the contracts individually. Most of the common types of contracts with members should be able to be combined, including maintenance of common property and management of the CIRA. Importantly, under the ASC, a contract cannot exist without it being collectible.
At contract inception, a CIRA should identify all promised goods and services included in its contracts. In doing so, the CIRA must also determine if they are separate and distinct performance obligations or if they represent a series of distinct goods and services that are substantially the same and that have the same pattern of transfer to the customer. In most cases, these goods and services are specifically designated in the governing documents and in the annual budgets to members. Commonly “promised” goods and services to members related to operating activities include but are not limited to:
These promised goods and services are activities that are not by themselves distinct and are properly grouped into a bundle of goods and services that constitute a single performance obligation. Projects related to replacement reserve expenditures and special assessments will usually be distinct and therefore constitute separate performance obligations.
The transaction price is the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services. Revenue recorded should be net of variable consideration, which for a CIRA includes expected defaults. Consequently, the transaction price recorded will often be less than the actual billings. This method represents a substantial change from the previous reporting which recorded assessment revenues at 100% of amounts billed and also recorded bad debt expense for uncollectible assessments. A financing component may exist when assessments are payable over a period of time over one year and, if material, interest should be recorded in accordance with existing GAAP.
If there are two or more performance obligations in the identified contracts, the allocation of the transaction price to these performance obligations must be done based on amounts that an entity would expect to receive if the performance obligations were sold individually (i.e. the relative standalone selling price).
Revenue is recognized in amounts corresponding to the amount of the transaction price allocated to each performance obligation as or when the performance obligations are satisfied. The authors believe that most revenue historically accounted for in operating funds of CIRAs, including maintenance and management services, are properly recognized on a per-day basis and that revenues related to replacement reserve projects are properly recognized as those replacement reserve funds are expended. Special assessment revenues will be recognized based on the unique purpose of the special assessment and may be recognized at a point in time or over time depending on the circumstances
CIRAs are facing significant changes in the upcoming months as their financial reporting gets a facelift under ASC 606 and will need to give significant consideration to the effects of the new standard on their financial reporting. For more information on this topic, please contact our professionals by filling out the form below.