In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) as part of a joint project with the International Accounting Standards Board (IASB). The purpose of the joint project and this new standard is to:
This ASU only affects contracts; therefore, not-for-profit organizations with exchange transactions will need to follow these new rules once they go into effect. Since the rules only affect exchange transactions, these rules will not affect items such as contributions, split interest agreements and financial instruments. However, these new rules will apply to not-for-profit organizations that have contracts with customers for items such as tuition, room and board, fee for service arrangements, cost reimbursement contracts, membership dues and special events, etc.
Under the new standard, entities should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled. The standard provides a 5 step process, which is as follows:
The AICPA has set up a not-for-profit Revenue Recognition Tax Force specifically for not-for-profit organizations which has been charged with developing revenue recognition implementation issues that will provide helpful hints and illustrative examples on how to apply the new standard. The following issues have been identified by the Task Force:
On July 8, 2015, the FASB approved a one-year deferral on the effective date of the standard. The new effective date for not-for-profit entities that have issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market is annual reporting periods beginning after December 15, 2017. For all other not-for-profit entities, the new effective date is annual reporting periods beginning after December 15, 2018.
Although the effective date of this standard is a few years away, not-for-profits should start considering how the new standard will affect their organization and consider taking the following steps to ensure compliance with the standard once it becomes affective:
If you have any questions about this not-for-profit update, please contact your WithumSmith+Brown professional, a member of Withum’s Not-for-Profit & Education Services Group or email us at firstname.lastname@example.org.