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Revenue Recognition Rules Impact: How Unions Treat Initiation Fees

Not-for-profit entities with a reporting period beginning after December 15, 2019 should be prepared to include FASB’s ASC 606, Revenue from Contracts with Customers, and changes in their audited financial statements. The new guidance supersedes or replaces nearly all previous revenue recognition guidance and places an emphasis on fulfillment of contract performance obligations for appropriate recognition. These changes are for unions that maintain their books on an accrual method.

Unions may not identify themselves with receiving contract-based revenue streams, however, many unions will be impacted by the new revenue recognition guidance as initiation fees are impacted by the change. Under ASC 606, not-for-profit entities are required to recognize initiation fees over the period of active membership, rather than when initiation fees are received, or when membership is initially granted. This entails determining the period of membership, which under ASC 606 is the when the performance obligation (membership) is fulfilled. Accordingly, the recognition of initiation fees should occur ratably over the estimated period of membership. Historical data should be used to determine the appropriate recognition period.  Unions will be required to reasonably assess and support the expected membership period of an active member using the best information available. For example, if a union determines the expected life of a an active member is ten years and initiation fees of $100,000 are received during a reporting period, $10,000 will be recognized as revenue in that period while $90,000 will be deferred. The union will then continue to recognize $10,000 over the remaining nine years.

ASC 606 requires initial implementation be retrospectively applied to all accounting periods presented in the financial statements, or retrospectively with a cumulative effect adjustment at the date the ASC is implemented.  In either circumstance, this new reporting requirement could have a significant impact on a union’s statement of financial position. Even if the yearly recognition of initiation fee revenue may seem to be immaterial to the union, it is the deferred revenue adjustment that could rise to a level of significance. Practically speaking, assuming that the union received $100,000 in initiation fees for each of the past 10 years, then $10,000 would be recognized from each of those years, and the remaining unrecognized accumulated amount of  $450,000 ($90,000 from year 1, $80,000 from year 2, $70,000 form year 3, etc.) would be unrecognized or deferred revenue, resulting in an adjustment to reallocate unrecognized initiation fees from net assets. Unions will need to consider how this change will be recognized on their LM report and IRS Form 990. This may also impact the union’s budgeting and financial ratios used to make management decisions or acquire loans from lending institutions.

Author: Austin Miller, CPA | amiller@withum.com

As the entire impact of ASC 606 may be challenging to assess, our experienced labor organization team here at Withum is ready to talk through any questions you may have to offer strategic, creative and compliant advice.

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