In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, primarily to eliminate inconsistencies in current revenue recognition standards and practices across different industries, including nonprofit organizations. The core principle of ASU 2014-09 is based on the contract (written, oral, or implied) between a vendor and a customer for the provision of goods or services (with certain contracts excluded). Revenue will be recognized by the vendor when control over the goods or services is transferred to the customer. The vendor will be expected to apply a five-step model for recognizing revenue from certain contracts:
Step 1: Identify the contract (whether written, oral, or implied).
Step 2: Identify the separate performance obligation(s).
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligation(s).
Step 5: Recognize revenue as or when each performance obligation is satisfied.
Nonprofit organizations should be aware that ASU 2014-09 may result in the use of more estimates and judgments in recognizing revenue from contracts than was previously the case. In addition, management should be aware that significant contracts may need to be proactively evaluated to assess what, if any, impact the new ASU may have on the organization’s compliance with debt-related covenants.
The American Institute of CPAs (AICPA) has also formed several industry task forces (including one specifically dedicated to the not-for-profit industry) to help develop a new Accounting Guide on Revenue Recognition that will provide helpful hints and illustrative examples for how to apply ASU 2014-09.
At its July 9, 2015 meeting, the FASB affirmed a proposal to defer the effective date of ASU 2014-09 for all entities by one year. As a result, ASU 2014-09 will take effect for most nonprofit organizations with annual reporting periods beginning after December 15, 2018 (i.e. December 31, 2019 calendar year-ends and thereafter). However, even with the postponement of the implementation date, nonprofit organizations should not wait to consider the implications of the standard. The revenue recognition standard will be a major change for some nonprofit organizations.
BMWL will provide updates and additional insights related to ASU 2014-09 as the effective date approaches.