In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This standard will impact all entities that have contracts with customers, including not-for-profits.
Many not-for-profit organizations are unsure how this new standard will impact them. Those concerns include which revenue sources the standard applies to, how to apply the standard, and when the standard will take effect.
Revenue Recognition Standard Summary
Below are five key things to know about the new Revenue Recognition Standard.
1. Converges with International Accounting Standards – The new standard is the result of a convergence with FASB and the International Accounting Standards Board (IASB) and took the two standard setting bodies over ten years to complete. The end result is the removal of numerous inconsistencies between the FASB and IASB revenue recognition standards.
2. Principle-Based Focus – One of the biggest changes is the move from rules-based accounting to a principle-based focus. Currently, there are over 200 industry-specific revenue recognition standards in the United States. Most of those rules-based standards will be gone once this new standard comes into effect. The core principle of the new standard focuses on the contract between the organization and its customers for the provision of goods or services, and more specifically, the rights and obligations between the two parties.
3. Follows a Five Step Recognition Process – The new standard provides a five step process to recognize revenue. This includes (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) each performance obligation is satisfied.
Each of these five steps contains concepts that can have a significant impact on the revenue recognition process. For example, the first step requires that an organization must conclude it is probable that it will collect the consideration from the customer for the goods and services transferred. For healthcare organizations, this first step may not be met due to certain patients’ (or customers’) inability to pay. Ultimately, this may delay the recognition of revenue until cash is collected. This is one of many new concepts organizations will need to consider.
4. Not All Revenue Sources Are Impacted – The new standard will impact just about every organization, however, it won’t impact all revenue sources. For example, many not-for-profit organizations receive revenue from contributions and investment income. Both of these revenue sources are not impacted by the new standard.
5. Effective Date – The new standard is effective for nonpublic entities for fiscal years beginning after December 15, 2017. Organizations can transition to the new standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. One reason for the additional time, relative to other new accounting standards, is to allow organizations to assess the impact of the standard and properly prepare for adoption.
In summary, the new revenue recognition standard will have an impact on most not-for-profit organizations. Some steps your organization can take now include becoming familiar with the new standard, discussing the new standard with your accounting advisors, and evaluating the impact the standard will have to all facets of your organization.