Take Action: ASC 606 for Your Nonprofit Organization
A recent change in revenue recognition standards (ASC 606-Revenue From Contracts With Customers) from the Financial Accounting Standards Board (FASB) has many nonprofits asking questions. ASC 606 has essentially been in revision by FASB and the International Accounting Standards Board (IASB) for the last decade, and is an attempt to correct discrepancies between standards.
For nonprofit bookkeeping services, the standard identifies a process for recognizing revenue within an organization.
What the standard says
First, the standard provides a definition for a contract that is fairly straightforward–”an agreement between two or more parties that creates enforceable rights and obligations.” Then, nonprofit tax services departments are asked to identify the performance obligations within the contract, which is the promise of the transfer of goods/services to the customer. Next, organizations should determine the price of the transaction by estimating the expected value of the transaction. After, the nonprofit or nonprofit bookkeeper should allocate the transaction price to the performance obligations in the contract. Finally, the standard asks organizations to recognize revenue when (or as) each performance obligation is satisfied and the transfer of goods/services is done.
The standard, which impacts all businesses, became effective on December 15, 2017 for nonprofits that have issues, are conduit bond obligors for, securities traded, listed, or quoted on an exchange or over-the-counter market. For others, the standard will be implemented on December 15, 2018 and interim reporting periods within annual reporting periods that begin after December 15, 2019.
Contracts that are excluded from ASC 606 include lease contracts, insurance contracts, financial contracts, and guarantees, as they are considered contributions and collaborative agreements. Investment income revenue streams are also unaffected.
Achieving compliance for your nonprofit
Your nonprofit tax service can help you achieve compliance by following a few simple rules. Your obvious first step will be to assess the potential impacts the standard may have on the ways you generate money. Are there places where your current practices diverge from those outlined by the new standard? To better determine this, it can help to have your nonprofit bookkeeping service draft financial statements that implement the standard to visualize the effects.
As in most things, there are some gray areas that can be difficult to understand without a nonprofit bookkeeper. For example, a literacy education center may ask for member dues of $100, which covers the purchase of an annual anthology of writing, valued at $20. Under ASC 606, this $20 is a contract, while the remaining $80 is a contribution and therefore except from the standard.
Finally, work with your nonprofit bookkeeper and other leaders within your organization to develop a plan of action. This may include revising debt covenants, contract terms, internal process, and even the technology you use to report. Be advised that your taxable income timelines may be subsequently revised. Begin early–while you may not be impacted for a year, it will be here before you know it.
The standard’s end goal is to build a compatible system of revenue recognition between organizations, so–while it may feel like a lot of initial change–it should ultimately result in a more efficient system for all businesses, including your nonprofit organization.