The purpose of this article is to provide an overview regarding the impact of the FASB Accounting Standards Codification – Topic 606, Revenue from Contracts with Customers (ASC 606) on Not For Profit entities.
This article, and the related articles, provides a brief overview of ASC 606 and omits requirements specific to public entities and many optional disclosures for non-public entities. ASC 606 and related guidance should be referred to for additional information and detail.
The new revenue recognition framework is effective for non-public entities, including not for profit entities (NFPs), for periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early application is permitted for non-public entities one year prior to the aforementioned effective periods.
Previous guidance will remain in force related to accounting for contributions; however, all revenue generated from exchange transactions will be subject to the new standard. For NFP’s, this revenue is generally derived from membership fees, sales of products and/or services, certain rights, sponsorships, and special events.
ASC 606 instructs the entity to recognize revenue for the transfer of goods or services in an amount that reflects the consideration which the entity expects it is entitled to receive from customers in exchange for those goods or services. Customers are defined as a party that has contracted with an entity to obtain goods or services in the ordinary course of business in exchange for consideration. The following steps should be applied:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Transfer of a promised good or service to a customer in satisfaction of performance obligations results in revenue recognition. This occurs when the customer obtains control of the good or service.
Fees from membership dues may result in obligations by a NFP to provide various benefits at varying times which will require a specific judgment and estimation under the new framework. When membership dues carry traits of both contributions and exchange components, they should be bifurcated as required by ASC 606-10-15-4. Previous guidance remains in effect for differentiating contributions from exchange transactions (ASC 958-605-55-8) and contributions from exchange portions of membership dues (ASC 958-605-55-12).
A contract with a customer may create legal rights and obligations whether or not the contract is in writing. The rights and obligations under the contract may in turn give rise to contract assets and contract liabilities.
Contract assets: Commonly referred to as unbilled receivables and progress payments to be billed. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. These assets arise when goods or services have been transferred to a customer but customer payment is contingent on a future event.
Contract liabilities: Commonly referred to as deferred revenue and unearned revenue. A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer.
Illustrative Example
An NFP charges $100 annually for membership dues. Invoices are initiated and mailed on January 1. As a result of purchasing a membership, members receive one admission to an annual conference which includes a meal and a quarterly magazine. In addition, exclusive member benefits are provided continuously over the course of the year. For purposes of this example, assume that all transactions take place within one reporting period (fiscal year).
- Identify the contract(s) with a customer.
Membership contract
- Identify the performance obligation(s) in the contract.
The NFP has identified two performance obligations (1) admission to an annual conference which includes a meal, and (2) four quarterly magazines. Since admission to the annual conference and the meal received at the conference are coupled together and cannot be separately attained, they are considered one single performance obligation.
- Determine the transaction price.
The NFP has determined the stand-alone selling price (ASC 606-10-05-4d) of each performance obligation which is defined as the price at which an entity would sell a promised good or service separately to a customer (ASC 606-10-32-32), based on observable evidence.
- Allocate the transaction price to the performance obligations in the contract.
As a result of the analysis in the previous step, the value of the admission to the annual conference and corresponding meal is $24, the value of the quarterly magazine is $40 ($10 per magazine, per quarter), and management estimated the value of the other member-only benefits provided throughout the year to be $36.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
The first performance obligation, admission to the annual conference and corresponding meal, is satisfied once the annual conference has occurred. The second performance obligation, delivery of the quarterly magazine, is satisfied over time and based on when the member receives the magazine.
Journal entries to record these transactions for a single transaction are illustrated as follows:
| Members dues are received | ||
| Cash | $100 | |
| ‘ Contract Liability – dues | $36 | |
| ‘ Contract Liability – admission | $24 | |
| ‘ Contract Liability – magazine | $40 |
On January 31, the NFP recognizes one month of dues revenue
| Contract Liability – dues | $3 | |
| ‘ Dues revenue ($36/12 x 1 mo) | $3 |
The member attends the annual conference
| Contract Liability – admission | $24 | |
| ‘ Admission revenue | $24 |
The member receives the first quarterly magazine
| Contract Liability – magazine | $10 | |
| ‘ Magazine revenue ($40/4 x 1 mag) | $10 |
This example illustrates the bifurcation of revenue required by the new revenue recognition framework. Readers should note that the new framework uses the term “contract liability”, which is currently referred to as “deferred revenue” or “unearned revenue”. A key takeaway from this example is that revenue is recorded when the performance obligation is satisfied. Under the existing generally accepted accounting principles, dues revenue would typically be recognized on a monthly basis calculated as $100 / 12 months = $8.33. This example assumes $36 of the annual dues as an exchange transaction. Membership organizations need to determine the contribution and exchange portions of their membership dues.
If an NFP has a membership cycle, tuition year, subscription period, etc. that coincide with the NFP’s fiscal year, the new revenue standard may have little to no affect on the amounts reported in the year end financial statements. However, the new standard will require enhanced and additional note disclosures.
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