The new revenue recognition standard for contracts with customers, ASC 606, is now in effect for all nonprofits. Although the updated guidelines apply to all entities and not just nonprofits, this article will largely focus on the effect on different revenue streams for not-for-profit organizations. Read on to see which revenue streams are affected by this new standard.
In an effort to standardize revenue recognition across the different accounting standards boards, ASC 606 has been updated to involve a more principles-based approach rather than the more traditional rules-based approach for recognizing revenue. For this reason, management teams may be required to use more judgement and make more estimates than they have in the past.
What revenue streams are subject to ASC 606?
Nonprofits generate their income from a variety of methods, many of which are considered exchange transactions that are subject to the new standard. An exchange transaction, also known as a contract with a customer, involves the transfer of goods or services to the customer, meaning a sort of reciprocity needs to exist between the organization and the customer. For this reason, most contributions to nonprofits are excluded from the scope of ASC 606. Also excluded are lease contracts, insurance contracts, financial instruments, and guarantees. Listed below are common nonprofit revenue streams that should be evaluated to determine their applicability to ASC 606. If the customer receives a benefit in exchange for their payment to the nonprofit, then the revenue must be recognized according to the five-step model outlined later in the article.
- Membership dues
- Conferences & Seminars
- Program Fees
- Royalty Agreements
- Federal and State Grants and Contracts
Some contracts involve both a contribution and an exchange portion, the latter of which often requires judgment to determine the amount. For example, if a nonprofit that has annual member dues of $100 also sends members a monthly magazine that has an annual value of $40, the organization can only consider $60 as a contribution. The remaining $40, the value of the magazine, is considered a benefit to the member and therefore an exchange transaction that would be accounted for under ASC 606.
There is a five-step model in determining which contracts apply under Topic 606. Each separate revenue stream that has an exchange transaction should be evaluated using this model in order to determine the amount and timing of revenue recognition.
- Identify the contract with a customer.
- Identify performance obligations, which are promises by a vendor to transfer goods or services to the customer.
- Determine the transaction price of the entire contract.
- Allocate the transaction price to the performance obligations identified in step 2.
- Recognize revenue when or as the entity satisfies the performance obligations.
Application of the five-step model results in revenue recognition when control over goods or services is transferred to the customer and the amount recognized is based on consideration provided for under the contract. Keep in mind that nonreciprocal transactions should follow the normal contribution guidance, whereas reciprocal transactions fall under Topic 606.
We know that it can be difficult to change your nonprofit’s revenue recognition methods and to determine what actually qualifies as an exchange transaction under the new standard. If you have any questions or need additional guidance, please do not hesitate to contact our office at (858) 558-9200.