Not-for-profit organizations have faced a myriad of financial reporting changes in recent years and the changes are still coming. For most organizations, 2018 or 2018-19 brought the challenges of adopting the reporting standards of ASU 2016-14, which classified net assets as with or without donor restrictions, added the liquidity footnote and required a statement of functional expenses. Hopefully, that has gone well for your organization.
Next up is the implementation of revenue recognition standards under ASU 2014-09, which are effective for years ended December 31, 2019 and forward. The standard aims for improved comparability across different NFP sectors and between donors and recipients. It follows criteria similar to for-profit organizations in applying the new principles. In reviewing a grant agreement, an organization would:
- Identify the contract with the resource provider (a donor, governmental agency or another NFP).
- Identify the performance obligations – what is that we agree to do with the funds?
- Determine the transaction’s fair value – applying discounts and allowances as needed.
- Allocate the transaction price to the performance obligations.,,
- Recognize revenue as the performance obligations are met.
For many contributions, the above analysis may be straightforward, particularly when a donor clearly will receive no benefit in return. The recognition principles are more difficult to apply to situations where a grant may have elements of an exchange transaction where a resource provider may receive something in return. If the general public benefits from the activity being funded, contribution guidance can be followed. If instead, there is a direct benefit to the grantor, the exchange guidance should be followed. Further, if the contribution has conditions, then the pledge or grant is not unconditional and must be recognized as a liability until the conditions are met.
Here is a common example that illustrates some of these issues. Do Good Community Services hosts an annual fundraiser and supporters buy tickets to the event. Of the $250 ticket price, $75 is determined to be the fair value of the meal and entertainment that donors will receive. Thus $175 per ticket is a contribution. The event, however, will not take place until the following fiscal year of the organization.
In the current year, the organization must record a liability (often called refundable advances) for the full ticket price as the event has not taken place – a key condition has not been satisfied. In the following year, the organization would recognize $75 as revenue from an exchange transaction and $175 as contribution income. As a practical matter, many organizations report the full amount as event income in their financial statements. However, the distinction between contribution and exchange income is shown on the organization’s 990 tax filing.
Applying the revenue recognition standards of ASU 2014-09 may present challenges for your organization as you review your activities. Please reach out to one of RINA’s Not-for-Profits experts if we can help. We welcome the opportunity to help you so you can help others.