for live program only new fasb asu 2014-09 revenue...

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New FASB ASU 2014-09 Revenue Recognition Standards

for Nonprofit Entities: Implementing ASC 606 for NFPs

TUESDAY, MAY 22, 2018, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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TUESDAY, MAY 22, 2018

New FASB ASU 2014-09 Revenue Recognition Standards for Nonprofit Entities: Implementing ASC 606 for NFPs

Joseph A. Arnone, CPA, CGMA, Senior Manager

CohnReznick, New York

[email protected]

Christopher J. Pentin, CPA, Audit Senior Manager

Grant Thornton, Washington, D.C.

[email protected]

Swami Venkat, CPA, CISA, CFE, ACA, Partner

CohnReznick, Roseland, N.J.

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

FASB ASU 2014-09 Revenue Recognition Standards

ASC 606 FOR NONPROFIT ENTITIES

http://intranet.cohnreznick.net/pages/home.aspx

AN INTRODUCTION TO COHNREZNICK

ADVISORY

N E W F A S B G U I D A N C E


To p i c 6 0 6 R e v e n u e f r o m C o n t r a c t s w i t h C u s t o m e r s

• The FASB replaced virtually all revenue recognition guidance with an entirely new standard. Upon the effective date, all guidance in the existing Topic 605 Revenue Recognition will be superseded.

OVERVIEW

Existing Topic 605 Revenue from Contracts with Customers Topic 606

Recognize revenue when it is earnedand realizable.

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services.

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• In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.”

• The AICPA has created two task forces to address implementation issues:

o Healthcare

o Not-for-Profits

➢Tuition and housing revenue

➢ Subscriptions and membership dues

• Contributions and grants were excluded from this guidance.

• Effective for non-public entities for calendar year 2019 or fiscal year 2020.

BACKGROUND


KNOW YOUR REVENUE STREAMS• Where do your revenues come from? For example:➢ Membership Dues➢ Publications➢ Sponsorship Revenue➢ Advertising Revenue➢ Federal, State, or Private Grants➢ Investment Income➢ Contributions➢ Retail Sales➢ Educational Service Fees➢ Pass-Through Funds➢ Tuition➢ Fee for Service➢ Refunds➢ Miscellaneous

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Classification of Membership Dues

Contract Criteria Contribution Exchange Transaction

NFP expressed intent for use

of dues revenue

Intent benefits the general

public of the NFPs

beneficiaries

Intent benefits members or

beneficiary designated by

member

Benefit to members Benefits are negligible More significant benefits and

may be available to non-

members for a fee

NFP obligations NFP services both members

and non-members

NFP will only serve its

members

Duration of benefits Unknown length or scope Defined length; additional

payments may extend

Refundability of dues

payment

Not refundable Refundable in full or ratably

if membership cancelled

Membership qualifications Open to the general public Only if certain criteria are

met (i.e. license or

credential)

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TOPIC 606 REVENUE FROM CONTRACTS WITH CUSTOMERS

Identify a contract with a

customer

Identify the performance obligations

Determine the transaction

price

Allocate the transaction price to the

performance obligations

Recognize revenue when/as

performance obligations are

satisfied

The Five-Step Framework will be used to determine whether the core principle of Topic 606 has been achieved

The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to be entitled in exchange

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Topic 606 Revenue from Contracts with Customers

Identify a contract with a customer


Determine the transaction price

Allocate the transaction price to

the performance obligations



satisfied

Criteria for accounting for revenue under 606:

1. The parties to the contract have approved the contract and are committed

to performing their respective obl igations.

2. Each party’s r ights regarding the goods or services to be transferred can be

identif ied.

3. The payment terms for the goods or services to be transferred are

identif iable.

4. The contract has commercial substance.

5. I t is probable the Organization wil l collect the consideration to which it wi l l

be entit led in exchange for the goods or services that wil l be transferred to

the customer.

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⚫Under current US GAAP (ASC 605), collectability is used to determine whether or not to recognize revenue.

⚫Under the new guidance (ASC 606), collectability is a gating question to determine whether you have a contract.

• In evaluating whether collectability of an amount of consideration is probable, consider the customer’s ability and intention to pay that amount of consideration when it is due.

Collectability

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Implementing the new revenue standardThe five step model

Identify the contract(s) with a customer



Allocate the transaction price to the performance obligations

Recognize revenue when or as an entity satisfies performance obligations

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Implementing the new revenue standardStep 2: Identify the performance obligations

A performance obligation is a promise to transfer either:

• A distinct good or service

• A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer

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Implementing the new revenue standardThe five step model

Identify the contract(s) with a customer



Allocate the transaction price to the performance obligations

Recognize revenue when or as an entity satisfies performance obligations

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Implementing the new revenue standardStep 3: Determine the transaction price

Transaction price

Time value of money

Variable consideration

Noncash consideration

Consideration payable to customer

Transaction price:

The amount of

consideration an

entity expects to be

entitled to in

exchange for

transferring

promised goods or

services to a

customer, excluding

amounts collected

on behalf of third

parties.

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Variable consideration

• Discounts

• Rebates

• Refunds

• Credits

• Price concessions

• Bonuses

• Penalties

Estimate amount

• Expected value (sum of probability weighted amounts)

• Most likely amount (single most likely outcome)

Include if probable that there will not be a significant revenue reversal

• Highly susceptible to factors outside entity's influence

• Limited predictive experience

• Large number of possible amounts

Implementing the new revenue standardStep 3: Determine the transaction price

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Implementing the new revenue standardIdentify the performance obligations

Significant judgement arises in assessing promises included in a contract and whether such process are accounted for together or separately. It is key for entities to assess appropriately as this impacts when revenue is being recognized.

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Implementing the new revenue standardIdentify the performance obligations - Distinct

There are two elements that must be present for a good or service to be distinct….

• The consumer can benefit from the good or service either on its own or together with other resources that are readily available to the customer

• The entity's promise to transfer the good or service to the consumer is separately identifiable form other promises in the contract

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Implementing the new revenue standardIdentify the performance obligations – implicit/explicit

Promises do not have to be explicit in a contract to be a performance obligation…

• If there are promises are customary and a consumer has a valid expectation that the product or service is include there is a separate performance obligation and revenue is recognized separately

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satisfied

At contract inception, the transaction price is allocated to each distinct good or service based on its relative stand-alone transaction price.

STEP 4:



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• Important when there are several types of performance obligations (products & services sold together)

• The transaction price must be allocated to each performance obligation in proportion to its stand-alone selling price

• A discount may be allocated to one or more, but not necessarily all, performance obligations. This applies in cases where the sum of stand-alone selling prices of a bundle of goods or services exceeds the promised consideration in a contract.

Step 4: Allocating the Transaction Price

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satisfied

Are the performance obligations satisfied at a certain point in time, or over time.

STEP 5:

Recognize revenue

when/as

performance

obligations are

satisfied

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Membership DuesCASE STUDY

Does the arrangement pass Step 1?

Step 1: Identify the contract

• Both parties approve the contract and are committed to perform

• Each party has defined rights

• The payment terms are defined

• The contract has commercial substance

• The Association has collected all of the consideration

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What are the promises?

Step 2: Determine the performance obligationsIDENTIFYING PROMISES• Career enrichment

• Option to purchase insurance from 3rd party provider

• Lobbying on behalf of profession

• 50% discount on additional CPE

• Quarterly webinars

• Quarterly Journal

• Defense of human rights

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Do the promises constitute

performance obligations?

Step 2: Determine the performance obligationsEVALUATING THE CAREER ENRICHMENT, INSURANCE AND LOBBYING

Insurance:

• Association has no obligation to transfer any additional good or service

• Provides benefit of negotiating on behalf of members

Career Enrichment/Lobbying/Negotiating:

• Capable of being distinct

• Distinct within the context of the contract

Performance obligation identified:

1 year of "membership benefits" comprised of these promises

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Step 2: Determine the performance obligationsEVALUATING THE WEBINARS AND CPE DISCOUNT

4 Quarterly Webinars



Discount on CPE

• Discount is incremental to the discount offered to non-members

• Material right for a 50% discount on CPE courses

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Step 2: Determine the performance obligationsEVALUATING THE JOURNAL AND DEFENSE OF HUMAN RIGHTS

4 Quarterly Journals



Defense of Human Rights

• Membership fees may be used towards the Association’s activities to defend human rights

• Broader social purpose and does not transfer a good or service to the customer.

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What are the performance obligations?

Performance obligations• Material Right for a 50% discount on CPE courses

• 4 Quarterly webinars

• 4 Quarterly Journals

• Membership Benefits

What is the transaction price?

The transaction price is $500 for a

one year membership.

How should the transaction price be allocated to the performance obligations?

Step 4: Allocate the transaction priceADDITIONAL INFORMATION

• 80% of licensed professionals will purchase an average of $200 of CPE using the 50% discount, that is they pay $100.

• Significant number of journals each quarter are sold to non-members at the stand-alone selling price of $25.

• Using the adjusted market assessment approach, the Association estimates:

• SASP of the webinars at $50 per webinar.

• SASP of membership benefits at $100 per year.

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Step 4: Allocate the transaction price to the performance obligations

Performance Obligation SASP Calculation

Material Right for CPE $ 80 80% x $200 x 50%

Webinars $ 200 $50 x 4

Journals $ 100 $25 x 4

Membership benefits $ 100 Adjusted Market

TOTAL for performance obligations $480

Contribution $ 20 Residual ($500 - $480)

TOTAL $ 500

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How should revenue be recognized?

Step 5: Recognize RevenueMATERIAL RIGHT

• As the option is exercised (the member attends a CPE course using the 50% discount) or when it lapses unused (at the end of membership year).

QUARTERLY WEBCASTS

• Point in time, when each webcast is offered.

QUARTERLY JOURNALS

• Point in time, upon delivery each journal.

MEMBERSHIP BENEFITS

• Over Time – time-based measure over membership period.

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Membership Dues – Example #2

EXAMPLE 2• A not-for-profit membership entity has annual dues

of $300.• It has a website that provides educational material

that can be accessed by members and the public. However, the public can only access to limited parts of the content. The entity advocates for the members related to legislative and industry matters. The entity has a monthly Journal subscription that is sent to members. The Journal is also sold to the public for a yearly subscription price. In addition, members are entitled to purchase educational programs from the entity at a discount.

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Membership Dues – Example #2

Step 1

Identify the contract

Contract is made up of

Membership Dues and a

Subscription

Step 2

Identify the performance

obligation

(a) Perform membership

services

(b) Provide subscription

services

Step 3


Total price $300

Step 4

Allocate the price to the

performance obligations

(a) $100 allocated to membership

services

(b) $300 allocated to subscription

services

Step 5Recognize

revenue as each performance obligation is

satisfied

Recognized ratably over 12 month period

(a) $6.25

(b) $18.75

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Implementing ASU 2014-09


Transition Road Map:

1Identify all revenue streams and types of contracts

2Understand the key revenue streams, accounting policies, and treatments

3Evaluate each contribution to identify conditions and donor-imposed restrictions

4Evaluate any grants to determine whether it is an exchange transaction or contribution

5For contracts, identify performance obligations and price

6Develop a method to allocate the price to each performance obligation

7Evaluate any changes and their potential impact on debt covenants, if any

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Organizations should reach out to their stakeholders early and communicate the impact of the new standards to their boards, lenders, donors, etc.

We recommend starting transition activities as soon as possible. Below are the key transition steps and their associated

timing.

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IN SUMMARY

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Key Tactics Moving Forward

Understand the Accounting Standards

Set-Up an Internal Committee

Draft Proforma Financial Statements

Reach Out to Your CPA

Consider Impact to Your Stakeholders (e.g. Covenants)

Communicate with Your Board, Lenders, Donors, etc.

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