by Manda Dinkel
FASB’s new revenue recognition standard will become effective for most not-for-profit (NFP) entities in 2019 (years ended December 31, 2019 and June 30, 2020). NFP’s are not excluded from the standard’s scope as the largest category of financial support for many NFPs is revenue generated through fees for good and services from private sources. Grants and contributions will not be affected by this standard; however, many times revenue from such sources as membership dues, sponsorships, and special events include a contribution element, along with an exchange transaction, which complicates the implementation of the new standard. NFPs will be required to bifurcate these using their judgement. Nonreciprocal contributions are not contracts with customer and are not within the scope of the new revenue standard.
Below, we summarize key considerations under the new standard as it relates to specific revenue streams:
- Membership Dues –
- Do your membership dues include a monthly newsletter or discounts to events? If so, then this standard will require bifurcation to record part contribution and part exchange transaction. The exchange transaction portion would be subject to the new standard rules.
- How long is your membership? Do the membership dues align with your fiscal year? These two factors will have an impact on the recognition of revenue. If the membership dues match your fiscal year end, this would simplify the recognition all at one; however, if these do not match, then the contribution would be recognized upon receipt and the exchange portion would be recognized ratably over the life of the membership.
- Special event revenue –
- Do your events include fund-raising activities and exchange transactions, such as fund-raising dinners? In such circumstances, the ticket revenue from such events is divided between contributions and revenue from exchange transactions for financial reporting purposes. The exchange transaction is measured at fair value of the direct donor benefits, and the excess of the ticket price over the fair value of the direct donor benefits is the contribution portion.
- Tuition and housing –
- Because many institutions have summer year-ends, many performance obligations will be satisfied prior to fiscal year end. The standard is not expected to have a significant impact on the higher education sector. There will be additional disclosures required.
- Does your institution have tuition and housing in a single contract or separate contract?
- Does your institution have the right to withdraw option? If so, how long does a student have to withdraw? Student withdrawals and related refunds are examples of items that would cause contract consideration to vary. For example, while student withdrawals are outside an institution’s influence, the institution may have significant predictive experience in estimating withdrawals and the uncertainty regarding a student’s withdrawal may be resolved in a short time frame. This may indicate that a significant reversal in the cumulative amount of revenue recognized may not occur.
- Does your institution receive nonrefundable deposits or other amounts that might affect the amount of consideration the institution may recognize such discounts, rebates, refunds, credits, price concessions, incentives, penalties or other similar items? Generally, reductions in amounts charged for housing and tuition are known and agreed to by the institution and the student prior to the recognition of revenue. Therefore, such reductions generally would be recognized as the institution recognizes the revenue.
- Healthcare revenue –
- Can your Organization aggregate individual contracts based on their characteristics (creating portfolios)? Such as payor categories, inpatient, outpatient, emergency room, etc.
- Does your Organization have a process to assess credit risks of contracts? Health care entities need to make significant judgments to assess collectability and estimate variable consideration. Considerations include collections experience on various classes of patients.
- After their initial recognition, patient receivables are subject to impairment assessments under the new standard.
- Does your Organization have variable consideration which will affect the revenue recognition under the new standard? For example, health care entities generally agree to accept payment (reimbursement) from payors (e.g., insurance companies) at varying rates for different goods and services provided to patients. Health care entities also have other forms of discounts or price concessions (e.g., prompt pay discounts, uninsured discounts) provided to patients. Under the standard, contractual adjustments (i.e., the difference between the list price and the reimbursement rate) and other revenue adjustments (e.g., discounts) result in variable consideration.
- Has your Organization updated your financial statements and disclosures to align with the new standard?