For the first time in many years, not-for-profit (NFP) entities will be inundated with a series of new Accounting Standards Updates (ASU). These likely will require organizations to invest significant time and resources to understand and implement the required changes. For NFPs that have issued debt securities listed on an exchange or an over-the-counter (OTC) market, certain standards not only require expanded disclosures, but are effective one year earlier than for all other organizations.
This article series will explore expected struggles organizations may encounter when adopting each of these new standards and provide tips for successful implementation. The following table outlines upcoming accounting pronouncements and effective dates for December 31 and June 30 year-ends.
Last month, we took an in-depth look at the expected implementation challenges of the new NFP reporting model standard. This month, we’ll examine ASU 2014-09: Revenue Recognition.
The new principles-based standard substantially replaces all existing guidance for recognizing revenue, including more than 200 pieces of industry-specific guidance. The ASU applies to all contracts with customers other than those within the scope of other standards, such as leases, insurance, financing arrangements, financial instruments and guarantees.
The core principle of the new model is that an entity would recognize revenue as it transfers goods or services to customers in an amount that reflects the consideration it expects to receive. To achieve that core principle, an entity would apply the following five-step model:
- Identify the contract with a customer
- Identify the separate performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the separate performance obligations in the contract
- Recognize revenue when (or as) performance obligations are satisfied
Challenge 1 – Complexity of New Terminology
Although the new standard attempts to simplify revenue recognition by providing one framework that can be used across multiple industries, the standard introduces many new terms and concepts that aren’t prevalent in most of the existing industry-specific rules. Such terms and concepts include performance obligations, variable consideration, material rights, price concessions, separately identifiable and contract assets and liabilities. Thoroughly understanding the definitions of such terms is essential in the interpretation and implementation of the five-step model.
Challenge 2 – Documentation of a Principles-Based Standard
Most professionals agree adoption of the new revenue recognition standard may not substantially change the way revenue is recognized for some organizations. However, all organizations that prepare financial statements in accordance with generally accepted accounting principles are required to comply with the new standards, which means management will need to analyze and document the five-step process for all significant revenue streams. This process is time-consuming and will require more estimation and judgment than what current guidance requires. Even if revenue recognition timing doesn’t change, organizations will still need to document and defend those conclusions to their auditors.
Challenge 3 – Bifurcation
While contribution revenue is specifically excluded from the new revenue recognition rules, some transactions have multiple components that consist of both contributions and exchange transactions, e.g., membership dues, sponsorship agreements and donor status transactions. In these situations, organizations will need to carve out or bifurcate the exchange portion of the transaction and apply the five-step revenue recognition model. This process can be somewhat ambiguous and will require NFPs to use judgment and apply estimates.
Challenge 4 – Expanded Disclosures for NFPs Considered Public Entities*
For NFPs that have issued debt securities listed on an exchange or an OTC market, the disclosure requirements are extensive and mirror those required for publicly traded entities—see this BKD white paper for more information. Unfortunately, while the disclosure requirements are the same, the resources and capacity seldom are. Determining what information needs to be captured and the best way to obtain it will be critical to a successful conversion.
Don’t wait. The common theme from those who adopted the standard early is that it took significantly more time than expected to navigate through the new standard’s complexities. A multipronged approach to learning will most likely be necessary. Consider appointing a project leader or assembling a task force responsible for developing and executing an implementation strategy that includes the following phases:
- Gain a thorough understanding of the five-step model, including all essential terms and definitions.
- Inventory all material revenue streams within the ASU’s scope. Determine which transactions can be grouped and analyzed as a portfolio versus those that will need to be reviewed on a contract-by-contract basis.
- For each significant contract (or portfolio of contracts), analyze and document the results of each of the model’s five steps, including the final determination on how revenue should be recognized.
- Determine what, if any, modifications need to be made to internal processes, controls and IT systems to comply with the new method of revenue recognition.
- Establish the method of adoption (full or modified retrospective method) that will be the least burdensome for the organization.
- Review the relevant disclosure requirements for your organization and determine how amounts will be accumulated.
For organizations with significant resource and time constraints, outsourcing the analysis and documentation might be a viable solution.
How BKD Can Help
For many NFPs, adoption of the ASU will be complex and likely will require significant hours to implement correctly. We encourage organizations to start planning for this transition now. BKD can help educate your team, provide implementation tools and assist with analysis and documentation. If you’d like assistance complying with the new revenue recognition standard, please contact your trusted BKD advisor.
Additional resources for your reference include:
Be sure to look for the next article in our new standard implementation series, which will cover leases.
* An NFP is considered a public entity if it has issued or is a conduit bond obligor for securities traded, listed or quoted on an exchange or over-the-counter market.