revenue recognition for nonprofits handout

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Revenue Recognition for Nonprofits

June 19, 2020

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Your presenters

M argaret F. (Peggy) Gallagher, CPA

Technical Resources

pgallagher@ w ithum .com

Jam es P. (Jim ) M ulroy, CPA , PSA , CGFM , CGM A

Team Leader, Not-for-Profit & Education

jm ulroy@ w ithum .com

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Disclaim er

These are the personal views of Jim Mulroy and Peggy Gallagher, and not necessarily the views of Withum

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Agenda

Background and Scope (ASU 2018‐08)Contribution or Exchange?Conditional or Unconditional Contribution?ASC 606 RefresherDocumentation of Decision ProcessQuestions?

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ASU 2018-08: Not-for-profit Entities (Topic 958) Clarifying The Scope And The

Accounting Guidance For Contributions Received And Contributions M ade

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Background and Scope

Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (ASU 2018‐08)

Addresses difficulty and diversity of practice in the following areas:

• Characterizing grants and similar contracts with government agencies and other funding sources as exchanges or contributions

• Distinguishing between conditional and unconditional contributions

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Background and Scope

• Applies to all entities (NFPs and business entities) that receive or make contributions

• Excludes transfers of assets from the government to business entities• Applies to both contributions received by a recipient and contributions

made by a resource provider• The term used in the financial statements to label revenue is not a factor for

determining whether an agreement is within the scope of the guidance

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Contribution or Exchange?

ContributionAn unconditional transfer of cash or other assets, as well as unconditional promises togive, to an entity or a reduction, settlement, or cancellation of its liabilities in avoluntary nonreciprocal transfer by another entity acting other than as an owner

Exchange TransactionReciprocal transfers in which each party receives and sacrifices approximatelycommensurate value

Why does it matter?

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Exchange• Commensurate value transferred (Direct

benefit)• Intent of parties is to exchange resources of

commensurate value• Parties agree on the amount of assets

transferred in exchange• Contractual provisions for economic forfeiture

beyond assets transferred to penalize nonperformance

• Government/Resource provider is a 3rd party payer on behalf of an identified customer

Contribution• Public benefits or indirect benefit received by

resource provider• Recipient solicits assets without intent to

transfer commensurate value• Resource provider has full discretion in

determining amount of transferred assets• Nominal penalties including return of unspent

funds and delivery of assets provided

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Com m ensurate Value-W ho benefits?

• Does the resource provider receive commensurate value?• The resource provider is not synonymous with the general public, even a

governmental entity. If a resource provider receives value indirectly by providing a societal benefit, this would be considered a nonreciprocal (contribution) transaction

• Furthering a resource provider’s mission or positive sentiment does not constitute commensurate value received

• The type of resource provider should not override the substance of the transaction

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Specified Third Parties

Certain transfers of assets (typically from a government entity) should be treated as part of an existing exchange transaction between a recipient and identified customer:• Medicare/ Medicaid• Pell grants and similar tuition assistance• Affordable Housing rent voucher payments

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Conditional or Unconditional?

Donor‐Imposed Condition For a donor‐imposed condition to exist:

One or more barriers that must be overcomeandA right of return to the contributor for assets transferred or a right of release of the promisor from its obligation to transfer assets

Why does it matter?

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Indicators That a Barrier M ay Exist

• Inclusion of a Measurable Performance‐Related Barrier or Other Measurable Barrier • Specified level of service• Identified number of units of output or specific outcome• Identified event occurs i.e. matching requirement

• The Extent to Which a Stipulation Limits Discretion by the Recipient on the Conduct of an Activity Qualifying allowable expenses Hire specific individuals Specific protocol must be adhered to

• The Extent to Which a Stipulation is Related to the Purpose of the Agreement • Generally excludes administrative tasks and trivial stipulations

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Lim ited Discretion Indicator-Budgets

• The existence of a budget and a requirement for adherence to it within deviation limits would not indicate by themselves that a barrier exists

• The budget are the NFP’s plans for how it expects to spend the funds and normally viewed by the funder as a guidepost for the NFP to do what it said it would do

• Differs from the concept of incurring qualifying expenses where entitlement is dependent upon compliance with a litany of cost principles and other requirements, often driven by public policy• Places limits on how activity is performed

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Exam ples-Right of Return/Release

“The Grantee promptly shall repay any portion of the grant, which for any reason is not used exclusively for the purposes of the grant. The Grantee shall repay any portion of the grant which is not used exclusively for the purposes described in Section 1 hereof within the time specified in the Grantee's proposal”“Payments are subject to your compliance with this Agreement, including your achievement of the milestones required under this Agreement.”“Funds awarded under this Agreement shall be used solely to reimburse the Organization for expenses incurred expressly and solely in accordance with the Project Budget and the Scope of Work. The Foundation shall reimburse the Organization for its actual and authorized expenditures incurred in satisfactorily completing the Scope of Work and otherwise fulfilling all requirements specified in this contract in an aggregate amount not to exceed $100,000.00.”

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Exam ples-Standard Term s

“Foundation may modify, suspend, or discontinue any payment of Grant funds or terminate this Agreement if Foundation is not reasonably satisfied with the Organization's progress on the Project

• Does this language constitute a barrier to entitlement?

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Exam ple 1 –Contribution vs. Exchange

• NFP A is a large research university with a cancer research center• Funds received from pharma co to finance costs of clinical trial• Pharma co dictates # of participants to test, dosages, and frequency and

requires a detailed report of test outcomes• The rights to the results of the study belong to the pharma co

• Contribution or Exchange?

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Conclusion:• Results of trial have particular commercial value for the pharma co• Pharma co is receiving direct commensurate value

Exchange Transaction

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• Local government provides funding to NFP to perform a research study on the benefits of a longer school year

• NFP required to plan the study, perform the research and submit the research to the local government

• Local government retains all rights to the study


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Conclusion:Because the study rights are retained by the local government, it is determined that direct commensurate value was exchanged

Exchange Transaction

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• Federal government award provided to a University• OMB rules and regulations must be followed• Qualified expenses must be incurred to be entitled to the assets• Unspent money is forfeited/returned• University retains the rights to the findings and has permission to publish

findings

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Conclusion:• The federal government does not receive direct commensurate value

because the University retains all rights to the research and findings• Public receives the benefits

Contribution

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Exam ple 4 -Conditional vs. Unconditional

Private Foundation Gift• NFP receives a grant of $400,000 to provide specific career training to at

least 8,000 disabled veterans during the next year, with minimums for each quarter (2,000)

• Right of release – foundation will only provide 100K per quarter if NFP demonstrate it trained 2,000 disabled veterans during the quarter


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Exam ple 4-Conditional vs. Unconditional

Conclusion:• Right of release exists in the grant• Specific LOS required (measurable performance related barrier)

Conditional Contribution• Record revenue as it overcomes the barrier

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Research Grant• NFP A is a public charity that works with gluten‐related allergies• NFP A receives $100K grant from corporate foundation to perform research• Right of return in grant agreement• General budget with proposal must be followed and any significant

deviations in spending must be approved• Cost report submitted at grant closeout


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Conclusion:• Right of return exists• General budget and reporting requirements not determined to be a barrier

Unconditional Contribution

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Financial Statem ent Considerations

Simultaneous Release Option‐Allows an NFP to elect a policy to report donor‐restricted contributions whose restrictions are met in the same reporting period as the revenue is recognized as support within net assets without donor restrictions. Election must be applied consistently to all restricted contributions and investment returns.

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Financial Statem ent Considerations-Disclosures

Recipients• No additional recurring disclosures

have been added in the guidance• Guidance in Topic 958 includes

disclosures for unconditional and conditional promises to give

• For conditional promises to give, recipients are required to disclose:

• The total of the amounts promised• A description and amount for each

group of promises having similar characteristics

Resource Providers• No additional recurring disclosures

have been added to the guidance• Guidance in Topic 958 includes a

cross reference to the disclosures in Topic 450, Contingencies, and in Topic 470, Debt

• Resource providers also are required to provide information about unconditional promises to give.

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The University receives sponsored program funding from various governmental and corporate sources. The funding may represent a reciprocal transaction in exchange for an equivalent benefit in return, or it may be a nonreciprocal transaction in which the resources provided are for the benefit of the university, the funding organization’s mission, or the public at large.Revenues from exchange transactions are recognized as performance obligations are satisfied, which in some cases are as related costs are incurred.Revenues from non‐exchange transactions (contributions) may be subject to conditions, in the form of both a barrier to entitlement and a refund of amounts paid (or a release from obligation to make future payments). Revenues from conditional non‐exchange transactions are recognized when the barrier is satisfied. In addition, the University has elected the simultaneous release option for conditional contributions that are also subject to purpose restrictions. Under this option, net assets without donor restrictions will include the donor‐restricted contributions for which the purpose restrictions are met in the same reporting period as the revenue is recognized.

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Effective Date

Recipients: Annual periods beginning after June 15, 2018, including interim periods

• Public Business Entities and NFPs that have issued or are a conduit bond obligor for securities that are publicly traded

Annual periods beginning after December 15, 2018 for all other entities

Resource Providers: Annual periods beginning after December 15, 2018, including interim periods

• Public Business Entities and NFPs that have issued or are a conduit bond obligor for securities that are publicly traded

Annual periods beginning after December 15, 2019 for all other entities.

What about NFPs that are both recipients and grant makers?

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ASC 606 REFRESH ER

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ASC 606 ADOPTION –the basicsOriginal effective dates for all entities other than public business entities*:

Annual periods: fiscal years beginning after Dec. 15, 2018

Interim periods: fiscal years beginning after Dec. 15, 2019

Early adoption was allowed in fiscal years beginning after Dec. 15, 2016

Effective dates for all entities other than public business entities that have not yet applied ASC 606 (ASU 2020‐05, issued June 2020) *:

Annual periods: fiscal years beginning after Dec. 15, 2019

Interim periods: fiscal years beginning after Dec. 15, 2020

* Including certain non‐profits and 11k filers

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Understanding ASC 606 -the basics

• Principle‐based guidance

• Revenue is recognized when the control of promised goods or services transfers to a customer

• The amount of revenue recognized equals the total consideration that an entity expects to be entitled to for the promised goods or services

• Expanded disclosures

• The word “contract” should not be taken literally

• Follow the 5 steps in a logical fashion (only). Think of them as silos.

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Step “0”: scopingDoes ASC 606 apply to all revenues?

NO ‐ the following are scoped out of ASC 606:

• Non‐reciprocal transactions

• leasing (by a lessor)

• insurance contracts

• interest & dividend income

• financial instruments & investment income

• guarantees (excluding warranties)

• certain non‐monetary exchanges

• gains on incidental transactions

Look to other GAAP for guidance on the above

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Com m on ASC 606 revenue sources for NFPs

Tuition and fees

Program fees

Royalties and licensing revenues

Exchange grants to perform certain services (research, studies, etc.)

Membership dues

Sponsorship fees

Consider the impact of bifurcating contributions vs exchanges

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Considerations for Step One

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Step 1: Identify the custom er contract

A contract is an agreement between at least two parties that includes enforceable rights and obligations.

Certain criteria* must be met in this step to move forward to Step 2.

For example, an agreement does not have to be in writing but there must be approval from all parties.

*ASC 606 has 5 criteria that must be met (see Appendix). These are usually not difficult to meet.

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Considerations for Step Tw o

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Step 2

Identify the perform ance obligations (See Appendix for m ore info)

A performance obligation is a promise in a contract with a customer to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same and that have the same pattern of

transfer to the customer.

If multiple goods or services are promised in a contract, and they aren’t individually “distinct”, combine into 1

distinct ‘bundle’.

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Step 2: W hat is “distinct”?It must meet both #1 and #2:

1. The customer may benefit from it on its own…

• It can be used, consumed, sold for an amount greater than scrap value, or otherwise held in a way that generates economic benefits.

…or, the customer may benefit from it together with readily available resources:

They are sold separately by the entity,

OR the resource was previously provided to the customer by the entity,

OR third parties provide the resource.

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Step 2 : W hat is “distinct”?

And…..

2. The good or service is separately identifiable from other promises in the contract (aka “distinct in the context of the contract” ):

Many promises will be “distinct”, but not “distinct in the context of the contract”

This is the critical part

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Step 2: W hat is “distinct in the context of the contract”?

Consider the underlying nature of the promise to the customer ‐ is it separately identifiable from other promises in the contract?

Versus ‐ is the customer purchasing the combined item as an assembled whole? (IE, construction of a building)

These factors indicate the promise is not distinct in the context of the contract:

the entity significantly integrates the goods or services as inputs to produce or deliver the combined output(s). A combined output might include more than one phase, element, or unit.

One or more of the goods or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods or services promised in the contract

The goods or services are highly interdependent or highly interrelated.

Judgement required – look at it from the customer’s perspective

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Step 2: Insights

Start by listing all promises

A ‘readily available resource’ includes goods or services that the customer has already obtained from the entity. Therefore, the timing or the order of delivery of goods or services could affect the evaluation of ‘distinct’ (ie, training on a product already delivered)

When evaluating promises:

Meeting the “distinct” criteria won’t be too challenging, but……

Satisfying the “distinct in the context of the contract” criteria will be harder!

And both must be met

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Step 2: Som e relief

Not required to bifurcate immaterial promised goods or services as a separate performance obligation:

Only if they are immaterial in the context of the contract with the customer (unit of account)

Does not apply to optional goods and services – special GAAP here

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H ow to apply Step 2

1. Identify the promises, from the customer’s perspective

2. Evaluate whether each promise is “distinct”

The challenge: meet both criteria

3. Do not think about when to recognize the revenue (silo!)

4. Disregard any promises that are immaterial in the context of the contract

5. Conclude on Step 2, and advance to Step 3

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H ow m any perform ance obligations in this exam ple?

Consider if the promises meet the two criteria of being distinct (capable of being distinct, and distinct in context of contract):

A trade association charges its members annual membership dues, and the membership includes access to an online database, a subscription to its monthly publication (one per month), and discounts on future educational opportunities. The trade association should assess whether access to the online database, each of the monthly publications and each discount related to separate educational programs are separate performance obligations or one (or more) bundle(s) of general membership benefits, and whether the discounts provide material rights (a type of performance obligation). The association should also consider if any are immaterial in the context of the contract.

Source: AICPA

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H ow m any perform ance obligations in this exam ple? Consider if the promises meet the two criteria of being distinct (capable of being distinct, and distinct in context of contract):

A professional membership organization presents conferences 2 times a year. It offers 3 types of conference sponsorships that include various combinations of:

Reserved seating at a premiere table

Opportunity to deliver a keynote address

Exhibit space

On‐line recognition as a sponsor on its website for 90 days

The organization should consider if each of the above are separate performance obligations, or one (or more) bundle(s) of general sponsorship benefits. It should not consider at this point when to recognize the related revenue. The association should also consider if any are immaterial in the context of the contract.

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Step 2: Things that are (usually) NOT perform ance obligations

1. Customer options (marketing offers)

2. Activities that an entity undertakes to fulfill a contract that do not transfer goods or services to the customer

1. IE, administrative tasks to set up a contract

3. Pre‐production activities, including the design and development of products or the creation of a new technology based on the needs of a customer.

1. IE, designing and developing tooling prior to the production of automotive parts.

2. Pre‐production activities that do not transfer a good or service to the customer

3. Other GAAP may apply

4. Shipping and handling of goods (usually)

1. Accounting policy election to treat as a fulfillment cost

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Considerations for Step Three

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Step 3: Determ ine the Total Transaction Price (TTP)

TTP is the consideration to which the entity expects to be entitled to for transferring promised goods or services to a customer

TTP includes fixed amounts AND variable amounts

TTP excludes:

Amounts collected on behalf of third parties

Sales and usage‐based royalties on IP licenses (special guidance)

Adjustments to reflect the customer’s credit risk (bad debts)

Options for additional purchases

Foreign currency transaction adjustments

TTP includes:

Prompt payment discounts (IE, 2%/10 days)

Significant finance components (e.g. contracts greater than one year)

Non‐cash consideration (use FV or refer to standalone selling price)

Consideration payable to the customer (rebates, discounts, etc.)

(See Appendix for more info)

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Step 3: TTP and Variable ConsiderationExamples (note – may be positive or negative):

Discounts, Rebates, Refunds, Credits, Price concessions, Incentives, Performance bonuses, Penalties

Interaction with contingencies:

Variable consideration includes items that are contingent on the occurrence or non‐occurrence of a future event.

• IE, a fixed amount promised as a performance bonus on achievement of a specified milestone.

Comparison to legacy GAAP:

Including variable consideration will likely lead to earlier revenue recognition

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Step 3: H ow to estim ate variable consideration1. Identify all elements of variable consideration, both explicit and

implicit, at contract inception

2. Evaluate the facts and circumstances, and apply the most appropriate method for estimating (Expected value (e.g. probability weighted cash flows) or Most likely amount (better for contracts with only 2 possible outcomes) ) 1. This is NOT a free choice!

3. Apply the constraint ‐ reduce the best estimate from #2 as needed

4. Update the estimate of the variable consideration prospectively, as needed, at each reporting period

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Step 3 Exam ple

A community organization partners with an insurer to offer low cost homeowners’ and renters’ insurance to its members. The organization receives a fixed 50% commission on the first year’s premium, less any chargebacks if the policy is cancelled within the year. The chargebacks are considered variable consideration. The organization should use its data and history in order to develop a good quality estimate of what its average chargebacks are, and record revenue net of that estimate. Because it is an estimate, it will be subsequently revised as more information becomes available.

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Considerations for Step Four

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Step 4 –Allocate the Transaction Price to all Perform ance Obligations (See Appendix for m ore info)

Allocate to each performance obligation based on the relative standalone selling prices (SSPs) of each item

Estimate the SSP, even if its price is not observable, using one of the following approaches:

1. Adjusted market assessment approach – an estimated selling price

2. Expected cost plus a margin approach

3. Residual approach (limited ‐only if prices are highly variable or price has not been established)

Allocate at contract inception

Variable consideration is generally allocated to all performance obligations. May be allocated to one performance obligation only if certain criteria are met.

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Step 4: Allocation Exam ples

Membership dues that include benefits such as publications (online or print), event admission, access to archives, gift shop discount, etc.

Sponsorship fees that include participation in a panel, presentation rights, banners, article authoring, free attendance at events, etc.

Event attendance that includes admission to certain events and membership rights for a period of time

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Considerations for Step Five

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Step 5: Recognize Revenue w hen/as Perform ance Obligations are Satisfied (See Appendix for m ore info)

Specifically ‐ revenue is recognized when (or as) the customer obtains control of the performance obligation

Consider from the customer’s perspective

Two methods of recognizing revenue:

Performance obligation satisfied over time

Performance obligation satisfied at a point in time

Narrow exception: licenses of intellectual property with consideration in the form of sales‐ and usage‐based royalties.

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Step 5: Recognize over tim e w hen one of these tests is m et

1. Customer simultaneously receives and consumes benefits as the entity performs

1. IE, services, such as transaction processing; membership

2. Entity creates or enhances an asset that the customer controls as the asset is enhanced or created

1. IE, construction or manufacturing contracts where the customer controls the work in process, or R & D contracts where the customer owns the findings

3. Entity does not create an asset with an alternative use to the entity and has an enforceable right to payment for performance completed to date

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Step 5 exam ple

Q: An institution requires a nonrefundable deposit from a potential student to secure a spot for enrollment or housing. When should the institution recognize the revenue?

A: Upon receipt, the institution records a contract liability. This gives the student the right to receive the instruction or housing, and obligates the institution. If the student does not move in or enroll, the institution will not recognize revenue (breakage) until the student’s rights have expired. If the student enrolls or moves in, it will recognize the revenue over time.

Source: AICPA

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Other ASC 606 topics for another day…..

Expanded disclosure requirements

Full retrospective vs. modified retrospective adoption methods

License revenue

Potential impact on financial reporting, IT systems, sales commission plans, etc.

Complexities of Steps 2, 3, and 4

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Docum entation

Document your revenue recognition decision process and conclusions:

• On the face of the award document• In your CRM or fundraising/development software• Withum Excel‐based tools for Topic 606 and Contributions

Ensure the key elements of your decision process are supported within the award documents

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QUESTIONS?

Peggy Gallagher, CPATechnical Resources

[email protected]

Jim Mulroy, CPA, PSA, CGFM, CGMATeam Leader, Not‐for‐Profit & Education

[email protected]

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APPENDIX -USEFUL ASC 606 INFORM ATION

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Step 1 –Identify the Contract w ith the Custom er –M ust M eet All of the Follow ing 5 Criteria

1. Parties to contract have approved the contract in accordance with customary business practices

A contract does not exist if each party may terminate without compensating the other party

2. The entity can identify each party’s rights regarding goods or services (GOS) to be transferred

3. The entity can identify payment terms for GOS to be transferred

4. The contract has commercial substance

May be written, oral, or implied by an entity’s customary business practices

The risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract

5. It is probable that entity will collect the consideration to which it will be entitled to in exchange for the GOS that will be transferred

This is a ‘gating’ issue, not a measurement issue.

Price concessions ‐ this is variable consideration (which affects the transaction price) rather than a factor to consider in assessing collectibility

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Step 2

Options vs. a “m aterial right” vs. perform ance obligations

A true option is NOT a performance obligation:

It’s a marketing offer for additional purchases at stand‐alone selling prices

It’s not an embedded promise to the customer

The customer may choose to exercise it, or not

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Step 2

Options vs. a “m aterial right” A “material right” IS a performance obligation:

It’s an embedded promise (an obligation) to provide a customer with free or significantly‐discounted goods or services

Look at it from the customer’s perspective ‐ does it provide an incremental, significant discount not offered to other customers because of the contract?

Creates a contract (aka deferred revenue) liability to be applied to future purchases

Examples: a renewal option may be a material right if it contains a benefit the customer would not have without the 606 contract; customer loyalty programs

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Step 3: Variable consideration

Per ASC 606‐10‐32‐5:

“If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.”

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Exam ples of variable consideration

1. A penalty: An entity enters into a contract to build an asset for $1 million. The terms include a penalty of $100,000 if the construction is not completed within 3 months of a date specified in the contract.

2. Volume discount: An entity agrees to sell Product A for $100 per unit. If the customer purchases more than 1,000 units of Product A in a calendar year, the price per unit is retrospectively reduced to $90 per unit.

3. Usage based fees: a contract provides a single distinct continuous service (1 PO) of healthcare managed services for a two‐year period. The entity charges a ‘per member per month fee’ (PMPM) during the two‐year period and a fixed up‐front fee.

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Step 3: M ethods for Estim ating Variable Consideration

Estimate VC using one of two methods (ASC 606‐10‐32‐8):

1. Expected value (e.g. probability weighted cash flows)

2. Most likely amount (better for contracts with only 2 possible outcomes)

Method chosen must be used consistently throughout the contract (and for similar contracts)

Not a free choice!

Cannot default to your “best estimate”

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Step 3: “Expected value” m ethod

Calculated as the sum of probability‐weighted amounts in a range of possible consideration amounts.

This method is usually more suitable if: an entity has a large number of contracts with similar characteristics.

OR, the contract has a large number of possible outcomes

Management utilizes quantitative evidence from other, similar contracts by leveraging a “portfolio of data” when it estimates variable consideration using the expected value method.

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Step 3: “M ost likely am ount” m ethod

• Record the single most likely amount in a range of possible consideration amounts (the single most likely outcome of the contract ).

• The “most likely amount” is usually appropriate if the contract has only two possible outcomes (either/or).

Example: an entity will either achieve a performance bonus of $100,000,or does not ($0). Record as either $100,000 or $0, based upon an analysis.

Not appropriate to estimate this based upon a 70% probability of achievement, or $70,000, as $70,000 is not a possible outcome

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Step 3: And speaking of the constraint…….. Only record VC to the extent that it is probable that a significant reversal in cumulative revenue will not occur (creates a ceiling or a minimum) (ASC 606‐10‐32‐11 & 32‐12)

Assess at the contract, not performance obligation, level

Considerations include (per ASC 606‐10‐32‐12):

Is it highly susceptible to factors outside the entity’s influence? IE, market volatility, third parties’ actions, weather, high risk of obsolescence, etc.

Uncertainties that will not be resolved for a long time

The seller has limited experience with similar contracts

The seller has a history of a broad range of price and other concessions

The contract has too many potential outcomes

Consider materiality

Do NOT consider bad debts (credit risk)

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Step 3 –Exam ple 3b

A university’s charges for tuition and housing are published on its website. Upon acceptance to the university, a student must pay a non‐refundable deposit to hold a spot. The university sends a bill for the remaining balance due a month prior to the start of the semester. There is an add/ drop period (first two weeks of the semester) when the student may receive a partial refund of the gross amount of tuition and housing charged.

What is the transaction price here?

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Step 3 –Solution 3b

The university has published fees for different educational levels and programs offered, so the transaction price is different based on different class of students.

The university receives payments from its students, or from others on behalf of its students. The transaction price includes payments from all sources.

The university has an add/drop period in which the student can receive a refund. Based on historical experience, the university estimates the percentage of students who will be due a refund. This percentage will then be used to reduce revenue recognition.

If a student paid the bill prior to the start of the semester, the refund amount will be reclassified from contract liability (deferred revenue) to refund liability. After the two‐week add/drop period ends, the university makes adjustments to this estimate based on actual results.

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Disclosure Requirem ents –the basics

Qualitative and quantitative information about:

Its contracts with customers (ASC 606‐10‐50‐4 through 50‐16)

Significant judgments and changes in applying guidance to those contracts (ASC 606‐10‐50‐17 through 50‐21)

Any assets recognized from the costs to obtain or fulfill a contract (ASC 340‐40‐50‐1 through 50‐6)

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ASC 606 –Expanded Disclosures For Private Entities –the details

• Disaggregated revenue:

Quantitatively, according to the timing of transfer of goods or services (for example, at a point in time and over time)

Qualitatively ‐ how economic factors (for example, type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows

• Descriptive disclosures of an entity’s performance obligations (nature, amount, timing)

• Significant judgments employed in the methods used to recognize revenue (for example, a description of the input method or output method) for POT (performance obligations satisfied over time) only; variable consideration info

• Apply to interim and annual financial statements

• Will require more judgement

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Tw o M ethods of TransitioningASC 606 requires retrospective implementation. Choices:

1. Retrospectively to each prior year presented with practical expedients

No restatement required for contracts beginning and ending in same period

Completed contracts with variable consideration, entity can use transaction price at date the contract was completed rather than estimating

No disclosure required for periods prior to date of initial application

Least popular method

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Tw o M ethods of Transitioning

2. Retrospectively with cumulative effect at date of initial application This method requires additional disclosures:

• The amount by which each financial statement line item is affected in the current reporting period vs. under prior standards

• An explanation of reasons for significant changes

Summary:

#2 is most common approach ‐ less work

Retrospective adoption may be more complex than you expect!

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W hat are the sources forASC Topic 606?

ASU 2014‐09 – Revenue from Contracts with Customers (Topic 606) “RFCWC”, as amended by:

• ASU 2015‐14 – RFCWC, Deferral of Effective Date

• ASU 2016‐08 – RFCWC, Reporting Gross vs. Net

• ASU 2016‐10 – RFCWC, Identifying Performance Obligations and Licensing

• ASU 2016‐12 – RFCWC, Narrow‐Scope Improvements and Practical Expedients

• ASU 2016‐20 – RFCWC, Technical Corrections and Improvements

• ASU 2017‐04 – RFCWC, SEC amendments

• ASU 2017‐13 – RFCWC, SEC amendments

• ASU 2018‐18 – RCFWC, Collaborative Arrangements

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AICPA Resources for Im plem enting ASC 606

A & A guide “Revenue Recognition” on revenue recognition for 16 ‘high impact’ industries: Aerospace & defense, Airlines, Asset Management

Broker‐dealers, Construction contractors

Depository institutions, Gaming, Health care

Hospitality, Insurance, Not‐for‐profit, Oil & gas

Power & utilities, Software, Telecom, Timeshares

Further info is at: http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/Pages/default.aspx

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W ithum Insights www.withum.com/resources/

revenue recognition for nonprofits handout

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