By Jason Clapp, CPA
Not-for-profit revenue recognition is challenging due to the variety of funding sources, complex accounting rules, and the need to distinguish between exchange transactions and contributions. Deciding when and how to recognize revenue can be difficult but is crucial to managing funding and ensuring compliance.
Revenue recognition has always been an area that sets not-for-profit organizations apart from most other entity types. Because the not-for-profit revenue model stands out from the rest of the revenue treatment guidance in U.S. GAAP (Generally Accepted Accounting Principles), this brief refresher can help you make sure your organization is appropriately following the guidance.
Not-for-Profit revenue recognition guidance can be found in the Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) 958-605, Not-For-Profit Entities – Revenue Recognition.
The most significant distinguishing factor in the not-for-profit revenue recognition model is whether a given transaction has, in whole or in part, characteristics of reciprocal transfer of resources of equal or commensurate value – this type of transaction is referred to as an exchange transaction. An exchange transaction is the common transaction type in the business world today and represents typical sales of goods and services for commensurate value in cash, receivables, or even a reduction of obligations.
The guidance for exchange transactions is not part of the industry specific guidance for not-for-profit organizations but rather is located in ASC 606, Revenue from Contracts with Customers, included in the broader U.S. GAAP guidance intended for all other entity types that do not have their own industry specific subset of guidance.
At a high level, there are five criteria for recognizing the revenue originating from an exchange transaction:
Identify the Performance Obligation
By definition, an entity is identifying distinct goods or services it is providing in exchange for commensurate value. These goods or services are considered the performance obligations, and each distinct performance obligation must be separately identifiable.
Determination of Transaction Price
The transaction has a stated price which is the consideration the entity expects to receive in exchange for the goods or services it will transfer to the other organization.
Allocation of the Transaction Price
The transaction price must be allocated between the separately identified performance obligations previously identified and based on the relative stand-alone selling prices of the goods or services.
Satisfaction of Performance Obligations
Revenue is recognized when the entity satisfies a performance obligation by transferring the agreed-upon goods or services to the customer.
Measurement of Progress
If the performance obligation is satisfied over the course of time, revenue is recognized according to some rational allocation methodology over that time period.
Exchange transactions in the not-for-profit industry would include various fee-for-service arrangements where the not-for-profit organization has customers, clients, students or patients that it serves in industries spanning health care, education, and other industries. Some not-for-profit organizations also sell goods in exchange transactions.
As indicated by the guidance in ASC-606, the exchange transaction always involves the exchange of value between an entity providing a good or a service to a 3rd party business, not-for-profit, governmental entity, or individual who is, in turn, providing valuable resources directly to the entity and not some other entity (e.g. cash, receivables, etc.).
When the not-for-profit entity does not provide goods or services of value directly to the 3rd party providing valuable resources, then the transaction is not an exchange transaction, and the guidance provided by ASC-606 does not apply. Instead, the not-for-profit entity should look to the guidance provided in the not-for-profit industry specific guidance provided by ASC 958-605, the guidance covering contributions.
A contribution is a non-reciprocal transfer where the party providing valuable resources does not receive commensurate value from the not-for-profit organization. As such, there is no exchange between the parties.
Whereas the five criteria above set forth the accounting guidance for exchange transactions, these criteria are not applicable to accounting for contributions.
Contributions from a 3rd party resource provider can carry certain requirements, stipulations, or conditions that are imposed on the not-for-profit entity that represents the rights of the 3rd party in the arrangement that do not represent something of value that they are receiving in return. These are generally referred to as conditions or restrictions.
Accounting for contributions that do not carry conditions or restrictions is fairly straightforward. If the not-for-profit entity receives cash or other goods, the general accounting model guidance would require the not-for-profit entity record these contributions at fair value as of the date received.
Accounting for contributed services does require the evaluation of criteria for the entity to record contribution revenue, with revenue being recognized if either of the criteria are met.
- The service provided must create or enhance a non-financial asset such as a building or equipment, or other real or personal property, or
- The services provided must require specialized skills by an individual that does possess those skills, and the not-for-profit would typically need to purchase those services if not provided via donation.
Upon meeting one of the above criteria, contributed services received should be measured at their fair value and recorded as revenue as of the date received (i.e. within the period received).
If instead of receiving cash, goods or services, the donor provides a promise to give to provide cash, goods or services at a future date with no conditions or restrictions, the not-for-profit organization should record a receivable and revenue as of the date they receive the promise from the donor (assuming that any services provided meet the criteria for revenue recognition noted above). The not-for-profit entity should record a receivable and revenue for a promise to give even if the future date they expect to receive the cash, goods or services is outside of the current period (i.e. expected to be received in future years).
Even with the most straightforward revenue types, there are numerous nuances and criteria that must be carefully considered to determine the proper timing of revenue recognition or if revenue should be recognized at all – and this is before considering the impact of conditions or restrictions. Consult with your auditor or other experts in the area to make sure you get the accounting right for your organization.
If you would like to talk more about the accounting treatment of your revenue transactions, contact Jacobson Jarvis today.
About the Author:
Jason Clapp, CPA
Jason Clapp CPA, Jacobson Jarvis & Co. PLLC, has more than 20 years of experience providing attestation services including audits, reviews, and compilations in various industries including serving not-for-profit organizations. Jason enjoys partnering with members of management and the board of directors of not-for-profit organizations to help them achieve their goals and objectives and to provide value-added perspectives in the areas of accounting, internal control, financial reporting, compliance with grant agreements, and Federal financial assistance.