FASB Revenue Recognition - Deep dive into impact to private institutions. Katie Thornton, Robb Rose

Transcription

1 FASB Revenue Recognition - Deep dive into impact to private institutions Katie Thornton, Robb Rose 1

2 FASB Revenue Recognition FASB ASU Revenue from Contracts with Customers Retrospectively to each periods presented Retrospectively with cumulative effect Effective date Institutions with public bonds July 1, 2018 Institutions without public bonds July 1, 2019 Impacts Tuition & Housing Other revenues from contracts with customers 2

3 FASB Revenue Recognition NOT Included What IS NOT included? Contributions Grants* Leases Financial instruments (investments, debt, derivatives, etc) Guarantees Nonmonetary exchanges *see next slide 3

4 FASB Revenue Recognition - Grants FASB proposed Accounting Standards Update (ASU) Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made Objective To clarify existing guidance on revenue recognition of grants Last meeting March 2018 Not issued as of April 13,

5 FASB Revenue Recognition - Grants Diversity in practice by NFPS on: Issue 1: Characterizing grants and similar contracts with government agencies and others as reciprocal transactions (exchanges) nonreciprocal transactions (contributions) Issue 2: Distinguishing between conditional and restricted contributions. 5

6 FASB Revenue Recognition - Grants Issue 1 Are grants really an exchange/reciprocal service to the grantor/resource provider (federal agency)? 6

7 FASB Revenue Recognition - Grants Issue 1 - FASB is exploring requiring a NFP consider a grant an exchange transaction if grantor, either (1) directly receives goods or services of commensurate value or (2) fulfills a known and explicit obligation to provide goods or services to others. If it is unclear whether the resource provider is fulfilling such an obligation by means of the grant (or similar contract), that ambiguity would be indicative of a nonreciprocal transaction. 7

8 FASB Revenue Recognition - Grants Issue 2 If grants are to be considered nonexchange contributions/gifts, are the grants tied to a condition or a restriction? Condition not recognized as revenue until condition is met Restriction fully recognized as donor restricted revenue, released to unrestricted when restriction is met 8

9 FASB Revenue Recognition - Grants Issue 2 - FASB will clarify and refine guidance ASC by indicating that the definition of a donor-imposed condition would include the following: A right of return, entailing either a return of assets transferred or a release of a promisor from its obligation to transfer assets. A barrier that must be overcome before the recipient is entitled to the assets transferred or promised. A barrier would be described through use of indicators and illustrative examples 9

10 FASB Revenue Recognition - Grants Likely result of FASB project Government grant Nonexchange revenue Meets clarified criteria for conditional contribution Grant revenue continues to be recognized as expended (no change from current practice) Fails clarified criteria; restricted gift Revenue with donor restrictions recognized up front (change from current practice) 10

11 FASB Revenue Recognition - Grants FASB Not-for-profit Advisory Committee (NAC) Met in March 2018: Amendments to emphasize the fact that a barrier is only present, and a contribution can only be conditional, if a donor s/grantor s stipulation hinders entitlement to assets Suggestion to include an example involving a grant agreement that explicitly states that the metrics in the agreement are intended as guidelines, which would emphasize that the contribution is not conditional because the metrics are only guidelines, rather than requirements 11

12 FASB Revenue Recognition - Grants FASB Not-for-profit Advisory Committee (NAC) Met in March 2018: When an NFP meets a condition and a restriction simultaneously, it would be difficult for a user of the financial statements to understand how a contribution became restricted in the first place. This is especially true with most federal grants, which are likely to be considered conditional contributions (nonexchanges) rather than exchanges under the new guidance, and where this release from restrictions has not been reported in the past 12

13 FASB Revenue Recognition - Grants As a private institution or Foundation, what about government grants? Either way it will change policy notes of the private institution or foundation about recognition of government grants as such Stay tuned for more information as the FASB board formalizes guidance 13

14 FASB Revenue Recognition Tuition and Room & Board Interim reporting (or not) is KEY! Most performance obligations occur within the fiscal year (i.e. the education and providing of housing for Fall/Winter semesters typically fall in the fiscal year of the institution) Summer semester will continue to be partially deferred (no change) If you have GAAP interim reporting, may need to change accounting Could request waiver from bank to keep reporting as is Add in caveat that the interim board reports are Not in accordance with GAAP If you do not have GAAP interim reporting, may not need to change accounting 14

15 FASB Revenue Recognition Tuition and Room & Board Overall thoughts for tuition and room & board: 6/30/19 revenue will be reported net of discounts (same!) 6/30/19 accounts receivable from students only includes balances where you ve performed the service (unpaid balances from previous Fall & Winter and the current Summer semesters) (this is the same!) 6/30/19 contract liability (can still call it deferred revenue) cash collected but have not performed service (cash for Fall semester collected before 6/30/19) (this is the same!) 6/30/19 refund liability might need to be recorded if refunds for Summer semester could be granted after 6/30/19 (this is new!) 15

16 FASB Revenue Recognition - 5 step process 16

17 FASB Revenue Recognition Step 1 Step 1 Identify Contracts. A contract exists when all are met: 1. The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. 2. The entity (you) can identify each party s rights regarding the goods or services to be transferred. 3. The entity (you) can identify the payment terms for the goods or services to be transferred. 4. The contract has commercial substance (that is, 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 the entity will collect substantially all of the consideration 17

18 FASB Revenue Recognition Step 1 Step 1 Identify Contracts The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. 18

19 FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 1 Contract Identification: Describe contract with student documentation (is it electronic? Signed by student/parent?) Contracts are uniform/non-negotiable and fall within the same fiscal year as the institution (except summer semester) Describe nonrefundable deposits for enrollment (creating contract liability/deferred revenue) How institution determines collectability ie. when does the institution determine a student can pay for tuition (at admission? Approval of SFA?) Conclusion on when a contract is created under ASC 606 (when student signs contract and student has ability to pay?) 19

20 FASB Revenue Recognition - Tuition Audit tests for Step 1 (Tuition): Obtain example student tuition contract in year of implementation and maintain in the permanent/carryforward file and review for key items identified on previous slide (this is new!) In future years, we ll inquire about significant changes to the student tuition contract and obtain if necessary Inquire if any student tuition contracts are negotiated outside of the standard process. Does this happen? Manual override? 20

21 FASB Revenue Recognition Step 2 Step 2 Identify the Performance Obligations A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. A good or service is distinct if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer and the entity s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. 21

22 FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 2- Performance Obligations: Document that all performance obligations are completed during the fiscal year Document the one performance obligation = Delivering education services Audit tests for Step 2 (Tuition): Validate that the performance obligation is singular and will be completed with the fiscal year 22

23 FASB Revenue Recognition Step 3 Step 3 Determine the transaction price An entity shall consider the terms of the contract and the customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. 23

24 FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 3- Transaction Price: Transaction price is based on an annual tuition rate schedule approved by the Board and published on the institution s website Document if institution awards tuition discounts to students, discussing if the discount is more of a financial aid scholarship or a truly discounted price (or if the same) Discuss awarding federal student aid Discuss tuition remission programs to employees Discuss how students (customers) have a right to withdrawal. Institution will assess and record refund liability on a portfolio basis related to summer semester. 24

25 FASB Revenue Recognition - Tuition Audit tests for Step 3 (Tuition): Validate rate schedules (not new!) Complete substantive analytics on tuition revenue 25

26 FASB Revenue Recognition Step 4 Step 4 Allocate the transaction price to the performance obligations The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer 26

27 FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 4- Allocation of Transaction Price: Not applicable for tuition only one performance obligation Audit tests for Step 4 (Tuition): None 27

28 FASB Revenue Recognition Step 5 Step 5 Recognize revenue when (or as) the entity satisfies a performance obligation An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer For each performance obligation identified, an entity needs to determine whether it satisfies the performance obligation over time or at a point in time Derecognize contract liability 28

29 FASB Revenue Recognition - Tuition Tuition conclusions to be documented for Step 5- Revenue Recognition (over time or point in time): Document that all performance obligations are satisfied within one year, therefore recognition over time or point in time is not a risk For summer semester, Document conclusion that performance obligation for delivering education is over time and that part of summer semester will be deferred. Document how students (customers) have a right to withdrawal. Institution will assess and record refund liability on a portfolio basis, for summer semester revenue. 29

30 FASB Revenue Recognition - Tuition Audit tests for Step 5 (Tuition): Inquire of management whether any semesters cross over multiple years (summer semester) Obtain management s analysis of summer semester tuition deferred revenue and test calculation Obtain management's analysis of summer semester refund liability and test calculation (if applicable) (this is new!) 30

31 FASB Revenue Recognition Housing (and room & board) Housing conclusions to be documented for Step 1 Contract Identification: Use tool provided separately (or your own!) Describe contract with student documentation (is it electronic? Signed by student/parent? Is it separate from tuition?) Contracts are uniform/non-negotiable and fall within the same fiscal year as the institution (except summer semester) Describe nonrefundable deposits for enrollment (creating contract liability/deferred revenue) How institution determines collectability ie. when does the institution determine a student can pay for housing (at admission? Approval of SFA?) Conclusion on when a contract is created under ASC 606 (when student signs contract and student has ability to pay?) 31

32 FASB Revenue Recognition - Housing Audit tests for Step 1 (Housing): Obtain example student housing contract in year of implementation and maintain in the permanent/carryforward file and review for key items identified on previous slide (this is new!) In future years, we ll inquire about significant changes to the student housing contract and obtain if necessary Inquire if any student housing contracts are negotiated outside of the standard process. Does this happen? Manual override? 32

33 FASB Revenue Recognition Housing Housing conclusions to be documented for Step 2- Performance Obligations: Document that all performance obligations are completed during the fiscal year Document the one performance obligation = Providing housing (and food) services Audit tests for Step 2 (Housing): Validate that the performance obligation is singular and will be completed with the fiscal year 33

34 FASB Revenue Recognition - Housing Housing conclusions to be documented for Step 3- Transaction Price: Transaction price is based on an annual housing rate schedule approved by the Board and published on the institution s website Document if institution awards housing discounts to students, discussing if the discount is more of a financial aid scholarship or a truly discounted price (or if the same) Discuss awarding federal student aid Discuss how students (customers) have a right to withdrawal. Institution will assess and record refund liability on a portfolio basis related to summer semester. (if applicable) Or Document if housing is not offered in the summer. 34

35 FASB Revenue Recognition Housing Audit tests for Step 3 (Housing): Validate rate schedules (not new!) Complete substantive analytics on housing revenue 35

36 FASB Revenue Recognition Housing Housing conclusions to be documented for Step 4- Allocation of Transaction Price: Not applicable for housing only one performance obligation Audit tests for Step 4 (Housing): None 36

37 FASB Revenue Recognition - Housing Housing conclusions to be documented for Step 5- Revenue Recognition (over time or point in time): Document that all performance obligations are satisfied within one year, therefore recognition over time or point in time is not a risk For summer semester, Document conclusion that performance obligation for providing housing is over time and that part of summer semester will be deferred. Document how students (customers) have a right to withdrawal. Institution will assess and record refund liability on a portfolio basis, for summer semester revenue. 37

38 FASB Revenue Recognition - Housing Audit tests for Step 5 (Housing): Inquire of management whether any semesters cross over multiple years (summer semester) Obtain management s analysis of summer semester housing deferred revenue and test calculation Obtain management's analysis of summer semester refund liability and test calculation (if applicable) (this is new!) 38

39 FASB Revenue Recognition Other Contracts Overall thoughts for Other Contracts: Need to assess the performance obligations of the Other Contract Need to assess contract life all within one fiscal year? Impact to the financial statements 6/30/19 revenue might be impacted based on performance obligation analysis 6/30/19 expenses might be impacted (if incur expenses but haven t earned the revenue yet, will create Contract Asset, until revenue is recognized) 6/30/19 accounts receivable includes balances where you ve performed the service but haven t collected the cash (this is the same!) 6/30/19 contract liability (can still call it deferred revenue) cash collected but have not performed service (this is the same!) 6/30/19 refund liability might need to be recorded if the contract includes a refund clause (this is new!) 39

40 FASB Revenue Recognition Other Contracts Key considerations: Does the contract cross over more than one fiscal year? What are the performance indicators? What s the transaction price? Point in time or over time revenue recognition? 40

41 Disclosure requirements New Footnote: General Disaggregation of Revenue Contract Balances Performance Obligations Determining the Timing & Satisfaction of Performance Obligations Determining the Transaction Price and Amounts Allocated to Performance Obligations Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer 41

42 Disclosure requirements General Requirement: Must disclose all of the following amounts for the reporting period unless those amounts are presented separately in the statement of activities: 1. Revenue recognized from contracts from customers. 2. Any impairment losses recognized on any receivables or contract assets arising from an entity s contracts with customers. 42

43 Disclosure requirements Disaggregation of Revenue Requirement: Must disaggregate exchange revenue recognized from contracts with customers according to the timing of the transfer of goods or services to customers (i.e. over time or at a point in time) and qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows. 43

44 Disclosure requirements Contract Balances Requirement: Must disclose the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers. 44

45 Disclosure requirements Performance Obligations Requirement: An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following: 1. When the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement; 2. The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable); 3. The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent) 4. Obligations for returns, refunds, and other similar obligations 5. Types of warranties and related obligations. 45

46 Disclosure requirements Determining the Timing and Satisfaction of Performance Obligations Requirement: An entity shall disclose the judgments, and changes in the judgments, made in applying the guidance in Topic 606 that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining the timing and satisfaction of performance obligations. For performance obligations that an entity satisfies over time, an entity shall disclose the methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied). 46

47 Disclosure requirements Determining the Transaction Price and the Amounts Allocated to Performance Obligations Requirement: An entity shall disclose the judgments, and changes in the judgments, made in applying the guidance in Topic 606 that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining the transaction price and the amounts allocated to performance obligations. An entity shall disclose information about the methods, inputs, and assumptions used for assessing whether an estimate of variable consideration is constrained. 47

48 Disclosure requirements Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer Requirement: If an entity elects to use the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less, the entity shall disclose that fact. 48

49 Disclosure Example See handout This disclosure example is provided for tuition and room and board revenue only. Disclosures must be added to meet all of the following requirements for any additional material exchange revenue streams. 49

50 What s Next? Confirm your implementation date Analyze possible impact now Complete analysis for tuition & housing Complete analysis for other revenue contracts with customers Meet with your audit team to go over implementation questions 50

51 Questions? 51

52 Thank you! 52