New FASB ASU Revenue Recognition Standards for Nonprofit Entities: Implementing ASC 606 for NFPs

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1 New FASB ASU Revenue Recognition Standards for Nonprofit Entities: Implementing ASC 606 for NFPs FOR LIVE PROGRAM ONLY TUESDAY, MAY 22, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at ext.1 (or ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x1 (or x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 New FASB ASU Revenue Recognition Standards for Nonprofit Entities: Implementing ASC 606 for NFPs TUESDAY, MAY 22, 2018 Joseph A. Arnone, CPA, CGMA, Senior Manager CohnReznick, New York Christopher J. Pentin, CPA, Audit Senior Manager Grant Thornton, Washington, D.C. Swami Venkat, CPA, CISA, CFE, ACA, Partner CohnReznick, Roseland, N.J.

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 FASB ASU Revenue Recognition Standards ASC 606 FOR NONPROFIT ENTITIES

6 AN INTRODUCTION TO COHNREZNICK ADVISORY N E W F A S B G U I D A N C E

7 T o p i c R e v e n u e f r o m C o n t r a c t s w i t h C u s t o m e r s The FASB replaced virtually all revenue recognition guidance with an entirely new standard. Upon the effective date, all guidance in the existing Topic 605 Revenue Recognition will be superseded. OVERVIEW Existing Topic 605 Recognize revenue when it is earned and realizable. Revenue from Contracts with Customers Topic 606 Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 7

8 BACKGROUND In May 2014, the FASB issued ASU , Revenue from Contracts with Customers. The AICPA has created two task forces to address implementation issues: o Healthcare o Not-for-Profits Tuition and housing revenue Subscriptions and membership dues Contributions and grants were excluded from this guidance. Effective for non-public entities for calendar year 2019 or fiscal year 2020.

9 KNOW YOUR REVENUE STREAMS Where do your revenues come from? For example: Membership Dues Publications Sponsorship Revenue Advertising Revenue Federal, State, or Private Grants Investment Income Contributions Retail Sales Educational Service Fees Pass-Through Funds Tuition Fee for Service Refunds Miscellaneous 9 9

10 Classification of Membership Dues Contract Criteria Contribution Exchange Transaction NFP expressed intent for use of dues revenue Intent benefits the general public of the NFPs beneficiaries Intent benefits members or beneficiary designated by member Benefit to members Benefits are negligible More significant benefits and may be available to nonmembers for a fee NFP obligations NFP services both members and non-members NFP will only serve its members Duration of benefits Unknown length or scope Defined length; additional payments may extend Refundability of dues payment Not refundable Refundable in full or ratably if membership cancelled Membership qualifications Open to the general public Only if certain criteria are met (i.e. license or credential) 10

11 TOPIC 606 REVENUE FROM CONTRACTS WITH CUSTOMERS The Five-Step Framework will be used to determine whether the core principle of Topic 606 has been achieved Identify a contract with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when/as performance obligations are satisfied The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to be entitled in exchange 11

12 Topic 606 Revenue from Contracts with Customers Criteria for accounting for revenue under 606: 1. The parties to the contract have approved the contract and are committed to performing their respective obligations. 2. Each party s rights regarding the goods or services to be transferred can be identified. 3. The payment terms for the goods or services to be transferred are identifiable. 4. The contract has commercial substance. 5. It is probable the Organization will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Identify a contract with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when/as performance obligations are satisfied 12

13 Collectability Under current US GAAP (ASC 605), collectability is used to determine whether or not to recognize revenue. Under the new guidance (ASC 606), collectability is a gating question to determine whether you have a contract. In evaluating whether collectability of an amount of consideration is probable, consider the customer s ability and intention to pay that amount of consideration when it is due. 13

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15 Implementing the new revenue standard The five step model Identify the contract(s) with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when or as an entity satisfies performance obligations 15

16 Implementing the new revenue standard Step 2: Identify the performance obligations A performance obligation is a promise to transfer either: A distinct good or service A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer 16

17 Implementing the new revenue standard The five step model Identify the contract(s) with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when or as an entity satisfies performance obligations 17

18 Implementing the new revenue standard Step 3: Determine the transaction price Transaction price: Consideration payable to customer Time value of money Transaction price Noncash consideration Variable consideration The amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. 18

19 Implementing the new revenue standard Step 3: Determine the transaction price Variable consideration Estimate amount Include if probable that there will not be a significant revenue reversal Discounts Rebates Refunds Credits Price concessions Bonuses Penalties Expected value (sum of probability weighted amounts) Most likely amount (single most likely outcome) Highly susceptible to factors outside entity's influence Limited predictive experience Large number of possible amounts 19

20 Implementing the new revenue standard Identify the performance obligations Significant judgement arises in assessing promises included in a contract and whether such process are accounted for together or separately. It is key for entities to assess appropriately as this impacts when revenue is being recognized. 20

21 Implementing the new revenue standard Identify the performance obligations - Distinct There are two elements that must be present for a good or service to be distinct. The consumer can benefit from the good or service either on its own or together with other resources that are readily available to the customer The entity's promise to transfer the good or service to the consumer is separately identifiable form other promises in the contract 21

22 Implementing the new revenue standard Identify the performance obligations implicit/explicit Promises do not have to be explicit in a contract to be a performance obligation If there are promises are customary and a consumer has a valid expectation that the product or service is include there is a separate performance obligation and revenue is recognized separately 22

23 Topic 606 Revenue from Contracts with Customers STEP 4: Allocate the transaction price to the performance obligations At contract inception, the transaction price is allocated to each distinct good or service based on its relative standalone transaction price. Identify a contract with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when/as performance obligations are satisfied 23

24 Step 4: Allocating the Transaction Price Important when there are several types of performance obligations (products & services sold together) The transaction price must be allocated to each performance obligation in proportion to its stand-alone selling price A discount may be allocated to one or more, but not necessarily all, performance obligations. This applies in cases where the sum of stand-alone selling prices of a bundle of goods or services exceeds the promised consideration in a contract. 24

25 Topic 606 Revenue from Contracts with Customers STEP 5: Recognize revenue when/as performance obligations are satisfied Are the performance obligations satisfied at a certain point in time, or over time. Identify a contract with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when/as performance obligations are satisfied 25

26 Membership Dues CASE STUDY

27 Does the arrangement pass Step 1?

28 Step 1: Identify the contract Both parties approve the contract and are committed to perform Each party has defined rights The payment terms are defined The contract has commercial substance The Association has collected all of the consideration 28

29 What are the promises?

30 Step 2: Determine the performance obligations IDENTIFYING PROMISES Career enrichment Option to purchase insurance from 3rd party provider Lobbying on behalf of profession 50% discount on additional CPE Quarterly webinars Quarterly Journal Defense of human rights 30

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32 Do the promises constitute performance obligations?

33 Step 2: Determine the performance obligations EVALUATING THE CAREER ENRICHMENT, INSURANCE AND LOBBYING Insurance: Association has no obligation to transfer any additional good or service Provides benefit of negotiating on behalf of members Career Enrichment/Lobbying/Negotiating: Capable of being distinct Distinct within the context of the contract Performance obligation identified: 1 year of "membership benefits" comprised of these promises 33

34 Step 2: Determine the performance obligations EVALUATING THE WEBINARS AND CPE DISCOUNT 4 Quarterly Webinars Capable of being distinct Distinct within the context of the contract Discount on CPE Discount is incremental to the discount offered to non-members Material right for a 50% discount on CPE courses 34

35 Step 2: Determine the performance obligations EVALUATING THE JOURNAL AND DEFENSE OF HUMAN RIGHTS 4 Quarterly Journals Capable of being distinct Distinct within the context of the contract Defense of Human Rights Membership fees may be used towards the Association s activities to defend human rights Broader social purpose and does not transfer a good or service to the customer. 35

36 What are the performance obligations?

37 Performance obligations Material Right for a 50% discount on CPE courses 4 Quarterly webinars 4 Quarterly Journals Membership Benefits

38 What is the transaction price?

39 The transaction price is $500 for a one year membership.

40 How should the transaction price be allocated to the performance obligations?

41 Step 4: Allocate the transaction price ADDITIONAL INFORMATION 80% of licensed professionals will purchase an average of $200 of CPE using the 50% discount, that is they pay $100. Significant number of journals each quarter are sold to non-members at the stand-alone selling price of $25. Using the adjusted market assessment approach, the Association estimates: SASP of the webinars at $50 per webinar. SASP of membership benefits at $100 per year. 41

42 Step 4: Allocate the transaction price to the performance obligations Performance Obligation SASP Calculation Material Right for CPE $ 80 80% x $200 x 50% Webinars $ 200 $50 x 4 Journals $ 100 $25 x 4 Membership benefits $ 100 Adjusted Market TOTAL for performance obligations $480 Contribution $ 20 Residual ($500 - $480) TOTAL $

43 How should revenue be recognized?

44 Step 5: Recognize Revenue MATERIAL RIGHT As the option is exercised (the member attends a CPE course using the 50% discount) or when it lapses unused (at the end of membership year). QUARTERLY WEBCASTS Point in time, when each webcast is offered. QUARTERLY JOURNALS Point in time, upon delivery each journal. MEMBERSHIP BENEFITS Over Time time-based measure over membership period. 44

45 Membership Dues Example #2 EXAMPLE 2 A not-for-profit membership entity has annual dues of $300. It has a website that provides educational material that can be accessed by members and the public. However, the public can only access to limited parts of the content. The entity advocates for the members related to legislative and industry matters. The entity has a monthly Journal subscription that is sent to members. The Journal is also sold to the public for a yearly subscription price. In addition, members are entitled to purchase educational programs from the entity at a discount. 45

46 Membership Dues Example #2 Step 1 Step 2 Step 3 Step 4 Step 5 Identify the contract Identify the performance obligation Determine the transaction price Allocate the price to the performance obligations Recognize revenue as each performance obligation is satisfied Contract is made up of Membership Dues and a Subscription (a) Perform membership services (b) Provide subscription services Total price $300 (a) $100 allocated to membership services (b) $300 allocated to subscription services Recognized ratably over 12 month period (a) $6.25 (b) $

47 Implementing ASU

48 Transition Road Map: We recommend starting transition activities as soon as possible. Below are the key transition steps and their associated timing Identify all revenue streams and types of contracts Understand the key revenue streams, accounting policies, and treatments Evaluate each contribution to identify conditions and donor-imposed restrictions Evaluate any grants to determine whether it is an exchange transaction or contribution For contracts, identify performance obligations and price Develop a method to allocate the price to each performance obligation Evaluate any changes and their potential impact on debt covenants, if any Organizations should reach out to their stakeholders early and communicate the impact of the new standards to their boards, lenders, donors, etc. 48

49 IN SUMMARY Understand the Accounting Standards Key Tactics Moving Forward Set-Up an Internal Committee Draft Proforma Financial Statements Reach Out to Your CPA Consider Impact to Your Stakeholders (e.g. Covenants) Communicate with Your Board, Lenders, Donors, etc. 49