December 1, 2017 Financial Reporting Center Revenue Recognition Working Draft: Not-for-Profit Revenue Recognition Implementation Issue Issue #11-5: Not-for-Profit Subscriptions and Membership Dues Expected Overall Level of Impact to Industry Accounting: Moderate Wording to be Included in the Revenue Recognition Guide: Distinguishing Contributions From Other Transactions: Exchange Transactions 1. The FASB ASC Glossary defines an exchange transaction and contribution as follows: An exchange transaction is a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations. A contribution is as an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. Those characteristics distinguish contributions from exchange transactions, which are reciprocal transfers in which each party receives and sacrifices approximately equal value; from investments by owners and distributions to owners, which are nonreciprocal transfers between an entity and its owners; and from other nonreciprocal transfers, such as impositions of taxes or legal judgments, fines, and thefts, which are not voluntary transfers. In a contribution transaction, the value, if any, returned to the resource provider is incidental to potential public benefits. In an exchange transaction, the potential public benefits are secondary to the potential proprietary benefits to the resource provider. The term contribution revenue is used to apply to transactions that are part of the entity's ongoing major or central activities (revenues), or are peripheral or incidental to the entity (gains). 2. Therefore a contribution differs from an exchange transaction because an exchange transaction is a reciprocal transfer in which each party receives and sacrifices something of approximately equal value. Membership Dues
3. Paragraphs 9 12 of FASB ASC 958-605-55 discuss NFPs that receive dues from their members. This paragraph and the following paragraph and table reproduce that guidance. The term "members" is used broadly by some NFPs to refer to their donors and by other NFPs to refer to individuals or other entities that pay dues in exchange for a defined set of benefits. These transfers often have elements of both a contribution and an exchange transaction because members receive tangible or intangible benefits from their membership in the NFP. For example, the exchange portion of member benefits may include a journal subscription, discounted or free continuing professional education (CPE) classes, conferences and seminars, discounted or free tickets to seats at performing arts events, discounted services, access to locked website contents or a library, networking opportunities, and/or career qualifications. When membership dues carry traits of both contributions and exchange components, they should be bifurcated as required in FASB ASC 606-10-15-4 (see paragraphs 8.7.02 8.7.06 of the AICPA Audit and Accounting Guide Revenue Recognition (Note: reproduced above) for additional discussion on bifurcation.) Usually, the determination of whether membership dues are contributions rests on whether the value received by the member is commensurate with the dues paid. For example, if an NFP has annual dues of $100 and the only benefit members receive is a monthly newsletter with a fair value of $25, $25 of the dues are received in an exchange transaction and $75 of the dues are a contribution. 4. Member benefits generally have value regardless of how often (or whether) the benefits are used. For example, most would agree that a health club membership is an exchange transaction, even if the member stops using the facilities before the completion of the membership period. It may be difficult, however, to measure the benefits members receive and to determine whether the value of those benefits is approximately equal to the dues paid by the members. 5. Table 5-2 contains the list of indicators from FASB ASC 958-605-55-12 that may be helpful in determining whether memberships are contributions, exchange transactions, or a combination of both. Depending on the facts and circumstances, some indicators may be more significant than others; however, no single indicator is determinative of the classification of a particular transaction. Indicators of a contribution tend to describe transactions in which the value, if any, returned to the resource provider is incidental to potential public benefits. Indicators of an exchange tend to describe transactions in which the potential public benefits are secondary to the potential proprietary benefits to the resource provider. Table 5-2 Indicators Useful for Determining the Contribution and Exchange Portions of Membership Dues INDICATOR CONTRIBUTION EXCHANGE TRANSACTION The request describes the dues as being used to provide benefits to the general public or to the NFP's service beneficiaries. Recipient not-for-profit entity's (NFP's) expressed intent concerning purpose of dues payment. The request describes the dues as providing economic benefits to members or to other entities or individuals designated by or related to the members. Extent of benefits to members NFP's service efforts The benefits to members are negligible. The NFP provides service to members and nonmembers. The substantive benefits to members (for example, publications, admissions, educational programs, and special events) may be available to nonmembers for a fee. The NFP benefits are provided only to members. Duration of benefits The duration is not specified. The benefits are provided for a defined period; additional payment of dues is required to extend benefits. Expressed agreement concerning refundability of the payment The payment is not refundable to the resource provider. The payment is fully or partially refundable if the resource
Qualifications for membership Membership is available to the general public. provider withdraws from membership. Membership is available only to individuals who meet certain criteria (for example, requirements to pursue a specific career or to live in a certain area). 6. FinREC believes that membership dues, excluding any amount determined to be a contribution, generally should be considered an exchange or reciprocal transaction in which the member receives something of value and in return pays the NFP for the benefits of membership. The exchange transaction should be accounted for in accordance with FASB ASC 606 as revenue from contracts with customers. 7. For example, a trade association charges its members annual membership dues that include a contribution to its educational foundation that funds a college scholarship for students that major in the same discipline that the trade association represents. Typically, the membership amount and the contribution amount are separately identified, and payment of the contribution is optional. In that case, the amounts specified on the invoice are the amounts to be recognized as membership dues and contribution. However, in the less likely case that the contribution portion is not specified but a contribution is included as part of the membership dues, as discussed in paragraph 8.7.06 of the AICPA Audit and Accounting Guide Revenue Recognition and paragraph 5.43 of the AICPA Audit and Accounting Guide Not-for-Profit Entities, the trade association should bifurcate the exchange from the contribution by determining the fair value of the exchange portion of the transaction (membership dues), with the residual (excess of the resources received over the fair value of the exchange portion of the transaction) reported as contributions. The NFP should apply the guidance in FASB ASC 606 to the exchange portion of the membership dues and apply FASB ASC 958-605 to the contribution. Discussion of the Five-Step Revenue Recognition Model Related to the Exchange Aspects of Membership Dues and Subscriptions Step 1: Identify the Contract with a Customer 8. In order for the exchange portion of membership dues, a subscription, a life-time subscription, or a life-time membership to be a contract with a customer, it would need to meet the following criteria as required by FASB ASC 606-10-25-1: a. The contract is approved and the parties are committed to their obligations. b. The NFP can identify each parties rights to the goods or services being provided. c. The NFP can identify the payment terms for the goods or services to be transferred. d. The contract has commercial substance. e. It is probable that the NFP will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. 9. In most cases, NFPs require and receive the payments in advance for memberships and subscriptions, life-time memberships and life-time subscriptions, which are based on pricing and terms established by the NFP. Therefore, FinREC believes that the criteria for contract existence in FASB ASC 606-10-25-1 generally would be met for the exchange aspects of memberships and subscriptions, when the order is placed.
10. In the circumstances in which an NFP bills a member or subscriber for a renewal in advance, prior to the beginning of the service period, it is unlikely that the requirements in FASB ASC 606-10-25-1 have been met for the renewal. Even in cases where the requirements in FASB ASC 606-10-25-1 have been met and it is determined that a contract with a customer exists, the NFP would need to consider whether either party to the contract has performed and whether the requirements in FASB ASC 606-10-45-1 through 45-5 have been met to determine the presentation of the contract. FASB ASC 606-10-45-4 states that an entity would only recognize a receivable if it has a present right to payment even though that amount may be subject to refund in the future. Furthermore, as illustrated by Example 38 of FASB ASC 606-10-55 (paragraphs 284-286), an entity should not recognize a receivable and contract liability in the statement of financial position if the entity does not yet have a right to consideration that is unconditional (that is, the contract is cancellable at the invoice date). Therefore, a receivable would not be recorded until the earliest of meeting the performance obligation or, under a noncancellable contract when the entity has an unconditional right to consideration. Step 2: Identify the Performance Obligations in the Contract 11. A performance obligation is defined in FASB ASC 606-10-25-14 as a promise in a contract with a customer to transfer to the customer either: a. A good or service (or a bundle of goods or services) that is distinct. b. A series of distinct good or services that are substantially the same and that have the same pattern of transfer to the customer. 12. If the NFP promises in a contract to transfer more than one good or service to the customer, in accordance with FASB ASC 606-10-25-14, the NFP should account for each promised good or service as a performance obligation only if it is (1) distinct or (2) a series of distinct goods or services that are substantially the same and have the same pattern of transfer. 13. For example, if a membership included access to free or discounted CPE course, the promised access would be considered distinct, as compared to other promised services included in the contract, if both of the following criteria in FASB ASC 606-10-25-19 are met: a. Capable of being distinct Can the customer benefit from the CPE course either on its own or together with other resources that are readily available to the customer? b. Distinct within the context of the contract Is the promise to transfer the good or service separately identifiable from other promises in the contract? 14. In accordance with FASB ASC 606-10-25-22, if the CPE courses are not distinct, then the CPE course should be combined with other promised goods or services (such as a membership and/or subscription) until the NFP identifies a bundle of promised goods or services that is distinct. 15. NFPs are required under FASB ASC 606-10-25-14 to assess contracts with customers to determine if there are multiple performance obligations. If so, the NFP is required by FASB ASC 606-10-32-28 to allocate the transaction price to each of the identified performance obligations in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised good or service to the customer.
16. For example, a trade association charges its members annual membership dues, and the membership includes a subscription to its monthly publication (one per month) and discounts on future educational opportunities. The trade association must assess whether each of the monthly publications and each discount related to separate educational programs is a separate performance obligation and whether the discounts provide material rights. In accordance with paragraphs 16A-16B of FASB ASC 606-10-25, an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer, although discounts that provide material rights cannot be deemed immaterial. Consistent with paragraphs 41-45 of FASB ASC 606-10- 55, the right to obtain a discount on future purchases does not create a performance obligation to which a portion of transaction price would need to be allocated unless the discount is considered to be a material right. (If an option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services, and the entity recognizes revenue when those future goods or services are transferred or when the option expires.) Example 49 Option that Provides the Customer with a Material Right (Discount Voucher) in FASB ASC 606-10-55-336 through 55-339 provides further guidance. Step 3: Determine the Transaction Price 17. As explained in FASB ASC 606-10-32-2, the transaction price is the amount of consideration (for example, cash payment) to which an NFP expects to be entitled in exchange for transferring promised goods or services to a member or subscriber (customer), excluding amounts collected on behalf of third parties. To determine the transaction price, an entity should consider the effects of: a. Variable consideration b. Constraining estimates of variable consideration c. The existence of a significant financing component d. Noncash consideration e. Consideration payable to the customer 18. In general, subscriptions, memberships, life-time memberships, and life-time subscriptions are paid for in advance by the customer to the NFP or they are bundled with other goods or services (e.g. membership dues, conference and seminars, etc.) and amounts paid are generally not refundable. FASB ASC 606-10-32-15 states, In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. However, FASB ASC 606-10-32-17 provides factors that, if present, indicate that a financing component does not exist. That paragraph addresses the circumstances in which a customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer. An example would be online CPE The customer pays for the course at the time of purchase and can choose when to complete the course within a one- or two-year period. 19. The assessment of what constitutes a significant benefit of financing requires judgment. BC234 of FASB ASU 2014-09 states, that for many contracts an entity will not need to adjust the promised amount of customer consideration because the effects of the financing component will not materially change the amount of revenue that should be recognized in relation to a contract with a customer. The assessment of what constitutes a significant benefit of financing will be based upon individual facts and circumstances for each entity. If an entity concludes the financing component is not significant, the entity does not need to adjust the consideration promised in determining the transaction price. Under FASB ASC 606-10-32-18, as a practical expedient, an NFP need not adjust the transaction price for a significant financing component if the NFP expects, at contract inception, that the period between transfer of the goods or services to the customer and payment by the customer will be one year or less. Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract
20. As explained in FASB ASC 606-10-32-28, for a contract with a customer that has more than one performance obligation, an NFP should allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the NFP expects to be entitled in exchange for transferring the promised goods or services to the customer. 21. In the case where there are multiple performance obligations, as required by FASB ASC 606-10-32-29, the NFP should allocate the transaction price to each performance obligation identified in a contract on a relative standalone selling price basis. As required by FASB ASC 606-10-32-33, if a standalone selling price is not observable, the NFP should estimate it. FASB ASC 606-10-32-34 provides examples of suitable methods for estimating the standalone selling price of a good or service. If the transaction price includes a discount or variable consideration that relates entirely to one or more, but not all, performance obligations in a contract, then the requirements in paragraphs 36 41 of FASB ASC 606-10-32 specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations in the contract. 22. Continuing the example in paragraph 16, after determining the transaction price, the association should allocate the transaction price to each separately identifiable performance obligation 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, as required by FASB ASC 606-10-32-28. Thus, if the right to obtain a discount on the future educational opportunities is a material right, the membership dues are allocated among the publication, the discount right, and the general membership benefits received. Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation 23. As explained in FASB ASC 606-10-25-23, an NFP should recognize revenue when (or as) it satisfies the performance obligation by transferring a promised good or service to the customer. For the membership service and/or subscriptions, whether they are annual or life-time, the recognition point will depend on the specific facts and circumstances. A good or service is transferred when (or as) the customer obtains control of that good or service. 24. FASB ASC 606-10-25-27 notes that an entity transfers control of a good or service over time, and, therefore, satisfies a performance obligation over time if one of the following criteria is met: a. The customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs. b. The entity s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. c. The entity s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. 25. For each performance obligation, an NFP should determine whether the performance obligation will be satisfied over time by transferring control of a good over time or if the NFP satisfies a performance obligation at a point in time. For performance obligations associated with nonrefundable life-time memberships and life-time subscriptions, if the obligation is satisfied over time, exchange transactions would be recognized as revenue over the average duration of membership or subscription, the life expectancy of the member or subscriber, or other appropriate time periods. If the performance obligation is not satisfied over time, an NFP should consider at what point in time control transfers, based on the following indicators as explained in FASB ASC 606-10-25-30: a. Present right to payment b. Legal title c. Physical possession d. Risks and rewards of ownership e. Customer acceptance
26. Continuing the example in paragraphs 16 and 22, the revenue related to the publications would be recognized monthly (as performance obligations are satisfied in separate monthly deliverables, which is a point in time per FASB ASC 606-10-25-30). The revenue allocated to the option is recognized when the educational opportunity is provided (if exercised) or the option expires. The revenue related to the general membership benefits is recognized ratably over the membership period customer simultaneously receives and consumes those benefits of membership which are not considered separate performance obligations, over the membership period. 27. If the member exercises the option to participate in the educational opportunity, the exercise might be accounted for by the association either as a contract modification or a continuation of the existing contract (i.e., a change in the transaction price for the contract). (Refer to FASB/IASB TRG Agenda Ref. 32: Accounting for a Customer s Exercise of a Material Right, and paragraphs 9 12 of Agenda Ref. 34: March 2015 Meeting Summary of Issues Discussed and Next Steps). If the association accounts for the exercise of the option as a contract modification, then it should apply the guidance in paragraphs 10 13 of FASB ASC 606-10-25. If the association accounts for the exercise of the option as a continuation of the existing contract, it should follow the example in paragraphs 14-15 of TRG Agenda Ref. 32 and allocate the additional consideration to the educational opportunity along with the amount previously allocated to the option to participate in the educational opportunity. 28. The following examples are meant to be illustrative, and the application of FASB ASC 606 should be based on the facts and circumstances of an entity s specific situation. Example #1: Subscriptions Received as Part of a Membership An NFP trade association produces a quarterly journal that discusses and highlights research, issues and trends of interest to its members and others in the respective discipline related to the NFP s mission. Members receive the NFP s quarterly journal as part of their annual membership dues, which are $300 per year. In addition to the quarterly journal, members receive other membership benefits, such as access to the members-only section of the association s website and legislative advocacy services. The NFP sells individual journals to others that are not members of the NFP for $25 per journal. The NFP has determined there is no contribution included in the payment from the customer. The NFP applies the guidance in FASB ASC 606 and determines the following: Step 1- Identify the Contract: There is a contract between the NFP and the member related to both membership and the journal subscription. Step 2 - Identify Performance Obligations: There are six promised goods or services that are to be evaluated whether they are performance obligations that meet the criteria in FASB ASC 606-10-25-19: The promise to the member to provide access to the website during the one-year term. The promise to the member to provide legislative advocacy services during the one-year term. The promise to the member of a subscription to provide four quarterly journals. For the purposes of this example the promises to deliver all of these goods and services are distinct. However, the promise to deliver access to the website and the promise to provide advocacy services are delivered concurrently and have the same measure of progress; therefore, they may be accounted for as if they were a single performance obligation (referred to as membership benefits ). Step 3 - Determine the Transaction Price: The transaction price is the contract price of $300 for a one year membership, which includes the subscription. Step 4 - Allocate the Transaction Price to Performance Obligations: The transaction price should be allocated between the five performance obligations based on the relative standalone selling prices of each performance obligation. The standalone selling price for each journal would be the observable price of $25, since that is the price at which the NFP separately sells the journals to customers.
The NFP does not sell membership separately without including the quarterly journals. Since there is no directly observable selling price, the NFP should estimate the standalone selling price. The NFP determines that the adjusted market assessment approach is a suitable method to use to estimate the standalone selling price for the membership, as the estimate will refer to prices charged by other NFPs for similar services. In this case, the standalone selling price was determined to be $250. The NFP would then allocate the transaction price to the performance obligations based on the relative standalone selling price as follows: Performance Obligation Standalone selling price Percentage 1 Quarterly Journal $ 25 7% 2 Quarterly Journal 25 7% 3 Quarterly Journal 25 7% 4 Quarterly Journal 25 7% 5 Membership benefits 250 72% Total $350 100% Performance Obligation Allocated Transaction Price 1 Quarterly Journal $ 21 2 Quarterly Journal 21 3 Quarterly Journal 21 4 Quarterly Journal 21 5 Membership benefits 216 Total $300 Step 5 - Recognize Revenue When Each Performance Obligation is Satisfied: The NFP concludes that: The member simultaneously receives and consumes the benefits of membership, and the membership performance obligation is satisfied over time. The NFP also concludes that the best measure of progress toward complete satisfaction of the membership performance obligation over time is a time-based measure. Thus, $216 is recognized ratably over the one-year membership period. The performance obligation for each quarterly journal is satisfied at a point in time, and revenue should be recognized when control of the journal has been transferred to the customer. Assuming the NFP concludes that control of the journal transfers to the customer upon shipment, $21 is recognized when each quarterly journal is shipped. Example #2: One-Year Subscription to an Academic Journal An NFP produces an academic journal quarterly that discusses and highlights research, issues and trends of interest to a particular special interest group that the NFP serves. The NFP produces this journal four times a year. The NFP offers the journal for an annual subscription for $120 a year, which represents the standalone selling price. For the purpose of this discussion there is no discount offered to members, members do not receive the subscription as part of their annual dues, and the NFP has determined there is no contribution included in the payment from the customer. The NFP sells the journals to non-subscribers for $35 per issue and distributes the journal for sale in college bookstores and specialty newsstands for the same $35 price per issue. The NFP applies the guidance in FASB ASC 606 and determines the following: Step 1: Identify the Contract: There is a contract between the NFP and subscriber to provide a subscription of the quarterly journal for a one-year period. Step 2: Identify Performance Obligations: There are four performance obligations that meet the criteria in FASB ASC 606-10-25-19: The promise to the subscriber to provide four quarterly journals.
The subscriber obtains the journals within the contract period at a discount to the $35 per issue price, but any additional journals purchased after the contract period would be at the non-subscriber price of $35 per issue. Therefore, the NFP concludes that the discount on the journals provided during the contract term does not provide the customer with a material right. Step 3: Determine the Transaction Price: After considering whether there is a financing component to the contract (including whether to apply the practical expedient permitted by FASB ASC 606-10-32-18 for contracts of less than one year if a significant financing component does exist), the NFP concludes that there is no significant financing component and the transaction price is the contract price of $120. Step 4: Allocate the Transaction Price to Performance Obligations: The transaction price should be allocated between the four performance obligations based on the relative standalone selling prices of each performance obligation. Each journal has the same standalone selling price of $35, so 25% of the transaction price is allocated to each journal. Performance Obligation Allocated Transaction Price 1 Quarterly Journal $ 30 2 Quarterly Journal 30 3 Quarterly Journal 30 4 Quarterly Journal 30 Total $120 Step 5 - Recognize Revenue When Each Performance Obligation is Satisfied: The NFP concludes that: The performance obligation for each quarterly journal is satisfied at a point in time, and revenue should be recognized when control of the journal has been transferred to the customer. Assuming the NFP concludes that control of the journal transfers to the customer upon shipment, $30 is recognized when each quarterly journal is shipped. Comments should be received by February 1, 2018, and sent by electronic mail to Chris Cole at chris.cole@aicpa-cima.com, or you can send them by mail to Chris Cole, Accounting & Auditing Publications, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110. DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775. All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.