Revenue Recognition Issue 12 – Special Focus: Nonprofit
The good news for nonprofits is that contribution revenue was determined by the accounting standard setters to be “out of scope” for these new standards. Accordingly, no assessment of contribution revenues is required; however, these organizations don’t just get a pass.
Determining whether an asset transfer is a contribution or exchange transaction is the first step in implementing revenue recognition for nonprofits. But careful consideration should be given in evaluating each transaction because a single transaction may be entirely a contribution, entirely an exchange, or in part a contribution and in part an exchange transaction. A few examples of such transactions include:
- Membership Dues
- Grants, awards, and sponsorships
- Naming opportunities
- Special events
For transactions that contain characteristics of both contribution and exchange, you will need to first bifurcate the portion that relates to the contribution and apply those accounting guidelines. The remaining exchange portion would need to be assessed within the new revenue recognition standard.
To assist in the evaluation of such transactions, the FASB issued new guidance to clarify accounting for contributions. The update to the standard clarifies the current guidance and will assist in evaluating whether transactions should be accounted for as contributions or exchange transactions.
Under the recent update, asset transfers are contributions if the resource providers do not receive commensurate value in exchange for the assets transferred, or if the value received by the resource provider is incidental to the potential public benefit from using the assets transferred.
A careful review of the specific characteristics of the transaction from the perspectives of both the resource provider and the recipient is necessary to determine if a transfer of assets is a contribution.
It should be noted that the effective date for revenue recognition for a nonprofit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or over-the-counter market is fiscal years beginning after December 15, 2017. For all other nonprofits, the effective date is fiscal years beginning after December 15, 2018.
Please contact your BMF Advisor for additional information regarding the new standards.
Tax Accounting Method Considerations
The impact of this change hits more than just the financial statements – significant tax changes could also lie ahead. The new standard presents a unique opportunity for companies to revisit their tax methods for revenue recognition. Not only do they need to ensure compliance with the tax rules, but they can also take advantage of tax opportunities and planning around revenue recognition. Companies will need to determine whether the new book methods will be permissible for tax purposes.
In instances where the new methods are permissible, the company could file a Form 3115 to implement the new methods on its tax return. If the new methods are not permissible or if the company chooses to continue using their current tax methods, the new financial accounting changes could affect or create new book-tax differences and deferred taxes related to revenue recognition. Companies will need to consider the information needed to compute these book-tax differences, and whether the information will be available after the changes for financial statement purposes.
It is important to plan ahead to make sure that tax considerations are considered upfront and not an afterthought. Companies should thoroughly assess all their revenue streams and the proper tax methods for each to plan the appropriate actions for successful implementation.
James E. Merklin?>
CPA/CFF, CFE, CGMA, MAcc
Katie A. Allender?>
About the Authors
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