The Financial Accounting Standards Board (FASB) is the agency in charge of monitoring, revising, and enforcing accounting practices in the United States. The FASB refers to its own team at the FASB Accounting Standards Codification (FASB Codification) for assistance in interpreting, updating, and translating the rules and regulations set for the accounting industry, called Generally Accepted Accounting Principles (GAAP).
Periodically there is a need to formally update, or change, the current FASB Codification, to reflect changes in technology, finances, and the industry. When those changes are made, the FASB issues an Accounting Standard Update (ASU). Each ASU includes the following information:
- Why the U.S. GAAP is being changed
- How U.S. GAAP is being changed
- What the formal amendment will be in the FASB Codification
- When the change must go into effect
Every time a new ASU is issued, businesses are affected. The accounting standards and updates to regulations have an impact on how companies keep their financial records, issue financial statements, and even run day-to-day operations. Businesses impacted include nonprofit organizations, for-profit small businesses, large corporations, and even sole proprietors.
Accounting Standards Update (ASU) 2014-09
One update to accounting regulations that have had a significant impact on not-for-profit organizations is ASU 2014-09, Revenue from Contracts with Customers. This particular update originally was published in May of 2014, but in July 2015, the FASB issued a statement deferring the effective date of ASU 2014-09 by one year for all businesses.
The conclusion stated that this ASU would be effective for nonprofits with financial reporting periods beginning after December 15, 2018. Today, all nonprofit organizations should be implementing the changes required by ASU 2014-09 into their current financial records.
The purpose of the update was to address inconsistencies in the way revenue, or money coming into organizations, was treated across several industries.
The update and the revised principles address contracts between vendors and their customers that may be formally written, oral, and even implied. The update states that the vendor should recognize revenue (entered into financial records at that time) when the control of the exchanged goods or services is fully turned over to the customer.
Revenue recognition is already challenging for nonprofits because most nonprofit organizations are collecting several different types of revenue, which may include contributions, earned revenue, unrelated business income, and more.
ASU 2014-09 affects nonprofits in multiple ways. Most often the nonprofit financial team is in the seat of the vendor during these types of transactions, so they will need to know how to recognize the revenue.
The FASB recommends using a five-step process to identify, sort, and recognize revenue from certain contracts. The five-step model works as follows:
- Identify whether the contract is written, oral, or implied.
- Identify performance obligations, and how they are different and related.
- List the transaction price of the entire contract and its parts.
- Assign the correct transaction prices to the correct performance obligation.
- Record the assigned price at the time that the matching obligation is satisfied.
This accounting standard update meant that nonprofits who were already using estimates to record revenue would now have to dive deeper and use several estimates or judgments to recognize each piece of revenue in a contract. Individuals in leadership roles also began to see a need to review current contracts with members, vendors, and customers.
Contracts executed before the effective date of ASU 2014-09 did not take into account the different types of performance obligations and the separation of their prices. As contracts expired and became eligible for renewal, many organizations chose to update the contracts to list the obligations separately and allocate pricing at that time.
The FASB issues updates to the current accounting principles that affect every entity, not just for-profit corporations. ASU 2014-09 went into effect in December 2018 for most companies. The update changes the way revenue collected during contracted exchanges is recognized.
Prior to ASU 2014-09, GAAP listed more transaction-based and industry-specific revenue recognition guidelines, however, ASU 2014-09 replaced those standards with this new way of recognizing revenue based on principles. Identifying and recording diverse streams of revenue is already challenging for nonprofit organizations.
While this update has now been in effect for four years, many of our clients at JFW Accounting Services struggle to accurately estimate and reflect prices for performance obligations. That challenge further complicates the total revenue recognized on annual reports.
At JFW, nonprofit accounting is our specialty. We partner with organizations, just like yours, to sort through financial data and help translate that into practical and functional statements. Give us a call today to see how we can simplify the revenue recognition process at your entity.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.