FOR LIVE PROGRAM ONLY New FASB ASU 2014-09 Revenue...
Transcript of FOR LIVE PROGRAM ONLY New FASB ASU 2014-09 Revenue...
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New FASB ASU 2014-09 Revenue Recognition Standards
for Nonprofit Entities: Implementing ASC 606 for NFPs
TUESDAY, MAY 22, 2018, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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FOR LIVE PROGRAM ONLY
TUESDAY, MAY 22, 2018
New FASB ASU 2014-09 Revenue Recognition Standards for Nonprofit Entities: Implementing ASC 606 for NFPs
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.
Notice
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The information contained herein is of a general nature and based on authorities that are
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FASB ASU 2014-09 Revenue Recognition Standards
ASC 606 FOR NONPROFIT ENTITIES
AN INTRODUCTION TO COHNREZNICK
ADVISORY
N E W F A S B G U I D A N C E
To p i c 6 0 6 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 Upon the effective date, all guidance in the existing Topic 605 Revenue Recognition will be superseded.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 Revenue from Contracts with Customers Topic 606
Recognize revenue when it is earnedand realizable.
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services.
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• In May 2014, the FASB issued ASU 2014-09, “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.
BACKGROUND
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
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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 non-
members 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)
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TOPIC 606 REVENUE FROM CONTRACTS WITH CUSTOMERS
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 Five-Step Framework will be used to determine whether the core principle of Topic 606 has been achieved
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
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Topic 606 Revenue from Contracts with Customers
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
Criteria for accounting for revenue under 606:
1. The parties to the contract have approved the contract and are committed
to performing their respective obl igations.
2. Each party’s r ights regarding the goods or services to be transferred can be
identif ied.
3. The payment terms for the goods or services to be transferred are
identif iable.
4. The contract has commercial substance.
5. I t is probable the Organization wil l collect the consideration to which it wi l l
be entit led in exchange for the goods or services that wil l be transferred to
the customer.
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⚫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.
Collectability
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Implementing the new revenue standardThe 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
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Implementing the new revenue standardStep 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
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Implementing the new revenue standardThe 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
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Implementing the new revenue standardStep 3: Determine the transaction price
Transaction price
Time value of money
Variable consideration
Noncash consideration
Consideration payable to customer
Transaction price:
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.
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Variable consideration
• Discounts
• Rebates
• Refunds
• Credits
• Price concessions
• Bonuses
• Penalties
Estimate amount
• Expected value (sum of probability weighted amounts)
• Most likely amount (single most likely outcome)
Include if probable that there will not be a significant revenue reversal
• Highly susceptible to factors outside entity's influence
• Limited predictive experience
• Large number of possible amounts
Implementing the new revenue standardStep 3: Determine the transaction price
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Implementing the new revenue standardIdentify 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.
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Implementing the new revenue standardIdentify 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
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Implementing the new revenue standardIdentify 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
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Topic 606 Revenue from Contracts with Customers
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
At contract inception, the transaction price is allocated to each distinct good or service based on its relative stand-alone transaction price.
STEP 4:
Allocate the transaction price to
the performance obligations
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• 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.
Step 4: Allocating the Transaction Price
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Topic 606 Revenue from Contracts with Customers
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
Are the performance obligations satisfied at a certain point in time, or over time.
STEP 5:
Recognize revenue
when/as
performance
obligations are
satisfied
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Membership DuesCASE STUDY
Does the arrangement pass Step 1?
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
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What are the promises?
Step 2: Determine the performance obligationsIDENTIFYING 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
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Do the promises constitute
performance obligations?
Step 2: Determine the performance obligationsEVALUATING 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
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Step 2: Determine the performance obligationsEVALUATING 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
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Step 2: Determine the performance obligationsEVALUATING 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.
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What are the performance obligations?
Performance obligations• Material Right for a 50% discount on CPE courses
• 4 Quarterly webinars
• 4 Quarterly Journals
• Membership Benefits
What is the transaction price?
The transaction price is $500 for a
one year membership.
How should the transaction price be allocated to the performance obligations?
Step 4: Allocate the transaction priceADDITIONAL 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.
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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 $ 500
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How should revenue be recognized?
Step 5: Recognize RevenueMATERIAL 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.
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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.
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Membership Dues – Example #2
Step 1
Identify the contract
Contract is made up of
Membership Dues and a
Subscription
Step 2
Identify the performance
obligation
(a) Perform membership
services
(b) Provide subscription
services
Step 3
Determine the transaction price
Total price $300
Step 4
Allocate the price to the
performance obligations
(a) $100 allocated to membership
services
(b) $300 allocated to subscription
services
Step 5Recognize
revenue as each performance obligation is
satisfied
Recognized ratably over 12 month period
(a) $6.25
(b) $18.75
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Implementing ASU 2014-09
Transition Road Map:
1Identify all revenue streams and types of contracts
2Understand the key revenue streams, accounting policies, and treatments
3Evaluate each contribution to identify conditions and donor-imposed restrictions
4Evaluate any grants to determine whether it is an exchange transaction or contribution
5For contracts, identify performance obligations and price
6Develop a method to allocate the price to each performance obligation
7Evaluate any changes and their potential impact on debt covenants, if any
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Organizations should reach out to their stakeholders early and communicate the impact of the new standards to their boards, lenders, donors, etc.
We recommend starting transition activities as soon as possible. Below are the key transition steps and their associated
timing.
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IN SUMMARY
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Key Tactics Moving Forward
Understand the Accounting Standards
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.