Revenue Recognition - BKD...revenue recognition guidance by analogy to these types of arrangements,...

Revenue Recognition: A Comprehensive Review for Not-for-Profit Organizations


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Table of Contents INTRODUCTION ..................................................................................................................................................... 4

THE MODEL ............................................................................................................................................................ 5

SCOPE .................................................................................................................................................................... 5

CONTRIBUTIONS/GRANTS ................................................................................................................................................ 5 COLLABORATIVE ARRANGEMENTS...................................................................................................................................... 5

BIFURCATING CONTRIBUTION & EXCHANGE COMPONENTS ................................................................................ 6

PORTFOLIO APPROACH .......................................................................................................................................... 8

STEP 1 – IDENTIFY THE CONTRACT WITH A CUSTOMER ......................................................................................... 9

COLLECTIBILITY ............................................................................................................................................................ 10

STEP 2 – IDENTIFY SEPARATE PERFORMANCE OBLIGATIONS ............................................................................... 11

IMMATERIAL ITEMS....................................................................................................................................................... 11 PRESENTATION OF SALES TAXES ...................................................................................................................................... 11 SHIPPING & HANDLING ................................................................................................................................................. 12 STAND-READY OBLIGATIONS .......................................................................................................................................... 12 MATERIAL RIGHTS ........................................................................................................................................................ 12

STEP 3 – DETERMINE THE TRANSACTION PRICE .................................................................................................. 12

VARIABLE CONSIDERATION & CONSTRAINING ESTIMATES .................................................................................................... 13 PORTFOLIO EXPEDIENT VERSUS PORTFOLIO DATA .............................................................................................................. 14 SIGNIFICANT FINANCING COMPONENT ............................................................................................................................. 14 CONSIDERATION PAYABLE TO A CUSTOMER ....................................................................................................................... 15

STEP 4 – ALLOCATE TRANSACTION PRICE TO SEPARATE PERFORMANCE OBLIGATIONS ....................................... 15

STEP 5 – RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED ............................. 16

PERFORMANCE OBLIGATIONS SATISFIED OVER TIME ............................................................................................................ 16 PERFORMANCE OBLIGATIONS SATISFIED AT A POINT IN TIME ................................................................................................ 16 NONREFUNDABLE UPFRONT FEES .................................................................................................................................... 17

LICENSES .............................................................................................................................................................. 18

SALES- & USAGE-BASED ROYALTIES ................................................................................................................................. 18

CONTRACT COSTS ................................................................................................................................................ 19

PRESENTATION .................................................................................................................................................... 19

DISCLOSURES ....................................................................................................................................................... 20

DISAGGREGATION ........................................................................................................................................................ 21 CONTRACT BALANCES ................................................................................................................................................... 21 PERFORMANCE OBLIGATIONS ......................................................................................................................................... 22 SIGNIFICANT JUDGMENTS .............................................................................................................................................. 22 CAPITALIZED CONTRACT COSTS ....................................................................................................................................... 23


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TRANSITION ......................................................................................................................................................... 23

FULL RETROSPECTIVE .................................................................................................................................................... 23 MODIFIED RETROSPECTIVE ............................................................................................................................................. 24

Completed Contracts ........................................................................................................................................... 24

CONTRIBUTOR ..................................................................................................................................................... 24

APPENDIX A – INTERNAL CONTROLS .................................................................................................................... 25

APPENDIX B – AICPA’S NFP REVENUE RECOGNITION TASK FORCE ISSUES ........................................................... 26

APPENDIX C – DISCLOSURE REQUIREMENTS ........................................................................................................ 27

APPENDIX D – SAMPLE SEC FILINGS ..................................................................................................................... 31

ADTALEM GLOBAL EDUCATION INC. (DEVRY EDUCATION GROUP INC.) 2017 10-K ................................................................. 31 GRAND CANYON EDUCATION 2017 10-K ......................................................................................................................... 33 GRAHAM HOLDINGS COMPANY (KAPLAN) ........................................................................................................................ 33


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Introduction The revenue recognition landscape dramatically changed with the May 2014 release of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU partially supersedes not-for-profit (NFP) industry-specific guidance and substantially all existing revenue recognition guidance and also adds significant interim and annual disclosures. Implementation and documentation will be significant undertakings for entities in all industries. NFPs may face more challenges than other industries due to the variety of funding sources and existing diversity in practice. A 2015 Urban Institute study indicates almost half the financial support for many NFPs is revenue generated through fees for goods and services. The ASU’s effect on each NFP will vary depending on existing revenue streams and current accounting practices. Even if the amount or timing of revenue recognition does not change, presentation and disclosure will. In addition, NFPs will have to redraft accounting policies under the new principles and update internal controls for the increases in management’s judgments.

The new revenue recognition model is now effective for public entities1 (see BKD’s white paper Revenue Recognition: An Updated Look at the Guidance). This paper focuses on those items in the new model that will have the greatest effect on NFPs and includes all subsequent amendments, Transition Resource Group (TRG) clarifications and finalized and exposed guidance from the American Institute of CPAs (AICPA) NFP Revenue Recognition Task Force (Task Force) (see Appendix B for the status of the Task Force’s issues).

A robust implementation plan will ensure a smooth transition. This includes evaluating existing revenue contracts and revenue recognition accounting policies to identify potential changes that will result from adopting the new standard. Management judgment will be required to identify a contract’s performance obligations, estimate the transaction price and its allocation to separate performance obligations and the pattern of recognition for the satisfaction of each performance obligation. The model requires an increased level of management judgment that will necessitate new documentation requirements and internal controls to support recognition, measurement, presentation and disclosure decisions. See Appendix A for sample internal control considerations. Even for contracts in which no change in accounting is expected, going through the process of proving that can be tedious and documentation-intensive.

1 The new revenue standard defines a public entity as any one of these: • A public business entity • An NFP entity that has issued—or is a conduit bond obligor for—securities traded, listed or quoted on an

exchange or over-the-counter market • An employee benefit plan that files or furnishes financial statements to the U.S. Securities and Exchange Commission

Effective DatesASU 2014-09

Revenue Recognition

Public Entities1

Annual and interim reporting periods beginning after

December 15, 2017

All OthersAnnual reporting

periods beginning after December 15, 2018

An NFP 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 must comply with the effective date for public entities (see BKD’s alert “Conduit Debt Obligations: Is Your NFP Subject to Accelerated Effective Dates?”).

https://www.bkd.com/docs/pdf/Revenue-Recognition-An-Updated-Look-at-the-Guidance.pdf

https://www.bkd.com/docs/pdf/Revenue-Recognition-An-Updated-Look-at-the-Guidance.pdf

https://www.bkd.com/articles/2018/conduit-debt-obligations-is-your-nfp-subject-to-accelerated-effective-dates.htm


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The Model The revenue recognition model’s core principle is that an entity would recognize as revenue the amount that reflects the consideration to which it expects to be entitled in exchange for goods or services when (or as) it transfers control to the customer. To achieve that core principle, an entity will apply a five-step model:

Identify the contract(s) with a customer

Identify the separate performance obligations

Determine the transaction price

Allocate the transaction price to the separate performance obligations

Recognize revenue when or as a performance obligation is satisfied

Scope The new revenue standard applies to all contracts with customers, e.g., members, sponsors, grantors or students, except for those within the scope of other standards, e.g., lease and insurance contracts, financing arrangements, financial instruments, guarantees and certain nonmonetary exchanges between vendors.

Contributions/Grants The standard does not explicitly exclude contributions, which resulted in a lengthy discussion at the TRG’s March 2015 meeting (see BKD’s article Clarification: Contributions Excluded from Revenue Standard). TRG members concluded contributions are outside the new standard’s scope if not given in exchange for goods or services that are an output of the entity’s ordinary activities, i.e., if they represent nonexchange transactions. The Financial Accounting Standards Board (FASB) determined no standard setting was required for a specific scope exclusion in the new revenue rules in Accounting Standards Codification (ASC) 606. FASB’s NFP Advisory Committee continued to press the issue due to the current diversity in practice in distinguishing between a conditional promise of financial support (nonexchange transaction) and a transaction where the resource provider receives commensurate value in return (exchange transaction). In August 2017, FASB issued an exposure draft to clarify existing guidance in ASC 958, Not-for-Profit Entities, on determining whether the receipt of funds under a government grant or contract is a contribution or an exchange transaction (see BKD’s article Guidance Proposed on Accounting for Contributions). The proposed guidance requires all organizations to evaluate whether the resource provider is receiving commensurate value in a transfer of assets transaction and whether contributions are conditional or unconditional. FASB’s current project plan indicates the issuance of a final standard in the second quarter of 2018.

Collaborative Arrangements The new revenue standard applies to contracts with a customer defined as “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.” For some contracts, the counterparty may not be a customer but rather a collaborator or partner that shares with the entity the risks and benefits resulting from the activity and, therefore, would not be in the new standard’s scope. Joint operating activities may involve the joint development and ultimate commercialization of intellectual property related to a potential new drug candidate, research and development, marketing and general and administrative activities. Common examples include:

Co-development and co-marketing arrangements — Joint operating agreements in which both parties to the agreement assume roles and responsibilities

Other sources of NFP income not affected by the new revenue standard include rental and investment income and in-kind contributions.

https://www.bkd.com/docs/pdf/Clarification-Contributions-Excluded-From-Revenue-Standard.pdf

https://www.bkd.com/articles/2017/guidance-proposed-on-accounting-for-contributions.htm

https://www.bkd.com/articles/2017/guidance-proposed-on-accounting-for-contributions.htm


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Co-promotion arrangements — Agreements in which companies partner together and use each company’s capabilities and experience to promote a product (owned by one of the parties) in various markets

These arrangements are most common in the biotech and pharmaceutical sectors but also may include higher education institutions.

In November 2017, FASB added a project to its agenda to make targeted improvements to the guidance in ASC 808, Collaborative Arrangements, to clarify when transactions between participants in a collaborative arrangement are within the revenue guidance’s scope. FASB has hosted several workshops and plans to issue an exposure draft in the second quarter of 2018. A final standard is expected by year-end.

Bifurcating Contribution & Exchange Components A contract may be partially in the new standard’s scope and partially in the scope of other accounting guidance. If the other accounting guidance specifies how to separate and/or initially measure one or more parts of a contract, an entity should first apply those requirements before applying ASC 606.

Many NFP transactions are in part a contribution and in part an exchange transaction (also referred to as bargain purchases). These transactions include an inherent contribution, which FASB defines as “a contribution that results if an entity voluntarily transfers assets (or net assets) or performs services for another entity in exchange for either no assets, or for assets of substantially lower value and unstated rights or privileges of a commensurate value are not involved.” Examples of transactions that may be in part a contribution and in part an exchange transaction include:

Membership dues

Grants, awards and sponsorships

Naming opportunities

Donor status

Gifts in kind

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. Existing guidance in ASC 958 illustrates separating and initially measuring such transactions, which by analogy could be applied to the transactions, noted above.

The Task Force believes when the transaction is in part a contribution and in part an exchange, the NFP should bifurcate the exchange from the contribution by determining the fair value of the transaction’s exchange portion, with the residual (excess of the resources received over the fair value of the transaction’s exchange portion) reported as contributions. The NFP should apply the guidance in ASC 606 to the transaction’s exchange portion and apply ASC 958 to the contribution.

Transactions among partners in collaboration arrangements within the scope of ASC 808 are out of scope of ASC 606. ASC 808 notes that when payments between parties in a collaboration are not within the scope of other authoritative guidance, an entity would determine income statement classification based on analogy to other authoritative accounting literature. Lacking an appropriate analogy, an entity may make an accounting policy election for a reasonable, rational and consistently applied classification. Therefore, an entity could apply the revenue recognition guidance by analogy to these types of arrangements, if that is the policy it has elected.


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FASB guidance in ASC 958 provides indicators that may be helpful in determining whether memberships are contributions, exchange transactions or a combination of both.

FASB Indicators for Contribution vs. Exchange Transaction

INDICATOR CONTRIBUTION EXCHANGE TRANSACTION

Recipient NFP's expressed intent concerning purpose of dues payment

The request describes the dues as being used to provide benefits to the general public or the NFP's service beneficiaries.

The request describes the dues as providing economic benefits to members or other entities or individuals designated by or related to the members.

Extent of benefits to members The benefits to members are negligible. The substantive benefits to members, e.g., publications, admissions, educational programs and special events, may be available to nonmembers for a fee.

NFP's service efforts The NFP provides service to members and nonmembers.

The NFP benefits only are provided 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 provider withdraws from membership.

Qualifications for membership Membership is available to the general public.

Membership only is available to individuals who meet certain criteria, e.g., requirements to pursue a specific career or live in a certain area.

Example: Membership Dues

The term "members" is broadly used 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 NFP membership, i.e., the exchange portion of member benefits may include a journal subscription, discounted or free continuing professional education 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.

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. 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. However, it may be difficult to measure the benefits members receive and determine whether the value of those benefits is approximately equal to the dues paid by members.


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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.

ASC 606 Scope

Included Not Included

Tuition & fees

Exchange grants

Membership dues

Sponsorship revenue

Royalty/licensing revenue

Program fees

Contributions

Nonexchange grants

Rental income

Leases

Insurance reimbursements

Guarantees

Nonmonetary exchanges

Portfolio Approach FASB recognized the challenges of applying the new revenue rules on a contract-by-contract basis and provided a practical expedient for entities with a large volume of similar contracts or similar customer classes to apply the guidance to a portfolio of contracts. Entities can apply the practical expedient if the portfolio has similar characteristics and the entity reasonably expects that the effects will not materially differ from applying the guidance to individual contracts. Because this is a practical expedient and not a requirement, an entity can choose to apply it to certain classes of customers and use it on an individual contract basis for others. The expedient is available for all aspects of the model or only to certain steps, e.g., the collectibility threshold or the evaluation of implicit price concessions (both of these concepts are new and discussed further below). Large organizations can adopt a portfolio approach on a systemwide or entity basis.

In establishing portfolios, an NFP will need to use judgment to determine the size, composition and number of portfolios. Each organization is unique, and portfolios will depend on the customer base and accounting system capabilities. Entities should consider the experience with and homogeneity of the portfolio to ensure the data is useful to predict an expected outcome. Entities should have documentation to support judgments and assumptions in determining portfolios.

The ASU does not mandate a specific approach in assessing materiality if using the portfolio approach will produce a different outcome than applying the guidance on an individual contract basis. An entity must demonstrate—in a reasonable manner, using some form of objective and identifiable information—why it expects the two approaches will not materially differ. This can include—but is not limited to—performing data analytics using information related to the portfolio, a sensitivity analysis to determine a range of potential differences between the two approaches or a qualitative assessment of disaggregating and aggregating the portfolio. Regular monitoring of portfolios is required. An entity should remove contracts from a portfolio when they no longer have similar characteristics with other contracts in the portfolio.


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Step 1 – Identify the Contract with a Customer The new revenue standard defines a contract as “an agreement between two or more parties that creates enforceable rights and obligations.” Accounting for contracts with customers under the new model only begins when all the following criteria are met:

Approval and commitment of all parties—this can be written, verbal or implied by an entity’s customary business practices

Identifiable rights and obligations for each party to the contract

Identifiable payment terms

Contract has commercial substance, defined as the expectation that the entity’s future cash flows will change as a result of the contract

Collectible, i.e., probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer

A contract would not exist if each party has the unilateral enforceable right to terminate a wholly unperformed contract without compensation.

Step 1 Identify contract with customer

Step 2 Identify

performance obligations

Step 3 Determine

transaction price

Step 4 Allocate

transaction price

Step 5 Recognize revenue

Consider an NFP with a gift shop or café with food sales. When a sale is made to a customer, there is implied approval and commitment. While there is no formal written agreement, this would still be considered a contract with a customer (if the remaining criteria are met).

Commercial substance

Collectible Contract Approval & commitment

Identifiable rights, obligations &

payment terms


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If an arrangement does not meet one or more of the contract criteria, an NFP should continually reassess the arrangement as facts and circumstances change. For partial payments received when the contract criteria are not met, revenue recognition only is allowable when the consideration received is nonrefundable and one of the following has occurred:

The NFP has no remaining performance obligation and all consideration promised by the customer has been received.

The contract is terminated—this is a legal matter and may require legal counsel’s involvement.

The NFP has transferred control of the goods or services to which the consideration that has been received relates; the entity has stopped transferring goods and services to the customer and has no obligation under the contract to transfer additional goods or services.

An NFP should recognize a liability for any customer consideration received until the contract criteria are met and revenue can be recognized. See Graham Holdings 1Q 2018 filing for an example in Appendix D.

Collectibility Under ASC 606, the evaluation of collectibility is a threshold for determining contract existence. For NFPs, the standard accelerates the assessment’s timing in the revenue cycle—current practice is to assess collectibility during the evaluation of accounts receivable and overall reserve establishment.

Collectibility is an explicit threshold for determining contract existence before applying the revenue recognition model. An NFP must evaluate customer credit risk and conclude it is “probable” that it will collect substantially all the consideration due in exchange for the services promised to the customer. Entities should evaluate both the customer’s ability and intent to pay as amounts become due.

The collectibility assessment relates to the amount of consideration to which an entity expects to be entitled, i.e., the transaction price, not the stated contract price. For higher education organizations, assessing the customer’s ability to pay would incorporate expected payments from parties in addition to the student and his/her parents, where applicable, e.g., financial aid packages that combine aid from a variety of sources—federal, state, local, etc., for a total combined collectibility assessment.

The transaction price may be less than the contract price because an entity intends to offer a price concession. Therefore, before determining if a customer contract exists, an entity will first need to estimate the transaction price so the appropriate values can be assessed for collectibility (see Step 3).

If this criterion is not initially met, it should be continually reassessed; however, if the collectability criterion is met initially, there is no need to reassess this criteria unless significant changes in circumstances occur, e.g., a customer files for bankruptcy.

Higher education institutions will need to consider such practices and processes—including those related to the admission and registration of students—in determining whether and when an agreement with a student creates enforceable rights and obligations between the institution and the student.

Entities may need to gather and track additional data to make this assessment. Simple aging schedules to calculate an allowance for doubtful accounts may no longer be adequate.


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Step 2 – Identify Separate Performance Obligations As soon as an NFP has identified its contracts, it should identify the separate performance obligations within those contracts. A performance obligation is a distinct promise to transfer goods or services to a customer and can be explicitly identified in a contract or implied by customary business practices, published policies or specific statements. For a promised good or service to be distinct and a separate performance obligation, both of the following criteria must be met:

Capable of being distinct because the customer can benefit from the good or service on its own or with other readily available resources

Distinct within the context of the contract—the good or service to the customer is separately identifiable from other promises in the contract. The following indicators would be used to evaluate if a good or service is distinct within the context of the contract:

• Significant integration services are not provided • The customer was able to purchase—or not purchase—the good or service without significantly

affecting other promised goods or services in the contract • The good or service does not significantly modify or customize another good or service promised

in the contract

Immaterial Items FASB did not expect entities to identify significantly more performance obligations than the deliverables identified today. A subsequent set of amendments clarified entities would be allowed to disregard promises deemed immaterial in the context of a customer contract. Items deemed immaterial would not have to be aggregated and assessed for materiality at the entity level for auditing purposes.

Presentation of Sales Taxes As originally issued, the ASU required amounts collected on behalf of third parties, e.g., some sales taxes, to be excluded from the transaction price. Entities would have to evaluate taxes collected in multiple jurisdictions to determine if a tax is levied on the entity or the customer; this analysis would include sales, use, excise and value-added taxes. Assessment would be on a tax-by-tax and jurisdiction-by-jurisdiction basis.

Reviewing and segregating these tax amounts would have been costly and operationally challenging. FASB reconsidered, and a subsequent set of amendments allows entities to make an accounting policy election to present sales taxes collected from customers on a net basis. The practical expedient would apply to all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. An entity not making this accounting policy election would apply the new revenue standard—as originally issued—in determining if those taxes should be included in the transaction price.

See Grand Canyon Education 1Q 2018 filing for an example in Appendix D.

Step 1 Identify contract with customer

Step 2Identify


Step 3 Determine

transaction price

Step 4 Allocate

transaction price

Step 5Recognize revenue

Determining separate performance obligations can be complex and will require significant management judgment. The NFP Task Force concluded, in most cases, tuition and housing are distinct services and, therefore, separate performance obligations.


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Shipping & Handling FASB has provided relief for any NFP with a retail or online sales operation. Under existing revenue guidance, many entities do not account for shipping of their sold goods as an additional deliverable. To reduce the cost and complexity of applying the new standard, entities may elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost, i.e., an expense. The election would be consistently applied to similar transactions; it is not an entitywide election since companies can have multiple customer arrangements. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities would be accrued.

See Graham Holdings 1Q 2018 filing for an example in Appendix D.

Stand-Ready Obligations The new standard notes a contract may include “a service of standing ready to provide goods or services or of making goods or services available for a customer to use as and when the customer decides.” TRG members generally agreed that the promise in a stand-ready obligation is the assurance the customer will have access to the good or service, not the delivery of the underlying good or service. This conclusion determines the pattern of revenue recognition in Step 5.

Material Rights A contract may contain an option to acquire additional goods or services. A separate performance obligation could exist if the option provides a material right to the customer that it would not receive without entering into that contract. Material right obligations must be separately valued to allocate part of the transaction price to those specific performance obligations. This conclusion affects the number of performance obligations identified and the pattern of revenue recognition in Step 5. See Graham Holdings 1Q 2018 filing for an example in Appendix D.

Step 3 – Determine the Transaction Price The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. To determine the transaction price, an entity would consider the terms of the contract, its customary business practices and the effects of the time value of money, noncash consideration and consideration payable to the customer. Consideration may include fixed amounts, variable amounts or both. An entity should recognize a liability if some or all of the consideration received from a customer is expected to be refunded.

Higher Education Considerations The AICPA Revenue Guide notes that in determining the transaction price, higher education institutions would include all the consideration they expect to be entitled to for the student’s tuition and housing. Certain institutions may offer students different tuition/housing rates based on the category of student, e.g., seniors, veterans, first responders, in-state versus out-of-state, etc. As such, the contract price may differ by student and

Consider a museum membership that includes a one-time free admission. Depending on the facts and circumstances, this could be viewed as a material right because it represents an option to buy additional goods and services at a price lower than normally charged.

Step 1 Identify

contract with customer

Step 2 Identify


Step 3Determine transaction

price

Step 4Allocate

transaction price



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would be based on the individual contract entered into by each student. The amounts an entity is entitled to can be paid by any party on the student’s behalf, e.g., parent, employer, federal or state governments or other external organizations through student aid specifically awarded to the student by such organizations, etc.

Transaction Price

Total amount of consideration to which an entity expects to be entitled

Variable consideration

Constraining estimates of variable

consideration

Significant financing Noncash consideration

Consideration payable to a

customer

Variable Consideration & Constraining Estimates Variable consideration is anything that causes the consideration to vary. Variable consideration can be explicitly stated (single service agreements or cash-pay schedules) or implicit from an entity’s customary business practices. For example:

Not performing a credit assessment prior to providing services

Continuing to provide services when experience indicates collection is not probable

A price concession can be implicit even if the organization continues to attempt to collect the full amount of charges. In some cases, it may be difficult to determine if an entity has implicitly offered a price concession or accepted the customer’s risk of default on the contractually agreed consideration. FASB declined to develop detailed guidance for differentiating between a price concession and an impairment loss. Documentation will be required to support management’s judgment in making this determination.

An estimate, including some or all of the variable consideration, could be included in the transaction price if it is “probable” the amount would not result in a significant revenue reversal. An NFP should consider the following factors when assessing the probability of a significant revenue reversal:

Factors outside an entity’s control Long period of time before final amount determined

Limited experience with contract type

Wide range of historical price concessions

An entity’s practice of offering price concessions or changing payment terms

Entities must estimate the transaction price using either the “expected value” or “most likely amount” approach, depending on which is expected to most accurately predict the consideration to which the entity will be entitled:

Expected value – The sum of probability-weighted amounts in a range of possible consideration amounts; an expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics

Most likely amount – The single most likely amount in a range of possible consideration amounts, i.e., the single most likely outcome of the contract. The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract only has two possible outcomes, e.g., an entity achieves or does not achieve a performance bonus

Each reporting period, management must reassess its transaction price estimates, including any constrained variable consideration. Entities with frequent subsequent adjustments should reassess the appropriateness of their estimation process, including the constraint.


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Higher Education Considerations Institutions may provide a stated period of time during which students may withdraw from classes without further (or reduced) financial obligation (beyond any nonrefundable deposits) that may result in a full or partial refund in those cases where consideration has been received in advance. This would be a form of variable consideration and an institution would need to recognize a refund liability. An entity would measure the refund liability at the amount of consideration received (or receivable) for which the institution does not expect to be entitled, i.e., amounts not included in the transaction price. It may be impractical to estimate the refund liability at an individual contract level when it is not known whether a specific student will withdraw. However, the entity may have evidence of withdrawals on a portfolio level. An institution would consider the factors above to assess the likelihood and magnitude of a revenue reversal. For example, while the withdrawals are outside of the institution’s influence, if the institution has significant predictive experience in estimating withdrawals and the uncertainty regarding a student’s withdrawal will be resolved in a short time frame, the Task Force believes these circumstances indicate a significant reversal in the cumulative amount of revenue recognized may not be expected. Therefore, it would be appropriate in this instance to include the institution’s estimate of withdrawals in the transaction price.

Portfolio Expedient Versus Portfolio Data Entities should consider all information—historical, current and forecast—that is reasonably available to estimate variable consideration when determining the transaction price regardless of whether ASC 606 is applied on a portfolio or individual contract basis. An NFP may use a portfolio of data to develop estimates for historical cash collections. TRG members clarified the use of portfolio data is not the same as applying the portfolio practical expedient. An entity is not required to apply the portfolio practical expedient when considering evidence from other similar contracts to develop an estimate of variable consideration. An entity could choose to apply the portfolio practical expedient, but it is not required to do so.

Significant Financing Component Contract terms may provide explicit or implicit favorable financing terms to an entity or its customer. An entity is required to adjust the transaction price to reflect the time value of money if the financing component is significant. The transaction price should reflect a selling price as though the customer had paid cash at the time of transfer. To determine if a contract contains a significant financing component, an entity would consider:

Whether the consideration would substantially differ if the customer promptly paid cash under typical credit terms

Expected length of time between delivery of goods or services and receipt of payment

The interest rate in the contract and prevailing market interest rates

TRG discussions clarified that an entity only should consider the significance of a financing component at a contract level rather than consider whether the financing is material at a portfolio level. As a practical expedient, an entity would not reflect the time value of money if the period between customer payment and transfer of goods or services is one year or less. Disclosure is required if this expedient is elected.

Example: NFP Thrift Store

An NFP runs a thrift store and sells goods that a customer can return within 30 days with a receipt for a refund. This is a form of variable consideration that must be estimated. The transaction price should not include the amounts for goods expected to be returned. Historically 5 percent of sales are returned. At each month-end, if circumstances remain unchanged, the NFP should recognize a 5 percent refund liability for anticipated returns. If $50,000 of merchandise was sold, based on historical experience—and if no current conditions say otherwise—the NFP expects 5 percent of that to be returned. The NFP would recognize $50,000 in cash, $2,500 in a refund liability and the remaining $47,500 as revenue.


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Consideration Payable to a Customer The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price. Consideration payable to a customer includes cash amounts that an entity pays—or expects to pay—to the customer. Consideration payable to a customer also includes credits or other items, e.g., a coupon or voucher, that can be applied against amounts owed to the entity. An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the entity.

Higher Education Considerations Institutions often provide reductions in tuition and housing, e.g., financial aid awarded to the student by the institution may be applied to tuition or housing charges, and will need to evaluate whether the aid relates partially or fully in exchange for a distinct good or service. In some cases, such reductions are given in exchange for distinct goods or services provided to the institution, e.g., as part of a compensation package (such as tuition remission provided to employees or work-study aid provided to students). Under existing guidance in ASC 958, such reductions are reported as expenses and would be reported in the same functional classification in which the cost of the goods or services provided to the institution are reported.

Alternatively, reductions in amounts charged for housing or tuition provided by an institution may be provided other than in exchange for a distinct good or service directly provided to the institution, e.g., a college may award a merit-based scholarship to a student enrolled at the college. In these instances, under ASC 606, such reductions would be accounted for as a reduction of the transaction price and revenue. If consideration payable to a customer is accounted for as a reduction of the transaction price, an entity shall recognize the reduction in revenue when (or as) the later of either of the following events occurs:

The entity recognizes the revenue for the transfer of the related goods or services to the customer.

The entity pays or promises to pay the consideration (even if the payment is conditional on a future event).

In general, reductions in amounts charged for housing or tuition are known and agreed to by the institution and the student prior to the recognition of revenue. The Task Force concluded such reductions would generally be recognized as the institution recognizes the revenue.

Step 4 – Allocate Transaction Price to Separate Performance Obligations If a contract includes separate performance obligations, an NFP would need to allocate the transaction price to performance obligations based on the relative standalone selling price of separate performance obligations. The best evidence of standalone selling price would be the observable price for which the entity sells goods or services separately. If an entity does not have separately observable sales, it should estimate the standalone selling price by using observable inputs and considering all information reasonably available to the entity. The objective would be to allocate the transaction price to each performance obligation in an amount that represents the consideration the entity expects to receive for its goods or services. Several approaches are available:

Adjusted market assessment – An entity would evaluate the market and estimate the price customers would pay. A competitor’s price information might be used and adjusted for an NFP’s cost and margins.

Step 1Identify contract with customer

Step 2Identify


Step 3Determine

transaction price

Step 4Allocate

transaction price



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Cost-plus margin – An entity would forecast its expected cost to provide goods or services and add an appropriate margin to the estimated selling price.

Residual value – An entity would subtract the sum of observable standalone selling prices for other goods and services promised in the contract from the total transaction price to find an estimated selling price for a performance obligation. The residual value approach would be appropriate only if the selling price is highly variable or uncertain, e.g., a new product.

Discounts and variable consideration should be allocated to all performance obligations unless it can clearly be shown the discount and/or variable consideration applies to only one or certain performance obligations.

Step 5 – Recognize Revenue When (or as) Performance Obligations Are Satisfied An NFP would recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. If the performance obligations are satisfied at a point in time, the associated revenue would be recognized at that point in time when control is transferred to the customer. Entities would recognize revenue for a performance obligation satisfied over time using a method that best depicts the transfer of goods or services.

Performance Obligations Satisfied over Time An entity transfers control over time if any of the following criteria are met:

The customer receives and consumes the benefits of the entity’s performance as the entity performs.

The customer controls the asset as it is created or enhanced by the entity’s performance (could be tangible or intangible).

The entity’s performance does not create an asset with an alternative use to the entity and the customer does not have control over the asset created, but the entity has an enforceable right to payment for performance completed to date and expects to fulfill the contract as promised.

For over-time revenue recognition, an NFP must be able to reasonably measure its progress toward completion using either output or input methods. The method chosen should be consistently applied to similar performance obligations in similar circumstances.


Performance Obligations Satisfied at a Point in Time If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time when control is transferred. FASB provided the following indicators of the transfer of control:

The entity has a present right to payment for the asset.

The customer has legal title to the asset.

The entity has transferred physical possession of the asset.

The customer has the significant risks and rewards of ownership of the asset.

Step 1Identify contract with customer

Step 2Identify


Step 3Determine

transaction price

Step 4Allocate

transaction price



17

The customer has accepted the asset.


Higher Education Considerations The Task Force concluded that in general, students simultaneously receive and consume all the benefits provided by the institution’s performance as the institution provides instruction or housing to the students throughout the academic period, and it would be appropriate for institutions to recognize tuition and housing revenues over time in these circumstances. Institutions will need to consider what method would be most appropriate for measuring progress if tuition and housing revenues are recognized over time. Instruction and housing services generally are provided ratably over the academic period. Therefore, the Task Force believes it would be appropriate for institutions to recognize revenue ratably over the academic period based on time elapsed.

Nonrefundable Upfront Fees Certain contracts charge a nonrefundable upfront fee to customers. Such fees may cover costs incurred in setting up a contract or may represent a separate performance obligation. If the upfront fee is an advance payment for future goods or services, revenue would be recognized when those goods or services are delivered to the customer. If the fees are compensation for setup activities and do not transfer a service to a customer, they are not a performance obligation. Management would need to evaluate if these costs have resulted in a capitalized asset.

Higher Education Considerations Students may choose not to enroll or not move into campus housing and then forfeit the associated nonrefundable deposit. If an institution expects to be entitled to a breakage amount in a contract liability, the entity should recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. Since whether a student actually enrolls or moves into housing are binary events, i.e., the student either exercises the right or not, and the student is not exercising any other rights, the Task Force concluded an institution would not record breakage until the student’s right to enroll or be provided housing expires.

Licenses Licensing refers to granting a customer the right to use—but not own—intellectual property (IP), e.g., patents or trademarks. Licensing arrangements have a variety of forms—term-based or perpetual, exclusive or nonexclusive—and payment terms can be fixed, variable, upfront or installment. An entity must first determine if

Recognize revenue when

control transfers

Over timeChoose progress measure (input

or output)

Point in time Determine when control transfers

An entity’s conclusion on point in time versus over time will affect disclosure requirements.


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the license is distinct from other goods or services in the arrangement. For licenses that are not distinct, an entity would combine the license with other goods and services in the contract and recognize revenue when it satisfies the combined performance obligation. If a license is distinct, an entity would assess the nature of the promise before applying the revenue recognition model to license arrangements. The type of license determines the timing of revenue recognition and is a challenging analysis requiring management judgment, even under current guidance. An NFP would classify IP in one of two categories:

Functional IP – This IP has significant standalone functionality. Because functional IP has significant utility independent of the licensor’s past or ongoing activities, and the functionality is not changing because of the licensor’s ongoing activities, the license is satisfied at the point in time the IP is made available for the customer’s use. If the functionality is expected to change, and the customer will be required or compelled to use the latest version of the IP, revenue for the license would be recognized over time.

Symbolic IP – This is IP without significant standalone functionality. The benefit from licenses of symbolic IP depends on the IP’s continuing support and maintenance. For example, a license to a sports team’s name and logo typically would have limited residual value if the team stops playing games, e.g., Hartford Whalers or Tampa Bay Devil Rays. Symbolic IP grants the customer an access right satisfied over time as the entity fulfills its promise to both:

• Grant the customer’s right to use and benefit from the IP • Support and maintain the IP

Sales- & Usage-Based Royalties FASB has provided a narrow exception to the variable consideration criteria for IP licenses when there is a sales-based or usage-based royalty. An entity should recognize revenue for such a transaction only when the later of the following events occurs:

Subsequent sale or usage

Satisfaction of performance obligation

Licenses are frequently bundled in a single contract with other goods and services. Several companies asked for clarification on the proper accounting treatment when licenses are bundled. A subsequent amendment clarifies when the sales-based royalty constraint would apply. An NFP would not be required to split a royalty into the portion that is subject to the royalty exception and the portion that is not. The sales-based royalty constraint would be applied to the overall royalty stream when the sole or predominant item within the arrangement is the license of IP. Otherwise, the general constraint on variable consideration would apply to the entire arrangement.

TRG members addressed how minimum guarantees would affect the recognition of sales- or usage-based royalties. General agreement was reached on the following:

• Point in time

Functional IP- Significant standalone functionality- Software, drug formulas, film, TV shows, music

• Over time

Symbolic IP- Does not have significant standalone functionality- Brand, team or trade names, logos, franchise rights


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Functional IP – A minimum guaranteed amount of sales- or usage-based royalties should be recognized at the point in time the entity transfers control. Any royalties above the fixed minimum would be recognized at the later of when the sale or usage occurs or when the performance obligation is satisfied.

Symbolic IP – Various recognition approaches could be acceptable for minimum guarantees in licenses of symbolic IP, which require revenue to be recognized over time.


Contract Costs In conjunction with the new revenue model, FASB also amended ASC 340, Other Assets and Deferred Costs. The ASU contains criteria for determining when to capitalize costs associated with obtaining and fulfilling a contract. Entities are required to recognize an asset for the incremental costs of obtaining a contract, e.g., sales commissions or legal fees, when those costs are expected to be recovered. A practical expedient allows expense recognition if the amortization period is less than a year; if elected, this must be disclosed in the financial statement notes. The costs of fulfilling a contract that are not covered by other standards, e.g., inventory, property, plant and equipment or capitalized software, only would be capitalized when they meet all the following criteria:

Directly relate to a contract

Generate or enhance resources that will be used to satisfy performance obligations

Are expected to be recovered

Sales commissions directly related to sales achieved during a time period typically represent incremental costs that would require capitalization. In general, costs incurred regardless of whether a contract is signed should be expensed unless they are explicitly chargeable to the customer, regardless of whether the contract is obtained (see Graham Holdings SEC disclosures in Appendix D).

An entity would amortize capitalized costs in a manner consistent with the pattern of transfer of the goods or services to which the asset is related. The amortization period also should take into consideration any expected contract renewals. Impairment of any recorded asset also will be subject to an ongoing assessment.

Presentation Any income streams not in ASC 606’s scope must be separately identified on the income statement. Entities will need to make this disclosure in the notes to the financial statements, if not presented separately on the face of the financial.

The model creates a new concept: a contract asset or liability. When an NFP satisfies a performance obligation by delivering promised goods or services, the NFP has earned a right to consideration and has a contract asset. When

License of IP

Other goods/ services

Royalty exception applies when the

predominant items to which the royalty relates is a license.

Otherwise, royalties are constrained as

variable consideration


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the customer performs first, e.g., prepayment, the NFP has a contract liability. Under existing guidance, when revenue is recognized but not yet billed, an entity records an asset for unbilled accounts receivable. After an invoice is sent to the customer, the related balance is reclassified as billed accounts receivable. Under Topic 606, reclassification from a contract asset to a receivable is contingent on fulfilling performance obligations—not on invoicing a client. As a result, the point at which a contract asset is reclassified as a receivable may be different than the time of invoicing (see Grand Canyon SEC filing in Appendix D).

Higher Education Considerations If a student pays consideration—or payments are received on the student’s behalf—or an entity has the right to an amount of consideration that is unconditional, i.e., a receivable, under a contract before the institution has provided the service to the student, the institution would present the consideration received (or receivable) as a contract liability when the payment is made or due. Institutions will need to consider the rights and obligations included in enrollment contracts to determine whether—and at what point—the contract is noncancellable. For example, many institutions provide a period during which students may withdraw from classes without further (or reduced) financial obligation. If an institution provides the tuition or housing services before the customer pays or before payment is due, the Task Force believes it is appropriate to recognize a contract asset for the services provided, excluding any amounts presented as a receivable. An institution might also be required to present a refund liability to reflect the amount of consideration received for which the institution does not expect to be entitled.

Since ASC 606 prescribes that revenue is recognized based on the transaction price (net of any reductions or consideration payable to customer), presenting the gross amount as revenue is not allowed. However, ASC 606 neither prescribes nor prohibits presentation of the reductions, e.g., financial aid or scholarships, in the financial statements. The Task Force concluded it is acceptable for institutions to disclose the amount of reductions incorporated in the revenue line either parenthetically on the face of the statement of activities or in the notes to the financial statements.

Disclosures FASB provided significant relief to entities that do not meet the definition of a public entity (see Appendix C for a summary of requirements for public and nonpublic entities).

Companies that have early adopted the standard have found this area to be more challenging than initially anticipated. The standard provides significant relief for nonpublic entities and less focus on quantitative disclosures. NFPs should ensure they have systems, internal controls and procedures in place to accumulate the information required to satisfy these new presentation and disclosure requirements. The objective of the disclosure requirements is to enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The standard does not prohibit an NFP from using alternative terms in the statement of financial position for a contract asset/liability. If an alternative description is used, an NFP shall provide sufficient information for financial statement users to distinguish between receivables and contract assets.


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Disaggregation When determining how to disaggregate revenue for disclosure purposes, an entity should consider how donors, regulators and lenders use the information to evaluate the entity’s financial performance. Public entities must disaggregate revenue in meaningful categories. Factors to consider in disaggregation include:

Geography

Market or type of customer – governmental and nongovernmental customers

Timing of transfer of goods or services – over time versus point in time

Operating segments or service lines

The ASU provides some relief to nonpublic entities on this requirement. At a minimum, revenue must be disaggregated according to the timing of transfer of goods or services (point-in-time versus over-time revenue recognition) and should include qualitative information about how economic factors affect the nature, timing and uncertainty of revenue and cash flows.

Contract Balances NFPs must report contract assets separately from accounts receivable on the balance sheet. A contract liability should not include amounts that are expected to be refunded. All NFPs must present opening and closing balances of receivables, contract assets and liabilities on the balance sheet or in the notes to the financial statements. FASB again provides significant relief for nonpublic entities. Only public entities are required to explain significant changes in the contract asset and liability balances during the reporting period. Entities will need to disclose reductions in a contract liability balance for services provided during the reporting period. The explanation will be required to include both qualitative and quantitative information. Public entities must disclose how the timing of satisfaction of its performance obligations relates to the typical timing of payment and the effect those factors have on the contract asset and liability balances. An entity can use qualitative information.

Under Topic 606, reclassification from a contract asset to a receivable is contingent on fulfilling performance obligations—not on invoicing a client. As a result, the point at which a contract asset is reclassified as a receivable may be different than the time of invoicing.

Understand nature, amount,

timing & uncertainty of

revenue & cash flows

Revenue disaggregation

Contract balances

Performance obligations

Significant judgments

Contract costs


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Performance Obligations All entities must disclose how performance obligations are satisfied, i.e., at a point in time or over time, significant payment terms, if the consideration is variable and if the estimate of variable consideration is constrained. All entities must describe the nature of goods or services provided, highlighting if an entity is acting as an agent.

Certain NFPs may have remaining performance obligations at the end of the reporting period. The following disclosures are required for public entities:

The aggregate amount of the transaction price allocated to the unsatisfied performance obligations at the end of the reporting period

An explanation of when the entity expects to recognize such revenue in either of the following ways:

• Quantitatively using time bands based on the duration of the remaining performance obligations • Qualitatively

FASB provided two practical expedients from the above requirement:

Disclosure is not required for remaining performance obligations if either condition is met:

• The contract has an original expected duration of one year or less • The entity recognizes revenue in an amount that directly corresponds with the value of the

performance completed to date, e.g., an entity bills a fixed amount for each hour of service provided

Disclosure is not required for variable consideration within unsatisfied performance obligations if either condition is met:

• The variable consideration is a sales- or usage-based royalty promised in exchange for a license of IP

• The variable consideration is fully allocated to a wholly unsatisfied performance obligation or wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation under the series provision

If an NFP elects either of these practical expedients, it must disclose what exemptions it is applying, the nature of the performance obligations, remaining duration and a description of the excluded variable consideration. An entity shall explain whether any consideration is not included in the transaction price and, therefore, not included in the information disclosed, e.g., an estimate of the transaction price would not include any estimated amounts of constrained variable consideration.

Significant Judgments All entities are required to disclose judgments and changes in judgments that significantly affect the amount and timing of revenue from customer contracts. This includes the timing of satisfaction of performance obligations and the transaction price and amounts allocated to performance obligations. All entities also must disclose the methods, inputs and assumptions made in assessing whether an estimate of variable consideration is constrained. Only public entities additionally must disclose the methods, inputs and assumptions for determining the transaction price, including estimating variable consideration, adjusting for significant financing and measuring noncash consideration and allocating the transaction price to goods and services. An entity will disclose whether estimates of transaction price are based on historical experience.

For performance obligations satisfied over time, all entities should disclose the methods used to recognize revenue. For public entities only, there should be an explanation of why the methods used provide an accurate depiction of the transfer of goods or services.

For performance obligations satisfied at a point in time, public entities should disclose the significant judgments made in evaluating when a customer obtains control of the promised goods or services.


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Capitalized Contract Costs If a public entity capitalized costs to obtain or fulfill a contract, it will be required to make the following disclosures:

Description of the judgments made in determining the amount of costs incurred to obtain or fulfill a contract

Description of the method to determine the amortization for each reporting period

The closing balances of assets recognized from the costs incurred by main category of asset, e.g., costs to obtain contracts, precontract costs and setup costs

The amount of amortization and any impairment losses recognized in the reporting period

Transition Entities must retrospectively apply the new revenue standard using either a full or modified retrospective approach. Each approach has relative benefits, costs and complexities. There is no one-size-fits-all solution—it will depend on each NFP’s specific facts and circumstances and which factors are most relevant. Some NFPs may consider comparability to peers or between reporting periods to be most relevant while others may prioritize the cost of implementation. In other cases, an NFP may consider comparability most important but determine the retrospective method is not feasible because it cannot make the necessary system changes in the required time frame at a reasonable cost.

Full Retrospective Under this approach, entities would apply the new guidance as if it had been in effect since the inception of all customer contracts. FASB provided several practical expedients:

For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.

For completed contracts with variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.

SEC filings for publicly traded higher education companies do not reveal a clear-cut preference—both approaches are planned (see Appendix D).

Full or modified

retrospective approach?

Systems & process

Comparability

Data availability

Volume & structure of

contracts

Significance of changes


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For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

ASU 2016-12 added an additional expedient for contract modifications, eliminating the need to separately evaluate the effects of each contract modification when determining the transaction price at initial adoption. An entity could elect to perform a single standalone selling price allocation—with the benefit of hindsight—to all of the contract’s satisfied and unsatisfied performance obligations.

Entities can elect any or all of these expedients and would disclose that fact as well as a qualitative assessment of the estimated effects. Entities must apply each expedient selected consistently to all contracts for all periods presented.

Modified Retrospective Under this approach, the cumulative effect of initially applying this ASU is recognized in opening retained earnings on the adoption date. An entity can elect to apply the modified retrospective transition approach to all contracts as of the adoption date or only to uncompleted contracts. Entities are required to disclose how they applied the modified retrospective method. Comparative-year restatement is not required, but entities must disclose an explanation of the reasons for significant changes. As originally issued, the standard would have required an entity electing modified retrospective application to disclose the effect of the change on income from continuing operations, net income, any other affected financial statement line items, any affected per-share amounts for the current period and any prior periods retrospectively adjusted, substantially increasing transition costs. For companies applying the guidance using the modified retrospective application, subsequent amendments in ASU 2016-12 eliminated the requirement to disclose the effect of the accounting change for the period of adoption. However, entities still would need to disclose the changes’ effect on any prior periods retrospectively adjusted.

Completed Contracts

For a contract to be considered completed at transition, all—or substantially all—of the revenue must have been recognized under legacy generally accepted accounting principles (GAAP) before the date of initial application. Accounting for contract elements that do not affect revenue under legacy GAAP would be irrelevant to the assessment of whether a contract is complete.

The adoption of ASC 606 will be complex and likely will require significant hours to correctly implement. BKD can help educate your team, provide implementation tools and assist with analysis and documentation. If you would like assistance complying with the new revenue recognition standard, contact your trusted BKD advisor. BKD has prepared a library of BKD Thoughtware® on revenue recognition issues. Visit our Hot Topics page to learn more.

Contributor Anne Coughlan Director 317.383.4000 [email protected]

NFPs will need to carefully consider the cost and benefits of these two approaches, which will affect the start date and data requirements of implementation projects.

https://www.bkd.com/hot-topics/index.htm

mailto:[email protected]


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Appendix A – Internal Controls

Five-Step Model Considerations for New or Amended Controls

Step 1: Identify the Contract with the Customer

• Identifying arrangements (whether written or unwritten) that meet the contract criteria

• Reassessing arrangements not initially meeting the contract criteria as significant changes may occur in the underlying facts and circumstances

• Assessing management’s and the customer’s commitment and ability to perform under the contract

• Checking that payment terms are properly considered • Assessing the collectibility criterion • Evaluating contract modifications

Step 2: Identify Performance Obligations

• Identifying performance obligations, including those explicitly stated in the contract and those that may be implied based on customary business practices

• Evaluating whether a promised good or service is distinct, particularly within the context of the contract

• Evaluating whether a series of goods or services should be treated as a single performance obligation

Step 3: Determine the Transaction Price

• Estimating the amount to which the entity expects to be entitled, i.e., the transaction price, including any variable consideration. When valuation consultants are hired, it is normally expected that controls are in place to help ensure their competence and objectivity

• Evaluating whether any portion of variable consideration should be constrained

• Determining the fair value of noncash consideration • Identifying and measuring whether there is a significant financing

component in the contract • Determining the accounting for consideration payable to a customer

Step 4: Allocate the Transaction Price

• Estimating the standalone selling price, including the increasing of observable inputs in that process

• Determining the appropriate transaction price allocation, including variable consideration and discounts

Step 5: Satisfaction of Performance Obligations

• Determining whether performance obligations are satisfied at a point in time or over time

• Measuring progress toward complete satisfaction of a performance obligation that is satisfied over time, i.e., the input and output methods

• Recognizing revenue only when (or as) control is transferred to the customer


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Appendix B – AICPA’s NFP Revenue Recognition Task Force Issues NFP Revenue Recognition Task Force – Issues List (as of May 21, 2018)

Issue #

Description of Implementation Issue Status

1 Tuition and Housing Revenue Finalized and included in the AICPA Guide Revenue Recognition

2 Contributions Finalized and included in the AICPA Guide Revenue Recognition

3 Grants FASB final standard expected in June 2018

4 Subscriptions and Membership Dues Finalized and included in the AICPA Guide Revenue Recognition

5 Bifurcation of Transactions Between Contribution and Exchange Components

Finalized and included in the AICPA Guide Revenue Recognition


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Appendix C – Disclosure Requirements New or Modified Revenue Disclosures

Description Public1 Entities

All Other Entities Annual

Interim (Public1 Entities Only)

Contracts with Customers

Revenue recognized from contracts with customers, separate from other sources of revenue YES YES YES

Any impairment loss on any receivable or contract assets arising from a contract with a customer, separate from impairment losses on other contracts

YES YES YES

Disaggregation of Revenue

An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors

YES NO YES YES

An entity shall disclose sufficient information to enable the users of financial statements to understand the relationship between the disclosures of disaggregated revenue and revenue information that is disclosed for each reportable segment, if the entity applies Topic 280

YES NO YES YES

Disaggregation Practical Expedient for Private Companies

Nonpublic entities electing not to disclose the quantitative disaggregation information above shall disclose, at a minimum, revenue disaggregated according to the timing of transfer of goods or services and qualitative information about how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows

N/A YES YES

Contract Balances

Opening and closing balances of receivables, contract assets and liabilities from contracts with customers, if not otherwise separately presented or disclosed

YES YES YES YES

Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period

YES NO YES YES

1 The new revenue standard defines a public entity as any one of these: • A public business entity • An NFP entity that has issued—or is a conduit bond obligor for—securities traded, listed or quoted on an

exchange or over-the-counter market • An employee benefit plan that files or furnishes financial statements to the SEC


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Contract Balances

Aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations at the end of the reporting period2 3

YES NO YES YES

Explanation of how the timing of satisfaction of its performance obligations related to the typical timing of payment and the effect those factors have on the contract asset and liability balances; may use qualitative information

YES NO YES

Explanation of significant changes in the contract asset and liability balances during the reporting period YES NO YES

Performance Obligations – Some Practical Expedients Available

When an entity typically satisfies its performance obligations YES YES YES

Significant payment terms (when payment is typically due, existence of significant financing component, any variable consideration, any constraints on variable consideration)

YES YES YES

Nature of goods or services promised, highlighting if entity is acting as an agent YES YES YES

Obligations for returns, refunds and other similar obligations YES YES YES

Types of warranties and related obligations YES YES YES

Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods

YES NO YES YES

When an entity expects to recognize as revenue the amount disclosed immediately above on either a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations or using qualitative information2 3

YES NO YES

2 An entity need not disclose this information for a performance obligation if either condition is met:

a. The performance obligation is part of a contract with an original expected duration of one year or less. b. The entity recognizes revenue in the amount to which the entity has a right to invoice.

3 An entity need not disclose this information for variable consideration if either condition is met: a. The variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property. b. The variable consideration is entirely allocated to a wholly unsatisfied performance obligation or wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation under the series provision.


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If Practical Expedients Are Elected for Performance Obligations

An entity shall disclose what optional exemptions it is applying as well as the nature of the performance obligations, the remaining duration and a description of the excluded variable consideration. An entity shall explain whether any consideration is not included in the transaction price and, therefore, not included in the information disclosed, e.g., an estimate of the transaction price would not include any estimated amounts of constrained variable consideration

YES YES YES

An entity shall disclose if a practical expedient is elected for either the existence of a significant financing component or the incremental costs of obtaining a contract

YES YES YES

Significant Judgments

Judgments and changes in judgments that significantly affect the amount and timing of revenue from customer contracts. This includes the timing of satisfaction of performance obligations and the transaction price and the amounts allocated to performance obligations

YES YES YES

For performance obligations satisfied over time:

• The method used to recognize revenue

• Explanation of why the methods used faithfully depict the transfer of goods or services

YES YES

YES

NO

YES YES

For performance obligations satisfied at a point in time, the significant judgments made in evaluating when a customer obtains control of the promised goods or services

YES NO YES

Methods, inputs and assumptions used for:

Determining the transaction price, including estimating variable consideration, adjusting the price consideration for the time value of money and measuring noncash consideration

YES NO YES

Assessing whether an estimate of variable consideration is constrained YES YES YES

Allocating the transaction price, including estimating the standalone selling price of promised goods or services and allocating discounts and variable consideration to a specific part of a contract

YES NO YES

Measuring obligations for returns, refunds and similar obligations YES NO YES


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Assets Arising from Contract Costs – Practical Expedients Available

Judgments made in determining the amount of cost incurred to obtain or fulfill a contract and the method used to determine amortization for each reporting period

YES NO YES

Closing balances of assets recognized from the cost incurred to obtain or fulfill a contract by main category of asset, e.g., cost to obtain a contract, precontract costs, setup costs

YES NO YES

Amount of amortization and any impairment losses recognized in the reporting period YES NO YES

If Practical Expedients Are Elected for Contract Costs

If a nonpublic entity elects the practical expedient in the paragraph on the first two disclosures above, the entity shall disclose that fact

N/A YES YES


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Appendix D – Sample SEC Filings

Adtalem Global Education Inc. (DeVry Education Group Inc.)

2017 10-K

In May 2014, FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606).” This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2017. Adtalem will implement this guidance effective July 1, 2018, using the retrospective approach. Management has assessed Adtalem’s revenue recognition policies and procedures, and based on the analysis performed to date, anticipates the adoption will not have a significant impact on Adtalem’s Consolidated Financial Statements.

Grand Canyon Education

2017 10-K

In May 2014, the FASB issued “Revenue from Contracts with Customers, as amended.” The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The accounting guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgements and changes in judgements and assets recognized from costs incurred to obtain or fulfill a contract. The University will adopt this new standard January 1, 2018 using the modified retrospective method and providing certain additional disclosures as defined within the standard. The University has elected to apply this guidance retrospectively to all contracts at the date of initial application. Management has undertaken a review of contracts and revenue streams for all of our net revenues. The majority of our revenues are related to tuition, net of scholarships, due from our students. Tuition revenues, net of scholarships, are currently recognized pro-rata over the applicable period of instruction which the University believes is consistent with the revenue recognition method required by the new standard. The University will provide expanded disclosures pertaining to revenue recognition in our annual and quarterly filings beginning in the period of adoption. The University will clarify further its receivables, contract assets and contract liabilities reported in its consolidated balance sheets. The University will elect the short-term contract exemption with respect to disclosures associated with its performance obligations as all performance obligations as of the end of any reporting period have original terms of less than a year. Thus, we anticipate the adoption of this standard will not have a material impact on our consolidated financial statements, cash flows or results of operations.

1Q 2018 10-Q

On January 1, 2018, the University adopted “Revenue from Contracts with Customers” using the modified retrospective method applied to all contracts. Net revenues consist primarily of tuition, net of scholarships, and fees derived from courses taught by the University online, on ground at its over 275 acre campus in Phoenix, Arizona, and at facilities it leases or those of employers, as well as from related educational resources that the University provides to its students, such as access to online materials. Tuition revenue is recognized pro-rata over the applicable period of instruction. A contract is entered into with a student and covers a course or semester. Revenue recognition occurs once a student starts attending a course. The University also charges online students an upfront learning management fee, which is deferred and recognized over the initial course. The University has no costs that are capitalized to obtain or to fulfill a contract with a customer. Ancillary revenues include housing and fee revenues that are recognized over the period the services are provided and include revenues from sales and services such as food and beverage, merchandise, hotel, golf and arena events that are recognized as sales occur or services are performed as these services are transferred at a point in time. For the three months ended March 31, 2018 and 2017, the University’s revenue was reduced by approximately $60,241 and $54,653, respectively, as a result of scholarships that the University offered to students. Sales tax collected


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from students is excluded from net revenues. Collected but unremitted sales tax is included as an accrued liability in our consolidated balance sheet.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

The following table presents our revenues disaggregated by the nature of services for the three months ended March 31, 2018:

Tuition revenues $278,713

Ancillary revenues (housing, meals, fees, golf, hotel, arena, other) 57,209

Total revenues 335,922

Scholarships (60,241)

Net Revenues $275,681

The University’s receivables represent unconditional rights to consideration from our contracts with students; accordingly, students are not billed until they start attending a course and the revenue recognition process has commenced. Once a student has been invoiced payment is due immediately. Included in each invoice to the student are all educational related items including tuition, net of scholarships, housing, educational materials, fees, etc. The University does not have any contract assets. The University’s contract liabilities are reported as deferred revenue and student deposits in the consolidated balance sheets. Deferred revenue and student deposits in any period represent the excess of tuition, fees, and other student payments received as compared to amounts recognized as revenue on the consolidated income statement and are reflected as current liabilities in the accompanying consolidated balance sheets. The University’s education programs have starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs is not yet earned. The majority of our traditional ground students do not attend courses during the summer months (May through August), which affects our results for our second and third fiscal quarters.

The University has identified a performance obligation associated with the provision of our educational instruction and other educational services, housing services, and other academic related services and uses the output measure for recognition as the period of time over which the services are provided to our students. The University has identified performance obligations related to our hotel, golf course, restaurants, sale of branded promotional items and other ancillary activities and recognizes revenue at the point in time goods or services are provided to our customers. The University maintains an institutional tuition refund policy, which provides for all or a portion of tuition to be refunded if a student withdraws during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which override the University’s policy to the extent in conflict. If a student withdraws at a time when only a portion, or none of the tuition is refundable, then in accordance with its revenue recognition policy, the University continues to recognize the tuition that was not refunded pro-rata over the applicable period of instruction. The University does not record revenue on amounts that may be refunded. However, for students that have taken out financial aid to pay their tuition and for which a return of such money to the Department of Education under Title IV is required as a result of his or her withdrawal, the University reassesses collectability for these students each quarter for the estimated revenue that will be returned and recognizes the revenue in future periods when payment is received. The University has elected the short-term contract exemption with respect to its performance obligations under its contracts with students as all such contracts have original terms of less than one year.


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Graham Holdings Company (Kaplan)

2017 10-K

In May 2014, the Financial Accounting Standards Board (FASB) issued comprehensive new guidance that supersedes all existing revenue recognition guidance. The new guidance requires revenue to be recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The new guidance also significantly expands the disclosure requirements for revenue recognition. The guidance is effective for interim and fiscal years beginning after December 15, 2017. The standard permits two implementation approaches, full retrospective, requiring retrospective application of the new guidance with a restatement of prior years, or modified retrospective, requiring prospective application of the new guidance with disclosure of results under the old guidance in the first year of adoption. The Company will adopt the new guidance on January 1, 2018 using the modified retrospective approach, which requires a cumulative adjustment to retained earnings.

Upon adoption of the new guidance, the Company will record a net increase to the opening balance of retained earnings of approximately $7 million to $12 million. This adjustment primarily results from a change to the Company’s current treatment of certain commissions paid to employees and agents at its education division. The Company currently expenses such commissions as incurred. Under the new guidance, the Company expects to capitalize certain commission costs as an incremental cost of obtaining a contract and subsequently amortize the cost as the tuition services are delivered to students.

The Company has substantially completed its evaluation of the impact of adopting the new guidance, as well as its assessment of the need for any changes to the Company’s accounting policies and internal control structure. As a result, the Company will implement new processes and internal controls to enable the preparation of financial information on adoption. The Company is finalizing its evaluation of new disclosures required by the guidance to determine additional information that will need to be disclosed including the nature and timing of the Company’s performance obligations, deferred revenue contract liabilities, deferred contract cost assets, as well as significant judgments and practical expedients used by the Company in applying the new guidance.

2018 10Q

The Company adopted the new guidance on January 1, 2018 using the modified retrospective approach for contracts not completed as of the adoption date. Upon adoption of the new guidance, the Company recorded a net increase to the opening balance of retained earnings of $7.4 million. This adjustment was driven by changes in the timing of recognition of both revenues and expenses. A change in the contract term at an education business resulted in a different revenue recognition pattern from previous recognition. Finally, the Company’s treatment of certain commissions paid to employees and agents at its education division changed. The Company previously expensed such commissions as incurred. Upon adoption of the new guidance, the Company capitalizes certain commission costs as an incremental cost of obtaining a contract and subsequently amortizes the cost as the tuition services are delivered to students. Under the modified retrospective method of adoption, the Company is required to disclose the impact the adoption of the revenue guidance had on its Condensed Consolidated Statement of Operations. If the company continued to follow its accounting policies under the previous guidance, revenue recognized would be $1.3 million lower and expenses would be $3.0 million higher. This is primarily due to the net impact of the change in the timing of the recognition of revenue and costs to obtain a contract.

The cumulative effect of the changes to the Company's Condensed Consolidated Balance Sheet as a result of adopting the new guidance was as follows:


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10. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue Recognition. The following table presents the Company’s revenues disaggregated by revenue source for the three months ended March 31, 2018 and 2017:

In the first quarter of 2018, the Company recognized 81% of its revenues over time as control of the services and goods transferred to the customer. The remaining 19% of revenues were recognized at a point in time, when the customer obtained control of the promised goods. The determination of the method by which the Company measures its progress towards the satisfaction of its performance obligations requires judgment and is described below for each revenue stream.


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The Company identifies a contract for revenue recognition when there is approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and the collectability of consideration is probable. The Company evaluates each contract to determine the number of distinct performance obligations in the contract, which requires the use of judgment.

Education Revenues. Education revenue is primarily derived from postsecondary education services, professional education and test preparation services provided both domestically and abroad. Generally tuition and other fees are paid upfront and recorded in deferred revenue in advance of the date when education services are provided to the student. In some instances, installment billing is available to students which reduces the amount of cash consideration received in advance of performing the service. The contractual terms and conditions associated with installment billing indicate that the student is liable for the total contract price, therefore mitigating the Company's exposure to losses associated with nonpayment. The Company determined the installment billing does not represent a significant financing component.

Higher education contracts consist either of one performance obligation that is a combination of distinct promises to a student, or two performance obligations if the student also enrolls in the Kaplan Tuition Cap. The Kaplan Tuition Cap establishes a maximum amount of tuition that KHE may charge students for higher education services. This effectively offers the student a discount on future higher education services, if exercised, and is accounted for as a material right. The transaction price of a higher education contract is stated in the contract and known at the time of contract inception, therefore no variable consideration exists. A portion of the transaction price is allocated to the material right, if applicable, based on the expected value method.

Higher education services revenue is recognized ratably over the instruction period. The Company generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and delivery of higher education services.

KHE provides first-time undergraduate students with a risk-free trial period through the Kaplan Commitment. The Company defers recognizing revenue related to services provided during the Kaplan Commitment timeframe as KHE does not have an enforceable right to payment during the trial period and therefore a valid contract does not exist.

KHE’s refund policy may permit students who do not complete a course to be eligible for a refund for the portion of the course they did not attend. The amount of the refund differs by school, program and state, as some states require different policies. Refunds generally result in a reduction of deferred revenue during the period that the student drops or withdraws from a class.

Kaplan Professional (U.S.) (KP): KP provides professional training and exam preparation for professional certifications and licensures to students. KP contracts include promises for professional education services and course materials. Generally KP revenue contracts consist of multiple performance obligations as each distinct promise is both capable of being distinct and distinct in the context of the contract. The transaction price is stated in the contract and known at the time of contract inception, therefore no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. KP generally determines standalone selling prices based on the prices charged to students. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract.

Professional education services revenue is recognized ratably over the period of access. KP generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and availability of access to professional education services. Revenue associated with distinct course materials is recognized at the point in time when control transfers to the student, generally when the products are delivered to the student.

Kaplan Test Preparation (KTP). KTP offers test preparation services and materials to students related to pre-college, graduate, health and bar review products. Generally KTP contracts include promises for test preparation services and course materials. As each promise is both capable of being distinct and distinct in the context of the contract, each promise is accounted for as a separate performance obligation. As the transaction price is stated in the contract and known at the time of contract inception, no variable consideration exists. Revenue is allocated to


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each performance obligation based on its standalone selling price. KTP generally determines standalone selling prices based on prices charged to students. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract.

Test preparation services revenue is recognized ratably over the period of access. At KTP, an estimate of average access period is developed for each course, and this estimate is evaluated on an ongoing basis and adjusted as necessary. KTP generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and availability of access to test preparation services. Revenue associated with distinct course materials is recognized at the point in time when control transfers to the student, generally when the products are delivered to the student.

KTP offers a guarantee on certain courses that gives students the ability to repeat a course if they are not satisfied with their exam score. The Company accounts for this guarantee as a separate performance obligation.

Revenue allocated to remaining performance obligations represents deferred revenue amounts that will be recognized as revenue in future periods. As of March 31, 2018, KTP’s deferred revenue balance related to certain medical and nursing qualifications with an original contract length greater than twelve months was $7.0 million. KTP expects to recognize 80% of this revenue over the next twelve months and the remainder thereafter.

Kaplan International (KI). KI provides higher education, professional education, and test preparation services and materials to students primarily in the United Kingdom, Singapore, and Australia. Some KI contracts consist of one performance obligation that is a combination of indistinct promises to the student while other KI contracts include multiple performance obligations as the promises in the contract are both capable of being distinct and distinct within the context of the contract. One KI business offers an option whereby students receive future services at a discount that is accounted for as a material right.

The transaction price is stated in the contract and known at the time of contract inception, therefore no variable consideration exists. Revenue is allocated to each performance obligation based on its standalone selling price. Any discounts within the contract are allocated across all performance obligations unless observable evidence exists that the discount relates to a specific performance obligation or obligations in the contract. KI generally determines standalone selling prices based on prices charged to students.

Revenue is recognized ratably over the instruction period or access period for higher education, professional education and test preparation services. KI generally uses the time elapsed method, an input measure, as it best depicts the simultaneous consumption and delivery of these services. Course materials determined to be a separate performance obligation are recognized at the point in time when control transfers to the student, generally when the products are delivered to the student.

Television Broadcasting Revenues. Television broadcasting revenues at Graham Media Group (GMG) are primarily comprised of television and internet advertising revenues, and retransmission revenues.

Television Advertising Revenues. GMG accounts for the series of advertisements included in television advertising contracts as one performance obligation. GMG recognizes advertising revenue, net of agency commissions, over time. The Company elected the right to invoice practical expedient, an output method, as GMG has the right to consideration that equals the value provided to the customer for advertisements delivered to date. As a result of the election to use the right to invoice practical expedient, GMG does not determine the transaction price or allocate any variable consideration at contract inception. Rather, GMG recognizes revenue commensurate with the amount to which GMG has the right to invoice the customer. Payment is typically received in arrears within sixty days of revenue recognition.

Retransmission Revenues. Retransmission revenue represents compensation paid by cable, satellite and other multichannel video programming distributors (MVPDs) to retransmit GMG’s stations’ broadcasts in its designated market area. The retransmission rights granted to MVPDs are accounted for as a license of functional intellectual property as the retransmitted broadcast provides significant standalone functionality. As such, each retransmission contract with an MVPD includes one performance obligation for each station’s retransmission


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license. GMG recognizes revenue using the usage-based royalty method in which revenue is recognized in the month the broadcast is retransmitted based on the number of MVPD subscribers and the applicable per user rate identified in the retransmission contract. Payment is typically received in arrears within sixty days of revenue recognition.

Other Revenues. The Company recognizes revenue associated with management services it provides to its affiliates. The Company accounts for the management services provided as one performance obligation and recognizes revenue over time as the services are delivered. The Company uses the right to invoice practical expedient, an output method, as the Company’s right to revenue corresponds directly with the value delivered to the affiliate. As a result of the election to use the right to invoice practical expedient, the Company does not determine the transaction price or allocate any variable consideration at contract inception. Rather, the Company recognizes revenue commensurate with the amount to which it has the right to invoice the affiliate which is based on contractually identified percentages. Payment is received monthly in arrears.

Other Revenues. Other revenues primarily include advertising and circulation revenues from Slate, Panoply and Foreign Policy. The Company accounts for other advertising revenues consistently with the advertising revenue streams addressed above. Circulation revenues consist of fees that provide customers access to online and print publications. The Company recognizes circulation revenues ratably over the subscription period beginning on the date that the publication is made available to the customer. Circulation revenue contracts are generally annual or monthly subscription contracts that are paid in advance of delivery of performance obligations.

Accounting Policy Elections. The Company has elected to account for shipping and handling activities that occur after the customer has obtained control of the good as a fulfillment cost rather than as an additional promised service. Therefore, revenue for these performance obligations is recognized when control of the good transfers to the customer, which is when the good is ready for shipment. The Company accrues the related shipping and handling costs over the period when revenue is recognized.

The Company has elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.

Practical Expedients. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the amount of revenue recognized is based on the amount to which the Company has the right to invoice the customer for services performed and (iii) contracts for which the consideration received is a usage-based royalty promised in exchange for a license of intellectual property.

With the exception of the education division, the Company expenses costs to obtain a contract as incurred as all contracts are less than one year.

Deferred Revenue. The Company records deferred revenue when cash payments are received or due in advance of the Company’s performance, including amounts which are refundable. The following table presents the change in the Company's deferred revenue balance during the period ended March 31, 2018:


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The majority of the change in the deferred revenue balance is related to the KU Transaction. During the first three months of 2018, $159.3 million of revenue was recognized relating to the Company’s deferred revenue balance as of January 1, 2018.

Costs to Obtain a Contract. The Company incurs costs to obtain a contract that are both incremental and expected to be recovered as the costs would not have been incurred if the contract was not obtained and the revenue from the contract exceeds the associated cost. The revenue guidance provides a practical expedient to expense sales commissions as incurred in instances where the amortization period is one year or less. The amortization period is defined in the guidance as the contract term, inclusive of any expected contract renewal periods. The Company has elected to apply this practical expedient to all contracts except for contracts in its education division. In the education division costs to obtain a contract are amortized over the applicable amortization period except for cases in which commissions paid on initial contracts and renewals are commensurate. The Company amortizes these costs to obtain a contract on a straight line basis over the amortization period. These expenses are included as operating expenses in the Company’s Condensed Consolidated Statement of Operations.

The following table presents changes in the Company’s costs to obtain a contract asset during the period ended March 31, 2018:

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