Revenue recognition in a not for profit audit has been a popular topic in the accounting world. In recent years, the Financial Accounting Standards Board (FASB) has led various new accounting standards to establish new guidance in this field. As your nonprofit prepares for your next audit, be aware of these 3 recent accounting changes that will impact your nonprofit annual audit.
1. FASB Accounting Standards Update (ASU) 2014-09 (Topic 606) – Revenue from Contracts with Customers
The FASB established new guidelines for reporting revenue from contracts with customers to remove inconsistencies and weaknesses in revenue reporting. This guidance creates equal reporting standards across all industries, including nonprofits, and will affect exchange transactions such as membership agreements and other contracts for goods and services.
The Five-Step Model
FASB ASU 2014-09 (Topic 606) establishes a 5-step analysis to determine if a fee-for-service transaction falls within 606 reporting requirements. This analysis will require nonprofit management to use judgment and make estimates appropriately.
- Identify the contract(s) with a customer.
- Identify the performance obligations.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue when (or as) the entity satisfies performance obligations.
When is ASU 2014-09 (Topic 606) Effective?
FASB has extended the effective date to periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.
2. FASB Accounting Standards Update (ASU) 2018-08 (Topic 958) – Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made
FASB ASU 2108-08 (Topic 958) changes the revenue classification of government grants and contracts and conditional contributions. This new standard helps nonprofits distinguish the difference between contributions and exchange transactions. This may mean that more grants and contracts are accounted for as contributions on financial statements for many nonprofits.
When is ASU 2018-08 (Topic 958) Effective?
This effective date has not been extended. ASU 2018-08 (958) applies to annual reporting periods beginning after December 15, 2018.
3. FASB Accounting Standards Update (ASU) 2020-07 (Topic 958) – Presentation and Disclosures by Not-for-Profit Entities for Contributed Non-financial Assets
Many nonprofits receive donated goods and services or gifts-in-kind (GIK). FASB ASU 2020-07 (Topic 958) provides new accounting standards for reporting GIK. This update will provide transparency in financial statements of all donations, how they are used, and how they are valued.
Will ASU 2020-07 (Topic 958) Apply To My Not for Profit Audit?
If your nonprofit receives donated goods and services, ASU 2020-07 (Topic 958) outlines how to disclose these contributed non-financial assets. All GIK will be listed as separate line items in the statement of activities, apart from financial assets. This accounting standard also requires nonprofits to meet specific disclosure guidelines.
When is ASU 2020-07 (Topic 958) Effective?
ASU 2020-07 (Topic 958) is applied on a retrospective basis and for annual reporting periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. Early adoption permitted.
Looking Ahead at Your Not for Profit Audit
These 3 new revenue recognition standards will affect all nonprofit organizations. As you prepare for future nonprofit audits, your organization must review these standards with an accounting firm with expertise in nonprofit auditing.
Our team of nonprofit auditors at Assurance Dimensions has a proven track record in nonprofit audits. We can help your organization understand and apply these new accounting changes. Contact us or request an audit quote today.
