Strong NEW REVENUE RECOGNITION GUIDANCE /strong – WHAT
NEW REVENUERECOGNITION GUIDANCE –WHAT NONPROFITS NEEDTO KNOW!March 8, 2018BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UKcompany limited by guarantee, and forms part of the international BDO network of independent member firms.
With you todayLEE KLUMPPCARLA DEMARTINIDirectorSenior artini@bdo.com703-770-1059aduffin@bdo.comNational Assurance Partner2New Revenue Recognition GuidanceAMY DUFFIN
Revenue From Contracts with a Customer(ASU 2014-09)3New Revenue Recognition Guidance
Revenue Recognition (Topic 606) Objective: To develop a single, principle-based revenue standard for U.S. GAAPand IFRS The revenue standard aims to improve accounting for contracts with customersby:o Providing a robust framework for addressing revenue issues as they ariseo Increasing comparability across industries and capital marketso Requiring better disclosureSubstantially converged with IFRS on major provisions4New Revenue Recognition Guidance
Scope All contracts with customers, excepto Lease contractso Insurance contractso Financial instrumentso Guaranteeso Non-monetary exchanges in the same line of business to facilitate sales tocustomers Contracts not with customers are excluded:o Contributionso Collaborative arrangements5New Revenue Recognition Guidance
Final U.S. GAAP Model – Recognition Core Principle:Recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which the entityexpects to be entitled in exchange for those goods or services Steps to apply the core principle:1. Identifythe contractswith thecustomer62. IdentifytheperformanceobligationsNew Revenue Recognition Guidance3. Determinethetransactionprice4. Allocatethetransactionprice5. Recognize revenuewhen (or as) aperformance obligationis satisfied
Final U.S. GAAP Model – DisclosureDisaggregation of revenueQualitative and quantitative disaggregation ofrevenue into categories that depict how revenue andcash flows are affected by economic factorsInformation about contractbalancesOpening and closing balancesAmount of revenue recognized from contractliabilities *Explanation of significant changes in contractbalances *Remaining performanceobligationsTransaction price allocated to remaining performanceobligations *Quantitative or qualitative explanation of whenamounts will be recognized as revenue *Interim requirementsQuantitative disclosures ** for public entities/ conduit debt obligors only7New Revenue Recognition Guidance
Revenue Recognition – Implementation Issues Transition Resource Group (TRG) has discussed 108 implementation issueso All have been closed and no more meetings currently plannedo Technical Inquiry Service available Follow-up ASUs issued:o ASU 2015-14: deferred effective date by one yearo ASU 2016-08: principal vs. agent considerationso ASU 2016-10: identifying performance obligations; licenses of intellectualpropertyo ASU 2016-12: narrow-scope improvements and practical expedientso ASU 2016-20: technical corrections and improvementso ASU 2017-05: asset derecognition and partial sales of nonfinancial assets Related FASB project: Grants and Contracts to NFPs (discussed in the nextsection) AICPA nearing completion of their work on applying Rev. Rec. guidance tovarious industry groups8New Revenue Recognition Guidance
Revenue Recognition – TransitionCumulativecatch-upRetrospective(with ect at date ofapplicationPY1(2017)CY(2018)CY FootnotesContracts under new standardContracts underlegacy standardCumulativecatch-upTransitionmethodExisting and Existing and newnew contracts contracts underlegacy standardunder newstandardfor CY (2018)Transition dates for non-public entities areextended one year later than the dates above9New Revenue Recognition Guidance
Revenue Recognition – Transition PracticalExpedients No restatement required for contracts that begin and are completed within thesame annual reporting period Completed contracts that have variable consideration:o Use transaction price at completiono No estimation required No restatement required for contract modifications that occur before thebeginning of the earliest period presented Modified retrospective approach may be applied to all contracts or completedcontracts onlySignificant judgmentneeded10New Revenue Recognition Guidance
Definition of Conduit Debt11New Revenue Recognition Guidance
Definition of Conduit Debt (FAS 126-1) A conduit debt security is an offering by a governmental entity that is not for itsown use but for the use of a private party The governmental entity that issues conduit debt securities does not have anysubsequent liability or continuing involvement In the initial security offering, the governmental entity is listed as the issuer,and the entity that receives the proceeds from the sale of the conduit debtsecurity is listed as the obligor. The conduit bond obligor is required to make or fund all interest and principalpayments as they become due, and any future financial reporting requirementsalso are the responsibility of that conduit bond obligor.An organization that has debt with a governmental entity (municipality, state,government etc.) and is obligated to make all principal and interest payments isconsidered to be conduit debt obligor.12New Revenue Recognition Guidance
Effective Date of Topic 606 for Conduit Debt ObligorsEffective Date for Topic 606Annual periods beginning afterDecember 15, 2017, including interimperiods: Public Business Entities NFP that has issued, or is a conduitbond obligor for, securities that aretraded, listed, or quoted onexchange or an over-the countermarket13New Revenue Recognition GuidanceAnnual periods beginning afterDecember 15, 2018, and interimperiods beginning after December 15,2019: All other entities
Revenue from Contracts with CustomersScoping14New Revenue Recognition Guidance
Revenue from Contracts with CustomersScoping – Does the Revenue Stream Fall Within Scope of 606Does the Contractfall completelywithin the scope ofother accountingguidance?YesApply thataccountingguidance (i.e. 606does not apply)15New Revenue Recognition GuidanceNoFully under606?YesApply 606NoNext slide
Revenue from Contracts with CustomersScoping – Does the Revenue Stream Fall Within Scope of 606The parties to the contractmust approve it and becommitted to perform theirrespective obligations.Use the other accountingguidance to separate thecontract and initiallymeasure the non-606element of the contract.Exclude the amount of thecontract that is underother accounting guidanceand use that as thetransaction price for partof the contract under 60616New Revenue Recognition GuidanceYesYesDoes the otheraccountingstandard haveguidance relatedto initialmeasurementthat applies?NoApply theguidance in 606 toseparate andinitially measurethe part of thecontract that fallsunder otheraccountingguidance and thepart of thecontract that fallsunder 606.
Scoping“Step 0” – Contribution vs exchange transactionContribution – An unconditional transfer of cash or other assets to an entity or a settlement orcancellation of its liabilities in a voluntary non-reciprocal transfer by anotherentity acting other than as an owner. Because a contribution is both voluntary and non-reciprocal, it is scoped out ofTopic 606 by definition.Exchange Transaction – A reciprocal transfer between two entities that results in one of the entitiesacquiring assets or services or satisfying liabilities by surrendering other assetsor services or incurring other obligations. Because an exchange transaction is reciprocal transaction in which two partiesexchange something of commensurate value, it is scoped in the Topic 606 bydefinition.17New Revenue Recognition Guidance
Scoping“Step 0” – Contribution vs exchange transactionIndicatorExchange TransactionWhat is the recipient nonprofit’sintent in soliciting the asset or service?Recipient nonprofit asserts that it issoliciting the asset / service as acontributionRecipient nonprofit asserts that it isseeking resources in exchange forspecified benefitsWhat is the resource provider’sexpressed intent about the purpose ofthe asset to be provided to therecipient nonprofit?Resource provider asserts that it ismaking a donation to support thenonprofit’s programs.Resource provider asserts that it istransferring resources in exchange forspecified benefits.What is the method of delivery?The time or place of delivery of theasset to be provided by the recipientnonprofit to third-party recipients is atthe discretion of the nonprofit.The method of delivery of the asset /service to be provided by the recipientnonprofit to third-party recipients isspecified by the resource providerAre there penalties asserted if thenonprofit fails to make timely deliveryof assets / services?Penalties are limited to the delivery ofassets already produced and the returnof the unspent amount (the nonprofitis not penalized for nonperformance)Provisions for economic penalties existbeyond the amount of payment (thenonprofit is penalized fornonperformance)Who receives the assets that areprovided by the recipient nonprofit?Assets are to be delivered toindividuals or organizations other thanthe resource provider.Assets are to be delivered to theresource provider or to individuals ororganizations closely connect to theresource providerSource: FASB ASC 958-605-55-818ContributionNew Revenue Recognition Guidance
Scoping“Step 0” – Contribution vs exchange transactionNonprofit A offers various sponsorship levels for their annual educationalconference. Company C has selected to be a Gold Sponsor for 50,000. The terms of the“Gold” sponsorship agreement are as follows: Night one dinner reception sponsor with Company C name displayed asbackdrop on the main stage Company C logo on the conference website Visual stage recognition during general sessions Booth space and free internet access (offered to non-sponsors at 1,000 perbooth) 5 conference passes (offered to attendees at 500 per pass)Under “Step 0” – Do we have a contribution, an exchange transactionor both?19New Revenue Recognition Guidance
Scoping“Step 0” – Contribution vs exchange transactionUnder “Step 0” – Do we have a contribution, an exchangetransaction or both?Elements of an Exchange Transaction- Booth Space- Conference Passes20New Revenue Recognition GuidanceElements of a Contribution- Dinner Reception Sponsor- Logo on Website- Visual Stage Recognition
Scoping“Step 0” – Contribution vs exchange transactionExposure Draft: Topic 958 – Not-for-Profit EntitiesClarifying the Scope and Accounting Guidance for ContributionsReceived and Contributions MadeKey Provisions:211)Assist entities in evaluating whether transactions should be accounted for ascontributions (nonreciprocal transactions) within the scope of Topic 958,Not-for-Profit Entities, or as exchange (reciprocal) transactions subject toother guidance2)Assist entities in distinguishing between conditional contributions andunconditional contributionsNew Revenue Recognition Guidance
Scoping“Step 0” – Contribution vs Exchange Transaction (Proposed)IndicatorContributionThe resource provider receives no direct value inexchange for the assets transferred (i.e. nocommensurate value)XThe value received by the resource provider isincidental to the potential public benefit from using theassets transferred (i.e. no commensurate value).XThe resource provider is executing under its mission orthe positive sentiment from acting as a donorXThe expressed intent asserted by both the recipient andthe resource provider is to exchange resources for goodsand services that are of commensurate valueThe recipient solicits assets from the resource providerwithout the intent of exchanging goods or services ofcommensurate value22New Revenue Recognition GuidanceExchangeXX
Scoping“Step 0” – Contribution vs exchange transaction (Proposed)IndicatorThe resource provider has full discretion indetermining the amount of the transferred assets.ContributionXThe recipient and the resource provider agree onthe amount of assets transferred in exchange forgoods and services that are of commensurate valuePenalties assessed on the recipient for failure tocomply with the terms of the agreement are limitedto the delivery of the assets provided and thereturn of the unspent amount.Contractual provisions for economic forfeiturebeyond the amount of assets transferred by theresource provider to penalize the recipient fornonperformance.23New Revenue Recognition GuidanceExchangeXXX
Proposed Accounting GuidanceDonor Imposed Conditions A donor imposed condition must have:- A barrier- A right of return to the promisor for assets transferred or a right ofrelease of the promisor from its obligation to transfer assets.24New Revenue Recognition Guidance
NFP Revenue Recognition Decision Process (Proposed)Reciprocaltransaction. Apply RevRec (ASC 606) or otherguidance.YesNoTransaction inwhich eachparty directlyreceivescommensuratevalue?*Nonreciprocal transaction. Applycontribution (non-exchange) guidance.YesConditionspresent (i.e.,right ofreturn/releaseand barrier)?Conditional - Recognizerevenue when condition is metRestrictionspresent (i.e.limitedpurpose ortiming)?NoUnconditional andwithout restrictions(unrestricted)*Includes third-party payments on behalf of identified customers. These do not create new revenue.25New Revenue Recognition GuidanceUnconditionaland restricted
Revenue from Contracts with CustomersStep 126New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – IDENTIFY THE CONTRACTPoints to note Contracts can be written, oral, or implied by the entity’s business practices Contracts with customers must meet ALL the following criteria:i) The parties to thecontract must approveit and be committed toperform theirrespective obligations.ii) Each party’s rightsregarding goods andservices to betransferred can beidentified.(iv)The contract musthave commercialsubstance.iii) The payment termsfor goods and servicesto be transferred canbe identified.(v) It is probable thatthe entity will collectthe consideration towhich it is entitled.Note: Reassessment required in certain circumstances.27New Revenue Recognition Guidance
COLLECTABILITY CONSIDERATIONSSTEP #1 Concept of collectability is slightly different between Topic 605 (old GAAP)and Topic 606 Assessment is based on whether the customer has the ability and intention topay the consideration to which the entity will be entitled in exchange for thegoods or services that will be transferred to the customer. Assessment is not necessarily based on the customer’s ability and intention topay the entire amount of promised consideration for the entire duration ofthe contract.28New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – IDENTIFY THE CONTRACTCOMBINATION OF CONTRACTSAre contracts entered into at or near the same time withthe same customer or related parties of the customer?NoYesWere the contracts negotiated as a packagewith a single commercial objective?NoAccountfor eachcontract asa separatecontractDoes the amount of consideration to be paidin one contract depend on the price orperformance of the other contract?NoNew Revenue Recognition GuidanceYesNoAre the goods and services promised inthe contracts a single performanceobligation?29YesYesAccount forthecontracts asa singlecontract
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – IDENTIFY THE CONTRACTContract modifications Contract modifications are changes in the scope and/or price of the contract:— i.e. create new or amend existing enforceable rights and obligations. A contract modification must be approved, in writing, orally, or otherwise asimplied by the entity’s business practices Depending on the circumstances may be accounted for as follows: A separate contract Termination – replace the old contract with the new contract Continuation – treat modification as part of the original contact30New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – EXAMPLEMembership Dues Membership application is signed by the member and ABC nonprofit on 1/1/2019 The price of the membership is 500 per member per year which includes:- A 5 donation toward the scholarship fund for students who are pursuing a career inscience (non-refundable)- The promise to the member to provide legislative advocacy services during the oneyear term- The promise to provide access to the members-only section of the nonprofit’swebsite- The promise to the member of a subscription to provide 4 quarterly scientificjournals The scientific journals are sold in bookstores and online for 20 per journalDo we have a contribution? Do we have an exchange transaction? Do we haveboth?31New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – EXAMPLEMembership Dues Do we have a contribution? Do we have an exchange transaction? Do wehave both?Elements of an Exchange Transaction- Legislative Advocacy- Website Access- 4 Quarterly Journals32New Revenue Recognition GuidanceElements of a Contribution- 5 Scholarship Donation
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – EXAMPLEMembership Benefits – Topic 606The parties to the contract must approve it and becommitted to perform their respective obligations.YesEach party’s rights regarding goods and services to betransferred can be identified.YesThe payment terms for goods and services to be transferredcan be identified.YesThe contract must have commercial substance.YesIt is probable that the entity will collect the consideration towhich it is entitled.Yes33New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #1 – RECAPHave the 5 criteriabeen met?(ASC 606-10-25-1)If a contract is modified,determine whether themodification is accounted foras a separate contract, atermination of an existingcontract and creation of a newcontract, or as part of theoriginal contract (ASC 606-1025-10 through 13)34New Revenue Recognition GuidanceCriteria 5 – Am I giving my customer a priceconcession or is collectability notprobable?(ASC 606-10-32-7)Step 1When contract terms areimplied or oral, considerdocumenting how the rightsand obligations within thecontract are legallyenforceableEstablish proceduresto determine ifcontracts with thesame customer orrelated party shouldbe combined.(ASC 606-10-25-9)
Revenue from Contracts with CustomersStep 235New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #2 – IDENTIFY SEPARATE PERFORMANCEOBLIGATIONSDefinition of performance obligationA performance obligation is a promise to provide goods or services (or a bundle ofgoods or services) that are either:i.Distinctii. Homogenous, and both: 36Each distinct good or service is a performance obligation satisfied over time (referto Step #5), andThe same method would be used to measure the entity’s progress towardscomplete satisfaction of the performance obligation to transfer each distinct goodor service to the customer (refer to Step #5).New Revenue Recognition Guidance
REVENUE FROM CONTRACTS WITH CUSTOMERSSTEP #2 – IDENTIFY SEPARATE PERFORMANCEOBLIGATIONSDefinition of a ‘distinct’ good or serviceCan the customer benefit from the good or service, either on its own, orwith other readily available resources?(‘readily available resources’ are those that the customer possesses oris able to obtain from the entity or another third party)NoYesIs the promise to transfer a good or service separate from the otherpromised goods or services in the contract? Indictors may include:The entity does notprovide a significantservice of integratingthe goods and servicesA good or service doesnot significantly modifyor customize the othergoods and servicesA good or service is no
strong NEW REVENUE RECOGNITION GUIDANCE /strong – . Objective: To develop a single, principle-based strong revenue standard /strong for U.S. GAAP and IFRS The strong revenue standard /strong aims to improve accounting for contracts with customers by: o Providing a robust framework for addressing strong revenue /strong issues as they arise
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strong Revenue Recognition /strong : What’s Really Changed? » strong The new standard /strong eliminates transaction and industry specific guidance that we have in current US GAAP » strong The new standard /strong is a more principles -based approach rather than a defined rules based approach » Requires a lot of JUDGMENT » Adds a strong new /strong Topic, FASB ASC 606, strong Revenue /strong from Contracts with
In 2014, the FASB issued ASU 2014-09, strong Revenue /strong from Contracts with Customers, the first of several ASU’s that created and amended ASC 606. This strong standard /strong sets out a single framework for strong revenue recognition /strong and supersedes virtually all previous strong revenue recognition /strong guidance. The strong standard /strong is effective January 1, 2019 for nonpublic companies.
Insurance For The strong Summer /strong Road Trip. Introducing The "At-Home Version" Of Insurance Key Issues. Click here for PDF Archives. Back Issues: strong Volume 2 /strong - strong Issue /strong 20 - October 30, 2013. strong Volume 2 /strong - strong Issue /strong 21 - November 13, 2013: strong Volume 2 /strong - strong Issue /strong 22 - November 27, 2013: strong Volume 2 /strong - strong Issue /strong 23 -
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strong New Revenue Recognition Standard /strong to be in effect in 2018 has requirement to only recognize strong revenue /strong when the performance obligation is complete – Convergence of IFRS and US GAAP strong revenue recognition /strong standards – Created via a collaboration between the International Accounting Standards Board (IASB) and the
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