Are you ready for the new revenue recognition standard?
ASU 2014-09 Revenue from Contracts with Customers will eliminate transaction and industry specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach.
When is the new revenue recognition standard applicable?
Nonpublic organizations should apply the new revenue standard to annual reporting periods beginning after December 15, 2018.
How to recognize revenue under the new standard?
The first step is to identify if you have a contract with a customer under the new standard. The following are some specifics to look for when determining if you have a contract with a customer:
Once you have determined a contract exists, the next step is to determine if the contract has multiple performance obligations. A performance obligation is a promise to provide a “distinct” good or service to a customer. If the customer can benefit from the good or service on its own, it is considered distinct.
If the contract contains multiple performance obligations, the transaction price of the contract must be allocated to each performance obligation and revenue is recognized in the financial statements as each performance obligation is satisfied.
Example: Impact on non-profit organization that collects annual membership dues
First, the organization must identify if the annual membership dues covers multiple performance obligations. For example, a children’s museum offers an annual membership costing $150, the membership includes free parking and one free admission per month. The member can benefit from the parking and admission individually, therefore each are considered a separate performance obligation.
Once you have established the contract has separate performance obligations, the membership dues of $150 must be allocated to parking and admission (i.e. each performance obligation).
The children’s museum shall recognize revenue in its financial statements upon satisfaction of each performance obligation.
The assignment of value and the timing of the revenue recognition can prove challenging for many non-profits. Please contact us for assistance in understanding how the new revenue recognition standard will impact your organization.