If you’re confused about Accounting Standards Codification (ASC) 606: Revenue from Contracts with Customers, you’re not alone.
The effective date of the new revenue standard has been deferred until December 15, 2017 for non-public entities, but that still doesn’t leave nonprofits with much time to prepare.
Here’s some background and what we recommend.
FASB & IASB Reconciliation
ASC 606 represents a 10-plus-year effort to reconcile inconsistencies between the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) revenue recognition standards. Issued jointly by the FASB and the IASB in May 2014, the new principle-based standard focuses on contracts between nonprofits and their customers for the provision of goods or services.
The standard outlines a five-step process for properly recognizing revenue:
- Identify the contract with a customer. The standard defines a contract as “an agreement between two or more parties that creates enforceable rights and obligations.”
- Identify the performance obligations in the contract. As defined in the standard, a performance obligation is a promise to transfer a good or service to the customer.
- Determine the transaction price. To determine the amount to include in the transaction price, a nonprofit should estimate the expected value (the sum of the probable weighted amounts the organization expects for the exchange) or the most likely amount (the single amount the organization expects for the exchange).
- Allocate the transaction price to the performance obligations in the contract. The standard requires sellers to allocate the total transaction price to each performance obligation on the basis of its relative stand-alone selling price at inception.
Recognize revenue when (or as) each performance obligation is satisfied. According to the new guidelines, a performance obligation is satisfied when the organization transfers goods or services to the customer.
Preparing for ASC 606
To get your nonprofit compliant with ASC 606, we recommend the following:
- Evaluate the potential effects of the standard on all facets of your organization’s revenue streams
- Identify any differences between your current practices and the new standard
- Consider preparing mockup financial statements to better understand the standard’s impact
- Determine if your nonprofit accounting software enables all of the above
- Start now so you have enough time to do all of the above
This content was originally posted here.