Demystifying Nonprofit Revenue Recognition

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The updated revenue recognition standards, found in the FASB ASU 2018-18 and ASC Topic 606, represent some of the largest changes to nonprofit accounting in recent years. The ability to produce accurate, compliant financial statements depends upon performing proper revenue recognition. Our team at Sage Intacct has been hard at work in this area, both in providing education about the updated standards  and in adding functionality to Sage Intacct in order to make revenue recognition easier for our nonprofit customers.

Andrea Small, Sage IntacctOn the education front, Andrea Small, MNA and Senior Project Manager for Sage Intacct recently presented a session entitled “Revenue Recognition Considerations for Nonprofits” at the Nonprofit Finance Leaders Forum. Andrea is passionate about helping nonprofits navigate complex accounting and finance issues. She earned a Masters of Nonprofit Administration from the University of San Francisco and has spent over 20 years in nonprofit and for-profit finance and operations management. I encourage you to watch Andrea’s informative presentation in full to learn more about this complicated topic.

Watch a replay of the entire session, Nonprofit Revenue Recognition Considerations for Nonprofits, and six other virtual events at the Nonprofit Finance Leaders Forum.

Revenue Recognition from Contributions

All types of revenue streams have been impacted by the updated standards, and in general, the clarification guidance found in ASU 2018-08 helps nonprofit finance teams exercise more judgment over how to recognize revenue from contributions. There are three decision points that will help you decide the timing of revenue recognition with contributions:

Nonprofit-Revenue-Recognition-3-Decision-Points-and-Timing-Impacts

Decision Point 1: Is This a Reciprocal or Nonreciprocal Transaction?

When considering the issue of reciprocal vs. nonreciprocal transactions (exchange vs. non-exchange), the question you’re considering is whether the provider of funding is receiving a benefit commensurate in value with the contribution being made. One important change in how nonprofit organizations exercise judgment about whether a transaction is reciprocal has to do with government funding and a “general public benefit.” When a government entity provides the funding, if the public receives the benefit, this is NOT considered a reciprocal transaction—recognize this revenue as a contribution.

If the funding qualifies as a reciprocal (exchange) transaction, then follow the guidance in ASC 606 for revenue recognition. If it is nonreciprocal, the transaction is a contribution and you can move to the next decision point.

Decision Point 2: Is This Contribution Conditional or Unconditional?

Two items must be present and stated in the Agreement in order for a donor-imposed condition to exist: 1) A right of return or release from obligation, or 2) A barrier that your organization needs to overcome.

Nonprofit Revenue Recognition Donor-Imposed Restrictions ConditionRight of return means if you got the money in advance, you’d be obligated to return the funds you received. Release from obligations means the funder would not be obligated to pay you if you don’t perform. Here are the three types of barriers that may be present in your agreement:

  1. Measurable, quantifiable performance-related barriers. These barriers include specific outcomes such as number of meals served, or number of people housed.
  2. Limited spending discretion, such as qualifying expenses or specific protocols stipulated by the funder. An example of qualifying expense would be a Federal grant that specifies you must follow OMB procurement rules. An example of a specific protocol is a research grant that specifies the research protocol you must follow.
  3. Primary purpose agreements. A stipulation must be related to the purpose of the agreement in order to qualify as a barrier. FASB guidance intends for organizations to exclude items that are administrative or trivial. If your funder requests reporting once per quarter, that’s required but it is not the purpose of the agreement and therefore, it is not considered a barrier for accounting purposes.

If the contribution is conditional, you should recognize revenue when your organization meets the conditions of the agreement.

Decision Point 3: Are There Donor-Imposed Restrictions Over This Contribution?

Has your funder included restrictions that limit the use of their contributions, either in terms of the timing of expenditures or the purpose of the expenditures? Donor-imposed restrictions are fairly common in the nonprofit industry. It’s not unusual for a funder to require that a grant get used within a specified time frame or that all of the grant money must be used for one narrowly defined objective or program.

If you have restrictions, track expenditures very carefully and record revenue releases only after the restrictions have been satisfied.

Nonprofit Revenue Recognition Automation with Sage Intacct

If you’ve struggled to track revenue recognition across loads of spreadsheets, it may be time for more automation to ease your burden. Sage Intacct Revenue Recognition for Nonprofits can centralize your revenue recognition inside the accounting system. It helps track and account for non-exchange revenue like conditional grants and contributions as well as exchange transactions like tuition and membership. By tracking revenue data in the centralized accounting system, Sage Intacct can help you improve visibility into conditions and restrictions and gain insights about your organization’s revenue.

Donor Condition Tracking

Sage Intacct Conditional Milestones ScheduleSelect conditional milestones and define a schedule to automate revenue recognition based on a conditional grant.

Restricted Contributions Tracking

Sage Intacct Restricted Release Journal

Sage Intacct enables you to track donor-imposed restrictions and automates journal entries as restrictions are released.

Conclusion

In order to maintain and grow your funding, it’s essential that your organization tracks and recognizes revenue correctly, in full compliance with updated FASB guidance. Accurate revenue recognition means you’ve stayed on top of donor-imposed conditions and restrictions and offered full transparency and accuracy in your financial statements. Automating revenue recognition with tools like Sage Intacct Nonprofit Revenue Recognition only saves time and improves the accuracy of nonprofit accounting. And that helps organizations enjoy a smoother audit and easier financial reporting to key funders.

For a more comprehensive look at how to implement updated FASB guidance for nonprofit revenue recognition, please watch a replay of the full presentation—and six other virtual sessions by nonprofit finance and technology experts—at the Nonprofit Finance Leaders Forum.

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