Nonprofit Revenue Recognition – Exchange Revenues

CPAs & Advisors

Written By: Wendy Thompson, CPA

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By now I am certain you have heard about the changes coming to revenue recognition for financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP). In the nonprofit world, these changes relate to exchange revenues, those transactions where both parties receive something of commensurate value. For nonpublic entities, this standard is effective for periods beginning after December 15, 2018, so it is for 2019 calendar year ends and later.

This new standard puts all entities, regardless of industry, into the same framework for recognizing revenue. It is a “simple” five-step process.

  1. Identify the contract with a customer.
  2. Identify the performance obligations.
  3. Determine the transaction price.
  4. Allocate the transaction price to performance obligations.
  5. Recognize revenue for the performance obligation when (or as) the customer obtains control of the good or service.

It sounds logical and easy, but there are many things to consider.

Step 1 – Identify the contract with a customer.

This has a few potential impacts on different types of nonprofits. Both parties have to approve and commit to the transaction before there is a contract. In the medical field in nonprofits, this could change the timing of when a contract is deemed to occur. The patient who is unconscious cannot commit to a transaction. Also imbedded in this is the concept of the collection being probable of all amounts the organization is entitled to. Nonprofits give discounts, based on ability to pay, and the probability of collection is based on the discounted amount, not the gross amount. Depending on the timing of when that discount is determined, the service may be provided before the collection of the discounted amount is probable.

If a wholly unperformed contract can be terminated without any penalty, then it is not considered a contract yet, either. For example, if there is a withdrawal period at a university and the student can get a full refund of tuition if they withdraw during the first week, then there is no contract until after that first week is complete.

If a contract doesn’t exist, no revenue can be recorded until a contract is considered to exist. Even if cash is received, if it is not probable that all amounts the organization is entitled to will be collected, then there is no contract, and therefore no revenue! For many organizations this will not change anything, but for others it will create more significant changes in revenue timing.

Step 2 – Identify the performance obligations.

For some organizations, especially membership organizations, this may be a lot of work. What are the goods or services, whether explicitly listed or implicitly promised, that the member gets when they purchase membership? For a zoo or a fitness center, this would include the obligation to “stand ready,” so it is the obligation to be open on all the days they say they will be. For an association, this might include the discounts the member gets when attending association trainings. If there is a loyalty program so that after seven purchases of a ride, the eighth is free, that is a material right and a performance obligation.

What are all the goods and services the customer expects to receive or the organization is obligated to provide? Especially for those membership organizations, this may be an extensive list. Once the list is determined, then consider whether each good or service is distinct, that the customer can benefit from it by itself or with other readily available resources. Those that are not distinct are bundled until the bundle is distinct.

Step 3 – Determine the transaction price.

For some organizations this is the list or contract price. For other organizations, such as those that have a sliding scale, the transaction price is the amount the entity expects to be entitled to, so it is the sliding scale price. If there are bonuses, penalties, contingencies, or price concessions, this transaction price can get harder to calculate. This price also includes any “nonrefundable advances,” as those are not separate transactions.


Step 4 – Allocate the transaction price to the performance obligations.

You have a potentially long list of performance obligations and you have a single transaction price. The transaction price has to be allocated to each of the performance obligations based on the stand-alone selling price, or the fair value, of each performance obligation. If there is only one performance obligation, this is straightforward. But for something like an association where membership dues provide access to a large number of performance obligations, this got a lot more difficult. Also, if there is a “nonrefundable advance,” remember that is part of what is being allocated amongst all of the performance obligations; it’s not recognized up front.

Step 5 – Recognize revenue for the performance obligation when (or as) the customer obtains control of the goods and services.

In step four, you found the price per performance obligation, and now whenever the performance obligation is performed, the revenue is recognized. That could result in differences in timing of revenue.

For example, the local chamber of commerce is a membership organization. As part of your membership you can attend the monthly networking events, except they have no networking events in June, July, and August. So the networking event revenue is not recognized 1/12 per month, but rather 1/9 per month for each month except June, July, and August. Depending on the fiscal year end and the dues year end, this could change the timing of revenue. Also included in that membership is a ticket to the gala event. That performance obligation occurs when the gala event occurs, at a point in time, so the revenue related to that is all recognized on the date of the gala event and not 1/12 per month.

Let’s say the organization has a buy seven and get the eighth free loyalty program and the selling price of each of the first seven is $10 each. Now when each of the first seven are purchased, something less than $10 is recognized, because a portion of that $10 is the right to obtain the eighth item free, and that performance obligation has not been fulfilled until the eighth item is obtained for free or the loyalty program expires!

Let’s say you have the zoo membership with the obligation to stand ready, or be open normal hours. If the zoo is open year-round, 1/12 per month works, but if the zoo is only open April through October, now revenue is 1/7 per month for the seven months the zoo is open.

This new revenue recognition standard sounds simplistic, based on the five steps, but will actually require a lot of thought and effort to determine if there are changes to revenue accounting, for financial statement purposes. There are no easy answers to say these types of organizations will have changes and these other types will not. It comes down to the specific transactions of each organization, and each organization will need to go through the process. In addition, the financial statement footnotes that will be required essentially disclose each of the five steps, so there are no shortcuts in the process. Your Yeo & Yeo team would be happy perform an engagement to assist you in determining the impact of this standard on your organization’s revenue recognition.

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