Nonprofit chief financial officers, controllers and other key financial managers need to knowledgeable and ready to address the new revenue recognition requirements, also called Topic 606 and ASU 2018-08. These changes in regulations are being made to better standardize the way that nonprofit organizations and those who fund them classify grants and contracts from federal, state and local governments and other funding sources like foundations.
Guidance calls for nonprofits to classify the revenue they receive as either a contribution or exchange transaction. A contribution is defined as an unconditional transfer of cash or assets in a voluntary, nonreciprocal transfer and are not part of the new revenue recognition guidelines.
An exchange transaction is defined as a reciprocal transaction in which two parties exchange something of commensurate value. These types of transactions are within the scope of Topic 606 and need to be accounted for following the new revenue recognition requirements.
Use the below flow chart to determine how to account for the grant funds received which you can download by clicking the image. Another great resource is a 26-minute podcast by the Journal of Accountancy that summarizes the new revenue recognition standards. Download the flowchart to save for future reference here.
For most nonprofit organizations, these new regulations should be applied for calendar years ending December 31, 2019 and noncalendar years ending in 2020.
Here are some next steps for nonprofits to consider as the new guidelines are put into effect:
- Review all contracts or agreements.
- Determine if the transaction outlined in the agreement is a contribution or exchange transaction, the flowchart provided above is a good way to work through those transactions.
- Consult with BerganKDV to ensure your organization is accounting for these transactions correctly and discuss any resulting changes to your organization’s financial statement reporting.
- If you determine the changes due to the new guidelines will significantly impact your organization, educate your board of directors and/or audit and finance committees about the impact of the new regulations.
Not sure what to do next? BerganKDV can help you navigate changing revenue recognition landscape. Want to learn more about what we can do for you? Start here.