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USNonprofits will need to be aware of several recent and upcoming updates to their reporting requirements: two to US GAAP and one to IFRS. Note that I will be relying heavily on the relevant FASB and IASB documents. My brief overview should not be taken as a substitute for your due diligence or professional judgment. Please examine each of these updates in depth and at its source.
IFRS 15
IFRS 15 is the revenue-recognition section of the International Financial Reporting Standards, issued by the IASB. The provision came into effect on January 1 of 2018 and applies to all IFRS reporting entities (IFRS does not distinguish between non- and for-profits).
Note that while US entities are not currently mandated to follow IFRS, all signs point to a need for future compliance. The SEC has publicly declared its commitment to single set of global standards. In a February 2010 statement, the commission described IFRS as “best-positioned to be able to serve the role as that set of standards in the US market,” and referred to “the convergence process ongoing between” the FASB and the IASB.
IFRS 15 provides a five-step model for revenue recognition that also applies to contribution transactions. Observe the central role that performance obligations play in determining the timing of revenue recognition:
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
Entities must complete each of these steps before moving on to the next. However, only steps three through five will apply to the majority of NFP transactions.
An example should help clarify. Consider a generic nonprofit, The Z Foundation. Normally, the Z Foundation would immediately recognize any donations as revenue. In a less common scenario, a wealthy donor gives $20,000 to the Z Foundation, but only on the condition that the Z Foundation complete a local memorial. In order to comply with IFRS 15 in this situation, accountants at the Z foundation would need to: (3) identify the transaction price ($20,000); (4) allocate that $20,000 to after the completion of the memorial; and (5) recognize that $20,000 as revenue once the memorial is completed next year.
ASU 2018-08
Accounting Standards Update 2018-08 announces amendments to the FASB’s revenue recognition guidelines. It applies to both non- and for-profits receiving contributions. The changes in ASU 2018-08 have already taken effect for contributions received after June 15, 2018. It will be effectual for annual periods after December 15, 2018, and for interim periods after December 15, 2019.
Several of the clarifications in ASU 2018-08 deserve specific mention.
First, the FASB identifies the difference between a contribution and an exchange transaction as whether the resource provider receives commensurate value for provided resources or not. The sense of goodwill and social enrichment a donor feels does not constitute commensurate value. Any transaction in which the resource provider does receive commensurate value should be considered an exchange transaction and falls under other provisions (for instance, Topic 606).
Second, the FASB offers additional clarification about when to consider a contribution conditional. Because a conditional transaction will be recognized after its conditions have been met, this affects the timing of revenue recognition. The FASB offers three indicators to help tell conditional from unconditional contributions. If the donor requires that measurable barriers be overcome before the fund transfer, or that funds only be spent on certain programs, then the contribution is conditional. However, an unrelated stipulation (for instance, about the gift’s naming) does not make a transaction conditional.
ASU 2016-14
Accounting Standards Update 2016-14 announces revisions to the FASB’s required classification of net assets. Unlike 2018-08, 2016-14 applies only to Not-for-Profits. The amendments have already taken effect for annual periods after December 15, 2017, and will be effective for interim periods after December 15, 2018.
The most notable change under 2016-14 involves collapsing the distinction between net assets with temporary donor restrictions and those with permanent donor restrictions. Under 2016-14, NFPs will be required to identify the amounts and changes in net assets with donor restrictions and those in net assets without donor restrictions. The update also streamlines the way that NFPs report operating cash flows.
Further, ASU 2016-14 instructs NFPs to deliver “enhanced reporting” of:
1. The effects, if any, of the limits on the use of resources imposed by an NFP’s governing board, donors, grantors, laws, and contracts on an NFP’s liquidity, financial flexibility, and allocation of resources
2. How an NFP manages its liquidity to meet short-term demands for cash
3. The types of resources used and how they are allocated in carrying out an NFP’s activities
4. The effects, if any, of methods used for allocating costs among an NFP’s program and supporting activities
5. The effects, if any, of underwater endowment funds on an NFP’s spending policies and its financial flexibility.