Jul 12, 2017
Revenue recognition is a tricky subject but it gets even trickier when you’re a nonprofit organization. When do you recognize that endowment? What about that pledge for support over the next five years? The situations are endless. Hopefully the following five things can help you sift through the variables and simplify a complex principle.
- First, you have to identify contracts. This can be harder than it sounds but if you dice it up into these five criteria you’ll be well on your way to success
- Both parties approve and commit to the agreement.
- Both parties’ rights are identifiable.
- Payment terms can be identified.
- There is commercial substance in the agreement.
- Collectability is reasonably assured.
- The next step is to identify performance obligations. Some donors can be very specific about how, or when they want their contribution used. An example of a performance obligation might be a donor agreeing to fund the construction of a football stadium if a school starts a football program and names the stadium after the donor.
- Next, assign value to the contribution. This is a no-brainer when it comes to cash; but what about that statue that was donated or the attorney who helped you with that endowment contract pro-bono? These are a little more complicated. You must use fair value of the good or service as if it was for profit. For the examples above, an appraisal of the statue might be appropriate or the hourly rate of the attorney for the legal services.
- After a value has been assigned to the contributions, the transaction price needs to be allocated to the performance obligations from step two. For the example above of the football stadium, all of the funds designated to the construction of the football stadium would be allocated to the obligations of starting a football program and naming the stadium after the donor.
- Finally, revenue is recognized when, or as, performance obligations are satisfied. Going back to the stadium example, if the construction of the stadium takes five years and the school cannot start the football program until the stadium is complete the school would not recognize this revenue until all obligations are fulfilled. Instead, the school would recognize a liability whenever the donor issues the school funds and leave the liability on their books until all performance obligations are fulfilled.