Webinar Slides: How Not-for-Profit Organizations Can Prepare for Revenue Recognition

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CBIZ & MHM
Executive Education Series™
How Not-for-Profit Organizations Can
Prepare for Revenue Recognition
Holly Perez and Mark Winiarski
September 28, 2018

About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

Presenters
Located in our Kansas City office, Holly is a Senior Manager in our Not-
for-Profit Group. Holly’s role includes auditing Not-for-Profit
Organizations.
Holly’s responsibilities include performing medium to large audit
engagements, assisting in the preparation of financial statements for
non-public companies, and resolving critical audit and risk issues. She
drives the day-to-day activities of audit engagement, assists in designing
the approach to audits, and guides the field staff in their auditing
efforts. Holly works with clients to understand their organization,
procedures and internal policies.
Holly’s industry experience includes working with Not-for-Profit
Organizations, Uniform Grant Guidance audits, U.S. Department of
Housing and Urban Development tax credits, and with rental real estate
companies.
816.945.5142• hperez@cbiz.com
HOLLY PEREZ, CPA
Senior Manager, CBIZ MHM, LLC

Presenters
Located in our Kansas City office, Mark is a member of our Professional
Standards Group (PSG). Mark's role includes instructing in our national
training program, presenting as a subject matter expert at webinars and
conferences, and preparing MHM publications on accounting and
auditing issues.
As a PSG member, Mark consults with clients and engagement teams
across the country in many areas of accounting and auditing. Mark has
served clients as an auditor, consultant and advisor in numerous
industries including manufacturing, distribution, mining, retail sales,
services and software.
816.945.5614 • mwiniarski@cbiz.com • @KCWini
MARK WINIARSKI, CPA
MHM Shareholder

Agenda
Background: Topic 606
02
01
04
Background: Topic 958
Questions05
03 Bifurcation
Final Thoughts

Revenue Recognition vs Contributions
Topic 606
Applies to exchange
transactions that occur
through contracts with
customers
Topic 958
Applies to non-
exchange transactions
(contributions)

I AM A NOT-FOR-PROFIT, WILL TOPIC 606 AND
ASU 2018-08 IMPACT ME?

It Depends!

What is your basis of accounting?
Do you have “customers”?
Do you have “contributors”?

BACKGROUND: TOPIC 606

Revenue Recognition: Topic 605 replaced by Topic 606
“Rules”
based
Principle
based
Topic 605
Over 100 authoritative standards
• FASB
• EITF
• SEC
• ARB
Supplemented by AICPA guides and
industry practice
Topic 606
Joint FASB and IASB project
Single standard
• Including an expected 5 updates
Supplemented by the Transition
Resource Group (TRG) and expected
AICPA guides

General Application Criteria vs Steps
Topic 605
• Staff Accounting Bulletin
(SAB) 104 establishes the
“four criteria” to recognize
revenue
• Persuasive evidence of an
arrangement
• Delivery and performance
• Fixed or determinable
sales price
• Collectability is reasonably
assured
Represents a drastic change in approach
1
•Identify the contract(s) with a customer.
2
•Identify the performance obligation(s) 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 satisfied a performance obligation.
Topic 606

Topic 606 - Scoping
• The following are scoped out and retain their existing industry
guidance:
 Leases
 Financial Instruments
 Topic 310, Receivables
 Topic 320, Investments- Debt and Equity
Securities
 Topic 323, Investments- Equity Method
and Joint Ventures
 Topic 325, Investments- Other
 Topic 405, Liabilities
 Topic 470, Debt
 Topic 815, Derivatives and Hedging
 Topic 825, Financial Instruments
 Topic 860, Transfers and Servicing
 Guarantees
 Insurance contracts
 Certain nonmonetary
exchanges
 Contracts not with
customers

Topic 606 - Scoping
The following items may be accounted for under Topic 606:
• Memberships
• Subscriptions
• Products and services
• Sponsorships
• Conferences and
seminars
• Tuition
• Royalty agreements
• Licensing
• Federal and state grants
and contracts
• Advertising

Effective Dates for Topic 606:
• Conduit bond holders or issuer:
• Annual, and interim periods within, beginning after December 15,
2017
• December 31, 2018; June 30, 2019
• All others:
• Annual periods beginning after December 15, 2018
• December 31, 2019; June 30, 2020

Topic 606 - Transition
• Transition options:
• Full retrospective: to each prior reporting period presented
• Elect to scope out contracts completed in same annual period
• Elect to use hindsight for variable consideration
• Modified retrospective: with the cumulative effect
adjustment recognized at the date of initial application
(i.e. July 1, 2019)
• Elect to apply to only contracts not completed
• Must disclose what revenues would have been under Topic
605 in year of adoption

Example #1 – Membership Dues
• NFP Organization has annual dues of $500.
• Members receive the following benefits from their
membership:
• Right to participate in monthly activities (membership services):
• Advocacy efforts
• Educational opportunities
• Information about industry trends
• Quarterly professional journal
• Assume the standalone selling price:
• $400 for membership services
• $100 for the quarterly journal

• Step #1 – Identify the Contract
• Contract between NFP and the Member for Dues and
Subscription
• Step #2 – Identify the Performance Obligations in the Contract
• Obligation #1 – Membership Services
• Obligation #2 – Quarterly Journal
• Step #3 – Determine the Transaction Price
• The Transaction Price for the bundle is $500

• Step #4 – Allocate the Transaction Price to the Performance
Obligations in the Contract
• Obligation #1 – Membership Services - $400
• Obligation #2 – Quarterly Services - $100
• Step #5 – Recognize Revenue when (or as) each Performance
Obligation is Satisfied
• Obligation #1 – Membership Services – over 12 months
• Obligation #2 – Subscription Services – each quarter (mailing)

Example #2 – Museum Dues
• A museum provides an annual individual membership for $75.
• Designated benefits include museum parking, a monthly
newsletter, and access to the museum research center, for
which the museum believes the fair value is $75.
• This year, to generate new memberships, the museum
launched a membership drive with two promotional benefits.
An individual membership will also include:
•One free admission to the museum (normally priced at $20).
•A $20 discount on any purchase of $100 or more in the museum
gift shop. The museum believes it 50% likely that the member will
make a purchase of at least $100.

• Contract between NFP and the Member related to membership
benefits and the promotional items
• Obligation #1 – Membership Services
• Obligation #2 – One Free Museum Admission
• Obligation #3 – Gift Shop Discount
• The Transaction Price for the bundle is $75

• The museum previously determined that member benefits
have standalone selling price of $75.
• One free admission has a standalone selling price of $20.
• The gift shop discount’s estimated stand-alone selling price is
$10 ($20 discount X 50% probability that it will be used).
• Member benefits ($75/105) x $75 = $54
• Free admission ($20/105) x $75 = $14
• Gift shop discount ($10/105) x $75 = $7

• Obligation #1 – Membership Services – over 12 months
• Obligation #2 – One Free Museum Admission – when utilized
• Obligation #3 – Gift Shop Discount – when utilized

BACKGROUND: TOPIC 958

ASU 2018-08 - Clarifying What is a Contribution
• Clarifying the scope and accounting guidance for
contributions received and contributions made
• Explains how to evaluate whether a transaction is an
exchange transaction
• Applies to all organizations that receive or make
contributions – including business entities
• Clarifies when a contribution is conditional

FASB Decision for Revenue Recognition for Contributions & Grants
Is the transaction one
in which each party
directly receives
commensurate
value?
Is the payment from
a third-party payer on
behalf of an existing
reciprocal
transaction?
It is a nonreciprocal
transaction.
Apply contribution
(nonexchange)
guidance.
Is it an exchange
transaction?
Apply Topic 606 on
revenue from contracts
with customers.
It is a balance-sheet only
transaction?
No effect on an entity’s
revenue recognition.
No
No
Yes
Yes

Example #3 – Event Sponsorship Example
• Trade Association give resource provider the opportunity to
sponsor a particular event for its members
• Sponsorship is publicized with logo placement at event and in
publications or advertisements

Example #3 – Event Sponsorship Example
• If it results in only nominal value to the sponsor, then
an exchange transaction has not occurred
• The NFP has received a contribution
• NFP should consider the speciﬁc facts and
circumstances of the naming opportunity and
accompanying rights and privileges, such as:
• the type of resource provider (individual or corporation),
• the length of time that the naming beneﬁt is provided,
• control over name and logo use, and
• other contract stipulations

Example #4: Grant from Federal Government
 NFP A is awarded a grant from the federal government.
 The agreement requires NFP A to:
 Follow the rules and regulations established by the Office of Management
and Budget (OMB)
 Incur certain expenses (costs) in compliance with rules and regulations
established by the OMB and the federal awarding agency
 Obtain an annual audit in accordance with OMB guidelines
 Submit a summary of program outcomes to the federal government
 Any unused assets are forfeited, and any disallowed cost that
have been drawn down by NFP A are required to be refunded
 NFP A retains the rights to all program outcomes.

Example #4: Conclusion
33
 NFP A concludes this is a nonexchange transaction
(nonreciprocal)
 Explanation:
 Commensurate value is not being exchanged between the two parties
 NFP A retains all the rights to the program outcomes and received the
primary benefit of the programs
 The federal government’s benefit is considered indirect because the
program outcomes serve the general public

Example #5: Grant from Local Government
 NFP B receives funding from the local government to
perform a research study on the benefits of changing the
current school curriculum.
 The agreement requires NFP B to:
 Plan the study
 Perform the research
 Summarize and submit the research to the local government
 The local government retains all rights to the study.

 NFP B concludes this is an exchange (reciprocal)
transaction.
 Explanation:
 Commensurate value is exchanged between the two parties
 The local government retains the rights to the study

Are there conditions
present (a barrier and
a right of return/right
of release must
exist)?
No
Yes
It is conditional.
Recognize revenue
when the condition is
met.
It is unconditional.
Recognize revenue in
appropriate net asset
class.
Are restrictions
present (that is,
limited purpose or
timing)?
It is unconditional and
without donor
restrictions.
It is unconditional and
with donor
restrictions.
No
Yes
Meeting of
Condition
FASB Decision for Revenue Recognition for Contributions & Grants

Example #4 (expanded): Conclusion
 NFP A determines that it should account for this grant as
conditional.
 Explanation:
 Barrier - The grant agreement limits NFP A’s discretion as a result of the
specific requirements on how the assets may be spent (qualifying
expenses)
 There is a right of return and release
 The audit requirement alone is not a barrier to entitlement because it
is not related to the purpose of the agreement.

Example #6: Grant from a Private Foundation
 NFP C receives a grant from a Private Foundation for funding
in the amount of $400,000 to provide specific life skills
training to displaced families.
 The grant requires NFP C to provide training to at least 500
displaced families during the next fiscal year, with specific
minimum targets that must be met each quarter.
 There is a right of release from the obligation in the
agreement.

 NFP C determines that it should account for this grant as
a conditional contribution.
 Explanation:
 The Private Foundation does not receive commensurate value
 The agreement contains a right of release from obligation
 The Private Foundation requires NFP C to achieve a specific level of
service that would be considered a measurable performance-related
barrier

Example #7: Grant from a Corporate Foundation
 NFP D is a public charity that works with schools to improve
education for individuals with intellectual disabilities as part of
its overall mission. It applies for and receives a $100,000
grant from a corporate foundation to perform research on
intellectual disabilities over the next year.
 The grant agreement includes:
 A right of return
 A statement that approval must be obtained from the corporate
foundation for any significant deviations in spending from the general
budget
 A requirement that at the end of the grant period a report must be filed
with the corporate foundation that explains how the assets are spent.

 NFP D determines that the grant is an unconditional
contribution.
 Explanation:
 The Corporate Foundation does not receive commensurate value
 The general budget included in the grant proposal is not a barrier
to entitlement because adherence to a general budget allows for
broad discretion
 There are no additional requirements in the agreement that
would indicate a barrier exists
 The reporting requirement is administrative and not related to the
purpose of the agreement.
 The grant is donor-restricted revenue

Effective Dates for Topic 958:
• Conduit bond holders or issuer:
• Annual periods beginning after June 15, 2018
• June 30, 2019; December 31, 2019
• All others:
• Annual periods beginning after December 15, 2018
• December 31, 2019; June 30, 2020
• Early adoption is permitted

Topic 606 - Transition
• Transition options:
• Modified prospective to:
• Contracts not completed as of the effective date
 Uncompleted portion
• Contracts entered into after the effective date
• Full retrospective

BIFURCATING CONTRACTS

Bifurcation – Transactions Partially Covered by 606
• Some transactions have multiple components that consist of
both contributions and exchange transaction
• Examples may include the following:
• membership dues
• sponsorship agreements
• donor transactions
• Organizations will identify and bifurcate the transaction

Example #8 – Monthly Newsletter
• NFP Organization has annual dues of $150.
• Members receive the following benefits from their
membership:
• Monthly newsletter with a fair value of $60

• Bifurcate the transaction
• Topic 606: Newsletter for $60
• Topic 958: Contribution of $90
• Contract between NFP and the Member
• Obligations –Monthly Newsletter
• The Transaction Price is $60

• $5 per Monthly Newsletter ($60 total)
• Monthly Newsletter– each month (mailing)
• Topic 958 Contribution
• Remaining $90 would be recognized as a contribution when
received

FINAL THOUGHTS

Keys to Implementation
• All-Hands Meeting
• Inventory of Revenue Streams
• Evaluate Differences Between Old and New Guidance
• Identify Changes in Controls Needed
• Determine Changes to Financial Statements
• Board
• Senior Staff
• Key Stakeholders
• Contributors
• Grant Conditions
• Banks
• Bondholders

?
QUESTIONS

If You Enjoyed This Webinar…
Upcoming Courses:
• 10/1: Your Guide to Adopting the New Revenue Recognition Standards
• 10/2: Third Quarter Accounting and Financial Reporting Issues Update
• 10/15: Changes to Lessor Accounting under the New Leasing Standard
• 10/25: Individual Year-End Tax Planning Tips for 2018 and Beyond
Recent Publications:
• Does Your Not-for-Profit Have an Effective Audit Committee?
• New Charitable Contribution Regulations May Require Not-for-Profits to Step
Up Their Game
• 5 Tips for Not-for-Profits in a Tight Labor Market

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CBIZ & Mayer Hoffman McCann P.C.
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