New accounting standards issued by the Financial Accounting Standards Board (FASB) in May 2014 have completely rewritten the rules for revenue recognition for foundations. But that was just one of the topics covered by Sarah Reichling, a manager in nonprofits for CliftonLarsonAllen, who spoke to a crowd of foundation executives at the CLA National Foundation Conference in February 2016. She reviewed a number of new accounting requirements that organizations must prepare for including:
- How to read and prepare financial statements
- How to disclose certain investments
- How to account for items such as inventory or cloud computing costs
- How certain revenue streams are recognized
In a six-minute CLA Talks video clip called Audit and Accounting Standards Update, Reichling specifically focuses on the anticipated revenue recognition changes. In the new rules, FASB has defined a core principle for recognizing revenue, which states that revenue should only be recorded when goods are transferred to a customer at an agreed-upon price.
A new core principle of revenue recognition
FASB offers five steps to achieve this core principle before determining how to recognize revenue from customers:
- Identify contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Taking a proactive approach to revenue recognition
Due to the deferral of the effective date for these rules, some nonprofits are taking a “wait and see” attitude. Reichling recommends a more proactive approach, beginning with the creation of a list of revenue streams and current customers. From that starting point you can assess performance obligations under individual contracts, with a focus on those that are multi-year or extend over the year end.
CliftonLarsonAllen has professionals who focus on nearly every type of nonprofit organization. We are continuing to study the new revenue recognition rules and all accounting standards, and can help you evaluatehow these changes impact your organization.
View additional installments in the CLA Talks video series.