The deadline is approaching next year for public companies to begin using the new revenue recognition standard, and many not-for-profits may find themselves confronting the new standard a lot sooner than they had expected.
“Not-for-profits need to start thinking about Topic 606 now,” said Lee Klumpp, a partner in BDO’s Institute for Nonprofit Excellence, referring to the topic number for revenue recognition in FASB’s Accounting Standards Codification.
Most private companies and not-for-profits have another year to get ready for the new revenue recognition rules, but in some cases the rules apply to not-for-profits at the end of this year too.
“A number of years ago, the FASB issued a FASB Staff Position, called FSP 126-1,” Klumpp explained. “That staff position basically said that if a not-for-profit issues tax-exempt bonds through a conduit such as a state or local government, the not-for-profit is actually the one responsible for the debt service. What the FASB said is if you issue conduit debt, which would be municipal debt, and if that debt is not owned by a couple of institutional investors, thereby being a private placement, and is therefore owned by the public, then according to the definition of the FASB, you would be considered a public company. That means if there was a new accounting standard that came out that required public companies to issue earlier than private companies, or had more disclosure requirements for a public company versus a private company, the nonprofit would have to turn around and follow the public guidance because a determination was made that was called a conduit debt obligor.”
He pointed out that a conduit debt issuer is the municipal government, while the conduit debt obligor would be the not-for-profit. “In order to be a conduit debt obligor you would have to be a not-for-profit issuing through a state or local government,” said Klumpp. “And then if the bond issuance is held by the public, then you’re considered a public entity.”
He has been dealing with many nonprofit organizations and found that many of them are unaware of the rule. “I’ve been talking about it for years,” said Klumpp. “There are several different definitions of public companies in the FASB’s codification, but this one’s still there and they haven’t done anything to get rid of it. That means for Topic 606, which is ‘Revenue from Contracts with Customers,’ nonprofits that are conduit debt obligors would have to turn around and address that new standard if they’re a calendar year end as of 1/1/18. Because they would have to have their books, all the revenue on their books that year would have to have been recognized under Topic 606, and in their financial statements under that topic as of 12/31/18, whereas everyone else has until 12/31/19.”
He noted that many for-profit businesses are struggling to implement the revenue recognition standard, even though it had initially seemed simple to many of them. But many nonprofits didn’t think of themselves as earning ‘revenue from contracts with customers, the title of Topic 606. But nonprofits such as museums may operate gift shops and restaurants, so they could be earning revenue that may qualify for treatment under the new standard.
Another factor complicating revenue recognition for nonprofits is that in August, FASB also proposed guidelines to standardize when grants are classified as exchanges as opposed to contributions to address what it sees as the current diversity of practice among nonprofits in how they account for that revenue.
“The FASB has issued an exposure draft for nonprofits, and the issue that nonprofits have had with state and local grants is that most nonprofits treat state and local grants and contracts as exchange transactions,” said Klumpp. “Therefore, it would be revenue from a contract with a customer. The issue of why some do and some do not stems from the definition of conditional, so we have conditional contributions or we have conditional gifts, and the definition of conditional and how that’s perceived versus restricted. There are two issues: exchange versus non-exchange, and exchange versus contribution. What makes something an exchange transaction versus making something a contribution? The other thing is the issue of condition versus restriction. This issue has been going on for a number of years.”
The standard has not yet been finalized and comments are due on November 1. But Klumpp noted that FASB wants to have it finalized in time to implement it along with the revenue recognition standard. But many open questions remain.
“Why do we treat a grant or contact from the Gates Foundation differently from than we would treat a grant or contract from the Department of Health and Human Services of the State of New York?” said Klumpp. “You could have the same language in both contracts, and one would be a contribution and the other an exchange. Why? … The issue around this standard is really how do we account for grants and contracts? If you put 12 people in a room and you ask them to write on a piece of paper the definition of grant accounting, you’ll get 12 different answers, depending on what their background is in grant accounting.”
While many small nonprofits will not have to deal with these news standards, larger ones may be facing them sooner than they expect. “For nonprofits and small private companies they’ve got a lot of work to do,” said Klumpp. “And if they wait until November of 2019, it’s going to be too late.”